**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**








**FORM
      10-Q**





(Mark
      one)


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


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      Quarter ended March 31, 2007





OR





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


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      transition period from ______ to ______





Commission
      File Number:  0-24077





**Mobius
      Management Systems, Inc.**


(Exact
      name of registrant as specified in its charter)





**Delaware             
      13-3078745**


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


incorporation
      or organization)            Identification
      Number)











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


(Address
      of
      principal executive offices)            
      (Zip code)





**(914)
      921-7200**


(Registrant’s
      telephone number, including area code)





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





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





Large
      Accelerated Filer  |   |    Accelerated
      Filer  |X|    Non-acceleratedFiler  |   |





Indicate
      by check mark whether the
      registrant is a shell company (as defined in Rule 12b-2 of the Exchange
      Act):   YES   ||   NO   |X|





Number
      of shares outstanding of the
      issuer's common stock as of May 4, 2007





Class                        Number
      of
      Shares Outstanding





Common
      Stock, par value $0.0001 per share        19,755,848










**MOBIUS
      MANAGEMENT SYSTEMS, INC.**








**INDEX**





**PART
                I. FINANCIAL INFORMATION**Item
                1. Financial Statements (unaudited)Consolidated
                Balance Sheets – June 30, 2006 and March 31, 2007
            3Consolidated
                Statements of Operations – Three and nine months ended March 31, 2006
                and 2007
            4Consolidated
                Statement of Stockholders’ Equity – Nine months ended March 31,
                2007
            5Consolidated
                Statements of Cash Flows – Nine months ended March 31, 2006 and
                2007
            6Notes
                to Unaudited Consolidated Financial Statements
            7Item 2. Management’s Discussion and Analysis of Financial Condition
                and Results of Operations
            14Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            30Item
                4. Controls and Procedures
            30**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            31Item
                1A. Risk Factors
            31Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            32Item
                3. Defaults Upon Senior Securities
            32Item
                4. Submission of Matters to a Vote of Security Holders
            32Item
                5. Other Information
            33Item
                6. Exhibits
            34**SIGNATURES**
            35**EXHIBITS
                AND CERTIFICATIONS**


2


**PART
      I. – FINANCIAL INFORMATION**





**Item
      1. – Financial Statements**





**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


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





**June
                30,**
            
            
            **March
                31,****2006**
            
            
            **2007****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            39,967
            
            
            $
            50,103Accounts
                receivable, net of allowances of $559 and $580,
                respectively
            
            
            19,654
            
            
            
            9,870Software
                license installments, current portion
            
            
            12,054
            
            
            
            11,651Other
                current assets
            
            
            2,480
            
            
            
            2,152Total
                current assets
            
            
            74,155
            
            
            
            73,776Software
                license installments, non-current portion, net of allowance for doubtful
                accounts of $99 and $213, respectively
            
            
            9,416
            
            
            
            8,071Property
                and equipment, net
            
            
            3,912
            
            
            
            3,537Deferred
                income taxes
            
            
            2,478
            
            
            
            3,826Other
                assets
            
            
            3,379
            
            
            
            3,103Total
                assets
            
            $
            93,340
            
            
            $
            92,313**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            15,994
            
            
            $
            12,673Deferred
                revenues
            
            
            22,765
            
            
            
            21,280Deferred
                income taxes
            
            
            2,480
            
            
            
            2,705Total
                current liabilities
            
            
            41,239
            
            
            
            36,658Deferred
                revenues
            
            
            2,092
            
            
            
            1,525Other
                non-current liabilities
            
            
            509
            
            
            
            266Total
                liabilities
            
            43,840
            
            
            38,449Commitments
                and Contingencies (Note 9)Stockholders’
                equity:Common
                stock, $.0001 par value; authorized 40,000,000 shares; issued
                24,303,853 and 25,039,621 shares, respectively;
              outstanding 18,949,630 and 19,685,398 shares, respectively
            
            
            2
            
            
            
            3Additional
                paid-in capital
            
            
            58,193
            
            
            
            61,666Retained
                earnings
            
            
            5,653
            
            
            
            5,085Accumulated
                other comprehensive income
            
            
            1,634
            
            
            
            3,092Treasury
                stock, at cost, 5,354,223 shares
            
            
            (15,982
            )
            
            
            (15,982
            )Total
                stockholders’ equity
            
            
            49,500
            
            
            
            53,864Total
                liabilities and stockholders' equity
            
            $
            93,340
            
            
            $
            92,313The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.





3


**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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





**Three
                Months Ended**
              **March
                31,**
            
            
            **Nine
                Months Ended**
              **March
                31,****2006**
            
            
            
            **2007**
            
            
            
            **2006**
            
            
            
            **2007**Revenues:Software
                license
            
            $
            9,126
            
            
            $
            5,834
            
            
            $
            27,628
            
            
            $
            24,863Maintenance
            
            
            10,435
            
            
            
            11,235
            
            
            
            31,491
            
            
            
            33,259Professional
                service and other
            
            
            2,070
            
            
            
            2,071
            
            
            
            5,691
            
            
            
            6,545Total
                revenues
            
            
            21,631
            
            
            
            19,140
            
            
            
            64,810
            
            
            
            64,667Cost
                of revenues:Software
                license
            
            
            183
            
            
            
            102
            
            
            
            838
            
            
            
            468Maintenance
            
            
            1,930
            
            
            
            2,229
            
            
            
            5,648
            
            
            
            6,374Professional
                service and other
            
            
            1,566
            
            
            
            1,495
            
            
            
            4,405
            
            
            
            4,606Total
                cost of revenues
            
            
            3,679
            
            
            
            3,826
            
            
            
            10,891
            
            
            
            11,448Gross
                profit
            
            
            17,952
            
            
            
            15,314
            
            
            
            53,919
            
            
            
            53,219Operating
                expenses:Sales
                and marketing
            
            
            9,085
            
            
            
            8,984
            
            
            
            27,314
            
            
            
            28,197Research
                and development
            
            
            6,002
            
            
            
            5,652
            
            
            
            17,316
            
            
            
            17,038General
                and administrative
            
            
            3,319
            
            
            
            3,858
            
            
            
            9,966
            
            
            
            11,171Total
                operating expenses
            
            
            18,406
            
            
            
            18,494
            
            
            
            54,596
            
            
            
            56,406Loss
                from operations
            
            
            (454
            )
            
            
            (3,180
            )
            
            
            (677
            )
            
            
            (3,187
            )Interest
                income, net
            
            
            577
            
            
            
            692
            
            
            
            1,759
            
            
            
            1,984Other
                income (expense)
            
            
            20
            
            
            
            (8
            )
            
            
            45
            
            
            
            (28
            )Income
                (loss) before income taxes
            
            
            143
            
            
            
            (2,496
            )
            
            
            1,127
            
            
            
            (1,231
            )Provision
                for (benefit from) income taxes
            
            
            (149
            )
            
            
            (815
            )
            
            
            203
            
            
            
            (663
            )Net
                income (loss)
            
            $
            292
            
            
            $
            (1,681
            )
            
            $
            924
            
            
            $
            (568
            )Basic
                earnings (loss) per share
            
            $
            0.02
            
            
            $
            (0.09
            )
            
            $
            0.05
            
            
            $
            (0.03
            )Basic
                weighted average shares outstanding
            
            
            18,870
            
            
            
            19,634
            
            
            
            18,709
            
            
            
            19,360Diluted
                earnings (loss) per share
            
            $
            0.01
            
            
            $
            (0.09
            )
            
            $
            0.05
            
            
            $
            (0.03
            )Diluted
                weighted average shares outstanding
            
            
            19,942
            
            
            
            19,634
            
            
            
            19,804
            
            
            
            19,360







The
      accompanying notes are an integral part of these unaudited
      consolidated


financial
      statements.





4


**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


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


**NINE
      MONTHS ENDED MARCH 31, 2007**


**(Unaudited,
      in thousands)**


Common
                Stock
              Shares  
                     
                Amount
            
            
            
            Additional
                Paid-in
              Capital
            
            
            
            Retained
                Earnings
            
            
            
            Accumulated
                Other Comprehensive Income
            
            
            
            Treasury
                Stock
              SharesAmount
            
            
            
            Total
              Stockholders’
              EquityBalance
                at June 30, 2006
            
            
            18,950
            
            
            $
            2
            
            
            $
            58,193
            
            
            $
            5,653
            
            
            $
            1,634
            
            
            
            5,354
            
            
            $
            (15,982
            )
            
            $
            49,500Net
                loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (568
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (568
            )Change
              in other comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,458
            
            
            
            -
            
            
            
            -
            
            
            
            1,458Comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            890Stock
                options exercised
            
            
            647
            
            
            
            1
            
            
            
            1,643
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,644Stock
                purchase plan
            
            
            88
            
            
            
            -
            
            
            
            491
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            491Tax
                benefit from employee stock plan
            
            
            -
            
            
            
            -
            
            
            
            557
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            557Stock
                based compensation expense
            
            
            -
            
            
            
            -
            
            
            
            782
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            782Balance
                at March 31, 2007
            
            
            19,685
            
            
            $
            3
            
            
            $
            61,666
            
            
            $
            5,085
            
            
            $
            3,092
            
            
            
            5,354
            
            
            $
            (15,982
            )
            
            $
            53,864








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







5





**MOBIUS
      MANAGEMENT SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Unaudited,
      in thousands)**




**Nine
                Months Ended****March
                31,****2006**
            
            
            **2007**Cash
                provided by operating activities:Net
                income (loss)
            
            $
            924
            
            
            $
            (568
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Deferred
                income taxes
            
            
            61
            
            
            
            (1,795
            )Depreciation
                and amortization
            
            
            1,520
            
            
            
            1,327Stock-based
                compensation expense
            
            
            613
            
            
            
            782Change
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            (2,481
            )
            
            
            10,002Software
                license installments
            
            
            4,806
            
            
            
            2,089Other
                assets
            
            
            (527
            )
            
            
            418Accounts
                payable and accrued expenses
            
            
            (317
            )
            
            
            (2,896
            )Deferred
                revenue
            
            
            (2,732
            )
            
            
            (2,248
            )Other
                non-current liabilities
            
            
            (238
            )
            
            
            (262
            )Total
                adjustments
            
            
            705
            
            
            
            7,417Net
                cash provided by operating activities
            
            
            1,629
            
            
            
            6,849Cash
                used in investing activities:Capital
                expenditures
            
            
            (1,465
            )
            
            
            (649
            )Net
                cash used in investing activities
            
            
            (1,465
            )
            
            
            (649
            )Cash
                provided by financing activities:Cash
                received from exercise of stock options
            
            
            661
            
            
            
            1,644Cash
                received from employee stock purchase plan
            
            
            575
            
            
            
            491Net
                tax benefit attributable to stock options
            
            
            306
            
            
            
            557Net
                cash provided by financing activities
            
            
            1,542
            
            
            
            2,692Effect
                of exchange rate changes on cash and cash equivalents
            
            
            (126
            )
            
            
            1,244Net
                change in cash and cash equivalents
            
            
            1,580
            
            
            
            10,136Cash
                and cash equivalents at beginning of period
            
            
            33,726
            
            
            
            39,967Cash
                and cash equivalents at end of period
            
            $
            35,306
            
            
            $
            50,103The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.


6


**MOBIUS
      MANAGEMENT SYSTEMS, INC.**





**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**(1)  Basis
      of Presentation**





The
      accompanying unaudited consolidated
      financial statements at June 30, 2006 and March 31, 2007 and for the three
      and
      nine month periods ended March 31, 2006 and 2007 have been prepared in
      accordance with the requirements of the U.S. Securities and Exchange Commission
      (“SEC”) for interim reporting. Under those rules, certain footnotes or other
      financial information that are normally required by generally accepted
      accounting principles (“GAAP”) may be condensed or omitted.





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





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





*Recent
      Accounting Pronouncements*





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





Differences
      between the amounts recognized in the statements of financial position prior
      to
      the adoption of FIN 48 and the amounts reported after adoption must be accounted
      for as a cumulative-effect adjustment recorded to the beginning balance of
      retained earnings. FIN 48 is effective for fiscal years beginning after December
      15, 2006. As such, the Company is required to adopt FIN 48 at the beginning
      of
      its fiscal year 2008. The Company is currently evaluating the various
      requirements of FIN 48, but it has not yet determined the impact, if any, on
      its
      consolidated financial statements.





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






7








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





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value
      in
      accordance with GAAP and expands disclosure about fair value measurements.
      The
      provisions of SFAS No. 157 are effective for fiscal years beginning after
      November 15, 2007. As such, the Company will be required to adopt SFAS No.
      157
      at the beginning of its fiscal year 2009. At this time, the Company is currently
      evaluating the requirements of SFAS No. 157, but the Company has not yet
      determined the impact, if any, on its consolidated financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities – Including an amendment of FASB
      Statement No. 115.” This Statement permits entities to measure many financial
      instruments and certain other items at fair value. SFAS No. 159 is effective
      for
      fiscal years beginning after November 15, 2007. Earlier application is
      permitted, subject to certain conditions. The Company is evaluating the
      provisions of SFAS No. 159, but has not yet determined whether it will elect
      the
      fair value option for any of its financial instruments and what the potential
      impact an election to do so could have on its consolidated financial
      statements.





**(2)  Earnings
      Per Share**





Basic
      EPS is computed by dividing net
      income (loss) by the weighted average number of common shares outstanding during
      the period. The computation of Diluted EPS is similar to the computation of
      Basic EPS except that it gives effect to all potentially dilutive instruments
      that were outstanding during the period.











8





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




**Three
      Months Ended
      March 31,**




**2006**
            
            
            **2****007**Net
                Income
            
            
            Shares
            
            
            Per
                Share
            
            
            Net
                Loss
            
            
            Shares
            
            
            Per
                Share(Numerator)
            
            
            (Denominator)
            
            
            Amount
            
            
            (Numerator)
            
            
            (Denominator)
            
            
            AmountBasic
                EPS:Net
                income (loss)
            
            $
            292
            
            
            
            
            
            
            
            
            $
            (1,681
            )Weighted
                average shares
              outstanding
            
            
            
            
            
            
            18,870
            
            
            
            
            
            
            
            
            
            
            19,634Basic
                earnings (loss)   per share
            
            
            
            
            
            
            
            
            
            $
            0.02
            
            
            
            
            
            
            
            
            
            
            $
            (0.09
            )Diluted
                EPS:Net
                income (loss)
            
            $
            292
            
            
            
            
            
            
            
            
            
            
            $
            (1,681
            )Dilutive
                effect of
              stock
                options
            
            
            
            
            
            
            1,072
            
            
            
            
            
            
            
            
            
            
            
            -Weighted
                average shares
              outstanding
            
            
            
            
            
            
            19,942
            
            
            
            
            
            
            
            
            
            
            
            19,634Diluted
                earnings (loss)  per share
            
            
            
            
            
            
            
            
            
            $
            0.01
            
            
            
            
            
            
            
            
            
            
            $
            (0.09
            )




**Nine
      Months Ended
      March 31,**




**2006**
            
            
            **2007**Net
                Income
            
            
            Shares
            
            
            Per
                Share
            
            
            Net
                Loss
            
            
            Shares
            
            
            Per
                Share(Numerator)
            
            
            (Denominator)
            
            
            Amount
            
            
            (Numerator)
            
            
            (Denominator)
            
            
            AmountBasic
                EPS:Net
                income (loss)
            
            $
            924
            
            
            
            
            
            
            
            
            $
            (568
            )Weighted
                average shares
              outstanding
            
            
            
            
            
            
            18,709
            
            
            
            
            
            
            
            
            
            
            19,360Basic
                earnings (loss)   per share
            
            
            
            
            
            
            
            
            
            $
            0.05
            
            
            
            
            
            
            
            
            
            
            $
            (0.03
            )Diluted
                EPS:Net
                income (loss)
            
            $
            924
            
            
            
            
            
            
            
            
            
            
            $
            (568
            )Dilutive
                effect of
              stock
                options
            
            
            
            
            
            
            1,095
            
            
            
            
            
            
            
            
            
            
            
            -Weighted
                average shares
              outstanding
            
            
            
            
            
            
            19,804
            
            
            
            
            
            
            
            
            
            
            
            19,360Diluted
                earnings (loss)  per share
            
            
            
            
            
            
            
            
            
            $
            0.05
            
            
            
            
            
            
            
            
            
            
            $
            (0.03
            )





Stock
      options for the three and nine
      months ended March 31, 2006, representing an aggregate of 1,565,219 and
      1,657,370 shares of common stock, respectively, and stock options for the three
      and nine months ended March 31, 2007, representing an aggregate of 1,829,079
      and
      2,075,756 shares of common stock, respectively, were excluded from the
      calculation of diluted earnings (loss) per share because the effect would be
      antidilutive. Stock options were the only potentially dilutive instruments
      outstanding for the three and nine months ended March 31, 2006 and 2007. In
      accordance with the provisions of SFAS No. 128, “Earnings Per Share,” for the
      three and nine months ended March 31, 2007, the net amount of dilutive
      securities of 772,618 and 861,290 shares, respectively, (included in the amounts
      in the first sentence above) were excluded from the calculation of diluted
      loss
      per share solely based on the loss from continuing operations incurred by the
      Company in such periods.





**(3)  Software
      License Installments Receivable**





In
      the ordinary course of business, the
      Company offers extended payment terms to some of its customers, with terms
      ranging from six months to five years, with the majority in the range of three
      years to five years. Software license installments








9






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




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





In
      the first quarter of fiscal 2005,
      the Company entered into an arrangement with General Electric Capital
      Corporation (“GECC”) under which eligible installments receivable can be sold
      without recourse to GECC at an amount equal to the discounted value of the
      underlying future payment streams. The rate used to discount the receivables
      is
      negotiated with GECC and is based primarily on GECC’s credit evaluation. Any
      difference between the carrying value of an installments receivable and the
      sale
      price to GECC is recorded as a gain or loss in “Other income (expense)” in the
      Consolidated Statements of Operations in the period of sale. For all periods
      presented, there were no significant gains or losses on the sale of such
      installments receivable.





This
      arrangement gives the Company
      enhanced flexibility in offering financing alternatives to our customers and
      to
      manage our cash flow. The agreement does not provide for a termination date,
      although the agreement can be terminated by either party with 90 days advance
      notice. Additionally, there is no maximum threshold as to the amount of
      installments receivable that can be sold to GECC. Once sold to GECC, these
      installments receivable are not included in the Consolidated Balance Sheets
      as
      the criteria for sale treatment established by SFAS No. 140, “Accounting for
      Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
have been met. Under SFAS No. 140, after a transfer of financial assets, an
      entity stops recognizing the financial assets when the control has been
      surrendered. The sale of installments receivable under the agreement meets
      the
      criteria of a sale under SFAS No. 140, which includes the transfer of title.
      During the three and nine months ended March 31, 2007, the Company sold
      approximately $0.1 million and $2.0 million, respectively, of installments
      receivable under this arrangement. During the three and nine months ended March
      31, 2006, the Company sold approximately $475,000 and $800,000, respectively,
      of
      installments receivable under this arrangement. Under the terms of the Merger
      Agreement (as defined in Note 12 below), the Company has agreed not to sell
      installments receivable between April 11, 2007 and the closing date of the
      Merger (as defined in Note 12 below) without the prior consent of Allen Systems
      Group, Inc. Please refer to Note 12, Subsequent Events, for additional
      information regarding the Merger.





**(5)  Property
      and Equipment**





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





Useful
              Life
            
            
            
            June
                30,
              2006
            
            
            
            March
                31,
              2007Computer
                software and equipment
            
            2-5
                years
            
            
            $
            9,883
            
            
            $
            10,474Furniture,
                fixtures and office equipment
            
            5
                years
            
            
            
            1,547
            
            
            
            1,574Leasehold
                improvements
            
            5-15
                years
            
            
            
            4,095
            
            
            
            4,10815,525
            
            
            
            16,156Less
                accumulated depreciation and amortization
            
            
            
            
            
            
            (11,613
            )
            
            
            (12,619
            )Property
                and equipment, net
            
            
            
            
            
            $
            3,912
            
            
            $
            3,537




Depreciation
        and amortization expense
        on property and equipment was $346,000 and $352,000 for the three months
        ended
        March 31, 2006 and 2007, respectively, and $1.1 million and $1.0 million
        for the
        nine months ended March 31, 2006 and 2007, respectively.





10






**(6)  Accounts
        Payable and Accrued Expenses**
 
 Accounts
        payable and accrued expenses
        consist of the following (in thousands):


June
                30,
              2006
            
            
            
            March
                31,
              2007Accounts
                payable
            
            $
            2,183
            
            
            $
            1,944Compensation
                and related benefits
            
            
            7,424
            
            
            
            6,975Royalties
                payable
            
            
            912
            
            
            
            335Other
            
            
            5,475
            
            
            3,419$
            15,994
            
            
            $
            12,673




**(7)  Stock-Based
      Compensation**





As
      of March 31, 2007, Mobius had the
      following stock-based compensation plans: the 2006 Stock Incentive Plan (“2006
      Stock Plan”), the Non-Employee Directors’ 1998 Stock Option Plan (“Directors’
Plan”) and the 1998 Employee Stock Purchase Plan (“ESPP”). For a further
      description of these compensation plans, please refer to Note 9, Stock-Based
      Compensation, in our Annual Report on Form 10-K for the fiscal year ended June
      30, 2006, filed with the SEC on September 11, 2006. At the Company’s annual
      meeting of stockholders on February 6, 2007, the stockholders approved an
      amendment to the Directors’ Plan increasing the maximum number of shares
      available for issuance under the Directors’ Plan from 500,000 shares to 750,000
      shares.





During
      the nine months ended March 31,
      2007, the Company issued stock options to purchase 19,950 shares of common
      stock
      (2,800 shares during the fiscal third quarter of 2007), 13,425 shares of
      restricted stock (no shares during the fiscal third quarter of 2007) and 2,100
      restricted stock units (all units during the fiscal third quarter of 2007)
      under
      the 2006 Stock Plan. Awards issued during the nine months ended March 31, 2007
      under the 2006 Stock Plan will vest in equal tranches over five years subject
      to
      the achievement of certain corporate financial goals, which are determined
      and
      communicated to participants annually. The value of each year’s tranche is
      measured at the time such financial goals are communicated to and understood
      by
      recipients. During the nine months ended March 31, 2007, 70,000 options were
      granted under the Directors’ Plan (all of which were granted during the fiscal
      third quarter of 2007) and 116,673 options were granted under the ESPP (all
      of
      which were granted during the fiscal second quarter of 2007). Equity-based
      compensation expense for the three and nine months ended March 31, 2007 was
      approximately $230,000 and $782,000, respectively. During the fiscal third
      quarter of 2007, management determined that it was no longer probable that
      the
      corporate financial goals established for vesting of awards under the 2006
      Stock
      Plan for fiscal 2007 would be met. Accordingly, in the fiscal third quarter
      of
      2007, the Company reversed the $6,000 of compensation expense that had been
      recorded during the first six months of fiscal 2007 relating to the 2006 Stock
      Plan. Please refer to Note 12, Subsequent Events, for additional information
      on
      the Merger’s potential impact on the Company’s stock options, restricted stock
      and restricted stock units.





No
      options were granted under the 1996
      Stock Incentive Plan and 2006 Stock Plan during the nine months ended March
      31,
      2006. During the nine months ended March 31, 2006, 60,000 options were granted
      under the Directors’ Plan (all of which were granted during the fiscal third
      quarter of 2006) and 93,280 options were granted under the ESPP during the
      nine
      months ended March 31, 2006 (all of which were granted during the fiscal second
      quarter of 2006). Equity-based compensation expense for the three and nine
      months ended March 31, 2006 was approximately $190,000 and $613,000,
      respectively.







11





**(8)  Comprehensive
      Income (Loss)**





SFAS
      No. 130, “Reporting Comprehensive
      Income” requires the disclosure of comprehensive income, which includes net
      income (loss) and foreign currency translation adjustments. Comprehensive income
      (loss) for the three and nine months ended March 31, 2006 and 2007 is as follows
      (in thousands):





**Three
                Months****Ended**
              **March
                31,**
            
            
            **Nine
                Months****Ended**
              **March
                31,**2006
            
            
            
            2007
            
            
            
            2006
            
            
            
            2007Net
                income (loss)
            
            $
            292
            
            
            $
            (1,681
            )
            
            $
            924
            
            
            $
            (568
            )Unrealized
                translation gain (loss)
            
            
            252
            
            
            
            63
            
            
            
            (121
            )
            
            
            1,458Comprehensive
                income (loss)
            
            $
            544
            
            
            $
            (1,618
            )
            
            $
            803
            
            
            $
            890





**(9)  Commitments
      and Contingencies**





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





**(10)  Litigation**





**Acartus
      Litigation:** As previously disclosed, on May 31, 2005, Mobius filed an
      action in the U.S. District Court for the District of Delaware against Acartus,
      Inc. The complaint, as amended, pleaded claims for trademark infringement,
      false
      representation/designation of origin and false advertising in violation of
      the
      Lanham Act, for violations of state statutory and common law and for violation
      of the Delaware Uniform Trade Secrets Act, against Acartus and its successor,
      EMC Corp. On December 21, 2006, the Court entered a stipulation signed by the
      parties providing for a permanent injunction with respect to the trademark
      infringement claims and otherwise disposing of the claims. The parties have
      completed discovery with respect to the remaining claims. On April 5, 2007,
      Acartus and EMC filed a motion for summary judgment seeking dismissal of the
      action. Briefing of the motion will be completed by mid-May. The case is
      currently scheduled for a two-week jury trial beginning on August 6, 2007.
      At
      this time, the Company cannot predict the outcome or estimate the amount, if
      any, that will be received in the event the Company prevails in this
      matter.








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





Intangible
      assets as of June 30, 2006 and March 31, 2007 were as follows (in
      thousands):





**June
                30, 2006**
            
            
            **March
                31, 2006**Accumulated
            
            
            
            
            
            
            
            
            AccumulatedGross
            
            
            Amortization
            
            
            Net
            
            
            Gross
            
            
            Amortization
            
            
            NetCompleted
                technology
            
            $
            1,780
            
            
            $
            1,537
            
            
            $
            243
            
            
            $
            1,780
            
            
            $
            1,757
            
            
            $
            23Customer
                relationships
            
            
            277
            
            
            
            199
            
            
            
            78
            
            
            
            277
            
            
            
            268
            
            
            
            9Total
            
            $
            2,057
            
            
            $
            1,736
            
            
            $
            321
            
            
            $
            2,057
            
            
            $
            2,025
            
            
            $
            32





Aggregate
      amortization expense for intangible assets for the quarters ended March 31,
      2006
      and 2007 was $156,000 and $96,000, respectively, and for the nine months ended
      March 31, 2006 and 2007 was $469,000 and $289,000, respectively. Amortization
      expense for the remainder of the fiscal year ended June 30, 2007, for
      acquisitions completed through March 31, 2007, is estimated to be
      $32,000.







12





Changes
      in the carrying amount of goodwill for the nine months ended March 31, 2007
      were
      as follows (in thousands):





**Total**Balance
                as of June 30, 2006
            
            $
            2,756Effect
                of exchange rate changes
            
            
            19Balance
                as of March 31, 2007
            
            $
            2,775





**(12)  Subsequent
      Events**





On
      April
      11, 2007, the Company, Allen Systems Group, Inc. (“ASG”) and ASG M&A, Inc.
      (the “Purchaser”) entered into an Agreement and Plan of Merger (the “Merger
      Agreement”), pursuant to which (i) the Purchaser shall be merged with and into
      the Company (the “Merger”) in accordance with the provisions of the Delaware
      General Corporation Law and the separate corporate existence of the Purchaser
      shall thereupon cease and (ii) the Company shall be the successor or surviving
      corporation in the Merger. The Board of Directors of the Company approved the
      Merger Agreement and the transactions contemplated thereby.





Subject
      to the terms and conditions of the Merger Agreement, at the effective time
      of
      the Merger (the “Effective Time”), each outstanding share of Company common
      stock will be converted into and will represent the right to receive an amount
      of cash, without interest, equal to $10.05. The completion of the Merger is
      subject to approval of the Company’s stockholders and other customary closing
      conditions. The Company has received an early termination of the
      Hart-Scott-Rodino Anti-Trust Improvements Act waiting period. The Company will
      solicit stockholder approval for the Merger at a special meeting, subject to
      the
      mailing of a definitive proxy statement. The Merger is expected to close during
      June 2007.





In
      connection with the execution of the Merger Agreement, Mitchell Gross,
      co-founder, President, Chairman and CEO of the Company, and Joseph J. Albracht,
      co-founder and a director of the Company, entered into a voting agreement,
      dated
      as of April 11, 2007 (the “Voting Agreement”) with ASG pursuant to which they
      have agreed to vote all of their shares (collectively representing approximately
      47.3% of the Company’s outstanding shares as of April 26, 2007) in favor of the
      Merger. The Voting Agreement expires upon termination of the Merger
      Agreement.





If
      the
      Merger is completed, the Merger Agreement provides that all Mobius employee
      stock options, restricted stock and restricted stock units will vest on the
      closing date of the Merger. The vesting of stock options held by Directors
      will
      not be accelerated. The holders of vested stock options will receive a cash
      payment equal to $10.05 less the per share exercise price of that stock option,
      times the number of options held. Holders of restricted stock and restricted
      stock units will receive $10.05 per restricted share or unit, as
      applicable.





The
      foregoing description of the Merger Agreement does not purport to be complete
      and is qualified in its entirety by reference to the Merger Agreement. The
      Merger Agreement was filed as Exhibit 2.1 to the Company's Form 8-K/A, which
      was
      filed with the SEC on April 19, 2007, and is incorporated herein by reference.
      Additional information about the Merger will be set forth in the definitive
      merger proxy statement when it is filed with the SEC.








13


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





In
      this section, we give readers a more
      detailed assessment of our operating results and changes in financial
      position.This section should be read in conjunction with our Unaudited
      Consolidated Financial Statements and Notes included in Item 1 in this Quarterly
      Report. Please note that references in this section to “last year’s quarter” and
“this quarter” refer to our fiscal quarters ended March 31, 2006 and 2007,
      respectively. Our quarterly revenues and operating results have varied
      substantially from quarter to quarter in the past, and are likely to continue
      to
      do so in the future.





Statements
      contained in this Quarterly
      Report, other than historical financial results, may be forward-looking within
      the meaning of the Private Securities Litigation Reform Act of 1995.
      Forward-looking statements involve risks and uncertainties. They are not
      historical facts or guarantees of future performance or events. They are based
      on current expectations, estimates, beliefs, assumptions, goals and objectives,
      and are subject to uncertainties that are difficult to predict. In particular,
      any statements contained herein regarding expectations with respect to future
      sales and profitability, as well as product development and/or introductions,
      and/or with respect to the proposed Merger (as defined below) with Allen Systems
      Group, Inc. (“ASG”), are subject to known and unknown risks, uncertainties and
      contingencies, many of which are beyond our control, which may cause actual
      results, performance or achievements to differ materially from those projected
      or implied in such forward-looking statements. Important factors that might
      affect actual results, performance or achievements include, among other things,
      effects of the announcement and pendency of the Merger on our business,
      potential for diversion of management and employee attention and employee
      attrition during the period prior to the completion of the Merger, the potential
      effect on our business and relations with customers, service providers and
      other
      stakeholders whether or not the Merger is consummated, market acceptance of
      Mobius's products, ability to manage expenses, fluctuations in period to period
      results, seasonality, uncertainty of future operating results, long and
      unpredictable sales cycles, technological change, product concentration,
      competition, international sales and operations, protection of intellectual
      property, extended payment risk, sufficient revenues from professional services,
      dependence on licensed technology, risk of product defects, product liability,
      expansion of indirect channels, management of growth, dependence on executive
      management, other key employees and subcontractors, consolidation in the
      industries we market and sell, concerns about transaction security on the
      Internet, factors affecting valuation of stock option expense, changes in
      prevailing equity-based compensation practices, general conditions in the
      economy and the impact of recently enacted or proposed regulations. Certain
      other important factors that may cause actual results, performance or
      achievements to differ materially from those projected or implied in such
      forward-looking statements include, but are not limited to, the failure to
      obtain the necessary approval of the Merger by Mobius’s stockholders and the
      failure of various other closing conditions contained in the Merger Agreement
      (as defined below) to be satisfied as provided therein. These risks and
      uncertainties are described in detail from time to time in our filings with
      the
      U.S. Securities and Exchange Commission (“SEC”), including our Annual Report on
      Form 10-K, filed on September 11, 2006, and our Quarterly Reports on Form 10-Q.
      Forward-looking statements included in this Quarterly Report are based on
      information known to us as of the date of this Quarterly Report and we accept
      no
      obligation (and expressly disclaim any obligations) to update these
      forward-looking statements and we do not intend to do so.





**Overview**





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








14






requirements
      in environments ranging from the desktop, to distributed servers to centralized
      mainframes.





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





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





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





**Recent
      Events**





On
      April
      11, 2007, Mobius, ASG and ASG M&A, Inc. (the “Purchaser”) entered into an
      Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which (i) the
      Purchaser shall be merged with and into Mobius (the “Merger”) in accordance with
      the provisions of the Delaware General Corporation Law and the separate
      corporate existence of the Purchaser shall thereupon cease and (ii) Mobius
      shall
      be the successor or surviving corporation in the Merger. Our Board of Directors
      approved the Merger Agreement and the transactions contemplated
      thereby.





Subject
      to the terms and conditions of the Merger Agreement, at the effective time
      of
      the Merger (the “Effective Time”), each outstanding share our common stock will
      be converted into and will represent the right to receive an amount of cash,
      without interest, equal to $10.05. The completion of the Merger is subject
      to
      approval of our stockholders and other customary closing conditions. We have
      received an early termination of the Hart-Scott-Rodino Anti-Trust Improvements
      Act waiting period. We will solicit stockholder approval for the Merger at
      a
      special meeting, subject to the mailing of a definitive proxy statement. The
      Merger is expected to close during June 2007.





In
      connection with the execution of the Merger Agreement, Mitchell Gross, our
      co-founder, President, Chairman and CEO, and Joseph J. Albracht, our co-founder
      and one of our directors, entered into a voting agreement, dated as of April
      11,
      2007 (the “Voting Agreement”) with ASG pursuant to which they have agreed to
      vote all of their shares (collectively representing approximately 47.3% of
      our
      outstanding shares as of April 26, 2007) in favor of the Merger. The Voting
      Agreement expires upon termination of the Merger Agreement.





The
      foregoing description of the Merger Agreement does not purport to be complete
      and is qualified in its entirety by reference to the Merger Agreement. The
      Merger Agreement was filed as Exhibit 2.1 to a Form 8-K/A which was filed with
      the SEC on April 19, 2007, and is incorporated herein by reference. Additional
      information about the Merger will be set forth in the definitive merger proxy
      statement when it is filed with the SEC.





15





**Critical
      Accounting Policies and Estimates**





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





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





***Revenue
      Recognition***





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





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





We
      generally license our products directly to our customers. We also license our
      products through agents, resellers and distributors (collectively “agents”).
      Revenues from licenses through these agents are recorded when all revenue
      recognition criteria are met. We also apply the guidance of Emerging Issues
      Task
      Force (“EITF”) Issue 99-19, Reporting Revenue Gross as Principal Versus Net as
      an Agent (“EITF 99-19”). In accordance with the criteria established by EITF
      99-19, in transactions where we act as principal, which includes, among other
      criteria, the assumption of credit risk, revenue is recorded at the gross amount
      of the transaction. Any agent fees or other costs associated with these
      transactions are reflected as a component of operating expenses in our
      consolidated statements of operations. When the agent acts as principal, we
      record revenues on a net basis; that is, the amount actually received by us
      from
      the agent.







16





For
      arrangements involving multiple elements, we defer revenue for the undelivered
      elements based on their vendor specific objective evidence (“VSOE”) and
      recognize the difference between the total arrangement fee and the amount
      deferred for the undelivered elements as revenue. The determination of fair
      value of each undelivered element in multiple element arrangements is based
      on
      the price charged when the same element is sold separately or renewal rates
      for
      maintenance. The vast majority of our software license contracts provide for
      optional maintenance which is billed separately from the software license
      arrangement and is renewable on an annual basis over the license term.
      Maintenance revenue is generally recognized ratably over the term of the
      support, typically twelve months. The unearned portion of maintenance revenue
      is
      classified as deferred revenue.





We
      offer
      installment contracts to our customers, which provide for periodic payments,
      with terms ranging from six months to five years, with the majority in the
      range
      of three years to five years, with generally the first payment due at the
      beginning of the contract period. Under such contracts, software license revenue
      reflects the present value of future payments under non-cancelable license
      arrangements. The discount is recognized as interest income over the term of
      the
      arrangement. We have an established business practice of offering installment
      contracts to customers and have a history of successfully enforcing original
      payment terms on these contracts without making concessions. In addition, the
      payment obligations are unrelated to product implementation or any other
      post-transaction activity. Therefore, revenues from installment contracts are
      generally recognized in the same manner as those requiring current payment.
      We
      entered into an arrangement during our first quarter of fiscal 2005 that
      provides us with the option of selling installments receivable to General
      Electric Capital Corporation (“GECC”). This arrangement gives us enhanced
      flexibility in offering financing alternatives to our customers and in managing
      our cash flows. Please refer to Note 4, Sale of Software License Installments
      Receivable, to the accompanying unaudited consolidated financial statements
      for
      additional information regarding this arrangement.





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





***Software
      Development Costs***





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





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





***Income
      Taxes***





We
      account for income taxes under SFAS No. 109, "Accounting for Income Taxes."
      SFAS No. 109 requires the use of the asset and liability method of
      accounting for income taxes. Under this method, deferred tax assets and
      liabilities are recognized for the future tax consequences attributable to
      differences between the financial








17




statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets are recognized for deductible temporary differences,
      net operating loss carryforwards, and tax credit carryforwards. A valuation
      allowance is established if it is more likely than not that a deferred tax
      asset
      will not be realized.





Beginning
      July 1, 2005, in accordance with SFAS No. 123(R), “Share-Based Payment (revised
      2004),” we record windfall tax benefits associated with the exercise of stock
      options directly to stockholders’ equity when realized. Accordingly, deferred
      tax assets are not recognized for net operating loss carryforwards resulting
      from windfall tax benefits occurring from July 1, 2005 onward. A windfall tax
      benefit occurs when the actual tax benefit realized by us of an equity-based
      award exceeds the deferred tax asset, if any, associated with the award that
      we
      had recorded.





***Stock-Based
      Compensation***





Beginning
      July 1, 2005, we account for share-based compensation in accordance with SFAS
      No. 123(R), which replaces SFAS No. 123, “Accounting for Stock-Based
      Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No.
      25, “Accounting for Stock Issued to Employees.” Under SFAS No. 123(R), we
      expense the grant date fair value of share-based compensation awards over the
      requisite service period. For additional information regarding the adoption
      of
      SFAS No. 123(R), please refer to Note 9, Stock-Based Compensation, in our Annual
      Report on Form 10-K for the fiscal year ended June 30, 2006, filed with the
      SEC
      on September 11, 2006.





During
      the first nine months of fiscal 2007, we granted stock options, restricted
      stock
      and restricted stock units under our 2006 Stock Incentive Plan (“2006 Stock
      Plan”). Under our current equity-based compensation program pursuant to the 2006
      Stock Plan, awards vest in equal tranches over five years subject to the
      achievement of certain corporate financial goals, which are determined and
      communicated to participants annually. The value of awards eligible to vest
      if
      such goals are achieved is measured at the date the terms are communicated
      to
      and understood by recipients. As a result, changes in the share price of our
      common stock as listed on the NASDAQ Global Market from the date the awards
      are
      issued to the date that the terms are communicated to and understood by
      recipients will impact the value of awards, and the amount to be recorded as
      expense for awards that vest. Additionally, we granted stock options to our
      Directors during the third quarter of fiscal 2007 under our Non-Employee
      Directors’ 1998 Stock Option Plan (“Directors’ Plan”). One-quarter of the
      options granted under the Directors’ Plan will vest every three months until the
      options fully vest on the one-year anniversary of the grant date. Please refer
      to Note 7, Stock-Based Compensation, to the accompanying unaudited consolidated
      financial statements for additional information regarding these
      grants.









18





**Results
      of Operations**





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





**Three
                Months Ended**
              **March
                31,**
            
            
            
            **Nine
                Months Ended**
              **March
                31,****2006**
            
            
            
            **2007**
            
            
            
            **2006**
            
            
            
            **2007**Revenues:Software
                license
            
            
            42.2
            %
            
            
            30.5
            %
            
            
            42.6
            %
            
            
            38.5
            %Maintenance
            
            
            48.2
            
            
            
            58.7
            
            
            
            48.6
            
            
            
            51.4Professional
                service and other
            
            
            9.6
            
            
            
            10.8
            
            
            
            8.8
            
            
            
            10.1Total
                revenues
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0Cost
                of revenues:Software
                license
            
            
            0.9
            
            
            
            0.5
            
            
            
            1.3
            
            
            
            0.7Maintenance
            
            
            9.0
            
            
            
            11.7
            
            
            
            8.7
            
            
            
            9.9Professional
                service and other
            
            
            7.2
            
            
            
            7.8
            
            
            
            6.8
            
            
            
            7.1Total
                costs of revenues
            
            
            17.1
            
            
            
            20.0
            
            
            
            16.8
            
            
            
            17.7Gross
                profit
            
            
            82.9
            
            
            
            80.0
            
            
            
            83.2
            
            
            
            82.3Operating
                expenses:Sales
                and marketing
            
            
            42.0
            
            
            
            46.9
            
            
            
            42.1
            
            
            
            43.6Research
                and development
            
            
            27.8
            
            
            
            29.5
            
            
            
            26.7
            
            
            
            26.3General
                and administrative
            
            
            15.3
            
            
            
            20.2
            
            
            
            15.4
            
            
            
            17.3Total
                operating expenses
            
            
            85.1
            
            
            
            96.6
            
            
            
            84.2
            
            
            
            87.2Loss
                from operations
            
            
            (2.2
            )
            
            
            (16.6
            )
            
            
            (1.0
            )
            
            
            (4.9
            )Interest
                income, net
            
            
            2.7
            
            
            
            3.6
            
            
            
            2.7
            
            
            
            3.0Other
                income (expense)
            
            
            0.1
            
            
            
            -
            
            
            
            0.0
            
            
            
            -Income
                (loss) before income taxes
            
            
            0.6
            
            
            
            (13.0
            )
            
            
            1.7
            
            
            
            (1.9
            )Provision
                for (benefit from) income taxes
            
            
            (0.7
            )
            
            
            (4.2
            )
            
            
            0.3
            
            
            
            (0.9
            )Net
                income (loss)
            
            
            1.3
            %
            
            
            (8.8
            )%
            
            
            1.4
            %
            
            
            (1.0
            )%







19






***Executive
      Overview***





Total
      revenues in the fiscal third
      quarter of 2007 of $19.1 million were 11.5% lower than revenues of $21.6 million
      in the same quarter last year. Operating loss in the fiscal third quarter of
      2007 was $3.2 million, or (16.6)% of revenues, as compared with an operating
      loss of $454,000, or (2.2)% of revenues, in the same quarter last year. Net
      loss
      for the fiscal third quarter of 2007 was $1.7 million, or $(0.09) per share,
      as
      compared with net income of $292,000, or $0.01 per diluted share, in the same
      quarter last year. Our earnings in the fiscal third quarter of 2007 and 2006
      were reduced by a pre-tax expense of $230,000, or $0.01 per diluted share,
      and
      $190,000, or $0.01 per diluted share, respectively, related to stock-based
      compensation recorded pursuant to SFAS No. 123(R).





Total
      revenues in the first nine months
      of fiscal 2007 were $64.7 million, as compared with revenues of $64.8 million
      in
      the same period last year. Operating loss in the first nine months of fiscal
      2007 was $3.2 million, or (4.9)% of revenues, as compared with an operating
      loss
      of $677,000, or (1.0)% of revenues, in the same period last year. Net loss
      for
      the first nine months of fiscal 2007 was $568,000, or $(0.03) per share, as
      compared with net income of $924,000, or $0.05 per diluted share, in the same
      period last year. Our earnings in the first nine months of fiscal 2007 and
      2006
      were reduced by a pre-tax expense of $782,000, or $0.04 per diluted share,
      and
      $613,000, or $0.03 per diluted share, respectively, related to stock-based
      compensation recorded pursuant to SFAS No. 123(R).





We
      have added over $10.0 million to our
      cash balances since the beginning of the fiscal year, which totaled $50.1
      million as of March 31, 2007. The increase was primarily due to a reduction
      in
      accounts receivable. For additional information relating to the increase in
      our
      cash balances, see the section entitled, “Liquidity and Capital Resources –
Executive Overview” below. For the first nine months of fiscal 2007, maintenance
      and professional service revenues continued to improve. License revenue,
      however, was lower than anticipated due to a number of factors, including
      several large opportunities moving out of the third quarter of fiscal 2007,
      the
      learning curve associated with new direct sales staff added over the first
      nine
      months of fiscal 2007 and delays in executing on our new channel sales program.
      During the fiscal first quarter of 2007, we formally established a Channel
      Sales
      and Marketing group to license certain of our products through channels and
      to
      initiate reseller, system integrator, OEM and individual software vendors’
partnerships.





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





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





While
      we
      believe that market conditions are favorable for us, there may be factors that
      drive customers to cautiously spend on enterprise software. We compete not
      only
      against other companies in our market space, but with other unrelated
      technologies vying for our customers’ spending budgets. These factors can result
      in unpredictability in the timing of orders. Additionally, the sales cycle
      is
      long and involves complexity as customers consider a number of factors before
      committing to purchase enterprise software. Factors considered by customers
      include product benefits (including its ability to meet various regulatory
      compliance requirements),








20






cost,
      time of implementation, return on investment, the ability to operate with
      existing and future computer systems, the ability to accommodate increased
      transaction volume and product reliability. There are no assurances that the
      market opportunity associated with the commoditization of ECM software or the
      success of our newer products, such as ViewDirect Records Manager, TCI and
      Audit
      and Balancing System, will develop as anticipated, that our sales execution
      will
      improve or that we will be successful building our channel sales
      program.





***Three
      Months Ended March 31, 2006
      Compared to Three Months Ended March 31, 2007***





***Revenues:***





·
            **Total
                revenues** decreased 11.5% from $21.6 million in last year’s
                quarter to $19.1 million this quarter. Domestic revenues decreased
                17.0%
                from $17.5 million in last year’s quarter to $14.5 million this quarter.
                International revenues increased 11.6% from $4.1 million in last
                year’s
                quarter to $4.6 million this quarter. The nature, size and timing
                of any
                individual license contract from time to time impacts the overall
                growth
                rates in our 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, 2007, as compared with the quarter ended March 31,
                2006.





·
            **Software
                license revenues** decreased 36.1% from $9.1 million in last
                year’s quarter to $5.8 million this quarter. The decrease in software
                license revenues was due to several factors, including several large
                opportunities moving out of this quarter and the learning curve associated
                with new direct sales staff added over the first nine months of fiscal
                2007.





·
            **Maintenance
                revenues** increased 7.7% from $10.4 million in last year’s
                quarter to $11.2 million this quarter. The increase in maintenance
                revenues was primarily due to new software licenses covered by maintenance
                agreements, which were partially offset by the non-renewal or reduction
                of
                existing maintenance contracts and lower maintenance rates on Solution
                Packs relative to other licenses.





Non-renewals
      and reductions in maintenance are the result of a number of factors, including
      the licensing of Solution Packs to our customers, changes in the product mix
      of
      license renewals, the consolidation of our customer base, the consolidation
      of
      customer data centers and the scaling back of obsolete customer operating
      systems. Annual maintenance for new 15 year enterprise licenses for server
      and
      client products is generally based on 15% of the contract value. Annual
      maintenance for Solution Packs, which represented approximately 32% and 11%
      of
      total software license revenues during the fiscal third quarter of 2006 and
      2007, respectively, is generally based on 10% of contract value. Solution Packs
      are combinations of certain server and client products designed to address
      specific customer requirements, which typically have five year license
      terms.





·
            **Professional
                service and other revenues** was $2.1 million in both last year’s
                quarter and 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 not require
      significant installation services. Other revenues for both periods were not
      significant.





***Cost
      of Revenues:***





·
            **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.








21






The
      cost of software license revenues decreased 44.3%
      from $183,000 in last year’s quarter to $102,000 this quarter, representing 2.0%
      and 1.7%, respectively, of software license revenues in those quarters. The
      percentage of cost of software license revenues to total revenues is generally
      low since most of the products we license are developed in-house. The decrease
      in such costs was primarily due to a lower mix of third-party software in this
      quarter.


·
            **Cost
                of maintenance revenues** consists primarily of personnel costs
                related to our Customer Support group. The cost of maintenance revenues
                increased 15.5% from $1.9 million in last year’s quarter to $2.2 million
                this quarter, representing 18.5% and 19.8%, respectively, of maintenance
                revenues in those quarters. The increase in cost of maintenance revenues
                is primarily due to higher allocation of expenses from research and
                development due to increased utilization of development personnel
                working
                on Customer Support projects.





·
            **Cost
                of professional service and other revenues**consists primarily of
                personnel costs associated with providing professional services,
                as well
                as third party subcontractor costs. The cost of professional service
                and
                other revenues decreased 4.5% from $1.6 million in last year’s quarter to
                $1.5 million this quarter. These costs as a percentage of professional
                service and other revenues decreased from 75.7% in last year’s quarter to
                72.2% in this quarter. This was primarily due to a decrease in third-party
                consultants.





***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 decreased from $9.1 million in last
                year’s quarter to $9.0 million this quarter, representing 42.0% and 46.9%,
                respectively, of total revenues in those quarters. The decrease in
                sales
                and marketing expenses was primarily attributable to decreased incentive
                compensation costs, primarily due to lower software license revenues,
                partially offset by increased personnel costs, reflecting the
                establishment of our new channel sales function, new hires and merit
                increases.





·
            **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 decreased
                5.8%
                from $6.0 million in last year’s quarter to $5.7 million this
                quarter, representing 27.8% and 29.5%, respectively, of total revenues
                in
                those quarters. The decrease in research and development expenses
                was
                primarily due to higher allocation of expenses to Customer Support
                due to
                increased utilization of development personnel working on Customer
                Support
                projects.





·****
            **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 16.2% from $3.3 million in last
                year’s
                quarter to $3.9 million this quarter, representing 15.3% and 20.2%,
                respectively, of total revenues in those quarters. The increase in
                general
                and administrative expenses was due to increases in several items,
                including fees associated with legal proceedings initiated by us
                related
                to intellectual property matters (see the section entitled, “Other Matters
                – Acartus Litigation” below). During the third quarters of fiscal 2006 and
                2007, we recorded legal fees relating to this proceeding of approximately
                $40,000 and $295,000, respectively. Through March 31, 2007, we have
                recorded cumulative legal fees relating to this proceeding of
                approximately $975,000. We also incurred professional fees in this
                quarter
                related to consulting work performed on our strategic operating
                plan.







22





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





Interest
      income, net of interest
      expense, was $577,000 in last year’s quarter and $692,000 in this quarter. The
      increase in interest income was primarily attributable to higher cash balances
      and higher interest rates on invested cash balances and installments receivable,
      partially offset by lower installments receivable balances, due to a decrease
      in
      financed licenses.





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





The
      tax benefit from income taxes was
      $149,000 (effective tax benefit rate of 104.2%) in last year’s quarter and
      $815,000 (effective tax benefit rate of 32.7%) in this quarter. Last year’s
      effective tax benefit rate was substantially higher than the current year’s rate
      due primarily to the reversal of previously accrued taxes as a result of the
      expiration of the IRS statute of limitations on the tax years for which the
      accruals were established. This benefit was partially offset by our inability
      to
      recognize a full year U.S. research and development tax credit (“R&D Tax
      Credit”) due to the expiration of the R&D Tax Credit effective on December
      31, 2005. The R&D Tax Credit was not reinstated until fiscal year 2007,
      retroactive to January 1, 2006.





***Nine
      Months Ended March 31, 2006
      Compared to Nine Months Ended March 31, 2007***





***Revenues:***





·
            **Total
                revenues** were $64.8 million in the first nine months of fiscal
                2006, as compared with $64.7 million in the first nine months of
                fiscal
                2007. Domestic revenues decreased 3.2% from $49.9 million in the
                first
                nine months of fiscal 2006 to $48.3 million in the first nine months
                of
                fiscal 2007. International revenues increased 9.7% from $14.9 million
                in
                the first nine months of fiscal 2006 to $16.4 million in the first
                nine
                months of fiscal 2007. The nature, size and timing of any individual
                license contract from time to time impacts the overall growth rates
                in our
                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 2006, as compared with the first nine months of fiscal
                2007.





·
            **Software
                license revenues** decreased 10.0% from $27.6 million in the
                first nine months of fiscal 2006 to $24.9 million in the first nine
                months of fiscal 2007, substantially due to our unfavorable results
                in the
                fiscal third quarter of 2007. The decrease was due to several factors,
                including several large opportunities moving out of the third quarter
                of
                fiscal 2007 and the learning curve associated with new direct sales
                staff
                added over the first nine months of fiscal
                2007.





·
            **Maintenance
                revenues** increased 5.6% from $31.5 million in the first nine
                months of fiscal 2006 to $33.3 million in the first nine months of
                fiscal
                2007. The increase in maintenance revenues was primarily due to new
                software licenses covered by maintenance agreements, which were partially
                offset by the non-renewal or reduction of existing maintenance contracts
                and lower maintenance rates on Solution Packs relative to other
                licenses.





Non-renewals
      and reductions in maintenance are the result of a number of factors, including
      the licensing of Solution Packs to our customers, changes in the product mix
      of
      license renewals, the consolidation of our customer base, the consolidation
      of
      customer data centers and the scaling back of obsolete customer operating
      systems. Annual maintenance for new 15 year enterprise licenses for server
      and
      client products is generally based on 15% of the contract value. Annual
      maintenance for Solution Packs, which represented approximately 31% and 14%
      of
      total software license revenues during the first nine months of fiscal 2006
      and
      2007,










23








respectively,
      is generally based on 10% of contract value. Solution Packs are combinations
      of
      certain server and client products designed to address specific customer
      requirements, which typically have five year license terms.





·
            **Professional
                service and other revenues** increased 15.0% from $5.7 million in
                the first nine months of fiscal 2006 to $6.5 million in the first
                nine
                months of fiscal 2007, due to higher service revenue in Europe, reflecting
                work on several large contracts, partially offset by a decrease in
                service
                revenue in the United States.





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. Other revenues for both periods were not
      significant.





***Cost
      of Revenues:***





·
            **Cost
                of software license revenues** decreased 44.2% from $838,000 in the
                first nine months of fiscal 2006 to $468,000 in the first nine months
                of
                fiscal 2007, representing 3.0% and 1.9%, 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 percentage of cost
                of
                software license revenues to total revenues is generally low since
                most of
                the products we license are developed in-house. The decrease in such
                costs
                was primarily due to a lower mix of third-party software included
                in
                software license revenues in the current period and the reversal
                of a
                reserve for royalty payments of approximately $100,000 in the second
                quarter of fiscal 2007 as a result of the settlement of litigation
                relating to the sale of our INFOPAC-TapeSaver product line. For additional
                information relating to this settlement, see the section entitled,
“Other
                Matters – INFOPAC-TapeSaver” included in our Management’s Discussion and
                Analysis of Financial Condition and Results of Operations, as included
                in
                our Quarterly Report on Form 10-Q for the quarter ended December
                31, 2006,
                filed with the SEC on February 8,
                2007.





·
            **Cost
                of maintenance revenues** increased 12.9% from $5.6 million in the
                first nine months of fiscal 2006 to $6.4 million in the first nine
                months
                of fiscal 2007, representing 17.9% and 19.2%, respectively, of maintenance
                revenues in those periods. The increase in cost of maintenance revenues
                is
                primarily due to higher allocation of expenses from research and
                development due to increased utilization of development personnel
                working
                on Customer Support projects.





·
            **Cost
                of professional service and other revenues** increased 4.6% from
                $4.4 million in the first nine months of fiscal 2006 to $4.6 million
                in
                the first nine months of fiscal 2007. These costs as a percentage
                of
                professional service and other revenues decreased from 77.4% in the
                first
                nine months of fiscal 2006 to 70.4% in the first nine months of fiscal
                2007. This was primarily due to improved professional staff utilization
                and the leverage of fixed costs over higher revenues. Partially offsetting
                this improvement was an increase in personnel costs due to higher
                headcount.








24





***Operating
      Expenses:***





·
            **Sales
                and marketing** expenses increased 3.2% from $27.3 million in
                the first nine months of fiscal 2006 to $28.2 million in the first
                nine months of fiscal 2007, representing 42.1% and 43.6%, respectively,
                of
                total revenues in those periods. Sales and marketing expenses increased
                primarily due to (i) higher personnel costs, reflecting increased
                headcount in sales and the establishment of our new channel sales
                function; (ii) fees paid to sales agents on several licenses which
                were
                recorded gross in revenues; (iii) higher bad debt expense, primarily
                due
                to a credit recorded in the prior year for the collection of a reserved
                account; and (iv) higher professional fees. These increases were
                partially
                offset by decreased incentive compensation costs, primarily due to
                lower
                software license revenues.





·
            **Research
                and development** expenses totaled $17.3 million in the first
                nine months of fiscal 2006 and $17.0 million in the first nine months
                of
                fiscal 2007, representing 26.7% and 26.3%, respectively, of total
                revenues
                in those periods. The decrease in research and development expenses
                was
                primarily due to higher allocation of expenses to Customer Support
                due to
                increased utilization of development personnel working on Customer
                Support
                projects, partially offset by higher subcontractor costs relating
                to the
                timing of third-party development work on certain
                projects.





·
            **General
                and administrative** expenses increased 12.1% from $10.0 million in
                the first nine months of fiscal 2006 to $11.2 million in the first
                nine
                months of fiscal 2007, representing 15.4% and 17.3%, respectively,
                of
                total revenues in those periods. The increase in general and
                administrative expenses was due to increases in several items, including
                fees associated with legal proceedings initiated by us related to
                intellectual property matters (see the section entitled, “Other Matters –
                Acartus Litigation” below). During the first nine months of fiscal 2006
                and 2007, we recorded legal fees relating to this proceeding of
                approximately $200,000 and $715,000, respectively. Through March
                31, 2007,
                we have recorded cumulative legal fees relating to this proceeding
                of
                approximately $975,000. We also incurred professional fees in the
                third
                quarter of fiscal 2007 related to consulting work performed on our
                strategic operating plan. In addition, accounting-related fees increased
                due to compliance work and equity-based compensation expense increased
                due
                primarily to a change in the vesting period of Director option grants
                from
                immediate vesting on the date of grant to quarterly vesting over
                a
                one-year period from date of grant, as well as the expensing of stock
                options received by two new Directors who joined the Board in May
                2006.





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





Interest
      income, net of interest
      expense, was $1.8 million in the first nine months of fiscal 2006 and $2.0
      million in the first nine months of fiscal 2007. The increase in interest income
      was primarily attributable to higher cash balances and higher interest rates
      on
      invested cash balances and installments receivable, partially offset by lower
      installments receivable balances, due to a decrease in financed
      licenses.





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





The
      tax provision for income taxes was
      $203,000 (effective tax provision rate of 18.0%) in the first nine months of
      fiscal 2006, as compared with a tax benefit from income taxes of $663,000
      (effective tax benefit rate of 53.9%) in the first nine months of fiscal 2007.
      The tax provision for the nine months ended March 31, 2006 was reduced by the
      reversal of previously accrued taxes as a result of the expiration of the IRS
      statute of limitations on the tax years for which the accruals were established.
      This benefit was partially offset by our inability to claim a full year R&D
      Tax Credit due to the expiration of the R&D Tax Credit effective on December
      31, 2005. Excluding the impact of these two items, the effective tax rate for
      the first nine months of fiscal 2006 would have been approximately 29.0%. The
      effective tax rate for the first nine months of fiscal 2007 was reduced by
      an
      adjustment to reflect the reinstatement of the R&D Tax Credit by
      Congress








25






retroactive
      to January 1, 2006. As a result of this reinstatement, we recaptured R&D Tax
      Credits not recorded in the third and fourth quarters of fiscal 2006. Excluding
      the impact of this adjustment, the effective tax rate for the first nine months
      of fiscal 2007 would have been approximately 27.0%.





**Liquidity
      and Capital Resources**





***Executive
      Overview***





Since
      our inception, we have funded our
      operations principally through cash flows from operating activities. As of
      March
      31, 2007, we had cash and cash equivalents of $50.1 million, a 25.4% increase
      from the $40.0 million held at June 30, 2006. The increase was
      primarily due to a reduction in accounts receivable that was associated with
      our
      efforts in fiscal 2006 to reduce the amount of license fees we financed for
      our
      customers. Instead, we shifted our focus to collect software license fees in
      one-time payments, typically paid in 30-60 days. As a result of this effect,
      software license installments receivable decreased by approximately $9.4 million
      during fiscal 2006, offset by a temporary increase in accounts receivable of
      approximately $9.1 million during fiscal 2006. This increase in accounts
      receivable was substantially collected during the first six months of fiscal
      2007. As of March 31, 2007 and June 30, 2006, the Company had no bank debt
      outstanding.





We
      believe that our existing cash balances and cash flows expected from future
      operations will be sufficient to meet our capital requirements at least through
      the end of our third quarter of fiscal 2008. As discussed in the section
      entitled, “Software License Installments Receivable” below, we have entered into
      a number of license contracts having extended payment terms. We continue to
      monitor the level of sales that include extended payment terms to manage our
      working capital associated with these sales. We entered into an arrangement
      during our first quarter of fiscal 2005 that provides us with the option of
      selling certain installments receivable to General Electric Capital Corporation
      (“GECC”). This arrangement gives us enhanced flexibility in offering financing
      alternatives to our customers and in managing our cash flows. During the first
      nine months of fiscal 2007, we sold approximately $2.0 million of installments
      receivable (of which approximately $0.1 million were sold during the fiscal
      third quarter) under this arrangement, bringing total sales of installments
      receivable to GECC through March 31, 2007 to approximately $7.8 million. If
      the
      level of software license revenues financed by installments receivable increases
      and we are unable to assign a substantial percentage of such receivables to
      GECC
      or other vendor financing firms, our cash position is likely to be adversely
      affected. Under the terms of the Merger Agreement, we have agreed not to sell
      installments receivable between April 11, 2007 and the closing date of the
      Merger, without the prior consent of ASG.





*****





Net
      cash provided by operating
      activities was $1.6 million and $6.8 million during the first nine months of
      fiscal 2006 and 2007, respectively. Our primary sources of cash during the
      first
      nine months of fiscal 2006 were from a reduction in software license
      installments receivable and net income adjusted for depreciation and
      amortization, deferred income taxes and other non-cash charges, partially offset
      by an increase in accounts receivable and a reduction in deferred revenues.
      Our
      primary sources of cash during the first nine months of fiscal 2007 were from
      a
      reduction in accounts receivable and software license installments receivable,
      partially offset by a decrease in accounts payable and accrued expenses. The
      decrease in accounts receivable of approximately $10.0 million was due to
      collections primarily during the first six months of fiscal 2007 of a
      substantial amount of the increase in accounts receivables outstanding as of
      June 30, 2006, which resulted from the shift during fiscal 2006 from licenses
      sold on an installment basis to licensees with one-time payment
      terms.





Net
      cash used in investing activities
      was $1.5 million and $649,000 in the first nine months of fiscal 2006 and 2007,
      respectively. Net cash used in investing activities
      during both periods represented the purchase of computer equipment, furniture
      and fixtures and leasehold improvements. Expenditures during the first nine
      months of fiscal 2006 included approximately $200,000 relating to the upgrades
      of our communications and customer relationship management systems, and
      approximately $125,000 relating to renovations of our offices in Ottawa,
      Canada. 
 Net
        cash
        provided by financing activities was $1.5 million and $2.7 million in the
        first
        nine months of fiscal 2006 and 2007, respectively. Net cash provided by
        financing activities for the first nine months of fiscal 2006 and 2007 was
        due
        to the exercise of stock options by employees of $661,000 and $1.6 million,
        respectively, employee stock purchases under the employee stock purchase
        plan of
        $575,000 and $491,000, respectively, and the excess tax benefit attributable
        to
        stock options of $306,000 and $557,000, respectively.






26





Our
      material obligations and commitments to make future payments under contracts
      consist of our operating leases for our office facilities. These leases expire
      on various dates through fiscal 2011 and provide for additional payments
      relating to utility costs. As of March 31, 2007, the future minimum lease
      payments for these operating leases are as follows (in thousands):





**Operating****Leases****Year
                  Ended:**March
                  31, 2008
              
              $
              2,893March
                  31, 2009
              
              
              2,389March
                  31, 2010
              
              
              1,861March
                  31, 2011
              
              
              515Total
                  minimum lease payments
              
              $
              7,658





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





**Accounts
      Receivable Reserves**





Accounts
      receivable reserves are provided for potential problem accounts. We specifically
      identify problem accounts based on the age of the receivable and through
      discussions with the customer and our sales representatives. Based on the
      specific account information and the historical relationship of actual losses
      to
      revenues and receivable balances, we exercise our judgment as to what portion
      of
      the accounts receivable balance requires a reserve. To the extent that an
      account for which a specific reserve was provided is subsequently collected,
      we
      reduce the reserves in the period of collection. We also reserve for the
      potential that some customers may decide to cancel or reduce the number of
      products covered by maintenance arrangements upon their anniversary but do
      not
      always notify us in sufficient time to prevent some portion of the annual
      maintenance billings from being recognized. These adjustments to the reserve
      are
      reflected as a reduction of maintenance revenues. Accounts receivable reserves
      were $559,000 and $580,000 at June 30, 2006 and March 31, 2007,
      respectively.





**Software
      License Installments Receivable**





As
      of
      March 31, 2007, software license installments receivable amounted to $19.7
      million, a decrease of 8.1% compared with the June 30, 2006 balance of $21.5
      million. This decrease was primarily due to collections, the sale of
      approximately $2.0 million of installments receivable to GECC and a lower
      percentage of financed licenses in the first nine months of fiscal 2007. We
      entered into an arrangement during our fiscal first quarter of 2005 that
      provides us with the option of selling certain installments receivable to GECC,
      which gives us enhanced flexibility in offering financing alternatives to our
      customers and in managing our cash flows. Through March 31, 2007, we have sold
      approximately $7.8 million of installments receivable to GECC. Please refer
      to
      Note 4, Sale of Software License Installments Receivable, in the accompanying
      unaudited consolidated financial statements for additional information regarding
      this arrangement. We offer extended payment terms to our customers that meet
      specified standards of creditworthiness, which we believe enhances our
      competitive position. Software license installments are discounted at a market
      rate of interest at the date the software license contract revenue is
      recognized. The discount is amortized to interest income using the interest
      method over the term of the financing. Software license installments receivable
      will fluctuate with the amount of license revenue sold on an installment basis.
      Under the terms of the Merger Agreement, we have agreed not to sell installments
      receivable between April 11, 2007 and the closing date of the Merger, without
      the prior consent of ASG.








27





As
      of
      March 31, 2007, one customer had a balance equal to 12.3% of total software
      license installments. No other customer had a balance in excess of 5.7% of
      total
      software license installments. As of March 31, 2007, total software license
      installments receivable have an average age of approximately 1.1
      years.





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





**Deferred
      Revenues**





Deferred
      revenues consist primarily of the unearned portion of maintenance revenues
      and,
      to a lesser extent, license contracts where the revenue has been deferred due
      to
      credit issues or specific contract clauses which preclude revenue recognition
      at
      that time. Current and non-current deferred revenues totaled $24.9 million
      at
      June 30, 2006 and $22.8 million at March 31, 2007. Deferred revenues can
      fluctuate due to the timing of annual maintenance billings, increases or
      decreases in current license revenues and increases or decreases in license
      contracts that include more than one year of maintenance. As of March 31, 2007,
      current deferred revenues totaled $21.3 million and non-current deferred
      revenues totaled $1.5 million.





**Other
      Matters**





**Acartus
      Litigation:** As previously disclosed, on May 31, 2005, we filed an
      action in the U.S. District Court for the District of Delaware against Acartus,
      Inc. The complaint, as amended, pleaded claims for trademark infringement,
      false
      representation/designation of origin and false advertising in violation of
      the
      Lanham Act, for violations of state statutory and common law and for violation
      of the Delaware Uniform Trade Secrets Act, against Acartus and its successor,
      EMC Corp. On December 21, 2006, the Court entered a stipulation signed by the
      parties providing for a permanent injunction with respect to the trademark
      infringement claims and otherwise disposing of the claims. The parties have
      completed discovery with respect to the remaining claims. On April 5, 2007,
      Acartus and EMC filed a motion for summary judgment seeking dismissal of the
      action. Briefing of the motion will be completed by mid-May. The case is
      currently scheduled for a two-week jury trial beginning on August 6, 2007.
      At
      this time, we cannot predict the outcome or estimate the amount, if any, that
      will be received in the event we prevail in this matter.





**Recent
      Accounting Pronouncements**





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





Differences
      between the amounts recognized in the statements of financial position prior
      to
      the adoption of FIN 48 and the amounts reported after adoption must be accounted
      for as a cumulative-effect adjustment recorded to the beginning balance of
      retained earnings. FIN 48 is effective for fiscal years beginning after December
      15, 2006. As such, we are required to adopt FIN 48 at the beginning of our
      fiscal year 2008. We are currently evaluating the various requirements of FIN
      48, but we have not yet determined the impact, if any, on our consolidated
      financial statements.






28







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





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value
      in
      accordance with generally accepted accounting principles and expands disclosure
      about fair value measurements. The provisions of SFAS No. 157 are effective
      for
      fiscal years beginning after November 15, 2007. As such, we will be required
      to
      adopt SFAS No. 157 at the beginning of our fiscal year 2009. At this time,
      we
      are currently evaluating the requirements of SFAS No. 157, but we have not
      yet
      determined the impact, if any, on our consolidated financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities – Including an amendment of FASB
      Statement No. 115.” This Statement permits entities to measure many financial
      instruments and certain other items at fair value. SFAS No. 159 is effective
      for
      fiscal years beginning after November 15, 2007. Earlier application is
      permitted, subject to certain conditions. We are evaluating the provisions
      of
      SFAS No. 159, but have not yet determined whether we will elect the fair value
      option for any of our financial instruments and what the potential impact an
      election to do so could have on our consolidated financial
      statements.










29





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





Our
      investment portfolio is comprised
      primarily of money market accounts and is subject to interest rate sensitivity.
      The primary objective of our investment activities is to preserve principal,
      while at the same time maximizing interest income. As of March 31, 2007, we
      held
      no marketable securities.





We
      are exposed to market risk arising
      from changes in foreign currency exchange rates as a result of selling our
      products and services outside the United States (principally Europe). Sales
      generated from our non-U.S. operations are denominated in currencies other
      than
      the U.S. dollar. Consequently, the translated U.S. dollar value of our non-U.S.
      sales and operating results are subject to currency exchange rate fluctuations
      which may favorably or unfavorably impact reported earnings and may affect
      comparability of period-to-period operating results. For the three and nine
      months ended March 31, 2007, approximately 8.5% and 7.9% of our revenues were
      denominated in Euros, respectively, and approximately 6.9% and 5.1% in British
      pounds, respectively. For the three and nine months ended March 31, 2006,
      approximately 7.4% and 7.4% of our revenues were denominated in Euros,
      respectively, and approximately 4.3% and 6.1% in British pounds,
      respectively.





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





**Item
      4. - CONTROLS AND PROCEDURES**





*Evaluation
      of Disclosure Controls
      and Procedures.* Under the supervision and with the participation of our
      management, including our Chief Executive Officer and our Chief Financial
      Officer, we have evaluated the effectiveness of the design and operation of
      our
      disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
      under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that
      evaluation, our Chief Executive Officer and our Chief Financial Officer have
      concluded that our disclosure controls and procedures were effective as of
      March
      31, 2007 to ensure that information required to be disclosed by us in reports
      that we file or submit under the Exchange Act was recorded, processed,
      summarized and reported within the time periods specified in Securities and
      Exchange Commission rules and forms, and that such information is accumulated
      and communicated to management to allow timely decisions regarding required
      disclosure.





*Changes
      in Internal Control Over
      Financial Reporting.* There were no changes in our internal control over
      financial reporting during our fiscal quarter ended March 31, 2007 that have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.











30


**PART
      II. - OTHER INFORMATION**





**Item
      1. - Legal Proceedings**





From
      time to time, we are involved in
      litigation relating to claims arising from our operations in the normal course
      of business. We are not a party to any legal proceedings, the adverse outcome
      of
      which, individually or in the aggregate, would have a material adverse effect
      on
      our business, operating results, cash flow or financial condition. For a
      discussion of certain legal proceedings initiated by us, reference is made
      to:





·
            Part
                I, Item 2, Management’s Discussion and Analysis of Financial Condition and
                Results of Operations, under the section entitled, “Other Matters” in this
                Quarterly Report on Form 10-Q;


·
            Part
                II, Item 1, Legal Proceedings, as included in Mobius’s Quarterly Report on
                Form 10-Q for the quarter ended December 31, 2006, filed with the
                SEC on
                February 8, 2007;


·
            Part
                II, Item 1, Legal Proceedings, as included in Mobius’s Quarterly Report on
                Form 10-Q for the quarter ended September 30, 2006, filed with the
                SEC on
                November 8, 2006; and


·
            Part
                II, Item 7, Management’s Discussion and Analysis of Financial Condition
                and Results of Operations, under the section entitled, “Other Matters,” as
                included in Mobius’s Annual Report on Form 10-K for the fiscal year ended
                June 30, 2006, filed with the SEC on September 11,
                2006.





**Item
      1A. – Risk Factors**





Our
      Annual Report on Form 10-K for the
      year ended December 31, 2006 includes a detailed discussion of our risk factors
      under the heading “Item 1A, Risk Factors.” The information presented below
      updates and should be read in conjunction with the risk factors and information
      disclosed in such Form 10-K.





**Our
      business and results of operations may be adversely affected by our announced
      merger with Allen Systems Group, Inc. (“ASG”).**





On
      April 11, 2007, Mobius, ASG and ASG
      M&A, Inc. (the “Purchaser”) entered into an Agreement and Plan of Merger
      (the “Merger Agreement”), pursuant to which (i) the Purchaser shall be merged
      with and into Mobius (the “Merger”) in accordance with the provisions of the
      Delaware General Corporation Law and the separate corporate existence of the
      Purchaser shall thereupon cease and (ii) Mobius shall be the successor or
      surviving corporation in the Merger. Our Board of Directors approved the Merger
      Agreement and the transactions contemplated thereby.





Subject
      to the terms and conditions of
      the Merger Agreement, at the effective time of the Merger (the “Effective
      Time”), each outstanding share our common stock will be converted into and will
      represent the right to receive an amount of cash, without interest, equal to
      $10.05. The completion of the Merger is subject to approval of our stockholders
      and other customary closing conditions. We have received an early termination
      of
      the Hart-Scott-Rodino Anti-Trust Improvements Act waiting period. We will
      solicit stockholder approval for the Merger at a special meeting, subject to
      the
      mailing of a definitive proxy statement. The Merger is expected to close during
      June 2007.





The
      announcement of the Merger could
      have an adverse effect on our revenue in the near term if customers delay,
      defer, or cancel purchases pending completion of the Merger. Although we are
      attempting to mitigate this risk by communicating with our customers, current
      and prospective customers might be reluctant to transact with us due to
      uncertainty about the combined company’s product offerings and its support and
      service of existing products. Resultant delays in purchase decisions would
      negatively impact our revenues and results of operations. In addition, Merger
      related activities and uncertainties could distract management’s and
      employees’








31






attention,
      cause disruptions in relationships with customers and business partners and
      lead
      employees to seek alternative employment. All of these possible consequences
      could have adverse effects on revenues and costs.





**If
      the proposed Merger with ASG is not completed, our business and stock price
      could be adversely affected.**





Our
      business and stock price could be
      adversely affected if the Merger is not completed as a result of several
      factors, including, but not limited to, the following:





·
            our
                stock price could decline if the Merger is abandoned to the extent
                that
                the current stock price includes a premium based on the assumption
                that
                the Merger will be completed;


·
            our
                customers, prospective customers and investors in general may view
                a
                failure to complete the Merger as a poor reflection on our business
                or
                prospects;


·
            certain
                of our suppliers and business partners may have sought to change
                or
                terminate their relationships with us as a result of the proposed
                Merger;


·
            our
                key employees may have sought other employment
                opportunities;


·
            activities
                and uncertainties relating to the Merger may have caused lost revenues
                and
                market share that we may not be able to regain if the Merger does
                not
                occur;


·
            we
                could be required to pay ASG a $6.0 million termination fee in specified
                circumstances, as disclosed in the Merger Agreement;
                and


·
            we
                would have incurred legal, accounting and other Merger related fees
                with
                no associated Merger related
                benefits.





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





(a)  Not
      applicable.





(b)  Not
      applicable.





(c)  Not
      applicable.





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





None.





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





Mobius
      held its Fiscal 2006 Annual
      Meeting of Stockholders on February 6, 2007. The matters submitted to a vote
      of
      stockholders were the election of three members of the Board of Directors to
      the
      class of directors whose terms expire at the Fiscal 2009 Annual Meeting of
      Stockholders (the “2009 Annual Meeting”), approval of an amendment to the
      Non-Employee Directors’ 1998 Stock Option Plan (the “Directors’ Plan”) to
      increase the maximum number of shares of the Company’s common stock available
      for issuance under the Directors’ Plan from 500,000 to 750,000 shares and the
      ratification of the appointment by the Audit Committee of Mobius’s independent
      registered public accounting firm.







32





Mobius's
      stockholders elected Mitchell
      Gross, Mark P. Cattini and Gary G. Greenfield to the Board of Directors, to
      hold
      office until the 2009 Annual Meeting and until their respective successors
      are
      duly elected and qualified. The results of the voting were as
      follows:






Mitchell
                  GrossVoted
                  for
              
              
              17,906,094Withheld
              
              
              379,946Mark
                  P. CattiniVoted
                  for
              
              
              17,763,854Withheld
              
              
              522,186Gary
                  G. GreenfieldVoted
                  for
              
              
              17,905,548Withheld
              
              
              380,492
  Mobius's
          stockholders approved an amendment to the Directors’ Plan. The results of the
          voting were as follows:
 Voted
                  for
              
              
              13,959,983Against
              
              
              1,822,352Abstained
              
              
              59,801Broker
                  Non-Votes
              
              
              2,443,904
 Mobius's
          stockholders ratified the appointment by the Audit Committee of
          PricewaterhouseCoopers LLP as Mobius’s independent registered public accounting
          firm for the fiscal year ending June 30, 2007. The
          results of the voting were as follows:
 Voted
                  for
              
              
              18,251,097Against
              
              
              30,614Abstained
              
              
              4,329




**Item
      5. - Other Information**





None.







33





**Item
      6. - Exhibits**





Exhibit No. 
      Description





2.1(1)
            Agreement
                and Plan of Merger dated April 11, 2007, among Mobius Management
                Systems,
                Inc., Allen Systems Group, Inc. and ASG M&A, Inc.
                (corrected).


3.1(2)
            Form
                of Second Amended and Restated Certificate of Incorporation of the
                Registrant.


3.2(2)
            Form
                of Restated By-Laws of the
                Registrant.


4.1(2)
            Specimen
                certificate representing the Common
                Stock.


10.1(3)
            Amendment
                No. 4 to Non-Employee Directors’ 1998 Stock Option
                Plan.


10.2(4)
            Voting
                Agreement dated as of April 11, 2007, among Mitchell Gross, Joseph
                J.
                Albracht and Allen Systems Group,
                Inc.


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
                Exhibit No. 2.1 to Mobius’s Current Report on Form 8-K/A filed with the
                SEC on April 19, 2007, and incorporated herein by reference to the
                same
                exhibit number.


(2)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.


(3)Filed
                as
                Exhibit No. 10.1 to Mobius’s Form 10-Q for the quarter ended December 31,
                2006, and incorporated herein by
                reference.


(4)Filed
                as
                Exhibit No. 10.1 to Mobius’s Current Report on Form 8-K filed with the SEC
                on April 12, 2007, and incorporated herein by
                reference.









34





**SIGNATURES**





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





Date:  May
      9, 2007




MOBIUS
      MANAGEMENT SYSTEMS, INC.






By:
      /s/ Raymond F.
      Kunzmann


Raymond F. Kunzmann


C hief
      Financial Officer


(Principal
      Financial and Accounting Officer)

















35