**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 December 31, 2006





OR





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


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      transition period from_______ to ________





Commission
      File Number: 0-24077





**Mobius
      Management Systems, Inc.**


(Exact
      name of registrant as specified in its charter)





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


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


incorporation
      or organization) Identification
      Number)








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


(Address
      of principal
      executive offices)             (Zip
      code)





**(914)
      921-7200**


(Registrant’s
      telephone number, including area code)





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





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





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





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





Number
      of
      shares outstanding of the issuer's common stock as of February 2,
      2007





Class           Number
      of Shares
      Outstanding





Common
      Stock, par value $0.0001 per share           19,617,702










**MOBIUS
      MANAGEMENT SYSTEMS, INC.**








**INDEX**





**PART
                I. FINANCIAL INFORMATION**Item
                1. Financial Statements (unaudited)Consolidated
                Balance Sheets - June 30, 2006 and December 31, 2006
            3Consolidated
                Statements of Operations - Three and six months ended December 31,
                2005
                and 2006
            4Consolidated
                Statement of Stockholders’ Equity - Six months ended December 31,
                2006
            5Consolidated
                Statements of Cash Flows - Six months ended December 31, 2005 and
                2006
            6Notes
                to Unaudited Consolidated Financial Statements
            7Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            13Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            29Item
                4. Controls and Procedures
            29**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            30Item
                1A. Risk Factors
            30Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            30Item
                3. Defaults Upon Senior Securities
            30Item
                4. Submission of Matters to a Vote of Security Holders
            30Item
                5. Other Information
            30Item
                6. Exhibits
            31**SIGNATURES**
            **32****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,
                2006
              
              December
                  31,
                2006**ASSETS**Current
                  assets:Cash and cash equivalents
              
              $
              39,967
              
              $
              53,270Accounts receivable, net of allowances of $559 and $492,
                  respectively
              
              
              19,654
              
              
              10,454Software license installments, current portion
              
              
              12,054
              
              
              11,614Other current assets
              
              
              2,480
              
              
              2,446Total
                  current assets
              
              
              74,155
              
              
              77,784Software
                  license installments, non-current portion, net of allowance for
                doubtful accounts of $99 and $238, respectively
              
              
              9,416
              
              
              9,140Property
                  and equipment, net
              
              
              3,912
              
              
              3,681Deferred
                  income taxes
              
              
              2,478
              
              
              2,992Other
                  assets
              
              
              3,379
              
              
              3,203Total
                  assets
              
              $
              93,340
              
              $
              96,800**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts payable and accrued expenses
              
              $
              15,994
              
              $
              13,113Deferred revenues
              
              
              22,765
              
              
              23,372Deferred income taxes
              
              
              2,480
              
              
              3,155Total
                  current liabilities
              
              
              41,239
              
              
              39,640Deferred
                  revenues
              
              
              2,092
              
              
              1,940Other
                  non-current liabilities
              
              
              509
              
              
              525Total
                  liabilities
              
              
              43,840
              
              
              _42,105Commitments
                  and Contingencies (Note 9)Stockholders’
                  equity:Common stock, $.0001 par value; authorized 40,000,000 shares; issued
                24,303,853 and 24,921,193shares,
                  respectively; outstanding 18,949,630
                and 19,566,970 shares, respectively
              
              
              2
              
              
              3Additional paid-in capital
              
              
              58,193
              
              
              60,879Retained earnings
              
              
              5,653
              
              
              6,766Accumulated other comprehensive income
              
              
              1,634
              
              
              3,029Treasury stock, at cost, 5,354,223 shares
              
              
              (15,982
              )
              
              (15,982
              )Total
                  stockholders’ equity
              
              
              49,500
              
              
              54,695Total
                  liabilities and stockholders' equity
              
              $
              93,340
              
              $
              96,800






The
        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
              
              Six
                  Months EndedDecember
                  31,
              
              December
                  31,2005
              
              2006
              
              2005
              
              2006Revenues:Software
                  license
              
              $
              9,507
              
              $
              9,088
              
              $
              18,502
              
              $
              19,029Maintenance
              
              
              10,377
              
              
              11,117
              
              
              21,056
              
              
              22,024Professional
                  service and other
              
              
              1,874
              
              
              2,631
              
              
              3,621
              
              
              4,474Total
                  revenues
              
              
              21,758
              
              
              22,836
              
              
              43,179
              
              
              45,527Cost
                  of revenues:Software
                  license
              
              
              370
              
              
              221
              
              
              655
              
              
              366Maintenance
              
              
              1,853
              
              
              2,240
              
              
              3,718
              
              
              4,145Professional
                  service and other
              
              
              1,453
              
              
              1,722
              
              
              2,839
              
              
              3,111Total
                  cost of revenues
              
              
              3,676
              
              
              4,183
              
              
              7,212
              
              
              7,622Gross
                  profit
              
              
              18,082
              
              
              18,653
              
              
              35,967
              
              
              37,905Operating
                  expenses:Sales
                  and marketing
              
              
              9,019
              
              
              10,051
              
              
              18,229
              
              
              19,213Research
                  and development
              
              
              5,793
              
              
              5,647
              
              
              11,314
              
              
              11,386General
                  and administrative
              
              
              3,390
              
              
              3,709
              
              
              6,647
              
              
              7,313Total
                  operating expenses
              
              
              18,202
              
              
              19,407
              
              
              36,190
              
              
              37,912Loss
                  from operations
              
              
              (120
              )
              
              (754
              )
              
              (223
              )
              
              (7
              )Interest
                  income, net
              
              
              588
              
              
              644
              
              
              1,182
              
              
              1,292Other
                  income (expense)
              
              
              24
              
              
              (16
              )
              
              25
              
              
              (20
              )Income
                  (loss) before income taxes
              
              
              492
              
              
              (126
              )
              
              984
              
              
              1,265Provision
                  for (benefit from) income taxes
              
              
              175
              
              
              (489
              )
              
              352
              
              
              152Net
                  income
              
              $
              317
              
              $
              363
              
              $
              632
              
              $
              1,113Basic
                  earnings per share
              
              $
              0.02
              
              $
              0.02
              
              $
              0.03
              
              $
              0.06Basic
                  weighted average shares
                outstanding
              
              
              18,706
              
              
              19,402
              
              
              18,631
              
              
              19,226Diluted
                  earnings per share
              
              $
              0.02
              
              $
              0.02
              
              $
              0.03
              
              $
              0.06Diluted
                  weighted average shares
                outstanding
              
              
              19,803
              
              
              20,181
              
              
              19,732
              
              
              20,059
 
 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**
 **SIX
        MONTHS ENDED DECEMBER 31, 2006**
 **(Unaudited,
        in thousands)**


Common
                  Stock
              
              
              Additional
                  Paid-in
              
              
              Retained
              
              
              Accumulated
                  Other Comprehensive
              
              
              Treasury
                  Stock
              
              
              Total
                  Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Earnings
              
              
              Income
              
              
              Shares
              
              
              Amount
              
              
              EquityBalance
                  at June 30, 2006
              
              
              18,950
              
              $
              2
              
              $
              58,193
              
              $
              5,653
              
              $
              1,634
              
              
              5,354
              
              $
              (15,982
              )
              $
              49,500Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              1,113
              
              
              -
              
              
              -
              
              
              -
              
              
              1,113Change
                  in other comprehensive income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,395
              
              
              -
              
              
              -
              
              
              1,395Comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,508Stock
                  options exercised
              
              
              529
              
              
              1
              
              
              1,155
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,156Stock
                  purchase plan
              
              
              88
              
              
              -
              
              
              491
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              491Tax
                  benefit from employee stock plans
              
              
              -
              
              
              -
              
              
              488
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              488Stock
                  based compensation expense
              
              
              -
              
              
              -
              
              
              552
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              552Balance
                  at December 31, 2006
              
              
              19,567
              
              $
              3
              
              $
              60,879
              
              $
              6,766
              
              $
              3,029
              
              
              5,354
              
              $
              (15,982
              )
              $
              54,695




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)**


**Six
                  Months Ended December 31**,**2005**
              
              
              **2006**Cash
                  provided by operating activities:Net
                  income
              
              $
              632
              
              $
              1,113Adjustments
                  to reconcile net income to net cash provided
                by operating
                  activities:Deferred income taxes
              
              
              356
              
              
              (539
              )Depreciation and amortization
              
              
              1,018
              
              
              878Stock-based compensation expense
              
              
              423
              
              
              552Change
                  in operating assets and liabilities:Accounts receivable, net
              
              
              (1,074
              )
              
              9,362Software license installments
              
              
              3,261
              
              
              1,034Other assets
              
              
              (593
              )
              
              168Accounts payable and accrued expenses
              
              
              (1,538
              )
              
              (2,435
              )Deferred revenue
              
              
              346
              
              
              293Other non-current liabilities
              
              
              (14
              )
              
              -Total adjustments
              
              
              2,185
              
              
              9,313Net
                  cash provided by operating activities
              
              
              2,817
              
              
              10,426Cash
                  used in investing activities:Capital expenditures
              
              
              (1,241
              )
              
              (455
              )Net
                  cash used in investing activities
              
              
              (1,241
              )
              
              (455
              )Cash
                  provided by financing activities:Cash received from exercise of stock options
              
              
              380
              
              
              1,156Cash received from employee stock purchase plan
              
              
              575
              
              
              491Excess tax benefit attributable to stock options
              
              
              185
              
              
              488Net
                  cash provided by financing activities
              
              
              1,140
              
              
              2,135Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (358
              )
              
              1,197Net
                  change in cash and cash equivalents
              
              
              2,358
              
              
              13,303Cash
                  and cash equivalents at beginning of period
              
              
              33,726
              
              
              39,967Cash
                  and cash equivalents at end of period
              
              $
              36,084
              
              $
              53,270




The
        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
      December 31, 2006 and for the three and six month periods ended December 31,
      2005 and 2006 have been prepared in accordance with the requirements of the
      U.S.
      Securities and Exchange Commission (“SEC”) for interim reporting. Under those
      rules, certain footnotes or other financial information that 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 we have not yet determined the impact, if any,
      on
      our consolidated financial statements.





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


7


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





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





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





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





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


**Three
        Months Ended December 31,**
  2005
              
              2006Net
                  Income
              
              Shares
              
              Per
                  Share
              
              Net
                  Income
              
              Shares
              
              Per
                  Share(Numerator)
              
              (Denominator)
              
              Amount
              
              (Numerator)
              
              (Denominator)
              
              AmountBasic
                  EPS:Net
                  income
              
              $
              317
              
              
              
              
              
              
              
              $
              363Weighted
                  average shares
                outstanding
              
              
              
              
              
              18,706
              
              
              
              
              
              
              
              
              19,402Basic
                  earnings per share
              
              
              
              
              
              
              
              $
              0.02
              
              
              
              
              
              
              
              $
              0.02Diluted
                  EPS:Net
                  income
              
              $
              317
              
              
              
              
              
              
              
              $
              363Dilutive
                  effect of
                stock options
              
              
              
              
              
              1,097
              
              
              
              
              
              
              
              
              779Weighted
                average shares outstanding
              
              
              
              
              
              19,803
              
              
              
              
              
              
              
              
              20,181Diluted
                  earnings per share
              
              
              
              
              
              
              
              $
              0.02
              
              
              
              
              
              
              
              $
              0.02
 
  **Six
        Months Ended December 31,**
  2005
              
              2006Net
                  Income
              
              Shares
              
              Per
                  Share
              
              Net
                  Income
              
              Shares
              
              Per
                  Share(Numerator)
              
              (Denominator)
              
              Amount
              
              (Numerator)
              
              (Denominator)
              
              AmountBasic
                  EPS:Net
                  income
              
              $
              632
              
              
              
              
              
              
              
              $
              1,113Weighted
                  average shares
                outstanding
              
              
              
              
              
              18,631
              
              
              
              
              
              
              
              
              19,226Basic
                  earnings per share
              
              
              
              
              
              
              
              $
              0.03
              
              
              
              
              
              
              
              $
              0.06Diluted
                  EPS:Net
                  income
              
              $
              632
              
              
              
              
              
              
              
              $
              1,113Dilutive
                  effect of
                stock options
              
              
              
              
              
              1,101
              
              
              
              
              
              
              
              
              833Weighted
                average shares outstanding
              
              
              
              
              
              19,732
              
              
              
              
              
              
              
              
              20,059Diluted
                earnings per share
              
              
              
              
              
              
              
              $
              0.03
              
              
              
              
              
              
              
              $
              0.06








Stock
      options for the three and six months ended December 31, 2005, representing
      an
      aggregate of 1,643,863 and 1,671,575 shares of common stock,







8


respectively,
      and stock options for the three and six months ended December 31, 2006,
      representing an aggregate of 1,132,489 and 1,220,230 shares of common stock,
      respectively, were excluded from the calculation of diluted earnings per share
      because the effect would be antidilutive. Stock options were the only dilutive
      instruments outstanding for the three and six months ended December 31, 2005
      and
      2006.





**(3)
      Software License Installments Receivable**





In
      the
      ordinary course of business, the Company offers extended payment terms to some
      of its customers, with terms ranging from six months to five years, with the
      majority in the range of three years to five years. Software license
      installments are discounted at a market rate of interest. The discount is
      amortized over the term of the financing to interest income using the interest
      method.





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


In
        the
        first quarter of fiscal 2005, 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 the three and six months ended December 31, 2005 and
        2006,
        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 and all collection risk to GECC. During the three and
        six
        months ended December 31, 2006, the Company sold approximately $1.2 million
        and
        $1.9 million, respectively, of installments receivable under this arrangement.
        During the six months ended December 31, 2005, the Company sold approximately
        $325,000 of installments receivable, all of which were sold during the fiscal
        first quarter of 2006.




**(5)
      Property and Equipment**





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


Useful
                Life
              
              June
                  30,
                2006
              
              December
                  31,
                2006Computer
                  software and equipment
              
              
              2-5
                  years
              
              $
              9,883
              
              $
              10,273Furniture,
                  fixtures and office equipment
              
              
              5
                  years
              
              
              1,547
              
              
              1,559Leasehold
                  improvements
              
              
              5-15
                  years
              
              
              4,095
              
              
              4,10315,525
              
              
              15,935Less
                  accumulated depreciation and amortization
              
              
              
              
              
              (11,613
              )
              
              (12,254
              )Property
                  and equipment, net
              
              
              
              
              $
              3,912
              
              $
              3,681







9





Depreciation
      and amortization expense on property and equipment was $363,000 and $353,000
      for
      the three months ended December 31, 2005 and 2006, respectively, and $705,000
      and $686,000 for the six months ended December 31, 2005 and 2006, respectively.





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





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


June
                  30,
                2006
              
              
              December
                  31,
                2006Accounts
                  payable
              
              $
              2,183
              
              $
              1,889Compensation
                  and related benefits
              
              
              7,424
              
              
              7,055Royalties
                  payable
              
              
              912
              
              
              440Other
              
              
              5,475
              
              
              3,729$
              15,994
              
              $
              13,113




**(7)
      Stock-Based Compensation**




As
      of
      December 31, 2006, Mobius had the following stock-based compensation plans: the
      2006 Stock Incentive Plan (“2006 Stock Plan”), the Non-Employee Directors’ 1998
      Stock Option Plan (“Directors’ Plan”) and the 1998 Employee Stock Purchase Plan
      (“ESPP”). For a further description of these compensation plans, please refer to
      Note 9, Stock-Based Compensation, in our Annual Report on Form 10-K for the
      fiscal year ended June 30, 2006, filed with the SEC on September 11, 2006.
      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 six months ended December 31, 2006, the Company issued stock options to
      purchase 17,150 shares of common stock (5,600 shares during the fiscal second
      quarter of 2007) and 13,425 shares of restricted stock (5,700 shares during
      the
      fiscal second quarter of 2007) under the 2006 Stock Plan. Awards issued during
      the six months ended December 31, 2006 will be eligible for vesting in equal
      tranches over five years subject to the achievement of certain corporate
      financial goals which will be determined and communicated to participants
      annually. The value of each year’s tranche will be measured at the time such
      financial goals are communicated. During the six months ended December 31,
      2006,
      88,172 shares were issued under the ESPP (all of which were issued during the
      fiscal second quarter). During the six months ended December 31, 2006, no
      options were granted under the Directors’ Plan. Equity-based compensation
      expense for the three and six months ended December 31, 2006 was approximately
      $286,000 and $552,000, respectively, of which approximately $4,000 and $6,000
      of
      such expense related to awards granted under the 2006 Stock Plan during the
      three and six months ended December 31, 2006, respectively. No options were
      granted under the 1996 Stock Incentive Plan, 2006 Stock Plan and Directors’ Plan
      during the six months ended December 31, 2005, and 101,792 shares were issued
      under the ESPP during the six months ended December 31, 2005 (all of which
      were
      issued during the fiscal second quarter). Equity-based compensation expense
      for
      the three and six months ended December 31, 2005 was approximately $196,000
      and
      $423,000, respectively.







10





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





SFAS
      No.
      130, “Reporting Comprehensive Income” requires the disclosure of comprehensive
      income, which includes net income and foreign currency translation adjustments.
      Comprehensive income for the three and six months ended December 31, 2005 and
      2006 is as follows (in thousands):


Three
                  Months Ended
                December
                  31,
              
              Six
                  Months Ended
                December
                  31,2005
              
              2006
              
              2005
              
              2006Net
                  income
              
              $
              317
              
              $
              363
              
              $
              632
              
              $
              1,113Unrealized
                  translation gain (loss)
              
              
              (342
              )
              
              1,605
              
              
              (373
              )
              
              1,395Comprehensive
                  income (loss)
              
              $
              (25
              )
              $
              1,968
              
              $
              259
              
              $
              2,508




**(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,
      collaterized by a certificate of deposit.





**(10)
      Litigation**





**Sale
      of INFOPAC-TapeSaver:** In
      January 1999, the Company sold the INFOPAC-TapeSaver product to a third party
      for approximately $3.0 million payable over a five-year period. As a result
      of
      this arrangement, the Company was going to recognize $3.0 million of license
      revenues as the buyer made payments over a five-year period ended December
      31,
      2003. The buyer has been delinquent on these payments since June 2001 and,
      as
      such, no license revenue relating to this agreement has been recognized from
      June 2001 through the end of the first quarter of fiscal 2007.





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





In
      December 2006, the Company reached a final settlement of its legal proceedings
      to collect license payments due under the agreement covering the sale of the
      INFOPAC-TapeSaver product to the buyer. Under the terms of the settlement,
      the
      Company received net proceeds of approximately $225,000, which have been
      recorded as license revenue in the fiscal second quarter of 2007. In addition,
      the settlement allowed the Company to reverse approximately $100,000 of
      previously-established reserves for royalty payments related to this matter.
      This reversal has been recorded as a reduction to license revenue cost of
      sales.







11





**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. 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 are now engaged in ongoing discovery with respect to the
      remaining claims. Summary judgment motions must be filed no later than April
      2,
      2007, and the case is 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 December 31, 2006 were as follows (in
      thousands):





**June
                30, 2006**
            
            **December
                31, 2006**Accumulated
            
            
            
            
            
            AccumulatedGross
            
            Amortization
            
            Net
            
            Gross
            
            Amortization
            
            NetCompleted
                technology
            
            $
            1,780
            
            $
            1,537
            
            $
            243
            
            $
            1,780
            
            $
            1,684
            
            $
            96Customer
                relationships
            
            
            277
            
            
            199
            
            
            78
            
            
            277
            
            
            245
            
            
            32Total
            
            $
            2,057
            
            $
            1,736
            
            $
            321
            
            $
            2,057
            
            $
            1,929
            
            $
            128





Aggregate
      amortization expense for intangible assets for the quarters ended December
      31,
      2005 and 2006 was $157,000 and $97,000, respectively, and for the six months
      ended December 31, 2005 and 2006 was $313,000 and $193,000, respectively.
      Amortization expense for the remainder of the fiscal year ended June 30, 2007,
      for acquisitions completed through December 31, 2006, is estimated to be
      $128,000.





Changes
      in the carrying amount of goodwill for the six months ended December 31, 2006
      were as follows (in thousands):





**Total**Balance
                as of June 30, 2006
            
            $
            2,756Effect of exchange rate changes
            
            
            13Balance
                as of December 31, 2006
            
            $
            2,769








12


**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 December 31, 2005 and 2006, respectively.
      Our quarterly
      revenues and operating results have varied substantially from quarter to quarter
      in the past, and are likely to continue to do so in the future.





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





**Overview**





We
      are a
      leading provider of integrated solutions for enterprise archiving and records
      management. For twenty-five years, we have delivered innovative software that
      helps major corporations manage and derive value from vast amounts of digital
      records, documents, 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 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.







13


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







**Critical
      Accounting Policies and Estimates**





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





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





***Revenue
      Recognition***





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





Revenues
      from software license agreements are recognized upon 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 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







14


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.





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.







15





***Income
      Taxes***





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





Beginning
      July 1, 2005, in accordance with SFAS No. 123(R), “Share-Based Payment (revised
      2004)” (“SFAS No. 123(R)”), we record windfall tax benefits associated with the
      exercise of stock options directly to stockholders’ equity when 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 and second quarters of fiscal 2007, we granted stock options and
      restricted stock. Please refer to Note 7, Stock-Based Compensation, to the
      accompanying unaudited consolidated financial statements for additional
      information regarding these grants. Under our current equity-based compensation
      program, awards will be eligible for vesting in equal tranches over five years
      subject to the achievement of certain corporate financial goals which will
      be
      determined and communicated to participants annually. The value of any awards
      eligible to vest if such goals are achieved will also be measured at the date
      the terms are communicated and understood. As a result, changes in the share
      price of our common stock as listed on the NASDAQ Global Market from the date
      the awards are issued to the date that the terms are communicated and understood
      will impact the value of the award, and thus, the amount to be recorded as
      an
      expense if the corporate goals are achieved and the awards vest.










16





**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
                December
                  31,
              
              Three
                  Months Ended
                December
                  31,Revenues:
              
              2005
              
              2006
              
              2005
              
              2006Software license
              
              
              43.7
              %
              
              39.8
              %
              
              42.8
              %
              
              41.8
              %Maintenance
              
              
              47.7
              
              
              48.7
              
              
              48.8
              
              
              48.4Professional service and other
              
              
              8.6
              
              
              11.5
              
              
              8.4
              
              
              9.8Total
                  revenues
              
              
              100.0
              
              
              100.0
              
              
              100.0
              
              
              100.0Cost
                  of revenues:Software license
              
              
              1.7
              
              
              1.0
              
              
              1.5
              
              
              0.8Maintenance
              
              
              8.6
              
              
              9.8
              
              
              8.7
              
              
              9.1Professional service and other
              
              
              6.6
              
              
              7.5
              
              
              6.5
              
              
              6.8Total
                  costs of revenues
              
              
              16.9
              
              
              18.3
              
              
              16.7
              
              
              16.7Gross
                  profit
              
              
              83.1
              
              
              81.7
              
              
              83.3
              
              
              83.3Operating
                  expenses:Sales and marketing
              
              
              41.4
              
              
              44.0
              
              
              42.3
              
              
              42.2Research and development
              
              
              26.6
              
              
              24.7
              
              
              26.2
              
              
              25.0General and administrative
              
              
              15.6
              
              
              16.3
              
              
              15.3
              
              
              16.1Total
                  operating expenses
              
              
              83.6
              
              
              85.0
              
              
              83.8
              
              
              83.3Loss
                  from operations
              
              
              (0.5
              )
              
              (3.3
              )
              
              (0.5
              )
              
              0.0Interest
                  income, net
              
              
              2.7
              
              
              2.8
              
              
              2.7
              
              
              2.8Other
                  income (expense)
              
              
              0.1
              
              
              -
              
              
              0.1
              
              
              -Income
                  (loss) before income taxes
              
              
              2.3
              
              
              (0.5
              )
              
              2.3
              
              
              2.8Provision
                  for (benefit from) income taxes
              
              
              0.9
              
              
              (2.1
              )
              
              0.8
              
              
              0.4Net
                  income
              
              
              1.4
              %
              
              1.6
              %
              
              1.5
              %
              
              2.4
              %









17





***Executive
      Overview***





Total
      revenues in the fiscal second quarter of 2007 of $22.8 million were 5.0% higher
      than revenues of $21.8 million in the same quarter last year. Operating loss
      in
      the fiscal second quarter of 2007 was $754,000, or (3.3)% of revenues, as
      compared with an operating loss of $120,000, or (0.5)% of revenues, in the
      same
      quarter last year. Net income for the fiscal second quarter of 2007 was
      $363,000, or $0.02 per diluted share, as compared with $317,000, or $0.02 per
      diluted share, in the same quarter last year. Our earnings in the fiscal second
      quarter of 2007 and 2006 were reduced by a pre-tax expense of $286,000, or
      $0.01
      per diluted share, and $196,000, or $0.01 per diluted share, respectively,
      related to stock-based compensation recorded pursuant to SFAS No.
      123(R).





Total
      revenues in the first six months of fiscal 2007 of $45.5 million were 5.4%
      higher than revenues of $43.2 million in the same period last year. Operating
      loss in the first six months of fiscal 2007 was $7,000, as compared with an
      operating loss of $223,000, or (0.5)% of revenues, in the same period last
      year.
      Net income for the first six months of fiscal 2007 was $1.1 million, or $0.06
      per diluted share, as compared with $632,000, or $0.03 per diluted share, in
      the
      same period last year. Our earnings in the first six months of fiscal 2007
      and
      2006 were reduced by a pre-tax expense of $552,000, or $0.02 per diluted share,
      and $423,000, or $0.02 per diluted share, respectively, related to stock-based
      compensation recorded pursuant to SFAS No. 123(R).





Cash
      generation continues to be very strong as we added over $7.0 million to our
      cash
      balance in the quarter and over $13.0 million year-to-date. 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. Professional service revenue continued to improve primarily as a result of
      growth in our European service business. License revenue, however, was lower
      than anticipated due to a number of factors, including several opportunities
      moving out to future quarters, the learning curve associated with new direct
      sales staff added over the first half 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
      typically earn significantly higher margins on the license component of our
      revenue. As such, although our total revenues in the second fiscal quarter
      of
      2007 increased 5.0% as compared with the same period last year, the mix of
      lower
      license revenue and higher service revenue resulted in an unfavorable variance
      in gross margins and an operating loss. This unfavorable variance was
      substantially offset by a favorable tax benefit due to the reinstatement of
      the
      U.S. research and development tax credit by Congress in December 2006,
      retroactive to January 1, 2006. As a result of the reinstatement, we recaptured
      credits not recorded in the prior three fiscal quarters and factored the credit
      into our current year tax rate.





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.







18





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





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





***Revenues:***





·
            **Total
                revenues**increased
                5.0% from $21.8 million in last year’s quarter to $22.8million
                this quarter. Domestic revenuesdecreased
                5.8% from $17.8 million in last year’s quarter to $16.7 million this
                quarter. International revenuesincreased
                53.2% from $4.0 million in last year’s quarter to $6.1 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. Thefollowing
                provides a discussion of the changes in software license revenues,
                maintenance revenues and professional service and other revenues
                for the
                quarter ended December 31, 2006, as compared with the quarter ended
                December 31, 2005.





·
            **Software
                license revenues**decreased
                4.4% from $9.5 million in last year’s quarter to $9.1 million
                this quarter. The decrease in software license revenues was due to
                several
                factors, including a number of potential opportunities that fell
                out of
                this quarter to future quarters, the learning curve associated with
                new
                direct sales staff added over the first half of fiscal 2007 and delays
                in
                executing on our new channel sales program. Included in software
                license
                revenues for the quarter ended December 31, 2006 is approximately
                $225,000, representing the net proceeds we received from the settlement
                of
                the INFOPAC-TapeSaver proceedings. For additional information relating
                to
                this settlement, see the section entitled, “Other Matters -
                INFOPAC-TapeSaver” below.





·
            **Maintenance
                revenues**increased 7.1% from $10.4 million in last year’s quarter to $11.1
                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 20% and 13%
      of
      total software







19


license
      revenues during the fiscal second quarter of 2006 and 2007, respectively, is
      generally based on 10% of contract value. Solution Packs are combinations of
      certain server and client products designed to address specific customer
      requirements, which typically have five year license terms.





·
            **Professional
                service and other revenues**increased 40.4% from $1.9 million in last year’s quarter to $2.6 million
                this quarter, due to higher service revenue in Europe, reflecting
                work on
                several large contracts.





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. The cost of software
                license revenues decreased 40.3% from $370,000 in last year’s quarter to
                $221,000 this quarter, representing 3.9% and 2.4%, 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 the reversal of a reserve for royalty payments
                of
                approximately $100,000 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” below.





·
            **Cost
                of maintenance revenues**consists primarily of personnel costs related to our Customer Support
                group. The cost of maintenance revenues increased 20.9% from $1.9
                million
                in last year’s quarter to $2.2 million this quarter, representing 17.9%
                and 20.1%, respectively, of maintenance revenues in those quarters.
                The
                increase in cost of maintenance revenues is primarily due to increased
                utilization of development personnel in Customer Support projects,
                resulting in a higher allocation of these costs to cost of maintenance
                revenues.





·
            **Cost
                of professional service and other revenues**consists
                primarily of personnel costs associated with providing professional
                services, as well as third-party subcontractor costs. The cost of
                professional service and other revenues increased 18.5% from $1.5
                million
                in last year’s quarter to $1.7 million this quarter. These costs as a
                percentage of professional service and other revenues decreased from
                77.5%
                in last year’s quarter to 65.5% in this quarter. This was primarily due to
                improved professional staff utilization and the leverage of fixed
                costs
                over higher revenues.





***Operating
      Expenses:***





·
            **Sales
                and marketing**expenses consist primarily of the cost of personnel associated with
                the
                selling and marketing of our products, including incentive compensation
                costs associated with revenues. Sales and marketing costs also include
                the
                cost of branch sales offices, marketing, promotional materials,
                advertising, food, travel and lodging expenses and bad debt expense.
                These
                expenses increased 11.4% from $9.0 million in last year’s quarter to $10.1
                million this quarter, representing 41.4% and 44.0%, respectively,
                of total
                revenues in those quarters. The increase in sales and marketing expenses
                was attributable to a number of items, including: (i) fees paid to
                sales
                agents on several licenses which were recorded gross in revenues;
                (ii) the
                timing of tradeshow and seminar expenses; (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 personnel costs, reflecting increased
                headcount in direct sales and the establishment of our channel sales
                function.







20


**·**
            **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 2.5% from
                $5.8 million in last year’s quarter to $5.6 million this quarter,
                representing 26.6% and 24.7%, 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 in 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 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 9.4% from $3.4 million in last
                year’s
                quarter to $3.7 million this quarter, representing 15.6% and 16.3%,
                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 second quarters of fiscal 2006
                and 2007, we recorded legal fees relating to this proceeding of
                approximately $95,000 and $240,000, respectively. Through December
                31,
                2006, we have recorded cumulative legal fees relating to this proceeding
                of approximately $685,000. In addition, 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.





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





Interest
      income, net of interest expense, was $588,000 in last year’s quarter and
      $644,000 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
      provision for income taxes was $175,000 (effective tax provision rate of 35.6%)
      in last year’s quarter and a tax benefit from income taxes of $489,000
      (effective tax benefit rate of 388.1%) in this quarter. The significant increase
      in the fiscal 2007 second quarter tax benefit was primarily due to the
      reinstatement of the U.S. research and development tax credit (“R&D Tax
      Credit”) by Congress retroactive to January 1, 2006. As a result of this
      reinstatement, we recaptured R&D Tax Credits not recorded in the prior three
      fiscal quarters and factored the R&D Tax Credit into our current year tax
      rate.





***Six
      Months Ended December 31, 2005 Compared to Six Months Ended December 31, 2006***





***Revenues:***





·
            **Total
                revenues**increased
                5.4% from $43.2 million in the first six months of fiscal 2006 to
                $45.5
                million in the first six months of fiscal 2007. Domestic revenuesincreased
                4.3% from $32.4 million in the first six months of fiscal 2006 to
                $33.7
                million in the first six months of fiscal 2007. International revenuesincreased
                9.0% from $10.8 million in the first six months of fiscal 2006 to
                $11.8
                million in the first six 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. Thefollowing
                provides a discussion of the changes in software license revenues,
                maintenance revenues and professional service
                and other revenues for the first six months of fiscal 2006, as compared
                with the first six months of fiscal 2007.









21





·
            **Software
                license revenues**increased 2.8% from $18.5 million in the first six months of fiscal
                2006 to $19.0 million in the first six months of fiscal 2007. The
                increase in software license revenues reflects several large renewals
                in
                the fiscal first quarter of 2007, each ranging from $1.2 million
                to $1.5
                million. This increase was partially offset by a number of potential
                opportunities that fell out of this quarter to future quarters, the
                learning curve associated with new direct sales staff added over
                the first
                half of fiscal 2007 and delays in executing on our new channel sales
                program. Included in software license revenues for the six months
                ended
                December 31, 2006 is approximately $225,000, representing the net
                proceeds
                we received in the second quarter from the settlement of the
                INFOPAC-TapeSaver proceedings. For additional information relating
                to this
                settlement, see the section entitled, “Other Matters - INFOPAC-TapeSaver”
                below.





·
            **Maintenance
                revenues**increased 4.6% from $21.1 million in the first six months of fiscal
                2006 to $22.0 million in the first six 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 30% and 15%
      of
      total software license revenues during the first six months of fiscal 2006
      and
      2007, respectively, is generally based on 10% of contract value. Solution Packs
      are combinations of certain server and client products designed to address
      specific customer requirements, which typically have five year license
      terms.





·
            **Professional
                service and other revenues**increased 23.6% from $3.6 million in the first six months of fiscal
                2006
                to $4.5 million in the first six 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 44.1% from $655,000 in the first six months of fiscal 2006
                to
                $366,000 in the first six months of fiscal 2007, representing 3.5%
                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 the
                reversal of a reserve for royalty payments of approximately $100,000
                as a
                result of the settlement of litigation relating to the sale of our
                INFOPAC-TapeSaver product line. For









22




additional
        information relating to this settlement, see the section entitled, “Other
        Matters - INFOPAC-TapeSaver” below. In addition, there was a lower mix of
        third-party software included in software license revenues in the current
        period.




·
            **Cost
                of maintenance revenues**increased 11.5% from $3.7 million in the first six months of fiscal
                2006
                to $4.1 million in the first six months of fiscal 2007, representing
                17.7%
                and 18.8%, respectively, of maintenance revenues in those periods.
                The
                increase in cost of maintenance revenues is primarily due to increased
                utilization of development personnel in Customer Support projects,
                resulting in a higher allocation of these costs to cost of maintenance
                revenues.





·
            **Cost
                of professional service and other revenues**increased 9.6% from $2.8 million in the first six months of fiscal
                2006 to
                $3.1 million in the first six months of fiscal 2007. These costs
                as a
                percentage of professional service and other revenues decreased from
                78.4%
                in the first six months of fiscal 2006 to 69.5% in the first six
                months of
                fiscal 2007. This was primarily due to improved professional staff
                utilization and the leverage of fixed costs over higher
                revenues.





***Operating
      Expenses:***





·
            **Sales
                and marketing**expenses increased 5.4% from $18.2 million in the first six months of
                fiscal 2006 to $19.2 million in the first six months of fiscal 2007,
                representing 42.3% and 42.2%, respectively, of total revenues in
                those
                periods. Sales and marketing expenses increased primarily due to
                higher
                personnel costs, reflecting increased headcount in direct sales and
                the
                establishment of our new channel sales function, and fees paid to
                sales
                agents on several licenses which were recorded gross in
                revenues.





·
            **Research
                and development**expenses totaled $11.3 million in the first six months of fiscal 2006
                and $11.4 million in the first six months of fiscal 2007, representing
                26.2% and 25.0%, respectively, of total revenues in those periods.
                The
                increase in research and development expenses was primarily due to
                higher
                subcontractor costs relating to the timing of third-party development
                work
                on certain projects, partially offset by higher allocation of expenses
                to
                Customer Support due to increased utilization of development personnel
                in
                Customer Support projects.





·
            **General
                and administrative**expenses increased 10.0% from $6.6 million in the first six months
                of
                fiscal 2006 to $7.3 million in the first six months of fiscal 2007,
                representing 15.3% and 16.1%, 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 six months of fiscal 2006 and 2007, we recorded legal fees
                relating to this proceeding of approximately $160,000 and $420,000,
                respectively. Through December 31, 2006, we have recorded cumulative
                legal
                fees relating to this proceeding of approximately $685,000. 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.





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





Interest
      income, net of interest expense, was $1.2 million in the first six months of
      fiscal 2006 and $1.3 million in the first six 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.










23






Provision
      for income taxes:





The
      tax
      provision for income taxes was $352,000 (effective tax provision rate of 35.8%)
      in the first six months of fiscal 2006 and $152,000 (effective tax provision
      rate of 12.0%) in the first six months of fiscal 2007. During the first six
      months of fiscal 2007, the effective tax provision rate was impacted primarily
      due to the reinstatement of the U.S. research and development tax credit
      (“R&D Tax Credit”) by Congress retroactive to January 1, 2006. As a result
      of this reinstatement, we recaptured R&D Tax Credits not recorded in the
      prior three fiscal quarters and factored the R&D Tax Credit into our current
      year tax rate.





**Liquidity
      and Capital Resources**





***Executive
      Overview***





Since
      our
      inception, we have funded our operations principally through cash flows from
      operating activities. As of December 31, 2006, we had cash and cash equivalents
      of $53.3 million, a 33.3% 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 December 31, 2006 and June
      30,
      2006, the Company had no bank debt outstanding.





We
      believe that our existing cash balances and cash flows expected from future
      operations will be sufficient to meet our capital requirements at least through
      the end of our second 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
      six months of fiscal 2007, we sold approximately $1.9 million of installments
      receivable (of which approximately $1.2 million were sold during the fiscal
      second quarter) under this arrangement, bringing total sales of installments
      receivable to GECC through December 31, 2006 to approximately $7.7 million.
      If
      the level of software license revenues financed by installments receivable
      increases and we are unable to assign a substantial percentage of such
      receivables to GECC or other vendor financing firms, our cash position is likely
      to be adversely affected.





*****





Net
      cash
      provided by operating activities was $2.8 million and $10.4 million during
      the
      first six months of fiscal 2006 and 2007, respectively. Our primary sources
      of
      cash provided by operating activities during the first six months of fiscal
      2006
      were from net income adjusted for depreciation and amortization, deferred income
      taxes and other non-cash charges and a reduction in software license
      installments receivable, partially offset by an increase in accounts receivable
      and reductions in accounts payable and accrued expenses. Our primary sources
      of
      cash provided by operating activities during the first six months of fiscal
      2007
      were from a reduction in accounts receivable and net income adjusted for
      depreciation and amortization, deferred income taxes and other non-cash charges,
      partially offset by a decrease in accounts payable and accrued expenses. The
      decrease in accounts receivable of approximately $9.2 million was due to
      collections during the first six months of fiscal 2007 of a substantial amount
      of the increase in receivables outstanding as of June 30, 2006, which resulted
      from the shift during fiscal 2006 from licenses sold on an installment basis
      to
      licenses with one-time payment terms.







24





Net
      cash
      used in investing activities was $1.2 million and $455,000 in the first six
      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
      six 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 $1.1 million and $2.1 million in the first
      six months of fiscal 2006 and 2007, respectively. Net cash provided by financing
      activities for the first six months of fiscal 2006 and 2007 was due to the
      exercise of stock options by employees of $380,000 and $1.2 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 $185,000 and $488,000, respectively.





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 December 31, 2006, the future minimum lease
      payments for these operating leases are as follows (in thousands):




Year
                Ending:
              
              
              Operating
                LeasesDecember
                  31, 2007
              
              $
              2,852December
                  31, 2008
              
              
              2,496December
                  31, 2009
              
              
              2,010December
                  31, 2010
              
              
              901Total
                  minimum lease payments
              
              $
              8,259


In
      addition to the commitments shown above, we have commitments at December 31,
      2006 for future purchases of goods and services of approximately
      $190,000.





In
      compliance with the lease of our corporate headquarters in Rye, NY, the landlord
      holds a letter of credit issued by a bank totaling $275,000, collaterized 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 $492,000 at June 30, 2006 and December 31, 2006,
      respectively.





**Software
      License Installments Receivable**





As
      of
      December 31, 2006, software license installments receivable amounted to $20.8
      million, a decrease of 3.3% compared with the June 30, 2006 balance of $21.5
      million. This decrease was
      primarily due to collections, the sale of approximately




25


$1.9
      million of installments receivable to GECC and a lower percentage of financed
      licenses in the first six 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 December 31, 2006, we have
      sold approximately $7.7 million of installments receivable to GECC. Please
      refer
      to Note 4, Sale of Software License Installments Receivable, in the accompanying
      unaudited consolidated financial statements for additional information regarding
      this arrangement. We offer extended payment terms to our customers that meet
      specified standards of creditworthiness, which we believe enhances our
      competitive position. Software license installments are discounted at a market
      rate of interest at the date the software license contract revenue is
      recognized. The discount is amortized to interest income using the interest
      method over the term of the financing. Software license installments receivable
      will fluctuate with the amount of license revenue sold on an installment
      basis.





As
      of
      December 31, 2006, one customer had a balance equal to 16.7% of total software
      license installments. No other customer had a balance in excess of 5.5% of
      total
      software license installments. As of December 31, 2006, total software license
      installments receivable have an average age of approximately 1.2
      years.





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





**Deferred
      Revenues**





Deferred
      revenues consist primarily of the unearned portion of maintenance revenues
      and,
      to a lesser extent, license contracts where the revenue has been deferred due
      to
      credit issues or specific contract clauses which preclude revenue recognition
      at
      that time. Current and non-current deferred revenues totaled $24.9 million
      at
      June 30, 2006 and $25.3 million at December 31, 2006. Deferred revenues can
      fluctuate due to the timing of annual maintenance billings, increases or
      decreases in current license revenues and increases or decreases in license
      contracts that include more than one year of maintenance. As of December 31,
      2006, current deferred revenues totaled $23.4 million and non-current deferred
      revenues totaled $1.9 million.





**Other
      Matters**





**INFOPAC-TapeSaver:** In
      January 1999, we sold the INFOPAC-TapeSaver product to a third party for
      approximately $3.0 million payable over a five-year period. As a result of
      this
      arrangement, we were going to recognize $3.0 million of license revenues as
      the
      buyer made payments over a five-year period ended December 31, 2003. The buyer
      has been delinquent on these payments since June 2001 and, as such, no license
      revenue relating to this agreement has been recognized from June 2001 through
      the end of the first quarter of fiscal 2007.





We
      commenced arbitration proceedings against the buyer to enforce the payment
      terms
      in the sales agreement. On March
      26, 2002, the arbitrator issued an award in our favor against the buyer and
      its
      president in the amount of $381,750, which represented the amount past due
      under
      such agreement. The arbitrator also directed the buyer and its president to
      pay
      us $37,500 per month from March 31, 2002 through December 31, 2003 and to pay
      our share of the arbitration expenses. In April 2002, Mobius commenced an action
      against the buyer and its president in the United States District Court for
      the
      Southern District of New York to confirm the arbitration award. The
      Court
      entered an order confirming the award on September 23, 2002. We have docketed
      the judgment in California for the full amount of the debt due of approximately
      $1.2 million. During January 2005, the buyer’s president filed for personal
      bankruptcy protection. In April 2005, we filed a complaint in the bankruptcy
      proceeding alleging that the buyer’s president’s debt to us is not dischargeable
      in the bankruptcy proceeding. The buyer’s president answered the







26


complaint,
      denying those allegations. On May 17, 2006, the parties settled the action,
      with
      the buyer’s president agreeing to pay certain sums to be realized from the sale
      of his residence after settlement of an existing mortgage on the
      property.





In
      December 2006, we reached a final settlement of our legal proceedings to collect
      license payments due under the agreement covering the sale of our
      INFOPAC-TapeSaver product to the buyer. Under the terms of the settlement,
      we
      received net proceeds of approximately $225,000, which have been recorded as
      license revenue in the fiscal second quarter of 2007. In addition, the
      settlement allowed us to reverse approximately $100,000 of
      previously-established reserves for royalty payments related to this matter.
      This reversal has been recorded as a reduction to license revenue cost of
      sales.





**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 violation of state statutory and common law and for violation
      of
      the Delaware Uniform Trade Secrets Act. 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 are now engaged in ongoing discovery with respect to the
      remaining claims. Summary judgment motions must be filed no later than April
      2,
      2007, and the case is 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.





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







27




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.









28





**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
      December 31, 2006, we held no marketable securities.





We
      are
      exposed to market risk arising from changes in foreign currency exchange rates
      as a result of selling our products and services outside the United States
      (principally Europe). Sales generated from our non-U.S. operations are
      denominated in currencies other than the U.S. dollar. Consequently, the
      translated U.S. dollar value of our non-U.S. sales and operating results are
      subject to currency exchange rate fluctuations which may favorably or
      unfavorably impact reported earnings and may affect comparability of
      period-to-period operating results. For the three and six months ended December
      31, 2006, approximately 10.0% and 8.0% of our revenues were denominated in
      Euros, respectively, and approximately 4.0% and 7.0% in Swedish kroners,
      respectively. For the three and six months ended December 31, 2005,
      approximately 7.0% and 7.0% of our revenues were denominated in Euros,
      respectively, and approximately 3.0% and 7.0% 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 December 31, 2006 to
      ensure that information required to be disclosed by us in reports that we file
      or submit under the Exchange Act was recorded, processed, summarized and
      reported within the time periods specified in Securities and Exchange Commission
      rules and forms, and that such information is accumulated and communicated
      to
      management to allow timely decisions regarding required disclosure.





*Changes
      in Internal Control Over Financial Reporting.* There
      were no changes in our internal control over financial reporting during our
      fiscal quarter ended December 31, 2006 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.











29


**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 September 30, 2006, filed with the
                U.S.
                Securities and Exchange Commission (“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**





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





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





(a)
      Not
      applicable.





(b)
      Not
      applicable.





(c)
      Not
      applicable.





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





None.





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





None.





**Item
      5. - Other Information**





None.







30





**Item
      6. - Exhibits**





Exhibit No. Description





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


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


4.1(1)
            Specimen
                certificate representing the Common
                Stock.


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


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


31.2
            CFO
                Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.


32.1
            CEO
                Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.


32.2
            CFO
                Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.








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









31





**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:
      February 8, 2007





MOBIUS
      MANAGEMENT
      SYSTEMS, INC.





By: /s/
      Raymond F.
      Kunzmann


Raymond
      F. Kunzmann


Chief Financial Officer


(Principal Financial and Accounting Officer)
















32