M Wise 10Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

o 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: 001-51743

m-Wise, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	11-3536906
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3 Sapir Street, Herzeliya Pituach, Israel 46852

(Address of principal executive offices)

+972-73-2620000

(Registrant’s telephone number, including area code)

All Correspondence to:

Arthur S. Marcus, Esq.

Gersten Savage LLP

600 Lexington Avenue, 9^th Floor

New York, New York 10022

(212) 752-9700

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 o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares outstanding of the issuer's common stock, as of August 14, 2008, was 139,322,145.

Index

		Page
PART I: FINANCIAL INFORMATION		F-1

Item 1:	Financial Statements	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4
Item 4T.	Controls and Procedures	4

PART II: OTHER INFORMATION		5

Item 1.	Legal Proceedings	5
Item 1A.	Risk Factors	5
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5
Item 3.	Defaults upon Senior Securities	5
Item 4.	Submission of Matters to a Vote of Security Holders	5
Item 5.	Other Information	5
Item 6.	Exhibits	5

SIGNATURES		8

PART I:

FINANCIAL INFORMATION

Item 1: Financial Statements

m-Wise, Inc. and Subsidiary

CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008, AND 2007

(UNAUDITED)

CONTENTS

Consolidated Balance Sheets	F-2

Consolidated Statements of Operations	F-3

Consolidated Statements of Cash Flows	F-4

Notes to Consolidated Financial Statements	F-5

F-1

M-WISE, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (NOTE 2)

AS OF JUNE 30, 2008, AND DECEMBER 31, 2007

(Unaudited)

	June 30,			December 31,
	2008			2007

ASSETS

Current Assets:
Cash and cash equivalents	$	20,382		$	365,513
Accounts receivable - Trade (net of allowance for doubtful
accounts of $ 306,915; 2007 $ 291,915)		678,545			710,782
Prepaid and other assets		41,125			21,238
Total current assets		740,052			1,097,533

Long-term Assets:
Long-term prepaid expenses		14,285			19,758
Equipment, net (Note 3)		66,593			79,601

Total long-term assets		80,878			99,359

Total Assets	$	820,930		$	1,196,892

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current Liabilities:
Bank indebtedness (Note 4)	$	5,403		$	-
Accounts payable - Trade		25,271			36,845
Other payables and accrued expenses (Note 5)		970,628			1,019,965
Advances from stockholder (Note 6)		315,187			310,083
Billings in excess of costs on uncompleted contracts		105,873			136,633
Total current liabilities		1,422,362			1,503,526

Long-term Liabilities:
Accrued severance pay (Note 7)		97,696			39,916
Total long-term liabilities		97,696			39,916
Total liabilities		1,520,058			1,543,442

Commitments and Contingencies (Note 13)

Stockholders' (Deficit):
Preferred stock (Note 8)		-			-
Common stock (Note 8)		236,848			236,610
Additional paid-in capital		11,182,209			10,977,577
Accumulated (deficit)		(12,118,185	)		(11,560,737	)
Total stockholders' (deficit)		(699,128	)		(346,550	)
Total Liabilities and Stockholders' (Deficit)	$	820,930		$	1,196,892

The accompanying notes to consolidated financial statements are

an integral part of these consolidated balance sheets.

F-2

M-WISE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 2)

FOR THE THREE MONTHS AND SIX MONTHS ENDED

JUNE 30, 2008, AND 2007

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Net Sales	$	612,584		$	426,333		$	1,295,161		$	905,199
Cost of Sales		271,615			76,132			504,391			135,242
Gross Profit		340,969			350,201			790,770			769,957

Expenses:
Research and development		182,431			189,492			387,657			379,078
General and administrative		495,405			398,298			926,787			753,309
Total expenses		677,836			587,790			1,314,444			1,132,387
(Loss) from operations		(336,867	)		(237,589	)		(523,674	)		(362,430	)
Other (Expense):
Interest and other		(10,689	)		(10,091	)		(33,774	)		(19,285	)
Total other (expense)		(10,689	)		(10,091	)		(33,774	)		(19,285	)

Provision for income taxes		-			-			-			-
Net (Loss)	$	(347,556	)	$	(247,680	)	$	(557,448	)		(381,715	)
Basic and Diluted (Loss) per Share (Note 8)
(Loss) per common share - Basic and diluted	$	(0.00	)		(0.00	)		(0.00	)		(0.00	)
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted		139,233,478			136,103,398			139,207,670			133,124,601

The accompanying notes to consolidated financial statements are

an integral part of these consolidated statements.

F-3

M-WISE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 2)

FOR THE SIX MONTHS ENDED JUNE 30, 2008, AND 2007

(Unaudited)

	Six Months Ended
	June 30,
	2008			2007

Operating Activities:
Net (loss)	$	(557,448	)	$	(381,715	)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation		22,268			30,575
Exercise of stock options		-			6,206
Employee options vested		201,560			88,325
Net changes in assets and liabilties-
Accounts receivable - Trade		32,237			21,284
Prepaid and other assets		(19,887	)		98,187
Loan receivable		-			-
Accounts payable - Trade		(11,574	)		27,492
Other payables and accrued liabilities		(49,337	)		(5,888	)
Billings in excess of costs on uncompleted contracts		(30,760	)		-
Long-term prepaid expenses		5,473			4,089
Accrued severence pay		57,780			10,198

Net Cash (Used in) Operating Activities		(349,688	)		(101,247	)

Investing Activities:
Acquisition of equipment		(9,260	)		(21,570	)

Net Cash (Used in) Investing Activities		(9,260	)		(21,570	)

Financing Activities:
Advances from (payments to) stockholder		5,104			(115,352	)
Deferred financing fees		-			6,314
Sale of common shares under Equity Financing Agreement		3,310			658,826
Bank indebtedness - Net		5,403			(3,110	)

Net Cash Provided by Financing Activities		13,817			546,678

Net (Decrease) Increase in Cash and Cash Equivalents		(345,131	)		423,861

Cash and Cash Equivalents - Beginning of Period		365,513			5,072

Cash and Cash Equivalents - End of Period	$	20,382		$	428,933

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	261		$	261

Income taxes	$	-		$	-

The accompanying notes to financial statements

are an integral part of these consolidated statements.

F-4

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

1.	Description of Business and Going Concern

Description of Business

M-Wise, Inc. (the “Company”) is a Delaware corporation that develops interactive messaging platforms for mobile phone-based commercial applications, transactions, and information services with internet billing capabilities.

The Company’s wholly owned subsidiary, m-Wise Ltd., is located in Israel and was incorporated in 2000 under the laws of Israel.

Going Concern

The Company’s consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced recurring losses since inception, and has negative cash flows from operations with negative working capital that raise substantial doubt as to its ability to continue as a going concern. For the six months ended June 30, 2008, the Company experienced net losses of $557,448 (2007 - $381,715) and a working capital deficit of $682,310 (December 31, 2007 - $405,993).

The Company is in an industry where operational fluctuation is usually higher than other ordinary industries. The accompanying financial statements reflect management’s current assessment of the impact to date of the economic situation on the financial position of the Company. Actual results may differ materially from management’s current assessment.

The Company’s ability to continue as a going concern is also contingent upon its ability to secure additional financing, continuing sale of its products, and attaining profitable operations.

The Company is pursuing additional financing, but there can be no assurance that the Company will be able to secure financing when needed or obtain financing on terms satisfactory to the Company, if at all.

The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

2.	Summary of Significant Accounting Policies

The accounting policies of the Company are in accordance with generally accepted accounting principles in the United States of America, and their basis of application is consistent with that of the previous year. Outlined below are those policies considered particularly significant:

F-5

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

Unaudited Interim Financial Statements

The interim financial statements of the Company as of June 30, 2008, and 2007, and for the three and six months ended June 30, 2008, and 2007, are unaudited. However, in the opinion of management, the interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 30, 2008, and 2007, and the results of its operations and its cash flows for the three and six months ended June 30, 2008, and 2007. These results are not necessarily indicative of the results expected for the calendar year ending December 31, 2008. The accompanying financial statements and notes thereto do not reflect all disclosures required under accounting principles generally accepted in the United States of America. Refer to m-Wise’s audited financial statements as of December 31, 2007, in its annual report on form 10-KSB filed with the SEC on April 8, 2008 for additional information, including significant accounting policies.

Reporting Currency

A majority of the Company’s revenues are generated in U.S. dollars. In addition, a substantial portion of the Company’s costs are incurred in U.S. dollars. Management has determined that the U.S. dollar will be used as the Company’s functional and reporting currency.

Basis of Consolidation

The consolidated financial statements include the operations of m-Wise Inc. and its wholly owned subsidiary. Intercompany balances and transactions have been eliminated in consolidation.

Equipment and Depreciation

Equipment is stated at cost. Depreciation is based on the estimated useful lives of the related assets and is provided using the undernoted annual rates and methods:

Furniture and equipment	6-15	%	Straight line
Computer equipment	33	%	Straight line
Leasehold improvements	Straight line over the term of the lease.

Revenue Recognition

The Company generates revenues from product sales, licensing, customer services, and technical support.

Revenues from products sales are recognized on a completed-contract basis, in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”), Statement of Position 97-2, “Software Revenue Recognition,” and Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” The Company has primarily short-term contracts whereby revenues and costs in the aggregate for all contracts is expected to result in a matching of gross profit with period overhead or fixed costs similar to that achieved by use of the percentage-of-completion method. Accordingly, financial position and results of operations would not vary materially from those resulting from the use of the percentage-of-completion method. Revenue is recognized only after all three stages of deliverables are complete; installation, approval of acceptance test results by the customer, and when the product is successfully put into real-life application. Customers are billed, according to individual agreements, a percentage of the total contract fee upon completion of work in each stage; approximately 40% for installation, 40% upon approval of acceptance tests by the customer, and the balance of the total contract price when the software is successfully put into real-life application. The revenues, less its associated costs, are deferred and recognized on completion of the contract and customer acceptance. Amounts received for work performed in each stage are not refundable.

F-6

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

On-going service and technical support contracts are negotiated separately at an additional fee. The technical support is separate from the functionality of the products, which can operate without on-going support.

Technology license revenues are recognized in accordance with SAB No. 101 at the time the technology and license is delivered to the customer, collection is probable, the fee is fixed and determinable, a persuasive evidence of an agreement exists, no significant obligation remains under the sale or licensing agreement, and no significant customer acceptance requirements exist after delivery of the technology.

Revenues relating to customer services and technical support are recognized as the services are rendered ratably over the period of the related contract.

The Company does not sell products with multiple deliverables. It is management’s opinion that EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” is not applicable.

Research and Development Costs

Research and development costs are expensed as incurred.

Use of Estimates

The preparation of financial statements, in conformity with generally accepted accounting principles in the United States of America, 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk

SFAS No. 105, “Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk” (“SFAS No. 105”), requires disclosure of any significant off-balance sheet risk and credit risk concentration. The Company does not have significant off-balance sheet risk or credit concentration. The Company maintains cash and cash equivalents with major Israeli financial institutions.

The Company provides credit to its clients in the normal course of its operations. Depending on their size, financial strength, and reputation, customers are given credit terms of up to 60 days. The Company carries out, on a continuing basis, credit checks on its clients and maintains provisions for contingent credit losses which, once they materialize, are consistent with management’s forecasts.

For other debts, the Company determines, on a continuing basis, the probable losses and sets up a provision for losses based on the estimated realizable value.

F-7

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

Concentration of credit risk arises when a group of clients having a similar characteristic such that their ability to meet their obligations is expected to be affected similarly by changes in economic or other conditions. The Company does not have any significant risk with respect to a single client.

Fair Value of Financial Instruments

The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in estimating fair value. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current market exchange. As of June 30, 2008, and December 31, 2007, the carrying amounts of cash equivalents, short-term bank deposits, trade receivables, and trade payables approximate their fair values due to the short-term maturities of these instruments.

Loss per Common Share

The Company calculates net loss per share based on SFAS No. 128, “Earnings per Share.” Basic loss per share is computed by dividing net loss attributable to the common stockholders by the weighted average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

Impact of Recently Issued Accounting Standards

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS No. 159”), which permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The decision about whether to elect the fair value option is applied instrument by instrument, with a few exceptions; the decision is irrevocable; and it is applied only to entire instruments and not to portions of instruments. The statement requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities and (b) between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year provided the entity also elects to apply the provisions of SFAS No. 157. Upon implementation, an entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. Since the provisions of SFAS No. 159 are applied prospectively, any potential impact will depend on the instruments selected for fair value measurement at the time of implementation. The adoption of this pronouncement did not have a material impact on the Company’s financial position or results of operations.

F-8

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

On May 2, 2007, the FASB issued FASB Interpretation FIN No. 48-1, “Definition of Settlement in FASB Interpretation 48” (“FIN No. 48-1”). FIN No. 48-1 amends FIN No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The guidance in FIN No. 48-1 shall be applied upon the initial adoption of FIN No. 48. Accordingly, the Company has applied the provisions of FIN 48-1 effective January 1, 2007. The adoption of FIN No. 48-1 did not have a material impact on the Company’s financial position or results of operations.

In September 5, 2007, the FASB published Proposed FSP No. APB 14-a, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion” (FSP No. APB 14”). The proposed FSP applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under SFAS No. 133. Convertible debt instruments within the scope of the proposed FSP are not addressed by FSP No. APB 14. Therefore, the liability and equity components of convertible debt instruments within the scope of the proposed FSP shall be separately accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate. This will require an allocation of the convertible debt proceeds between the liability component and the embedded conversion option (i.e., the equity component). The difference between the principal amount of the debt and the amount of the proceeds allocated to the liability component would be reported as a debt discount and subsequently amortized to earnings over the instrument’s expected life using the effective interest method. The Company is currently reviewing the impact, if any, of the proposed FSP if it were to be adopted.

In November 2007, the FASB ratified the consensus on the Emerging Issues Task Forces (“EITF”) Issue 07-01, “Accounting for Collaborative Arrangements” (“EITF 07-01”). EITF 07-01 requires collaborators to present the results of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. Further, EITF 07-01 clarified that the determination of whether transactions within a collaborative arrangement are part of a vendor-customer (or analogous) relationship subject to Issue 01-9, “Accounting for Consideration Given by a Vendor to a Customer.” EITF 07-01 is effective for fiscal years beginning after December 15, 2008. The Company has not yet completed its evaluation of EIFT 07-01 on the consolidated financial position and results of operations.

In December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). This statement replaces SFAS No. 141, “Business Combinations,” and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS No. 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS No. 141(R)). In addition, SFAS No. 141(R)’s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. SFAS No. 141(R) amends SFAS No. 109 to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently assessing the potential impact that the adoption of SFAS No. 141(R) could have on its consolidated financial statements.

F-9

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements— an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently assessing the potential impact that the adoption of SFAS No. 160 could have on its consolidated financial statements.

In February 2008, FASB issued FASB Staff Position (“FSP”) on SFAS No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP SFAS No. 140-3”). The objective of this FSP is to provide guidance on accounting for a transfer of a financial asset and a repurchase financing. This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 140”). However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under SFAS No. 140. FSP SFAS No. 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within these fiscal years. Earlier application is not permitted. The Company is currently reviewing the effect, if any, the proposed guidance will have on its consolidated financial statements.

F-10

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

In February 2008, FASB issued FSP SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,” (“FSP SFAS No. 157-1”). FSP SFAS No. 157-1 amends SFAS No. 157 to exclude FASB No. 13, “Accounting for Leases,” and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB No. 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB No. 141, “Business Combinations,” or FASB No. 141 (revised 2007), “Business Combinations,” regardless of whether those assets and liabilities are related to leases. This FSP shall be effective upon the initial adoption of SFAS No. 157.

In February 2008, FASB issued FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP SFAS No. 157-2”). FSP SFAS No. 157-2 delays the effective date of SFAS No. 157, “Fair Value Measurement” to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company is currently reviewing the affect, if any, the proposed guidance will have on its consolidated financial statements.

In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement 133” (“SFAS No. 161”). SFAS No. 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Specifically, SFAS No. 161 requires:

Disclosure of the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation;

Disclosure of the fair values of derivative instruments and their gains and losses in a tabular format;

Disclosure of information about credit-risk-related contingent features; and

Cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed.

SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Earlier application is encouraged. The Company does not expect the adoption of this pronouncement to have a material impact on its consolidated financial statements.

In April 2008, FASB issued FASB Staff Position SFAS No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS No. 142-3”). FSP SFAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognizable intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The intent of FSP SFAS No. 142-3 is to improve the consistency between the useful life of a recognizable intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), “Business Combinations,” and other U.S. generally accepted accounting principles. FSP SFAS No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not anticipate that the adoption of FSP SFAS No. 142-3 will have an impact on its financial position or results of operations.

F-11

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

On May 26, 2008, the FASB issued FASB Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts” (“SFAS No. 163”). SFAS No. 163 clarifies how FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises” (“SFAS No. 60”), applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts.

The accounting and disclosure requirements of SFAS No. 163 are intended to improve the comparability and quality of information provided to users of financial statements by creating consistency. Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under SFAS No. 60, “Accounting and Reporting by Insurance Enterprises.” That diversity results in inconsistencies in the recognition and measurement of claim liabilities because of differing views about when a loss has been incurred under FASB Statement No. 5, “Accounting for Contingencies” (“SFAS No. 5”). SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations and (b) the insurance enterprise’s surveillance or watch list.

SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities. Disclosures about the insurance enterprise’s risk-management activities are effective the first period beginning after issuance of SFAS No. 163. Except for those disclosures, earlier application is not permitted. The Company does not expect the adoption of this pronouncement to have a material impact on its consolidated financial statements.

F-12

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

3.	Equipment, net

Equipment, net is comprised of the following:

			June 30,					December 31,
			2008					2007
			Accumulated					Accumulated
	Cost		Depreciation			Cost		Depreciation
Furniture and equipment	$	57,491	$	(33,989	)	$	63,832	$	(38,311	)
Computer equipment		136,460		(93,967	)		342,755		(289,841	)
Leasehold improvements		2,592		(1,994	)		2,592		(1,426	)
	$	196,543	$	(129,950	)	$	409,179	$	(329,578	)

			$	66,593				$	79,601

Depreciation expenses during the six months ended June 30, 2008, of $20,298 (June 30, 2007 - $29,188) and $1,970 (June 30, 2007 - $1,387) have been included in research and development, and general and administrative expenses, respectively.

4.	Bank Indebtedness

The Company’s Israel subsidiary has an overdraft facility of $15,000, bearing interest at 9.26% per annum. The line of credit is unsecured. As of June 30, 2008, bank indebtedness was $5,403 (December 31, 2007 - $0).

5.	Other Payables and Accrued Expenses

Other payables and accrued expenses consisted of the following as of June 30, 2008 and December 31, 2007 respectively:

	2008		2007
Employee payroll accruals	$	564,136	$	538,349
Accrued payroll taxes		29,005		32,820
Accrued expenses		377,487		448,796
	$	970,628	$	1,019,965

F-13

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

6.	Advances from Stockholders

The advances from the Company’s major stockholder are non-interest bearing and have no fixed terms of repayment. According to an agreement dated January 2003, a stockholder granted a credit facility of $500,000 to the Company in return for preferred class “C” shares as described in Note 8. As of June 30, 2008, and December 31, 2007, the line of credit had an outstanding balance of $315,187 and $310,083, respectively.

7.	Accrued Severance Pay

The Company accounts for its potential severance liability of its Israel subsidiary in accordance with EITF 88-1, “Determination of Vested Benefit Obligation for a Defined Benefit Pension Plan.” The Company’s liability for severance pay is calculated pursuant to applicable labor laws in Israel on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date for all employees. The Company’s liability is fully accrued and reduced by monthly deposits with severance pay funds and insurance policies. As of June 30, 2008, and December 31, 2007, the amount of the liabilities accrued were $268,072 and $169,335, respectively. Severance pay expenses for the six months ended June 30, 2008, and 2007 were $90,143 and $31,792 respectively.

The deposit funds include profits accumulated up to the balance sheet date from the Israeli company. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay laws or labor agreements. Cash surrender values of the deposit funds as of June 30, 2008, and December 31, 2007, were $170,376 and $129,419, respectively. Income earned from the deposit funds for 2008, and 2007, was immaterial.

8.	Capital Stock

Authorized:

210,000,000

Common shares, par value $0.0017 per share

170,000,000

Preferred shares

Series “A”: convertible, voting, par value of $0.0017 per share

Series “B”: 10% non-cumulative dividend, redeemable,convertible, voting, par value of $0.0017 per share

Series “C”: 10% non-cumulative dividend, convertible, voting, par value of $0.0017 per share

	June 30,		December 31,
Issued:	2008		2007
139,322,145 Common stock (2007 - 139,182,145)	$	236,848	$	236,610

F-14

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

Stock Options and Warrants:

The Company has accounted for its stock options and warrants in accordance with SFAS No. 123(R) “Share-Based Payments” (“SFAS No. 123(R)”), and SFAS No. 148, “Accounting for Stock - Based compensation - Transition and Disclosure – an amendment of FASB Statement No. 123” (“SFAS No. 148”). The value of options granted has been estimated by the Black-Scholes option pricing model. The assumptions are evaluated annually and revised as necessary to reflect market conditions and additional experience. The following assumptions were used:

	2008						2007
	Israel			International			Israel			International
Interest rate		4.5	%		4.5	%		4.5	%		4.5	%
Expected volatility		80	%		80	%		80	%		80	%
Expected life in years		3			5			4			6

Warrants:

In April 2000, 56,180 warrants, equivalent to 337,080 shares after the Company's six-for-one forward stock split, were issued to one of the stockholders with his preferred Class “A” shares for a total investment of $750,000. Warrants will expire in the event of an initial public offering of the Company’s securities. Warrants have an exercise price for preferred Class “A” shares of the Company at $4.45 per share, equivalent to $0.74 after the six-for-one forward stock split. No value has been assigned to the warrants and the total investment net of par value of preferred Class “A” shares has been presented as additional paid in capital. The warrants for preferred Class “A” shares were converted into warrants for common shares on a one-to-one basis during the year.

In January 2003, the Company issued warrants to purchase 180,441 Class “B” preferred shares of the Company for deferral of debt for legal services rendered, which was valued at $10,000. The warrants will expire in 2010.

The warrants for preferred Class “B” shares have been converted into warrants for common shares during the year at a ratio of 1-to-6.3828125. After the conversion, the warrants were further split at the ratio of one-to-six in accordance with the forward stock split of the common shares. After the conversion and the forward split, there were warrants to purchase 7,025,778 shares outstanding.

On April 4, 2007, 505,732 of the above warrants have been converted into common shares and the number of warrants outstanding as of June 30, 2008, was 6,520,046.

On December 22, 2005, the Company entered into an agreement with Syntek Capital AG, as part of the agreement for conversion of the note payable into common shares, whereby the Company issued warrants to purchase up to 5,263,158 common shares of the Company at an exercise price of $0.19. As of June 30, 2008, the warrants had not been converted into shares of common stock.

On February 2, 2006, the Company entered into an identical agreement with DEP Technology Holdings Ltd. The value assigned to the warrants was $ 218,114. As of June 30, 2008, the warrants had not been converted into shares of common stock.

F-15

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

Capital Stock:

In January 2003, the Company issued 4,297,816 common shares, equivalent to 25,786,896 after the six-for-one forward stock split, for $250,000 of offering costs with regard to the registration of its securities with the Securities and Exchange Commission. In November 2003, it was agreed upon by the parties that the fair value of the offering costs was only $60,000 and therefore 19,786,896 of the post-split shares were forfeited. The offering costs have been charged to professional services expense in the year.

In January 2003, the Company issued 6,315,258 Class “C” preferred shares to a stockholder for providing a non-interest bearing credit line facility of $300,000. These shares were issued at par value, which approximates the fair market value of the financing fees relating to the credit line facility. As of June 30, 2008, the line of credit had an outstanding balance of $315,187. The 6,315,258 Class “C” preferred shares were subsequently converted into 37,891,548 common shares post forward stock split.

On November 19, 2003, the Company, in accordance with the holders, agreed to convert all the 268,382 Class “A,” 489,456 Class “B,” and 6,315,258 Class “C” preferred shares into common shares. Following the conversion, the Company granted a six-for-one forward stock split of its common shares. The conversion has been recorded prospectively in the consolidated financial statements, while the forward stock split has been recorded retroactively.

On July 29, 2005, the Company issued 5,000,000 shares of common stock, at par value, to its Chief Financial Officer as compensation for services rendered from September 2002 to December 2005. It was agreed upon by the parties that the fair value of such services was $500,000, all of which has been charged to wage expense.

On March 8, 2006, the Company issued 12,400,448 shares of common stock for repayment of the $1,744,910 note payable to Syntek Capital AG (“Syntek”) and DEP.

On April 28, 2006, the Company issued 2,818,182 shares of common stock to its external consultant in exchange for consulting services. It was agreed upon by the parties that the fair value of such services was $310,000. As of December 31, 2006, $206,667 had been charged to consulting expense and $103,333 had been deferred and will be amortized over the term of the contract. The balance of $103,333 has been amortized and charged to consulting expense in 2007.

On March 6, 2007, the Company exercised its right pursuant to the February 6, 2006, equity financing agreement with Dutchess Private Equity Fund (“DPEF”). The agreement entitled the Company to sell up to 20,000,000 of the Company’s common shares (up to $10,000,000) over the course of 36 months. The amount that the Company shall be entitled to request from each of the purchase “Puts,” shall be equal to either 1) $300,000 or 2) 200% of the average daily volume (“ADV”) multiplied by the average of the three daily closing prices immediately preceding the Put date. The ADV shall be computed using the 10 trading days prior to the Put Date. The Purchase Price for the common stock identified in the Put Notice shall be set at 93% of the lowest closing bid price of the common stock during the Pricing Period. The Pricing Period is equal to the period beginning on the Put Notice date and ending on and including the date that is five trading days after such Put Date. There are put restrictions applied on days between the Put Date and the Closing Date with respect to that Put. During this time, the Company shall not be entitled to deliver another Put Notice.

F-16

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

In connection with the equity financing agreement, the Company has issued a preliminary prospectus whereby DPEF and a current significant stockholder can sell up to 30,000,000 common shares at market value. For the year ended December 31, 2007, 6,515,483 common shares were issued under the agreement for $825,365.

On May 29, 2008, 140,000 common shares have been issued under the DPEF equity financing agreement for $3,310.

Stock Options:

In February 2001, the Board of Directors of the Company adopted two option plans to allow employees and consultants to purchase ordinary shares.

Under the Israel 2001 Share Option Plan, management authorized stock options for 2,403,672 common shares of the Company having a $0.0017 nominal par value each and an exercise price of $0.0017, and under the International 2001 Share Option Plan, stock options for 300,000 common shares having a $0.0017 nominal par value each and an exercise price of $0.0017. As of June 30, 2008, 3,672 options under the Israel 2001 Share Option Plan for common stock were not yet granted.

Under the Israel 2003 Share Option Plan, management authorized stock options (on a post conversion, post split basis) for 16,094,106 preferred Class “B” shares, which were converted to options for common shares of the Company having a $0.0017 nominal par value each and an exercise price of $0.0017, and under the International 2003 Share Option Plan stock options (on a post conversion, post split basis) for 25,061,094 preferred Class “B” shares which were converted to options for common shares of the Company having a $0.0017 nominal par value each and an exercise price of $0.0017. On January 5, 2006, the share option plan was amended to authorize an additional 1,260,000 stock options and the exercise price per share for the new options will be $0.12 for options granted after January 5, 2006. On August 14, 2006, the share option plan was amended to authorize an additional 6,000,000 stock options at an exercise price of $0.04. On June 16, 2008, the exercise price of 17,080,000 options granted under Israel Stock Option (2003) and 15,750,000 options granted under the International Stock Option Plan (2003) was amended to $0.03. As of June 30, 2008, 38,256 options under the Israel 2003 Share Option Plan were not yet granted.

On January 12, 2006, 1,260,000 stock options under the Israel 2003 Share Option Plan were granted at an exercise price of $0.12. On June 6, 2006, the exercise price was amended to $0.05. The compensation cost has been revalued as if the option plan has been cancelled and reissued.

On August 14, 2006, 6,000,000 stock options under the Israel 2003 Share Option Plan were granted at an exercise price of $0.04.

On November 1, 2006, 700,000 stock options under the Israel 2003 Share Option Plan were granted at an exercise price of $0.04.

On November 27, 2006, 10,000,000 stock options under the International 2003 Share Option Plan were granted at an exercise price of $0.08.

F-17

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

On November 27, 2006, 2,500,000 stock options under the Israel 2003 Share Option Plan were granted at an exercise price of $0.08.

On December 1, 2006, 200,000 stock options under the Israel 2003 Share Option Plan were granted at an exercise price of $0.05.

On January 16, 2007, 1,250,000 stock options at an exercise price of $0.08 and 280,000 stock options at an exercise price of $0.05 were granted, all under the Israel 2003 Share Option Plan.

In February 2007, 872,864 stock options under the Israel 2001 Share Option Plan were exercised.

In March 2007, 1,586,782 stock options under the Israel 2003 Share Option Plan, and 400,000 stock options under the Israel 2001 Share Option Plan were exercised.

On June 22 2007, 132,914 stock options under the Israel 2003 Share Option Plan, and 168,213 stock options under the Israel 2001 Share Option Plan were exercised.

On June 29, 2007, 180,000 stock options at an exercise price of $0.13 were granted under the Israel 2003 Share Option Plan.

On July 1, 2007, 103,230 stock options under the Israel 2003 Share Option Plan were exercised.

On September 14, 2007, 500,000 stock options at an exercise price of $0.11 were granted under the International 2003 Share Option Plan.

On December 14, 2007, 5,500,000 stock options at an exercise price of $0.09 were granted under the Israel 2003 Share Option Plan.

On December 16, 2007, 400,000 stock options at an exercise price of $0.09 were granted under the Israel 2003 Share Option Plan.

On December 14, 2007, 5,250,000 stock options at an exercise price of $0.09 were granted under the International 2003 Share Option Plan.

On January 4, 2008, 500,000 stock options at an exercise price of $0.09 were granted under the International 2003 Share Option Plan.

On June 16, 2008, the Company lowered the exercise price of 17,080,000 options in its Israel 2003 Share Option Plan and 15,750,000 options in the International 2003 Share Option Plan to $0.03, resulting in additional compensation costs of $41,059 in accordance with SFAS 123(R), Paragraph A150. $35,229 and $5,830 have been included in general and administrative and research and development expenses, respectively.

The options vest gradually over a period of four years from the date of grant for Israel and 10 years (no less than 20% per year for five years for options granted to employees) for the International Plan. The term of each option shall not be more than eight years from the date of grant in Israel and 10 years from the date of grant in the International Plan. The outstanding options that have vested have been expensed in the consolidated statements of operations as follows:

F-18

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

Year ended December 31,
2001	$	9,000
2002		-
2003		384,889
2004		25,480
2005		13,733
2006		117,044
2007		181,622
Six months ended June 30, 2008		201,560
	$	933,328

The following table summarizes the activity of common stock options during the six months ended June 30, 2008, and year ended December 31, 2007:

	June 30, 2008						December 31, 2007
	Israel			International			Israel			International
Outstanding, beginning of period		18,209,767			16,776,797			14,233,508			11,026,797
Granted		-			500,000			7,610,000			5,750,000
Exercised		-			-			(3,264,003	)		-
Forfeited		(510,000	)		(500,000	)		(369,738	)		-
Outstanding, end of period		17,699,767			16,776,797			18,209,767			16,776,797

Weighted average fair value of options granted during the period	$	-		$	0.0552		$	0.0575		$	0.0595

Weighted average exercise price of common stock options, beginning of period	$	0.0493		$	0.0792		$	0.0217		$	0.0727

Weighted average exercise price of common stock options granted in the period	$	-		$	0.0900		$	0.0878		$	0.0917

Weighted average exercise price of common stock options, end of period	$	0.0307		$	0.0330		$	0.0493		$	0.0792

Weighted average remaining contractual life of comon stock options		3 years			5 years			4 year			6 years

F-19

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

The stock options have not been included in the calculation of the diluted earnings per share as their affect would be anti-dilutive.

9.	Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This standard prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates. The effects of future changes in tax laws or rates are not anticipated.

Under SFAS No. 109, income taxes are recognized for the following: a) amount of taxes payable for the current year, and b) deferred tax liabilities and assets for future tax consequences of events that have been recognized differently in the financial statements than for tax purposes. Management determined that the values of its assets and liabilities recorded for financial reporting purposes are not materially different from their values for income tax purposes, and therefore, no deferred tax assets/liabilities have been recorded in the accompanying financial statements to account for the temporary differences.

The Company has deferred income tax assets as follows:

	2008			2007

Loss carryforwards	$	2,910,000		$	2,686,000
Less - Valuation allowance		(2,910,000	)		(2,686,000	)
Total net deferred tax assets	$	-		$	-

For the six months ended June 30, 2008, and 2007, the Company provided a valuation allowance equal to the deferred income tax assets because it is not presently more likely than not that they will be realized.

F-20

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

As of June 30, 2008, the Company had approximately $11,640,000 in tax loss carryforwards in the United States, and insignificant tax losses in its Israeli subsidiary. Tax loss carryforwards in the United States, if not utilized, will expire in 20 years from the year of origin as follows:

December 31,
2020	$	909,500
2021		2,398,000
2022		778,000
2023		5,005,000
2024		581,000
2025		560,500
2026		196,000
2027		700,000
2028		512,000
	$	11,640,000

10.

Related Party Transactions

During the six months ended June 30, 2008, the Company incurred directors’ consulting fees and salaries in the amount of $69,996 (2007 - $77,000). As of June 30, 2008, $515,396 (December 31, 2007 - $486,098) was unpaid and included in other payables and accrued expenses.

These transactions were in the normal course of business and recorded at an exchange value established and agreed upon by the parties mentioned above.

11.

Major Customers

For the six months ended June 30, 2008, the Company had three major customers which primarily accounted for 51%, 13%, and 10% of the total revenues. For the six months ended June 30, 2007, the Company had three major customers which accounted for 54%, 16%, and 10% of the total revenues.

F-21

M-WISE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008, AND 2007

(UNAUDITED)

12.

Segment Information

	Israel			USA			Total
Gross revenue
June 30, 2008	$	25,286		$	1,269,875		$	1,295,161
June 30, 2007		10,757			894,442			905,199
Net loss
June 30, 2008		(45,698	)		(511,750	)		(557,448	)
June 30, 2007		(64,992	)		(316,723	)		(381,715	)
Total assets
June 30, 2008		124,940			695,990			820,930
December 31, 2007		129,816			1,067,076			1,196,892

For the six months ended June 30, 2008, the Company derived 7% (2007, 10%) of its revenues from sales to the Far East, 22% from sales to Europe (2007, 7%), and 71% (2007, 83%) from sales to America.

13.

Commitments

The Company was committed under an operating lease for its premises which expired June 30, 2008. Minimum annual payments (exclusive of taxes, insurance, and maintenance costs) under the lease amount to $54,000. On June 30, 2008, the lease was renewed and expires June 30, 2010. Under the new agreement, minimum annual payments (exclusive of taxes, insurance, and maintenance costs) under the lease amount to $90,000.

In addition, the Company is committed under operating vehicle leases as follows:

2009	$	87,690
2010		51,330
2011		13,590
	$	152,610

Rent expense paid during the six months ended June 30, 2008, and 2007, amounted to $43,905 and $33,504, respectively.

F-22

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report.

This filing contains forward-looking statements. The words "anticipate," "believe," "expect, "plan," "intend," "seek," "estimate," "project," "will," "could," "may," and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation: (a) the timing of our sales could fluctuate and lead to performance delays; (b) without additional equity or debt financing we cannot carry out our business plan; (c) our stockholders have pre-emptive rights to purchase securities of m-Wise, which could impair our ability to raise capital; (d) we operate internationally and are subject to currency fluctuations, which could cause us to incur losses even if our operations are profitable; (e) we are dependent upon certain major customers, and the loss of one or more of such customers could adversely affect our revenues and profitability; (f) our research and development facilities are located in Israel and we have important facilities and resources located in Israel which could be negatively affected due to military or political tensions; (g) certain of our officers and employees are required to serve in the Israel defense forces and this could force them to be absent from our business for extended periods; (h) the rate of inflation in Israel may negatively impact our costs if it exceeds the rate of devaluation of the NIS against the U.S. Dollar. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. These forward-looking statements speak only as of the date of this Quarterly Report. Subject at all times to relevant federal and state securities law disclosure requirements, we expressly disclaim any obligation or undertaking to disseminate any update or revisions to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. Consequently, all of the forward-looking statements made in this Quarterly Report are qualified by these cautionary statements and there can be no assurance of the actual results or developments.

OVERVIEW

We were incorporated in February 2000, and commenced operations immediately thereafter. We initially primarily provided pan-European wireless application service provider operations by hosted MOMA Platform services to customers in the United Kingdom, Spain, France and Italy. We established data centers in Spain, Italy, and France that were connected to our main data center in the United Kingdom. We had connectivity and billing arrangements with cellular operators that enabled us to provide our hosted services. We gained strong credibility and experience as a wireless application service provider during calendar years 2000 and 2001, while we continued to build and develop our wireless middleware product. However, due to the high costs and low revenues in the European wireless application service provider (ASP) market, in 2002, our management decided to transition our focus away from pan-European wireless application service providers, toward installing and licensing our middleware technology at cellular operators and wireless application service providers worldwide, and to operate through original equipment manufacturers (OEMs) and regional sales representatives to sell our products. Our shift away from hosted wireless application services using our Platform enabled us to focus more on the core middleware benefits of our technology in fiscal 2002.

During calendar 2002, we channeled our research and development efforts to enhance and update our middleware technology to interface with advanced and emerging wireless technologies such as MMS (Multimedia Messaging Service - delivery of highly enhanced images and audio files) and J2ME, which utilizes Java programming technology built into certain cellular phones, enables applications to be written once for a wide range of devices, to be downloaded dynamically, and to leverage each device’s native capabilities. We also upgraded our middleware platform to incorporate modules for application deployment and management, for centralized management of multiple value added services and multiple third-party content and media providers, and for managing increased data traffic and real-time billing and reporting requirements. In addition, we restructured our sales efforts toward establishing distribution channels via OEMs and partnerships with major IT vendors and system integrators. In fiscal 2003, we had to direct our research and development resources in an effort to respond to specific business opportunities that were introduced to us by our distributors and original equipment manufacturers, and to be able to meet our customers’ enhanced requirements in elements such as increased transactions volume support and new J2ME possibilities.

During calendar 2004, we followed the market evolution with respect to the enhanced ability to deliver downloadable content directly to mobile phones and invested significant research and development efforts to comply with such new market trends. We substantially improved the MOMA Platform mobile content management abilities, especially with respect to content adaptation to a growing number and types of mobile handsets, and connectivity between the MOMA platform and content presentation layers such as Internet and WAP interfaces. We also concluded sales agreements with new wireless operators and wireless application service provider clients, and at the same time, improved our product positioning in the market.

During calendar year 2005, we continued to follow-up with the rapid changes in the mobile entertainment market, especially with the growing introduction of enhanced mobile entertainment services through the third generation infrastructure for wireless services, and the continuous development of wireless handsets and their ability to present higher levels of multi media. We invested significant research and development efforts in complying with these changes, and indeed, the delivery of enhanced mobile entertainment services became a central part of the MOMA Platform functionalities. We also identified a growing trend in the market that many potential customers prefered to outsource platform functionalities to service providers (ASPs) rather than to purchase platform and install on site (Customer Premises Model) and we invested significant funds and efforts in the infrastructure that was required for this ASP model. During 2006, we invested extensive efforts in establishing our customer base and expanding our distribution channels, by enhancing our technology and expanding the terms and scope of our relationships with our customers.

In calendar year 2007, we have been able to acquire prestige and market leaders customers and strengthen the profit share model that we have began developing in 2005. We signed profit share based deals with News International, part of the News Corp group, to deliver mobile entertainment services in conjunction of leading UK newspapers The Sun and The Times. We signed a profit share based deal with Telcogames, a leading mobile games company to provide a hosted environment for the delivery of their services to their customers. This deal expanded the reach of our technology and it made it available to the large market of mobile games provider which we actively pursue. We signed a deal with Arvato Mobile, part of the great media group Bertelsmann and one of the largest leaders in mobile entertainment worldwide, to provide large variety of mobile content management and delivery services on a profit share model. We have also strengthen the relationship with existing customers such as Thumbplay, SupportComm, Logia Mobile and Interchan (formerly Comtrend) by providing the needed support and technical expertise to their expansion and expanding the basis for cooperation. We clearly see that the business shift made in 2005 from a license model to profit share model is starting to bear the desired fruits by generating a stable business environment for recurring revenues and consistently increasing profitability. In 2007 we made considerable business development investments in the penetration into the US market and the establishment of a local sales and marketing presence. We are starting to see positive results for these efforts in Calendar 2008 in a manner that will ensure the continuous growth of the company.

Revenues

Our revenues grew from $905,199 in the six months ended June 30, 2007 to 1,295,161 in the six months ended June 30, 2008 and from $2,230,264 in the year ended December 31, 2006 to $2,295,260 in the year ended December 31, 2007. Management believes that our efforts to refocus our resources towards building relationships with OEMs may yield additional contracts. Although we are in negotiations for several new contracts there can be no assurance that such contracts will be secured or that they will generate significant revenue. We derive revenues from product sales, licensing, revenue share, customer services and technical support.

When we license our MOMA Platform solutions to our customers, we generate revenues by receiving a license payment, ongoing support fees which are typically 15% of the annual license payment, and professional service fees which are generated from our customers’ request for additional training, IT administration and tailoring of our products for their specific needs. When we license our products to our customers, we install our product at a location specified by our client. We also derive revenue through our hosted services, whereby we enable customers to remotely use features of our MOMA Platform (such as a mobile content sales and delivery service for ring tones and color images), which is installed and hosted at our location, and receive a set-up fee for launching the services for them, as well as a portion of our customer's revenues generated through our platform. When we provide hosted services, we maintain the MOMA Platform at our location on behalf of our customer.

Customers and customer concentration. Historically we have derived the majority of our revenues from a small number of customers and, although our customer base is expanding, we expect to continue to do so in the future. For the six months Ended June 30, 2008, approximately 51% of our sales were derived from sales to Thumbplay, 13% to mBlox and 10% to Arvato Mobile. In the year ended December 31, 2007, approximately 46% of our sales were derived from sales to Thumbplay, 14% to Comtrend Corporation and 13% to Supportcomm.

Geographical breakdown. We sell our products primarily to customers in America and Europe. For the six months Ended June 30, 2008, we derived 71% of our revenues from sales in America, 22% from sales in Europe and 7% from sales in the Far East. For the year ended December 31, 2007, we derived 65% of our revenues from sales in America, 17% from sales in Europe and 18% from sales in the Far East. Of these revenues, 98% were derived from sales by the Company, and 2% of our revenues were derived from sales by our subsidiary.

Cost of revenues

Customer services and technical support cost of revenues consist of the salary and related costs for our technical staff that provide those services and support and related overhead expenses.

Operating expense

Research and development. Our research and development expenses consist primarily of salaries and related expenses of our research and development staff, as well as subcontracting expenses. All research and development costs are expensed as incurred except equipment purchases that are depreciated over the estimated useful lives of the assets.

General and administrative. Our general and administrative expenses consist primarily of salaries and related expenses of our executive, financial, administrative and sales and marketing staff. These expenses also include costs of professional advisors such as legal and accounting experts, depreciation expenses as well as expenses related to advertising, professional expenses and participation in exhibitions and tradeshows.

Financing income and expenses

Financing income consists primarily of interest earned on our cash equivalents balances and other financial investments and foreign exchange gains. Financing expenses consist primarily of interest payable on bank loans and foreign exchange losses.

Critical Accounting Policies.

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available.

These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of the periods presented. To fully understand and evaluate our reported consolidated financial results, we believe it is important to understand our revenue recognition policy.

Revenue recognition. Revenues from products sales are recognized on a completed-contract basis, in accordance with Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB No. 101"), Statement of Position 97-2 "Software Revenue Recognition" and Statement of Position 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts". The Company has primarily short-term contracts whereby revenues and costs in the aggregate for all contracts is expected to result in a matching of gross profit with period overhead or fixed costs similar to that achieved by use of the percentage-of-completion method. Accordingly, financial position and results of operations would not vary materially from those resulting from the use of the percentage-of- completion method. Revenue is recognized only after all the three stages of deliverables are complete; installation, approval of acceptance tests results by the customer and when the product is successfully put into real-life application. Customers are billed, according to individual agreements, a percentage of the total contract fee upon completion of work in each stage; approximately 40% for installation, 40% upon approval of acceptance tests by the customer and the balance of the total contract price when the software is successfully put into real-life application. The revenues, less its associated costs, are deferred and recognized on completion of the contract and customer acceptance. Amounts received for work performed in each stage are not refundable.

Technology license revenues are recognized in accordance with SAB No. 101 at the time the technology and license is delivered to the customer, collection is probable, the fee is fixed and determinable, a persuasive evidence of an agreement exists, no significant obligation remains under the sale or licensing agreement and no significant customer acceptance requirements exist after delivery of the technology.

Revenue share is recognized as earned based on a certain percentage of our clients' revenues from selling services to end users. Usage is determined by receiving confirmation from the clients.

Revenues relating to customer services and technical support are recognized as the services are rendered ratably over the period of the related contract.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2008, COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2007.

Revenues

License fees and products. Revenues from license fees and products were $99,999 for the three months ended June 30, 2008 and $99,999 for the same period in 2007.

Revenue share. Revenues from revenue share increased 89% to $173,849 for the three months ended June 30, 2008 from $92,179 for the same period in 2007. The increase is primarily due to revenues received from current customers who were not our customers during 2007 and from customers that did not previously generate revenues from selling services to end users.

Customer services and technical support. Revenues from customer services and technical support increased 45% to $338,736 for the three months ended June 30, 2008 from $234,155 for the same period in 2007.

Cost of revenues.

Cost of revenues increased 257% to $271,615 for the three months ended June 30, 2008 from $76,132 for the same period in 2007. The increase was primarily due to higher costs associated with our revenue share income.

Operating expenses.

Research and development. Research and development expenses decreased 4% to $182,431 for the three months ended June 30, 2008 from $189,492 for the same period in 2007. This decrease was primarily due to a $9,139 decrease in payroll and related expenses. Research and development expenses, stated as a percentage of revenues decreased to 30% for the three months ended June 30, 2008 from 44% for the same period in 2007.

General and administrative.

General and administrative expenses increased 24% to $495,405 for the three months ended June 30, 2008 from $398,298 for the same period in 2007. This increase was primarily due to a $82,334 increase in payroll and related expenses and a $18,079 increase in travel expenses, partially offset by a $14,447 decrease in professional services expenses. General and administrative expenses, stated as a percentage of revenues, decreased to 81% for the three months ended June 30, 2008 from 93% for the same period in 2007.

Financing expenses.

Our financing expenses increased 6% to $10,689 for the three months ended June 30, 2008 from $10,091 for the same period in 2007.

SIX MONTHS ENDED JUNE 30, 2008, COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2007.

Revenues

License fees and products. Revenues from license fees and products increased 34% to $267,518 for the six months ended June 30, 2008 from $199,998 for the same period in 2007. This increase in revenues of $67,520 was derived from a new customer.

Revenue share. Revenues from revenue share increased 62% to $378,647 for the six months ended June 30, 2008 from $233,450 for the same period in 2007. The increase is primarily due to revenues received from current customers who were not our customers during 2007 and from customers that did not previously generate revenues from selling services to end users.

Customer services and technical support. Revenues from customer services and technical support increased 38% to $648,996 for the six months ended June 30, 2008, from $471,751 for the same period in 2007.

Cost of revenues.

Cost of revenues increased 273% to $504,391 for the six months ended June 30, 2008, from $135,242 for the same period in 2007. The increase was primarily due to higher costs associated with our revenue share income.

Operating expenses.

Research and development. Research and development expenses increased 2% to $387,657 for the six months ended June 30, 2008, from $379,078 for the same period in 2007. This increase was primarily due to a $21,033 increase in payroll and related expenses, partially offset by a $10,224 decrease in subcontractors expenses. Research and development expenses, stated as a percentage of revenues, decreased to 30% for the six months ended June 30, 2008, from 42% for the same period in 2007.

General and administrative.

General and administrative expenses increased 23% to $926,787 for the six months ended June 30, 2008, from $753,309 for the same period in 2007. This increase was primarily due to a $191,044 increase in payroll and related expenses and a $25,921 increase in travel expenses, partially offset by a $70,110 decrease in consulting expenses. General and administrative expenses, stated as a percentage of revenues, decreased to 72% for the six months ended June 30, 2008, from 83% for the same period in 2007.

Financing expenses.

Our financing expenses increased 75% to $33,774 for the six months ended June 30, 2008, from $19,285 for the same period in 2007.

Liquidity and Capital Resources

Our principal sources of liquidity since our inception have been private sales of equity securities, stockholder loans, borrowings from banks and to a lesser extent, cash from operations. We had cash and cash equivalents of $20,382 as of June 30, 2008, and $365,513 as of December 31, 2007. Our initial capital came from an aggregate investment of $1.3 million from Cap Ventures Ltd. To date, we have raised an aggregate of $5,300,000 from placements of our equity securities (including the investment by Cap Ventures and a $4,000,000 investment by Syntek Capital AG and DEP Technology Holdings Ltd.). We have also borrowed an aggregate of $1,800,000 from Syntek Capital AG and DEP Technology Holdings Ltd. and as of the date of this quarterly report we have no funds available to us under bank lines of credit. We have a credit line agreement for $500,000 with Miretzky Holdings Limited. As of June 30, 2008, $315,187 is outstanding under the credit line. The credit line has no termination date and does not provide for interest payments.

Other than the credit line agreement with Miretzky, we do not have any commitments from any of our affiliates or current stockholders, or any other non-affiliated parties, to provide additional sources of capital to us. We have an equity line for $10.0 million with Dutchess Private Equity Fund and as of August 14, 2008, we have drawn $828,675 under the Equity Line. We will need approximately $1.2 million for the next twelve months for our operating costs which mainly include salaries, office rent, and network connectivity, which we estimate will total approximately $80,000 per month, and for working capital. We intend to finance this amount from our ongoing sales and through the sale of either our debt or equity securities or a combination thereof, to affiliates, current stockholders, and/or new investors. Currently, we do not believe that our future capital requirements for equipment and facilities will be material.

Operating activities.

For the six months ended June 30, 2008, net cash used in operating activities was $349,688 primarily due to our net loss of $557,448 and a $49,337 decrease in other payables and accrued liabilities, partially offset by a $201,560 in employee vested options expense and a $57,780 increase in accrued severance pay. In the same period in 2007, net cash used in operating activities was $101,247 primarily due to our net loss of $381,715, partially offset by a $98,187 decrease in prepaid and sundry assets, a $88,325 in employee vested options expense, and a $30,575 in depreciation expenses.

Investing and financing activities.

Property and equipment consist primarily of computers, software, and office equipment. For the six months ended June 30, 2008, net cash used in investing activities was $9,260 consisting of an investment in equipment. In the same period in 2007, net cash used in investing activities was $21,570 consisting of an investment in equipment. For the six months ended June 30, 2008, net cash provided by financing activities was $13,817 primarily due to a $5,403 increase in bank indebtedness and a $5,104 increase in advances from shareholders. In the same period in 2007, net cash provided by financing activities was $546,678 primarily due to a $658,826 sale of common shares under equity financing agreement, partially offset by a $115,352 decrease in advances from shareholders.

Dividends.

We have not paid any dividends on our common stock. We currently intend to retain any earnings for use in our business, and therefore do not anticipate paying cash dividends in the foreseeable future.

Off Balance Sheet Arrangements

None.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4T. Controls and Procedures

With the participation of management, our Chief Executive Officer and Chief Financial Officer evaluated our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to management, to allow for timely decisions regarding required disclosure of material information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended.

There were no changes in our internal control over financial reporting identified in connection with the evaluation described above during the period covered by this report that has materially affected or is reasonably likely to materially affect our internal controls over financial reporting.

PART II:

OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not applicable.

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

None.

Item 3. Defaults upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibit No.		Description

3.1		Amended and Restated Certificate of Incorporation⁽²⁾

3.2		Bylaws⁽²⁾

4.1		Purchase and registration rights agreement and schedule of details⁽²⁾

10.1		Amended and Restated Employment Agreement with Mordechai Broudo⁽²⁾

10.2		Amendment to Amended and Restated Employment Agreement with Mordechai Broudo⁽²⁾

10.3		Amended and Restated Employment Agreement with Shay Ben-Asulin⁽²⁾

10.4		Amendment to Amended and Restated Employment Agreement with Shay Ben-Asulin⁽²⁾

10.5		Employment Agreement, Gabriel Kabazo⁽²⁾

10.6		Confidentiality Rider to Gabriel Kabazo Employment Agreement⁽²⁾

10.7		Employment Agreement Asaf Lewin⁽²⁾

10.8		2003 International Share Option Plan⁽²⁾

10.9		Form of Option Agreement, 2003 International Share Option Plan⁽²⁾

10.10		2001 International Share Option Plan⁽²⁾

10.11		Form of Option Agreement, 2001 International Share Option Plan⁽²⁾

10.12		2003 Israel Stock Option Plan⁽²⁾

10.13		Form of Option Agreement, 2003 Israel Stock Option Plan⁽²⁾

10.14		2001 Israel Share Option Plan⁽²⁾

10.15		Form of Option Agreement, 2001 Israel Share Option Plan⁽²⁾

10.16		Investors' Rights Agreement dated January 11, 2001⁽²⁾

10.17		Stockholders Agreement⁽²⁾

10.18		Agreement for Supply of Software and Related Services dated October 14, 2002, by and between i Touch plc and m-Wise, Inc.⁽²⁾

10.19		Purchase Agreement between m-Wise, Inc. and Comtrend Corporation dated May 22, 2002⁽²⁾

10.20		Amended and Restated Consulting agreement between Hilltek Investments Limited and m-Wise dated November 13, 2003⁽²⁾

10.21		Consulting Agreement between Hilltek Investments Limited and m-Wise dated June 24, 2003, subsequently amended (see Exhibit 10.20 above)⁽²⁾

10.22		Amendment to Investors' Rights Agreement dated October 2, 2003⁽²⁾

10.23		Appendices to 2003 Israel Stock Option Plan⁽²⁾

10.24		Appendices to 2001 Israel Share Option Plan⁽²⁾

10.25		Credit Line Agreement between m-Wise, Inc. and Miretzky Holdings, Limited dated January 25, 2004⁽²⁾

10.26		Termination and Release Agreement by and among the Company and Syntek capital AG.⁽³⁾

10.27		Termination and Release Agreement dated February 2, 2006, by and among the Company and DEP Technology Holdings Ltd.⁽⁴⁾

21		List of Subsidiaries⁽²⁾

31.1		Rule 13a-14(a)/15d-14(a) Certification.⁽¹⁾

31.2		Rule 13a-14(a)/15d-14(a) Certification.⁽¹⁾

32.1		Certification by the Chairman Relating to a Periodic Report Containing Financial Statements.⁽¹⁾

32.2		Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.⁽¹⁾

(1) Filed herewith.

(2) Incorporated by reference from the registration statement filed with the Securities and Exchange Commission Registration Statement on Form SB-2 (Reg. No. 333-106160).

(3) Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January 13, 2006.

(4) Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on February 7, 2006.

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.

	m-Wise, Inc. (Registrant)

Date: August 14, 2008	By:	/s/ Mordechai Broudo
		Name: Mordechai Broudo Title: Chairman

Date: August 14, 2008	By:	/s/ Gabriel Kabazo
		Name: Gabriel Kabazo Title: Chief Financial Officer and Principal Accounting Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	7th grade Avg

M Wise (MWIS) Inactive 10-Q2008 Q2 Quarterly report

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