wireless carriers and direct customers. Since we had limited capital, we lacked the resources to execute this strategy quickly. Once we began generating operating revenue in late 2004 and once we raised modest amounts of capital in the second quarter of 2005, we were able to begin hiring the sales and marketing and administrative personnel necessary to execute our strategy.

In 2006, in conjunction with our strategic alliance with Shuffle Master and because of the perceived opportunities for wireless applications in the gaming industry, we switched our primary sales and development focus towards the gaming industry. We continue to focus on the financial services and enterprise market sectors for products, customers and verticals where we have previously experienced success or where we perceive significant opportunities to exist.

Business Trends

The market demand for mobile and wireless solutions, both at the enterprise and consumer levels, continues to grow rapidly. We believe that we are well-positioned to exploit this opportunity with various focused initiatives, ranging from direct and channel sales to the enterprise market, combined with partnership and joint venture agreements with content providers to satisfy the significant growth in demand from the consumer market for these types of services.

Approximately 62% of our revenue for the fiscal quarter ended June 30, 2007 resulted from upfront development fees for project work and approximately 38% from continuing license subscriptions. During the comparative fiscal quarter ended 2006, 80% of revenue resulted from project work and 20% from continuing subscriptions. Much of our project work is attributable to new engagements for which we received upfront development fees. We believe that in future quarters, the ratio will move toward continuing license subscription revenue, as we transition from focusing on custom projects in the financial services and enterprise segment and move towards longer term licensing contracts in the gaming industry in conjunction with our strategic alliance with Shuffle Master and from perceived potential opportunities in the horse wagering industry. As the relationship with Shuffle Master progresses and new leads are generated, we anticipate that significant business opportunities will emerge. However, we cannot assure you that our relationship with Shuffle Master will progress or that any such business opportunities will emerge, or if they do, that any such opportunity will result in a definitive arrangement with any enterprises in the gaming industry, or that any such definitive arrangement will be profitable.

Significant Transactions

In January 2006, we entered into a strategic alliance distribution and licensing agreement with Shuffle Master, a leading provider of table gaming content, to license, develop, distribute and market ‘‘in casino’’ wireless handheld gaming content and delivery systems to gaming venues throughout the world. Under the terms of the agreement, we agreed to develop a Shuffle Master-branded wireless gaming platform powered by our SWP for in-casino use, which would feature handheld versions of Shuffle Master’s proprietary table game content, as well as other proprietary gaming content and public domain casino games. In conjunction with this strategic alliance, Shuffle Master invested $3 million in the Company, in exchange for common stock and warrants to purchase common stock in our Company pursuant to the Licensing and Distribution Agreement, dated January 12, 2006 between the Company and Shuffle Master, (the ‘‘Licensing and Distribution Agreement’’). This Licensing and Distribution Agreement was amended and restated in February 2007. Under the terms of the amended Licensing and Distribution Agreement, dated February 28, 2006, both the Company and Shuffle Master are permitted to distribute, market and sell the Casino On Demand Wireless Gaming System to gaming venues worldwide. Additionally, we have been granted a non-exclusive worldwide license to offer Shuffle Master’s proprietary table game content on the platform, and the Company has granted Shuffle Master a non-exclusive worldwide license to certain Company developed wireless platform software and enhancements that support the integration and mobilization of casino gaming applications into in-casino wireless gaming delivery systems. Shuffle Master beneficially owns 10% of our common stock as of June 30, 2007.

On April 28, 2006, we purchased certain intellectual property assets from Digital Wasabi LLC, a Colorado limited liability company (‘‘Digital Wasabi’’). The purchase price was 800,000 shares of our

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common stock. The assets consist of intellectual property in the form of software under development related to communications and gaming. The principals and employees of Digital Wasabi became our employees and are based in our Boulder, Colorado office. While we believe this purchased technology will have significant future value, the software does not meet the criteria for capitalization as prescribed by SFAS No. 86, ‘‘Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed’’ (‘‘SFAS 86’’) and as such was written off in the quarter of acquisition.

On July 7, 2006, we closed a private placement to accredited investors whereby we sold 16,943,323 shares of common stock and warrants to purchase 8,471,657 shares of common stock for gross proceeds of approximately $10.1 million before payment of commissions and expenses. The warrants had an exercise price of $0.83 per share, subject to downward adjustment if the Company does not meet specified annual revenue targets, and are exercisable at any time during the period commencing July 7, 2006 and ending July 7, 2011. The funds from the financing will primarily be used for general working capital purposes. During the fourth quarter of fiscal 2006, as a result of the Company not meeting the specified revenue targets, the exercise price of the warrants was adjusted downwards to an exercise price of $0.70 per share. As of June 30, 2007, the exercise price of the warrants remained at $0.70 per share. We used $300,000 of the funds raised to repurchase 650,000 shares of common stock from our former chief executive officer, John Bush. We agreed to file and filed a registration statement with the U.S. Securities and Exchange Commission (the ‘‘SEC’’) to register the resale of the shares of common stock issued in the private placement, as well as the shares of common stock issuable upon exercise of the aforementioned warrants. Such registration statement was declared effective by the SEC on November 3, 2006. A post-effective amendment to this registration statement was filed on April 3, 2007, which amendment was declared effective by the SEC on April 11, 2007.

Corporate History

Sona Mobile, Inc. (‘‘Sona Mobile’’) was formed under the laws of the State of Washington in November 2003 for the purpose of acquiring Sona Innovations, Inc. (‘‘Innovations’’), which it did in December 2003. On April 19, 2005, Sona Mobile merged (the ‘‘Merger’’) with and into PerfectData Acquisition Corporation, a Delaware corporation (‘‘PAC’’) and a wholly-owned subsidiary of PerfectData Corporation, also a Delaware corporation (‘‘PerfectData’’). Under the terms of that certain Agreement and Plan of Merger dated as of March 7, 2005, (i) PAC was the surviving company but changed its name to Sona Mobile, Inc.; (ii) the pre-merger shareholders of Sona Mobile received stock in PerfectData representing 80% of the voting power in PAC post-merger; (iii) all of PerfectData’s officers resigned and Sona Mobile’s pre-merger officers were appointed as the new officers of PerfectData; and (iv) four of the five persons serving as directors of PerfectData resigned and the remaining director appointed the three pre-merger directors of Sona Mobile to the PerfectData Board of Directors. In November 2005, PerfectData changed its name to ‘‘Sona Mobile Holdings Corp.’’

At the time of the Merger, PerfectData was essentially a shell company that was not engaged in an active business. Upon completion of the Merger, PerfectData’s only business was the historical business of Sona Mobile and the pre-merger shareholders of Sona Mobile controlled PerfectData. Accordingly, the Merger was accounted for as a reverse acquisition of a public shell and a recapitalization of Sona Mobile. No goodwill was recorded in connection with the Merger and the costs were accounted for as a reduction of additional paid-in-capital. The pre-merger financial statements of Sona Mobile are treated as the historical financial statements of the combined companies. The historical financial statements of PerfectData prior to the Merger are not presented. Furthermore, because Sona Mobile is deemed the accounting acquirer, its historical stockholders’ equity has been adjusted to reflect the new capital structure.

Critical Accounting Policies

We prepare our financial statements in accordance with U.S. generally accepted accounting principles. These accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and

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liabilities at the date of its financial statements. Management is also required to make certain judgments that affect the reported amounts of revenues and expenses during each reporting period. Management periodically evaluates these estimates and assumptions including those relating to revenue recognition, impairment of goodwill and intangible assets, the allowance for doubtful accounts, capitalized software, restructuring, income taxes, stock-based compensation and contingencies and litigation. Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable based on specific circumstances. Management reviews the development, selection, and disclosure of these estimates with the Audit Committee of our Board of Directors. These estimates and assumptions form the basis for judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Further, changes in accounting and legal standards could adversely affect our future operating results. Our critical accounting policies include: revenue recognition, allowance for doubtful accounts, capitalized software, income taxes, stock-based compensation, and derivatives, each of which are discussed below.

Revenue Recognition

We follow specific and detailed guidance in measuring revenue, although certain judgments affect the application of our revenue recognition policy. These judgments include, for example, the determination of a customer’s creditworthiness, whether two separate transactions with a customer should be accounted for as a single transaction, or whether included services are essential to the functionality of a product thereby requiring percentage of completion accounting rather than software accounting.

We recognize revenue in accordance with Statement of Position (‘‘SOP’’) 97-2, ‘‘Software Revenue Recognition,’’ as amended by SOP 98-4 and SOP 98-9, and in certain instances in accordance with SOP 81-1, ‘‘Accounting for Performance of Construction-Type and Certain Production-Type Contracts.’’ We license software under non-cancelable license agreements. License fee revenues are recognized when (a) a non-cancelable license agreement is in force, (b) the product has been delivered, (c) the license fee is fixed or determinable and (d) collection is reasonably assured. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer.

Residual Method Accounting.    In software arrangements that include multiple elements (e.g., license rights and technical support services), we allocate the total fees among each of the elements using the ‘‘residual’’ method of accounting. Under this method, revenue allocated to undelivered elements is based on vendor-specific objective evidence of fair value of such undelivered elements, and the residual revenue is allocated to the delivered elements. Vendor specific objective evidence of fair value for such undelivered elements is based upon the price we charge for such product or service when it is sold separately. We may modify our pricing practices in the future, which would result in changes to our vendor specific objective evidence. As a result, future revenue associated with multiple element arrangements could differ significantly from our historical results.

Percentage of Completion Accounting.    Fees from licenses sold together with consulting services are generally recognized upon shipment of the licenses, provided (i) the criteria described in subparagraphs (a) through (d) in the second paragraph under ‘‘Revenue Recognition’’ above are met; (ii) payment of the license fee is not dependent upon performance of the consulting services; and (iii) the consulting services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software, or performance of services is a condition to payment of license fees, both the software license and consulting fees are recognized under the ‘‘percentage of completion’’ method of contract accounting. Under this method, we are required to estimate the number of total hours needed to complete a project, and revenues and profits are recognized based on the percentage of total contract hours as they are completed. Due to the complexity involved in the estimating process, revenues and profits recognized under the percentage of completion method of accounting are subject to revision as contract phases are actually completed. Historically, these revisions have not been material.

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Sublicense Revenues.    We recognize sublicense fees as reported by our licensees. License fees for certain application development and data access tools are recognized upon direct shipment by us to the end user or upon direct shipment to the reseller for resale to the end user. If collection is not reasonably assured in advance, revenue is recognized only when sublicense fees are actually collected.

Service Revenues.    Technical support revenues are recognized ratably over the term of the related support agreement, which in most cases is one year. Revenues from consulting services subjected to time and materials contracts, and for education, are recognized as services are performed. Revenues from other contract services are generally recognized based on the proportional performance of the project, with performance measured based on hours of work performed.

Allowance for Doubtful Accounts

Whenever relevant, we maintain an allowance for doubtful accounts to reflect the expected non-collection of accounts receivable based on past collection history and specific risks identified in our portfolio of receivables. Additional allowances might be required if deteriorating economic conditions or other factors affect our customers’ ability to make timely payments.

Capitalized Software Development Costs

We capitalize certain software development costs after a product becomes technologically feasible and before its general release to customers. Significant judgment is required in determining when a product becomes ‘‘technologically feasible.’’ Capitalized development costs are then amortized over the product’s estimated life beginning upon general release of the product. Periodically, we compare a product’s unamortized capitalized cost to the product’s net realizable value. To the extent unamortized capitalized cost exceeds net realizable value based on the product’s estimated future gross revenues (reduced by the estimated future costs of completing and selling the product) the excess is written off. This analysis requires us to estimate future gross revenues associated with certain products and the future costs of completing and selling certain products. Changes in these estimates could result in write-offs of capitalized software costs. As of June 30, 2007, certain development costs of the Company met the criteria of SFAS 86 for the capitalization of software development costs. Accordingly, $316,821 of software development costs are capitalized as of June 30, 2007.

Income Taxes

We use the asset and liability approach to account for income taxes. This methodology recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. We then record a valuation allowance to reduce deferred tax assets to an amount that likely will be realized. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If we determine during any period that we could realize a larger net deferred tax asset than the recorded amount, we would adjust the deferred tax asset and record a corresponding reduction to its income tax expense for the period. Conversely, if management determines that we would be unable to realize a portion of our recorded deferred tax asset, it would adjust the deferred tax asset and record a charge to income tax expense for the period. Significant judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences (e.g., the income we earn within the United States) could materially impact our financial position or results of operations.

We adopted the provisions of FASB Interpretation 48, ‘‘Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,’’ (‘‘FIN 48’’) on January 1, 2007. As the we have a valuation allowance against the full amount of its net deferred tax asset, the adoption of FIN 48 did not have an impact on the financial statements for the six months ended June 30, 2007.  We do not expect FIN 48 to have an impact on the Company’s financial statements in the current fiscal year.

Stock-based Compensation

As of January 1, 2006, we adopted the provisions of, and accounts for stock-based compensation in accordance with the Financial Accounting Standards Board’s (‘‘FASB’’) Statement of Financial

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Accounting Standards No. 123 – revised 2004 (‘‘SFAS 123R’’), ‘‘Share-Based Payment’’ which replaced Statement of Financial Accounting Standards No. 123 (‘‘SFAS 123’’), ‘‘Accounting for Stock-Based Compensation’’ and supersedes APB Opinion No. 25, ‘‘Accounting for Stock Issued to Employees.’’ Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. Estimated compensation for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS 123 pro forma disclosures, as adjusted for estimated forfeitures.

During the first six months of fiscal 2007 and during fiscal 2006 the Company issued stock options to directors, officers, and employees under the Amended and Restated Stock Option Plan of 2000 and the 2006 Incentive Plan as described in Note 11 to our consolidated financial statements. The fair value of these options was estimated at the date of grant using a Black-Scholes option-pricing model, using a range of risk-free interest rates of 4.2% – 5.1%, weighted average option term of 3.1 years, expected weighted average volatility of 62.4% and no dividend.

Derivatives

We follow the provisions of SFAS No. 133 ‘‘Accounting for Derivative Instruments and Hedging Activities’’ (SFAS No. 133’’) along with related interpretations EITF No. 00-19 ‘‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock’’ (‘‘EITF 00-19’’) and EITF No. 05-2 ‘‘The Meaning of ‘Conventional Convertible Debt Instrument’ in Issue No. 00-19’’ (‘‘EITF 05-2’’). SFAS No. 133 requires every derivative instrument (including certain derivative instruments embedded in other contracts) to be recorded in the balance sheet as either an asset or liability measured at its fair value, with changes in the derivative’s fair value recognized currently in earnings unless specific hedge accounting criteria are met. We value these derivative securities under the fair value method at the end of each reporting period, and their value is marked to market with the gain or loss recognition recorded against earnings. We use the Black-Scholes option-pricing model to determine fair value. Key assumptions of the Black-Scholes option-pricing model include applicable volatility rates, risk-free interest rates and the instruments expected remaining life. These assumptions require significant management judgment. At June 30, 2007, there were no derivative instruments reported on the Company’s balance sheet.

Results of Operations

Our business is in its early stages and consequently our financial results are difficult to compare from one period to the next. We expect such period-to-period differences to continue to be significant over the next several quarters, until we have a number of full years of operations.

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Comparison of three months ended June 30, 2007 and 2006

For the three months ended June 30, 2007, we had a comprehensive loss of $1.33 million compared to a comprehensive loss of $2.15 million for the three months ended June 30, 2006. The decrease in comprehensive loss of $0.82 million over the comparative fiscal quarter ended 2006 is primarily due to the decrease of $0.64 million in selling and marketing expenses caused by our change in sales focus to a channel and partner based selling model. A channel and partner based selling model requires significantly less sales resources than a direct sales model, as it leverages the resources of the sales channels and partners. The following table compares our consolidated statement of operations data for the three months ended June 30, 2007 and 2006.

			Three months ended June 30,
			2007						2006
Net Revenue				$	267,182					$	165,429
Operating expenses
Depreciation and amortization					15,722						8,950
General and administrative expenses					696,133						727,005
Professional fees					228,332						302,180
Development expenses					372,130						370,029
Selling and marketing expenses					299,695						938,663
Total operating expenses					1,612,012						2,346,827
Operating loss					(1,344,830	)					(2,181,398	)
Interest income					39,256						19,638
Interest expense					—						(1,013	)
Other income and expense					2,194						230,573
Net loss					(1,303,380	)					(1,932,200	)
Foreign currency translation adjustment					(25,912	)					(215,462	)
Comprehensive loss				$	(1,329,292	)				$	(2,147,662	)

Net Revenue

Net revenue during the second quarter of fiscal 2007 was $267,000 compared to net revenue of $165,000 for the comparable quarter of fiscal 2006, an increase of 62%. The net revenue of $267,000 for the second quarter of fiscal 2007 included $253,000 of software licensing and development revenue and $14,000 of maintenance fees. Approximately 38% of the current quarter revenue is attributable to continuing license subscriptions and the balance relates to new projects begun this quarter and recognition of deferred revenue for projects completed.

Operating expenses

Total operating expenses for the second quarter of fiscal 2007 were $1.61 million compared to $2.35 million in the comparable quarter of fiscal 2006, a decrease of 31%. There were substantial changes in the type of expenses incurred this quarter versus the same quarter a year ago. Selling and marketing expenses decreased by $639,000 or 68%, as we moved from a direct sales model to a partner and channel-based selling model which requires less headcount resources.

Depreciation and amortization

Depreciation and amortization expenses for the second quarter of fiscal 2007 were $16,000 compared to $9,000 in the comparable quarter of fiscal 2006. The depreciation and amortization expense for the second quarter of both years was composed of depreciation of property, plant and equipment.

General and Administrative expenses

General and administrative expenses for the second quarter of 2007 were $696,000 compared to $727,000 for the comparable quarter in fiscal 2006, a 4% decrease. Related payroll and rent expenses

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decreased in total by 38% during the second quarter of fiscal 2007 compared to the same quarter of fiscal 2006. These decreases were substantially off-set by increases in travel and entertainment, insurance, and stock based compensation expenses, equipment repair, and printing costs.

Professional fees

Professional fees for the second quarter of fiscal 2007 were $228,000, compared to $302,000 for the comparable quarter in fiscal 2006, a 24% decrease. The higher level of professional fees in the comparable quarter in fiscal 2006 related primarily to higher than normal legal expenses associated with the completion and filing of the registration statement which was filed and declared effective in such quarter. 

Development expenses

Development expenses for the second quarter of fiscal 2007 were $372,000 compared to $370,000 for the comparable quarter of fiscal 2006, a 1% increase. Gross payroll related expenses increased by 62% from $320,000 for the comparable quarter in fiscal 2006 to $519,000 in the second quarter of fiscal 2007. During the second quarter of 2007, approximately $240,000 of payroll related expenses were capitalized as software development costs, in accordance with SFAS 86, reducing development expense by the amount capitalized. The capitalization of software development costs resulted in total development expenses in the second quarter of 2007 to remain static as compared to the 2006 quarter. The capitalized development costs were connected to the wireless gaming software development project.

Selling and marketing expenses

Selling and marketing expenses for the second quarter of fiscal 2007 were $300,000 compared to $939,000 for the comparable quarter of fiscal 2006, a 68% decrease. The decrease in expenses is attributable to the significant effort initiated in 2006 to reduce the selling costs associated with our products by switching to a partner and channel driven sales model, instead of the relatively expensive direct sales model we had previously employed. Our personnel and sales contractor costs decreased by 67%, from $711,000 in the second quarter of fiscal 2006 to $235,000 in the current quarter of fiscal 2007. Expenses related to marketing, advertising and trade shows decreased from $60,000 in the second quarter of fiscal 2006 to $13,000 in the second quarter of fiscal 2007, as we reduced our direct marketing efforts. Travel expenses also decreased substantially in this category from $77,000 in the second quarter of fiscal 2006 to $35,000 in the second quarter of fiscal 2007, which also reflected our reduced level of sales personnel.

Other income and expense

For the quarter ended June 30, 2007, this income and expense category consisted of a foreign exchange gain in the amount of $7,600, offset by a loss resulting from the disposal of fixed assets in the amount of $5,200. For the quarter ended June 30, 2006, other income and expense consisted of a gain of $615,000 relating to the reclassification from liability to equity of the common stock purchase warrants issued in June 2005 as of the registration statement effective date in the second quarter of fiscal 2006, in accordance with the provisions of EITF 00-19. This gain was offset by other expense of approximately $598,000, related to the write off of in-process technology which was acquired from Digital Wasabi in April 2006, as it did not meet the criteria for capitalization as prescribed in SFAS 86. There was also a foreign exchange gain of $201,000 and a gain arising from the adjustment of other taxes in the amount of $12,000 included in other income and expense in 2006.

Interest income

Interest income is derived from investing unused cash balances in short-term liquid investments. Average cash balances for the second quarter were higher in fiscal 2007 than in fiscal 2006, resulting in the higher level of interest income of $39,000 in the current year’s second quarter versus $20,000 in the prior year’s second quarter.

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Interest expense

The interest expense amount of approximately $1,000 in the second quarter of fiscal 2006 relates primarily to bank charges and wire fees. There were no such expenses for the second quarter of fiscal 2007.

Foreign currency translation adjustment

Prior period retained earnings on Innovations’ books are translated at historical exchange rates while the rest of the financial statement line items are translated at current period rates. The resulting difference is treated as gain or loss due to foreign currency translation during the period. The $26,000 loss in this category for the second quarter of fiscal 2007, as compared to the translation adjustment loss of $215,000 incurred in the second quarter of fiscal 2006 is due to the fact that in the second quarter of fiscal 2007 exchange gains or losses on long-term intercompany balances on Innovation’s books were charged to foreign currency translation adjustment, while in fiscal 2006, intercompany balances were considered short-term and foreign exchange gains or losses were charged to other income and expense.

Comparison of six months ended June 30, 2007 and 2006

For the six months ended June 30, 2007, we had a comprehensive loss of $2.98 million compared to a comprehensive loss of $4.72 million for the six months ended June 30, 2006. The decrease of $1.74 million in comprehensive loss between the first half of fiscal 2007 and 2006 is primarily due to the decrease of $1.59 million in selling and marketing expenses caused by our change in sales focus to a channel and partner based selling model. The following table compares our consolidated statement of operations data for the six months ended June 30, 2007 and 2006.

			Six months ended June 30,
			2007						2006
Net Revenue				$	415,309					$	290,753
Operating expenses
Depreciation and amortization					28,007						16,787
General and administrative expenses					1,241,723						1,300,065
Professional fees					625,791						600,086
Development expenses					917,177						753,694
Selling and marketing expenses					645,963						2,239,647
Total operating expenses					3,458,661						4,910,279
Operating loss					(3,043,352	)					(4,619,526	)
Interest income					94,995						36,653
Interest expense					(464	)					(1,965	)
Other income and expense					(9,631	)					53,190
Net loss					(2,958,452	)					(4,531,648	)
Foreign currency translation adjustment					(24,845	)					(190,057	)
Comprehensive loss				$	(2,983,297	)				$	(4,721,705	)

Net Revenue

Net revenue for the six months ended June 30, 2007 was $415,000 compared to net revenue of $291,000 for the comparable six month period ended June 30, 2006, an increase of 43%. The net revenue of $415,000 for the first half of fiscal 2007 included $388,000 of software licensing and development revenue and $27,000 of maintenance fees. Approximately 32% of revenue for the six months ended June 30, 2007 is attributable to continuing license subscriptions and the balance relates to new projects begun during the same quarters and recognition of deferred revenue for projects completed.

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Operating expenses

Total operating expenses for the first half of fiscal 2007 were $3.46 million compared to $4.91 million for the comparable half of fiscal 2006, a decrease of 30%. There were substantial changes in the type of expenses incurred during the first half of fiscal 2006 as compared to those during the first half of fiscal 2007. Selling and marketing expenses decreased by $1.59 million or 71%, as we moved from a direct sales model to a partner and channel-based selling model which requires less headcount resources.

Depreciation and amortization

Depreciation and amortization expenses for the first half of fiscal 2007 were $28,000 compared to $17,000 in the comparable half of fiscal 2006. The depreciation and amortization expense for both years was composed of depreciation of property, plant and equipment. The amounts in fiscal 2007 are higher than in fiscal 2006 due to the higher level of fixed assets.

General and Administrative expenses

General and administrative expenses for the first six months of fiscal 2007 were $1.24 million compared to $1.3 million for the comparable period in fiscal 2006, a 4% decrease. Related payroll and rent expenses decreased in total by 27% during the first six months of fiscal 2007 compared to the same period during fiscal 2006. These decreases were substantially off-set by increases in travel and entertainment, insurance, conferences, equipment repair, printing costs, and other general expenses relating to our business.

Professional fees

Professional fees for the first six months of fiscal 2007 were $626,000, compared to $600,000 for the comparable half of fiscal 2006, a 4% increase. The higher level of professional fees for the first six months of fiscal 2007 related primarily to higher than normal legal expenses associated with the renegotiation of the Shuffle Master agreements in the first quarter of fiscal 2007. The increase in legal fees in the first half of fiscal 2007 compared to the comparable half of fiscal 2006 was partially offset by a decrease in accounting fees of approximately $31,000 in the first half of fiscal 2007 to $61,000 versus $92,000 in the first half of fiscal 2006. Other professional fees, consisting of investor relations and recruiting costs, declined by $26,000 to $33,000 for the first half of fiscal 2007 compared to $59,000 in the first half of fiscal 2006.

Development expenses

Development expenses for the first half of fiscal 2007 were $917,000 compared to $754,000 for the comparable half of fiscal 2006, a 22% increase. Gross payroll and related expenses increased by 49% from $702,000 in the first half of fiscal 2006 to $1,043,000 in the current year’s comparative period. During the first half of fiscal 2007, $317,000 of total payroll related expenses was capitalized as software development costs, in accordance with SFAS 86, reducing development expense by the same amount capitalized. The capitalization of software development costs resulted in total payroll costs expensed in this category to increase slightly from $668,000 during the first half of fiscal year 2006 compared to $684,000 in the comparative period of fiscal 2007. The remaining differences related to the increase in this category were primarily caused by lease costs associated with laboratory and test equipment ($40,000), development consulting resources ($51,000) and travel ($25,000) associated with trips to Las Vegas for the GLI product certification process.

Selling and marketing expenses

Selling and marketing expenses for the first half of fiscal 2007 were $646,000 compared to $2,240,000 for the same period in fiscal 2006, a 71% decrease. The decrease in expenses is attributable to the significant effort undertaken in 2006 to reduce the selling costs associated with our products by switching to a partner and channel driven sales model, instead of the direct sales model we had

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previously employed. Our personnel and sales contractor costs decreased by 67%, from $1,570,000 in the first half of fiscal 2006 to $521,000 in the comparative half of fiscal 2007. Expenses related to marketing, advertising and trade shows decreased from $119,000 incurred in the first half of fiscal 2006 to $16,000 in the comparative period of 2007, as we reduced our direct marketing efforts. Travel expenses also decreased substantially in this category from $276,000 in the first half of fiscal 2006 to $70,000 in the comparable period this year, which also reflected our reduced level of sales personnel.

Other income and expense

For the six months ended June 30, 2007, other income and expense consisted of a foreign exchange loss in the amount of $4,400, and a loss resulting from the disposal of fixed assets in the amount of $5,200. The other income and expense amount in the first half of fiscal 2006 consisted of $171,000 gain in foreign exchange fluctuation. During the first half of fiscal 2006, there was a net gain of $468,000 related to the revaluation of the warrants carried as a liability on the balance sheet at that time, in accordance with the provisions of EITF 00-19. The gains due to this revaluation and the foreign exchange gain were offset by other expenses of approximately $598,000, related to the write off of in-process technology which was acquired from Digital Wasabi in April 2006, as it did not meet the criteria for capitalization as prescribed in SFAS 86.

Interest income

Interest income is derived from investing unused cash balances in short-term liquid investments. Average cash balances for the first half of fiscal 2007 were higher than in the first half of fiscal 2006, resulting in the higher level of interest income of $95,000 during the first half of fiscal 2007 versus $37,000 in the prior year’s comparable period.

Interest expense

The interest expense amounts for the first half of fiscal 2007 of under $500 and just under $2,000 in the first half of fiscal 2006 relate primarily to bank charges and wire fees.

Foreign currency translation adjustment

Prior period retained earnings on Innovations’ books are translated at historical exchange rates while the rest of the financial statement line items are translated at current period rates. The resulting difference is treated as gain or loss due to foreign currency translation during the period. The fact that there was a relatively minimal fluctuation in the Canadian dollar exchange rate in the first half year of fiscal 2007 is due to the fact that in 2007, exchange gains or losses on long-term intercompany balances on Innovation’s books were charged to foreign currency translation adjustment, while in 2006, intercompany balances were considered short-term and foreign exchange gains or losses were charged to other income and expense.

Liquidity and Capital Resources

At June 30, 2007, we had total cash and cash equivalents of $2.7 million held in current and short-term deposit accounts. We believe that based on our current level of spending, this cash will only be sufficient to fund our current level of operating expenses until November 2007. Based on our current business plan, we will be obligated to seek additional financing before that time.

We cannot assure you that we will be able to successfully implement our plans to raise additional capital or to increase revenue. We may not be able to obtain additional capital or generate new revenue opportunities on a timely basis, on favorable terms, or at all. If we cannot successfully implement our plans, our liquidity, financial condition and business prospects will be materially and adversely affected and we may have to cease operations.

Because of our limited revenue and cash flow from operations, we have depended primarily on financing transactions to support our working capital and capital expenditure requirements. Through

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June 30, 2007, we had accumulated losses of approximately $18.9 million, which were financed primarily through sales of equity securities. Since our inception in November 2003 through June 30, 2007, we have raised approximately $20 million in equity financing. The foregoing included the sale of 2,307,693 shares of our common stock and warrants to purchase 1,200,000 shares of our common stock to Shuffle Master for $3.0 million in January 2006. The Shuffle Master warrants had an exercise price of $2.025 per share and expired on July 12, 2007 without being exercised. The sale of these shares and the issuance of the warrants were in connection with the original strategic alliance distribution and licensing agreement between us and Shuffle Master.

In addition, on July 7, 2006, we closed a private placement to accredited investors whereby we sold 16,943,323 shares of common stock and warrants to purchase 8,471,657 shares of common stock at an exercise price of $0.83 per share, subject to downward adjustment if the Company does not meet specified annual revenue targets, for gross proceeds of approximately $9.3 million after payment of commissions and expenses. As of December 31, 2006, as a result of the Company not meeting the specified annual revenue targets, the exercise price of the warrants was adjusted downwards to $0.70 per share.

Our working capital at June 30, 2007 was $1.7 million compared to our working capital of $3.2 million at March 31, 2007, a decrease of $1.5 million. Our current ratio at June 30, 2007 was 2.5 to 1 compared to our current ratio of 3.6 to 1 at March 31, 2007. The current ratio is derived by dividing current assets by current liabilities and is a measure used by lending sources to assess our ability to repay short-term liabilities.

Overall, for the first half year of fiscal 2007, we had a net cash decrease of $2.96 million, attributable primarily to net cash used in operating activities. The primary components of our operating cash flows are net loss adjusted for non-cash expenses, such as depreciation and amortization, stock-based compensation, and the changes in accounts receivable, accrued liabilities and payroll, deferred revenue, and accounts payable. Cash used in operating activities was $2.55 million in the first half year of fiscal 2007 versus $3.55 million in the comparable period of 2006, a $992,000 improvement. This improvement was primarily caused by the decrease in net loss on a year over year basis due to a reduction of expenses and slight increase in revenue.

There were capital expenditures of $79,000 during the first half year of fiscal 2007 and software development costs of $317,000 were capitalized during the first half year of fiscal 2007.

As of June 30, 2007, we had no indebtedness.

Commitment and Contingencies

Lease commitments.    The Company leases office space in Toronto, Ontario and Boulder, Colorado. The Company was released from its lease obligation in New York, New York, which was to expire at the end of December 2007, at the end of September 2006. The Company is currently leasing space in New York, New York on a short-term basis under a lease which runs to December 2007, for its corporate headquarters and sales and support functions. The Company intends to renew its lease on substantially the same terms on a short-term basis when the current lease agreement expires. The Company agreed with the existing landlord to move the Boulder office into new space as of May 2007. This move terminated the existing lease which was replaced by a new lease covering the new space. The lease of the new Boulder office commenced on May 1, 2007 and will run through September 2010. Office lease expenses for the three month periods ended June 30, 2007 and 2006 were approximately $110,000 and $177,000, respectively. In addition, the Company leases an apartment in Las Vegas, Nevada, which runs to February 28, 2008, as a cost effective way to house employees during frequent business visits to Las Vegas. The Company also leases office equipment. These leases have been classified as operating leases. Office equipment lease expenses for the three months period

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ended June 30, 2007 and 2006 were approximately $49,000 and $18,000, respectively. Future lease commitments by year are as follows (2007 amounts are for six months):

			Future Lease Commitments by Year
			(US$)
			2007						2008						2009						2010						2011
Office Space Leases:
United States				$	148,018					$	116,362					$	125,926					$	96,836					$	—
Canada					35,059						107,917						111,249						114,638						118,084
Total Office Space					183,078						224,279						237,175						211,474						118,084
Office Equipment					72,147						143,973						60,975						646						—
Total Lease Commitments				$	255,224					$	368,252					$	298,150					$	212,120					$	118,084

Purchase commitments.    On September 1, 2006, the Company entered into a Private Label Partner Agreement (the ‘‘Agreement’’) with Motorola, Inc. (‘‘Motorola’’), formerly Symbol Technologies, Inc., pursuant to which the Company has the exclusive right to purchase certain private label wireless solution products from Motorola to support the Company’s development of a secure wireless handheld gaming system. The Agreement requires that the Company purchase a specified minimum number of units over the three-year term of the Agreement. In the event such minimum purchase requirement is not met, Motorola has the right to adjust the unit purchase price to a level commensurate with the Company’s volume and the private label exclusivity under the Agreement will be void. The Company believes that in the event of either the loss of private label exclusivity or the renegotiation of the unit purchase price, its consolidated financial statements would not be materially affected.

Off-Balance Sheet Arrangements

As of June 30, 2007, there were no off-balance sheet arrangements.

Item 3.    Controls And Procedures

Evaluation of Disclosure Controls and Procedures.    The Company’s management, with the participation of the chief executive officer and the chief financial officer, carried out an evaluation of the effectiveness of the Company’s ‘‘disclosure controls and procedures’’ (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’) of the end of the period covered by this quarterly report (the ‘‘Evaluation Date’’). Based upon that evaluation, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective, as of the Evaluation Date to ensure that (i) information required to be disclosed in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time limits specified in the Commission’s rules and forms, and (ii) information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and the chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.    There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
OTHER INFORMATION

Item 6.    Exhibits.

Exhibits:

Exhibit No.						Description
	2	.1				Agreement and Plan of Merger, dated as of March 7, 2005 among the Company, PAC and Sona Mobile (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed March 11, 2005).
	3	.1				Certificate of Incorporation, as amended (incorporated by reference to the following documents (i) the Company’s Consent Solicitation dated October 26, 2004 as filed on November 1, 2004; (ii) Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock filed as Exhibit 4.2 to the Company’s Annual Report on Form 10-KSB for its fiscal year ended March 31, 2005; (iii) Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 22, 2005; and (iv) Appendix IV to the Company’s Definitive Proxy Statement dated October 27, 2005 and filed on the same date).
	3	.2				By-laws of the Company, as amended July 20, 2007.*
	4	.1				Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 1 to the Company’s Form SB-2 (file number 333-130461), filed February 2, 2006).
	31	.1				Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
	31	.2				Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
	32	.1				Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

*	Filed herewith.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			Sona Mobile Holdings Corp.
			(Registrant)
Date: August 14, 2007			/s/ Shawn Kreloff
			Chief Executive Officer
Date: August 14, 2007			/s/ Stephen Fellows
			Chief Financial Officer (Principal Financial Officer)

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