UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549








FORM
10-Q




(Mark
One)





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES
      EXCHANGE ACT OF 1934
              
              For the quarterly period ended  June 30,
      2010


OR




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
              
              For the transition period from 
      to ____________


Commission
file number  001-33035





WIDEPOINT
CORPORATION


(Exact
name of registrant as specified in its charter)





Delaware
            
            52-2040275(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (IRS
      Employer Identification No.)





18W100
      22nd St., Oakbrook Terrace, IL
            
            60181(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant's
telephone number, including area code: (630)
629-0003





Indicate by check 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 xNo o





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).   Yes o 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.(Check one):





Large
accelerated filer o      Accelerated
filer o   
Non-accelerated filer o    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





As of
August 13, 2010, 61,375,333 shares of common stock, $.001 par value per share,
were outstanding.









WIDEPOINT
CORPORATION





INDEX




Page No.Part I. FINANCIAL
    INFORMATIONItem
      1.
            
            Condensed
      Consolidated Financial Statements
            
            3Condensed
      Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December
      31, 2009 (unaudited)
            
            3Condensed
      Consolidated Statements of Operations for the three months and six months
      ended June 30, 2010 and 2009 (unaudited)
            
            4Condensed
      Consolidated Statements of Cash Flows for the three months and six months
      ended June 30, 2010 and 2009 (unaudited)
            
            5Notes
      to Condensed Consolidated Financial Statements
            
            6Item
      2.
            
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            18Item
      4.
            
            Controls
      and Procedures
            
            24Part
      II. OTHER INFORMATIONItem
      5.
            
            Other
      Information
            
            26Item
      6.
            
            Exhibits
            
            28SIGNATURES
            
            29CERTIFICATIONS




2




PART I. FINANCIAL
INFORMATION







ITEM
    1.
            CONDENSED CONSOLIDATED
      FINANCIAL STATEMENTS.




WIDEPOINT
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS






June
      30,
              2010
            
            
            December 31,
              2009(unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            2,565,082
            
            
            $
            6,238,788Accounts
      receivable, net of allowance of $0 and $52,650,
    respectively
            
            
            7,681,993
            
            
            
            7,055,525Unbilled
      accounts receivable
            
            
            2,412,841
            
            
            
            1,334,455Prepaid
      expenses and other assets
            
            
            364,123
            
            
            
            359,563Total
      current assets
            
            
            13,024,039
            
            
            
            14,988,331Property
      and equipment, net
            
            
            456,934
            
            
            
            538,811Goodwill
            
            
            10,475,513
            
            
            
            9,770,647Other
      Intangibles, net
            
            
            1,375,197
            
            
            
            1,381,580Other
      assets
            
            
            62,806
            
            
            
            75,718Total
      assets
            
            $
            25,394,489
            
            
            $
            26,755,087Liabilities
      and stockholders’ equityCurrent
      liabilities:Short
      term note payable
            
            $
            55,837
            
            
            $
            102,074Accounts
      payable
            
            
            6,129,977
            
            
            
            7,120,168Accrued
      expenses
            
            
            1,677,166
            
            
            
            2,304,995Deferred
      revenue
            
            
            263,487
            
            
            
            768,504Short-term
      portion of long-term debt
            
            
            538,911
            
            
            
            520,855Short-term
      portion of deferred rent
            
            
            12,627
            
            
            
            54,497Short-term
      portion of capital lease obligation
            
            
            77,394
            
            
            
            112,576Total
      current liabilities
            
            
            8,755,399
            
            
            
            10,983,669Deferred
      income tax liability
            
            
            392,227
            
            
            
            313,782Long-term
      debt, net of current portion
            
            
            332,217
            
            
            
            604,048Fair
      value of earnout liability
            
            
            300,000
            
            
            
            —Deferred
      rent, net of current portion
            
            
            82,849
            
            
            
            7,312Capital
      lease obligation, net of current portion
            
            
            44,428
            
            
            
            67,632Total
      liabilities
            
            $
            9,907,120
            
            
            $
            11,976,443Stockholders’
      equity:Common
      stock, $0.001 par value; 110,000,000 shares authorized; 61,375,333 shares
      issued and outstanding, respectively
            
            
            61,375
            
            
            
            61,375Stock
      warrants
            
            
            24,375
            
            
            
            24,375Additional
      paid-in capital
            
            
            67,931,139
            
            
            
            67,874,394Accumulated
      deficit
            
            
            (52,529,520
            )
            
            
            (53,181,500
            )Total
      stockholders’ equity
            
            
            15,487,369
            
            
            
            14,778,644Total
      liabilities and stockholders’ equity
            
            $
            25,394,489
            
            
            $
            26,755,087





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




3





WIDEPOINT
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS





Three
      Months
              Ended
      June 30,
            
            
            Six
      Months
              Ended
      June 30,2010
            
            
            2009
            
            
            2010
            
            
            2009(unaudited)Revenues,
      net
            
            $
            12,452,120
            
            
            $
            10,392,282
            
            
            $
            23,615,176
            
            
            $
            20,527,664Cost
      of sales (including amortization and depreciation of $243,277, $242,755,
      $469,562, and $485,891, respectively)
            
            
            9,521,361
            
            
            
            8,190,224
            
            
            
            18,160,582
            
            
            
            16,282,504Gross
      profit
            
            
            2,930,759
            
            
            
            2,202,058
            
            
            
            5,454,594
            
            
            
            4,245,160Sales
      and marketing
            
            
            487,996
            
            
            
            265,317
            
            
            
            831,003
            
            
            
            494,783General
      and administrative (including shared-based compensation expense of
      $27,565, $75,857, $56,745, and $106,587, respectively)
            
            
            1,882,721
            
            
            
            1,576,711
            
            
            
            3,714,532
            
            
            
            3,112,982Depreciation
      expense
            
            
            48,743
            
            
            
            41,105
            
            
            
            98,477
            
            
            
            84,112Income
      from operations
            
            
            511,299
            
            
            
            318,925
            
            
            
            810,582
            
            
            
            553,283Interest
      income
            
            
            2,231
            
            
            
            4,651
            
            
            
            8,845
            
            
            
            18,739Interest
      expense
            
            
            (22,793
            )
            
            
            (33,701
            )
            
            
            (50,170
            )
            
            
            (114,000
            )Other
      expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income before income tax expense
            
            $
            490,737
            
            
            $
            289,875
            
            
            $
            769,257
            
            
            $
            458,022Income
      tax expense
            
            
            38,832
            
            
            
            -
            
            
            
            38,832
            
            
            
            -Deferred
      income tax expense
            
            
            39,223
            
            
            
            39,223
            
            
            
            78,445
            
            
            
            78,445Income
      tax expense
            
            
            78,055
            
            
            
            39,223
            
            
            
            117,277
            
            
            
            78,455Net
      income
            
            $
            412,682
            
            
            $
            250,652
            
            
            $
            651,980
            
            
            $
            379,577Basic
      earnings per share
            
            $
            0.01
            
            
            $
            0.00
            
            
            $
            0.01
            
            
            $
            0.01Basic
      weighted average shares outstanding
            
            
            61,375,333
            
            
            
            58,305,514
            
            
            
            61,375,333
            
            
            
            58,300,044Diluted
      earnings per share
            
            $
            0.01
            
            
            $
            0.00
            
            
            $
            0.01
            
            
            $
            0.01Diluted
      weighted average shares outstanding
            
            
            63,299,155
            
            
            
            61,562,251
            
            
            
            63,163,824
            
            
            
            60,788,081




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




4




WIDEPOINT
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS





Six
      Months
              Ended
      June 30,2010
            
            
            2009Cash
      flows from operating activities:Net
      income
            
            $
            651,980
            
            
            $
            379,577Adjustments
      to reconcile net income to net cash provided by operating
      activities:Deferred
      income tax expense
            
            
            78,445
            
            
            
            78,445Depreciation
      expense
            
            
            144,644
            
            
            
            112,233Amortization
      of intangibles
            
            
            423,395
            
            
            
            457,770Amortization
      of deferred financing costs
            
            
            4,995
            
            
            
            3,753Stock
      options expense
            
            
            56,745
            
            
            
            106,587Changes
      in assets and liabilities (net of business combinations):Accounts
      receivable and unbilled accounts receivable
            
            
            (1,704,854
            )
            
            
            131,785Prepaid
      expenses and other current assets
            
            
            37,440
            
            
            
            (9,880
            )Other
      assets
            
            
            7,917
            
            
            
            15,482Accounts
      payable and accrued expenses
            
            
            (2,032,258
            )
            
            
            198,442Deferred
      revenue
            
            
            (505,017
            )
            
            
            (426,951
            )Net
      cash (used in) provided by operating activities
            
            $
            (2,836,568
            )
            
            $
            1,047,243Cash
      flows from investing activities:Purchase
      of subsidiary, net of cash acquired
            
            
            (383,701
            )
            
            
            (3,482
            )Purchase
      of property and equipment
            
            
            (19,092
            )
            
            
            (77,798
            )Software
      development costs
            
            
            (35,593
            )
            
            
            (12,452
            )Net
      cash used in investing activities
            
            $
            (438,386
            )
            
            $
            (93,732
            )Cash
      flows from financing activities:Borrowings
      on notes payable
            
            
            -
            
            
            
            400,737Principal
      payments on notes payable
            
            
            (340,366
            )
            
            
            (2,711,303
            )Principal
      payments under capital leaseObligation
            
            
            (58,386
            )
            
            
            (56,710
            )Proceeds
      from exercise of stock options
            
            
            -
            
            
            
            3,750Costs
      related to renewal fee for line of credit
            
            
            -
            
            
            
            (12,000
            )Net
      cash used in financing activities
            
            $
            (398,752
            )
            
            $
            (2,375,526
            )Net
      decrease in cash
            
            $
            (3,673,706
            )
            
            $
            (1,422,015
            )Cash
      and cash equivalents, beginning of period
            
            $
            6,238,788
            
            
            $
            4,375,426Cash
      and cash equivalents, end of period
            
            $
            2,565,082
            
            
            $
            2,953,411Supplementary
      Information:Cash
      paid for income tax
            
            $
            38,832
            
            
            $
            -Cash
      paid for interest
            
            $
            46,929
            
            
            $
            263,975





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




5




WIDEPOINT
CORPORATION AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1. Basis
of Presentation




WidePoint
Corporation (“WidePoint,” the “Company,” “we,” or “our”) is a provider of
technology-based products and services to both the government sector and
commercial markets. WidePoint was incorporated in Delaware on May 30,
1997.  We have grown through the merger with and acquisition of highly
specialized regional IT consulting companies.





Our
expertise lies within three business segments operated through six wholly-owned
operational entities.  Our three business segments include: Wireless
Mobility Management (formerly referred to as our “Wireless Telecommunications
Expense Management Services” segment), Cybersecurity Solutions (formerly
referred to as our “Identity Management” segment), and IT Consulting Services
and Products.  These segments offer unique solutions and proprietary
intellectual property (“IP”) in mobile and wireless full life cycle management
solutions; cybersecurity solutions with specific subject matter expertise, U.S.
government certifications and authorizations, and IP in identity management and
information assurance services utilizing certificate-based security solutions;
and other associated IT consulting services and products through which we
provide specific subject matter expertise in IT Architecture and Planning,
Software Implementation Services, IT Outsourcing, and Forensic
Informatics.





WidePoint
has three material operational entities, Operational Research Consultants, Inc.
(“ORC”), iSYS, LLC (“iSYS”), and WidePoint IL, Inc. (“WP IL”) (operating in
conjunction with WP NBIL, Inc.), and with two early stage development companies:
Protexx Acquisition Corporation, doing business as Protexx, and Advanced
Response Concepts Corporation, doing business as Advanced Response Concepts. ORC
specializes in IT integration and secure authentication processes and software,
and is a provider of services to the U.S. Government.  ORC has been at
the forefront of implementing Public Key Infrastructure
(“PKI”) technologies.  PKI technology uses a class of algorithms
in which a user can receive two electronic keys, consisting of a public key and
a private key, to encrypt any information and/or communication being transmitted
to or from the user within a computer network and between different computer
networks. PKI technology is rapidly becoming the technology of choice to enable
security services within and between different computer systems utilized by
various agencies and departments of the U.S. Government.  iSYS
specializes in mobile telecommunications expense management services and
forensic informatics, as well as information assurance services, predominantly
to the U.S. Government.  WP IL and WP NBIL provide information
technology consulting services predominately to large commercial
enterprises.  Protexx specializes in identity assurance and mobile and
wireless data protection services.





On
January 29, 2010, we completed the asset purchase and assumption of certain
liabilities from Vuance, Inc, including acquisition of their Government Services
Division.  These assets are now housed in our wholly owned subsidiary
Advanced Response Concepts Corporation.  Advanced Response Concepts
develops and markets leading-edge secure critical response management solutions
designed to improve coordination within emergency services and critical
infrastructure agencies.





Our staff
consists of business process and computer specialists who help our government
and civilian customers augment and expand their resident technologic skills and
competencies, drive technical innovation, and help develop and maintain a
competitive edge in today’s rapidly changing technological environment in
business. Our organization emphasizes an intense commitment to our people, our
customers, and the quality of our solutions offerings. As a services
organization, our customers are our primary focus.





The
condensed consolidated balance sheet as of June 30, 2010, the condensed
consolidated statements of operations and statements of cash flows for the three
months and six months ended June 30, 2010 and 2009, respectively, have been
prepared by the Company and are unaudited.  The condensed consolidated
balance sheet as of December 31, 2009 was derived from the audited consolidated
financial statements included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2009.





The
unaudited condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”).  Pursuant to such rules and
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles (“GAAP”) have been condensed or omitted. It is the opinion of
management that all adjustments (which include normal recurring adjustments)
necessary for a fair statement of financial results are reflected in the interim
periods presented.  The results of operations for the three months and
six months, respectively, ended June 30, 2010 are not indicative of the
operating results for the full year.





6





2. Significant
Accounting Policies




Accounting
Standards Updates




In
September, 2009, FASB issued Accounting Standard Update No. 13 (“ASU 13”),
Multiple Element Revenue Arrangements, which applies to ASC Topic 605, Revenue
Recognition.  ASU 13, among other things, establishes the use of the
best estimate of selling price to determine the separate units of accounting in
a multiple element arrangement in the absence of vendor-specific objective
evidence or third party evidence.  ASU 13 also removes the requirement
to use the residual method to allocate arrangement consideration to the separate
units of accounting in an arrangement, and instead requires the use of
management’s best estimate of the relative selling prices of each unit of
accounting to determine the consideration allocation. ASU 13 is effective for
arrangements entered into or materially modified in a fiscal year beginning on
or after June 15, 2010. This update to the ASC will be applied on a prospective
basis, and management is in the process of evaluating whether the update will
materially change the pattern and timing of the Company's recognition of
revenue.




Significant
Customers




For the
three months and six months ended June 30, 2010, three customers, the
Transportation Security Administration (“TSA”), the Department of Homeland
Security (“DHS”), and the Washington Headquarters Services (“WHS”), an agency
within the Department of Defense (“DoD”) that provides services for many DoD
agencies and organizations, represented the percentages of our revenue set forth
in the table below.  Due to the nature of our business and the
relative size of certain contracts, which are entered into in the ordinary
course of business, the loss of any single significant customer could have a
material adverse effect on our results of operations.






For
      the Three Months
              Ended
      June 30,
            
            
            For
      the Six Months
              Ended
      June 30,Customer
      Name
            
            2010
              (%)
              Revenue
            
            
            2009
              (%)
              Revenue
            
            
            2010
              (%)
              Revenue
            
            
            2009
              (%)
              RevenueTSA
            
            
            20
            %
            
            
            22
            %
            
            
            22
            %
            
            
            23
            %DHS
            
            
            18
            %
            
            
            27
            %
            
            
            19
            %
            
            
            24
            %WHS
            
            
            16
            %
            
            
            19
            %
            
            
            17
            %
            
            
            18
            %




Effective
July 31, 2010, WHS pass-through billing services contract lapsed. Over the past
six months this represented approximately $6 million in
revenue.




Concentrations
of Credit Risk




Financial
instruments potentially subject the Company to credit risk, which consist of
cash and cash equivalents and accounts receivable.  As of June 30,
2010 and December 31, 2009, respectively, three customers represented the
percentages of our accounts receivable and unbilled accounts receivable as set
forth in the table below:





As
      of
              June
      30,
              2010
            
            
            As
      of
              December
      31,
              2009Customer
      Name
            
            (%)
              Receivables
            
            
            (%)
              ReceivablesDHS
            
            
            19
            %
            
            
            30
            %TSA
            
            
            23
            %
            
            
            26
            %WHS
            
            
            4
            %
            
            
            20
            %




7




Fair
Value of Financial Instruments




The
Company’s financial instruments include cash equivalents, accounts receivable,
notes receivable, accounts payable, short-term debt and other financial
instruments associated with the issuance of the common stock.  The
carrying values of cash equivalents, accounts receivable, notes receivable, and
accounts payable approximate their fair value because of the short maturity of
these instruments. The carrying amounts of the Company’s bank borrowings under
its credit facility approximate fair value because the interest rates are reset
periodically to reflect current market rates.





Accounts
Receivable





The
majority of the Company's accounts receivable is due from the federal government
and established private sector companies in the following industries:
manufacturing, customer product goods, direct marketing, healthcare, and
financial services.  Credit is extended based on evaluation of a
customer’s financial condition and, generally, collateral is not
required.  Accounts receivable are usually due within 30 to 60 days
and are stated at amounts due from customers net of an allowance for doubtful
accounts if deemed necessary.  Customer account balances outstanding
longer than the contractual payment terms are reviewed for collectability and
after 90 days are considered past due.





The
Company determines its allowance for doubtful accounts by considering a number
of factors, including the length of time trade accounts receivable are past due,
the Company’s previous loss history, the customer’s current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole.  The Company writes off accounts receivable when
they become uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts.





The
Company has not historically maintained a bad debt reserve for our federal
government or commercial customers as we have not witnessed any material or
recurring bad debt charges and the nature and size of the contracts has not
necessitated the Company’s establishment of such a bad debt
reserve.  Upon specific review and our determination that a bad debt
reserve may be required, we will reserve such amount if we view the account as
potentially uncollectable.





The
Company is following a customer’s procedural guidelines in pursuing final
approval and collection of a single sales invoice of approximately
$500,000.  In September of 2010 we will be filing further information as we
follow the procedural guidelines in response to our efforts to collect this
invoice.  The aging of this invoice exceeds the 90 day past due
threshold noted above.  However, the Company believes that it is adequately
responded to the procedural requirement to allow us to substantiate the billing
and we believe it is probable that the balance will be fully collected upon
completion of the procedural process we are following to collect this
invoice.





Basic
and Diluted Net Income Per Share




Basic net
income per share includes no dilution and is computed by dividing net income by
the weighted-average number of common shares outstanding for the period. Diluted
net income per share includes the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Net income per common share
was computed as follows:





For
      the Three Months
              Ended
      June 30,
            
            
            For
      the Six Months
              Ended
      June 30,2010
            
            
            2009
            
            
            2010
            
            
            2009Basic
      Net Income Per Common Share:Net
      income
            
            $
            412,682
            
            
            $
            250,652
            
            
            $
            651,980
            
            
            $
            379,577Weighted
      average number of common
      shares
            
            
            61,375,333
            
            
            
            58,305,514
            
            
            
            61,375,333
            
            
            
            58,300,044Income
      per common share
            
            $
            0.01
            
            
            $
            0.00
            
            
            $
            0.01
            
            
            $
            0.01Diluted
      net Incomeper
      Common Share:Net
      income
            
            $
            412,682
            
            
            $
            250,652
            
            
            $
            651,980
            
            
            $
            379,577Weighted
      average number of common shares
            
            
            61,375,333
            
            
            
            58,305,514
            
            
            
            61,375,333
            
            
            
            58,300,044Incremental
      shares from assumed conversions of stock options
            
            
            1,923,822
            
            
            
            3,256,737
            
            
            
            1,788,491
            
            
            
            2,488,037Adjusted
      weighted averagenumber
      of common shares
            
            
            63,299,155
            
            
            
            61,562,251
            
            
            
            63,163,824
            
            
            
            60,788,081Income
      per common share
            
            $
            0.01
            
            
            $
            0.00
            
            
            $
            0.01
            
            
            $
            0.01





8





Stock-based
compensation





The
Company recognizes share-based compensation ratably using the straight-line
attribution method over the requisite service period.  In addition,
the Company is required to estimate the amount of expected forfeitures when
calculating share-based compensation.





The
amount of compensation expense recognized during the three month and six month
periods ended June 30, 2010 and 2009, respectively, under our plans was
comprised of the following:





Three
      Months ended
              June
      30,
            
            
            Six
      Months ended
              June
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009General
      and administrative expense
            
            $
            27,565
            
            
            $
            75,857
            
            
            $
            56,745
            
            
            $
            106,587Share-based
      compensation before taxes
            
            
            27,565
            
            
            
            75,857
            
            
            
            56,745
            
            
            
            106,587Total
      net share-based compensation expense
            
            $
            27,565
            
            
            $
            75,857
            
            
            $
            56,745
            
            
            $
            106,587Net
      share-based compensation expenses per basic and diluted common
      share
            
            
            - 0
      -
            
            
            
            - 0
      -
            
            
            
            - 0
      -
            
            
            
            - 0
      -





Since we
have cumulative operating tax losses as of June 30, 2010, for which a valuation
allowance has been established, we recorded no income tax benefits for
share-based compensation arrangements.  Additionally, no incremental tax
benefits were recognized from stock options exercised during the three months
and six months ended June 30, 2010, which would have resulted in a
reclassification to reduce net cash provided by operating activities with an
offsetting increase in net cash provided by financing
activities.





The fair
value of each option award is estimated on the date of grant using a
Black-Scholes option pricing model, which uses the assumptions of no dividend
yield, risk-free interest rates and expected life in years of approximately 3
years.  The option awards are for the period from 1999 through 2010.
Expected volatilities are based on the historical volatility of our common
stock. The expected term of options granted is based on analyses of historical
employee termination rates and option exercises. The risk-free interest rates
are based on the U.S. Treasury yield for a period consistent with the expected
term of the option in effect at the time of the grant.





Six
      Months
              Ending
              June
      30,
              2010Expected
      dividend yield
            
            
            0Expected
      volatility
            
            
            102
            %Risk-free
      interest rate
            
            
            1.40
            %Expected
      life – Employees options
            
            3.0
            yearsExpected
      life – Board of directors options
            
            
            n/a





9





Share-based
compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during
the period.  The estimated forfeiture rates are based on analyses of
historical data, taking into account patterns of involuntary termination and
other factors.  A summary of the option activity under our plans during the
six month periods ended June 30, 2010 and 2009 is presented
below:





NON-VESTED





#
      of
              Shares
            
            
            Weighted
              average
              grantdate
              fairvalue
              pershareNon-vested
      at January 1, 2010
            
            
            1,215,004
            
            
            $
            0.39Granted
            
            
            75,000
            
            
            $
            0.41Vested
            
            
            120,001
            
            
            $
            0.05Forfeited
            
            
            -
            
            
            
            -Non-vested
      at March 31, 2010
            
            
            1,170,003
            
            
            $
            0.43Granted
            
            
            -
            
            
            
            -Vested
            
            
            31,250
            
            
            $
            0.44Forfeited
            
            
            -
            
            
            
            -Non-vested
      at June 30, 2010
            
            
            1,138,753
            
            
            $
            0.43Non-vested
      at January 1, 2009
            
            
            1,314,000
            
            
            $
            0.57Granted
            
            
            -
            
            
            
            -Vested
            
            
            119,996
            
            
            $
            0.80Forfeited
            
            
            -
            
            
            
            -Non-vested
      at March 31, 2009
            
            
            1,194,004
            
            
            $
            0.55Granted
            
            
            25,000
            
            
            $
            0.54Vested
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -Non-vested
      at June 30, 2009
            
            
            1,219,004
            
            
            $
            0.39





OUTSTANDING AND
EXERCISABLE





#
      of
              Shares
            
            
            Weighted
              average
              grantdate
              fairvalue
              pershareTotal
      outstanding at January 1, 2010
            
            
            4,517,411
            
            
            $
            0.54Issued
            
            
            75,000
            
            
            
            -Cancelled
            
            
            1,000
            
            
            $
            0.65Exercised
            
            
            -
            
            
            
            -Total
      outstanding at March 31, 2010
            
            
            4,591,411
            
            
            $
            0.54Total
      exercisable at March 31, 2010
            
            
            3,421,408
            
            
            $
            0.44Issued
            
            
            -
            
            
            
            -Cancelled
            
            
            7,611
            
            
            $
            0.45Exercised
            
            
            -
            
            
            
            -Total
      outstanding at June 30, 2010
            
            
            4,583,800
            
            
            $
            0.54Total
      exercisable at June 30, 2010
            
            
            3,445,047
            
            
            $
            0.44Total
      outstanding at January 1, 2009
            
            
            8,523,411
            
            
            $
            0.45Issued
            
            
            -
            
            
            
            -Cancelled
            
            
            1,000
            
            
            $
            1.35Exercised
            
            
            30,000
            
            
            
            0.13Total
      outstanding at March 31, 2009
            
            
            8,492,411
            
            
            $
            0.45Total
      exercisable at March 31, 2009
            
            
            7,298,407
            
            
            $
            0.38Issued
            
            
            25,000
            
            
            $
            0.54Cancelled
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Total
      outstanding at June 30, 2009
            
            
            8,517,411
            
            
            $
            0.40Total
      exercisable at June 30, 2009
            
            
            7,298,407
            
            
            $
            0.32




10




The
aggregate remaining contractual lives in years for the options outstanding and
exercisable on June 30, 2010 were 4.18 and 3.44, respectively.  In
comparison, the aggregate remaining contractual lives in years for the options
outstanding and exercisable on June 30, 2009, were 2.78 and 2.03,
respectively.





Aggregate
intrinsic value represents total pretax intrinsic value (the difference between
WidePoint’s closing stock price on June 30, 2010, and the exercise price,
multiplied by the number of in-the-money options) that would have been received
by the option holders had all option holders exercised their options on June 30,
2010. The intrinsic value will change based on the fair market value of
WidePoint’s stock. The total intrinsic values of options outstanding and
exercisable as of June 30, 2010, were $1,506,694 and $1,458,143, respectively.
The total intrinsic value of options exercised for the second quarter of fiscal
2010 was $0. The Company issues new shares of common stock upon the exercise of
stock options.  At June 30, 2010, 4,436,438 Shares were available for
future grants under the Company's 2008 Stock Incentive Plan.




At June
30, 2010, the Company had approximately $285,000 of total unamortized
compensation expense, net of estimated forfeitures, related to stock option
plans that will be recognized over the weighted average period of 3.53
years.





Non-Employee
Stock-based Compensation:





The
Company accounts for stock-based non-employee compensation arrangements using
the fair value recognition provisions of ASC 505-50, “Equity-Based Payments to
Non-Employees” (formerly known as FASB Statement 123, Accounting for Stock-Based
Compensationand “Emerging Issues Task Force” EITF 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services).





3.  Debt




On May
25, 2010 the Company entered into an Amended Commercial Loan Agreement with
Cardinal Bank (the “2010 Debt Modification Agreement”).  Pursuant to
the 2010 Debt Modification Agreement, the repayment date of the revolving credit
facility was extended from June 1, 2010. to September 1, 2010. and advances
under the revolving credit facility now will bear interest at a variable rate
equal to the prime rate plus 0.5% with an interest rate floor of 5%. Borrowings
under the 2009 Commercial Loan Agreement (as amended by the 2010 Debt
Modification Agreement) are collateralized by the Company’s eligible contract
receivables, inventory, all of its stock in certain of its subsidiaries and
certain property and equipment. As part of the credit facility, the Company must
comply with certain financial covenants that include tangible net worth and
interest coverage ratios.  The Company was in full compliance with
these financial covenants on August 16, 2010.  The Company is
presently working with Cardinal Bank on renewing the credit facility and expects
to renew the credit facility prior to September 1, 2010.




11





The
Company also has a four-year term note with Cardinal Bank that we entered into
January 2008 in the principal amount of $2 million, which bears interest at the
rate of 7.5% with 48 equal principal and interest payments. At June 30, 2010, we
owed approximately $1.0 million under the term note.





4. Goodwill
and Intangible Assets





Goodwill
is to be reviewed at least annually for impairment. The Company has elected to
perform this review annually on December 31st of each calendar year. We
have not identified any impairment as of June 30, 2010.


The
changes in the carrying amount of goodwill for the six-month period ended June
30, 2010 and for the year ended December 31, 2009, respectively, are as
follows:





TotalBalance
      as of December 31, 2009
            
            $
            9,770,647Advanced
      Response Concepts asset purchase
            
            
            704,866Balance
      as of June 30, 2010
            
            $
            10,475,513




Purchased
and Internally Developed Intangible Assets





The
following table summarizes purchased and internally developed intangible assets
subject to amortization:





As
      of June 30, 2010Gross
              Carrying
              Amount
            
            
            Accumulated
              Amortization
            
            
            Weighted
              Average
              Amortization
              Period
              (in
      years)Purchased
      Intangible AssetsORC
      Intangible (includes customer relationships and PKI business opportunity
      purchase accounting preliminary valuations)
            
            $
            1,145,523
            
            
            $
            (1,132,146
            )
            
            
            5iSYS
      (includes customer relationships, internal use software and trade
      name)
            
            $
            1,230,000
            
            
            $
            (644,168
            )
            
            
            5Protexx
      (Identity Security Software)
            
            $
            506,463
            
            
            $
            (323,574
            )
            
            
            3Advanced
      Response Concepts (includes preliminary values for customer relationships
      and first responder security software)
            
            $
            381,420
            
            
            $
            (39,731
            )
            
            
            4$
            3,263,406
            
            
            $
            (2,139,619
            )
            
            
            4Internally
      Developed Intangible AssetsORC
      PKI-I Intangible (Related to internally generated
software)
            
            $
            334,672
            
            
            $
            (329,822
            )
            
            
            6ORC
      PKI-II Intangible (Related to internally generated
    software)
            
            $
            649,991
            
            
            $
            (604,880
            )
            
            
            6ORC
      PKI-III Intangible (Related to internally generated
    software)
            
            $
            211,680
            
            
            $
            (152,880
            )
            
            
            3ORC
      PKI-IV Intangible (Related to internally generated
    software)
            
            $
            42,182
            
            
            $
            (30,465
            )
            
            
            3ORC
      PKI-V Intangible (Related to internally generated
software)
            
            $
            147,298
            
            
            $
            (16,366
            )
            
            
            31,385,823
            
            
            $
            (1,134,413
            )
            
            
            5Total
            
            $
            4,649,229
            
            
            $
            (3,274,032
            )
            
            
            5Aggregate
      Amortization Expense:For
      the three months ended 6/30/10
            
            $
            220,354For
      the six months ended 6/30/10
            
            $
            423,395Estimated
      Amortization Expense:For
      the year ending 12/31/10
            
            $
            728,409For
      the year ending 12/31/11
            
            $
            474,912For
      the year ending 12/31/12
            
            $
            332,121For
      the year ending 12/31/13
            
            $
            255,204For
      the year ending 12/31/14
            
            $
            7,946Total
            
            $
            1,798,592




12




The total
weighted average life of all of the intangibles is approximately 3
years.




There
were no amounts of research and development assets acquired or written-off
during the three month or six month period ended June 30, 2010.





5. Income
Taxes




The
Company accounts for income taxes in accordance with ASC 740, “Income Taxes”
(formerly known as SFAS No. 109, “Accounting for Income Taxes”). Deferred
tax assets and liabilities are computed based on the difference between the
financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate.  Income tax accounting guidance requires
that the net deferred tax asset be reduced by a valuation allowance if, based on
the weight of available evidence, it is more likely than not that some portion
or all of the net deferred tax asset will not be realized.  The
Company recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit.  For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax
authority.  The Company’s assessments of its tax positions did not
result in changes that had a material impact on results of operations, financial
condition or liquidity. As of June 30, 2010 and December 31, 2009, the Company
had no unrecognized tax benefits. While the Company does not have any interest
and penalties in the periods presented, the Company’s policy is to recognize
such expenses as tax expense.




13





The
Company files U.S. federal income tax returns with the Internal Revenue Service
(“IRS”) as well as income tax returns in various states. The Company may be
subject to examination by the IRS for tax years 2002 through 2009. Additionally,
the Company may be subject to examinations by various state taxing jurisdictions
for tax years 2002 through 2009. The Company is currently under examination by
the IRS for its fiscal period ending December 31, 2008. The Company is not
currently under examination by the IRS for any other fiscal period and is not
currently under examination by any other state taxing authority.





As of
June 30, 2010, the Company had net operating loss (NOL) carry forwards of
approximately $15 million to offset future taxable income. There are also up to
approximately in $8 million in state tax NOL carry forwards.  These
carry forwards expire between 2010 and 2029. In assessing the ability to realize
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon generation of
future taxable income during the periods in which those temporary differences
become deductible. Based upon the level of historical losses that may limit
utilization of NOL carry forwards in future periods, management is unable to
predict whether these net deferred tax assets will be utilized prior to
expiration. Under the provision of the Tax Reform Act of 1986, when there has
been a change in an entity’s ownership of 50 percent or greater,
utilization of net operating loss carry forwards may be limited. As a result of
WidePoint’s equity transactions, the Company’s net operating losses will be
subject to such limitations and may not be available to offset future income for
tax purposes. In the fourth quarter of 2009, the Company completed its
“Section 382” analysis and preliminarily determined that some of the
Company’s net operating losses may be limited as a result of expirations that
may occur prior to the utilization of those net operating losses under the
limitations from certain changes of control that  occurred in past
years.   Such limitations will result in approximately $4,907,000 of
tax benefits related to federal NOL carryforwards that will expire unused.
Accordingly, the related NOL carryforwards have been removed from deferred tax
assets accompanied by a corresponding reduction of the valuation allowance. Due
to the existence of the valuation allowance, limitations created by future
ownership changes, if any, related to our operations in the U.S. will not impact
our effective tax rate.





No stock
options have been exercised in the six months ending June 30,
2010.  Therefore, no tax benefit has been realized during the three or
six month periods ending June 30, 2010, respectively.  For the three
and six months ending June 30, 2009, respectively, no tax benefit has been
realized because of the existence of net operating loss
carryforwards.  There will be no credit to additional paid in capital
for such stock option exercises until the associated benefit is realized through
a reduction of income taxes payable.





The
Company has determined that its net deferred tax asset did not satisfy the
recognition criteria and, accordingly, established a valuation allowance for
100 percent of the net deferred tax asset.





The
Company incurred a deferred income tax expense of approximately $39,000 for the
three months ended June 30, 2010, and June 30, 2009, respectively. This deferred
income tax expense is attributable to the differences in our treatment of the
amortization of goodwill for tax purposes versus book purposes as it relates to
our acquisition of iSYS in January 2008. Because the goodwill is not
amortized for book purposes but is for tax purposes, the related deferred tax
liability cannot be reversed until some indeterminate future period when the
goodwill either becomes impaired and/or is disposed of. The deferred tax
liability can be offset by deferred income tax assets that may be recognized in
the future and the deferred tax expense is a non-cash expense. Income tax
accounting guidance requires the expected timing of future reversals of deferred
tax liabilities to be taken into account when evaluating the realizability of
deferred tax assets. Therefore, the reversal of deferred tax liabilities related
to the goodwill is not to be considered a source of future taxable income when
assessing the realization of deferred tax assets. Because the Company has a
valuation allowance for the full amount of the deferred income tax asset, the
deferred income liability associated with the tax deductible goodwill has been
recorded and not offset against existing deferred income tax
assets.





6.  Segment
reporting





Segments
are defined by authoritative guidance as components of a company in which
separate financial information is available and is evaluated by the chief
operating decision maker, or a decision making group, in deciding how to
allocate resources and in assessing performance.  Management evaluates
segment performance primarily based on revenue and segment operating
income.





The
Company operates as three segments, which include Wireless Mobility Management,
Cybersecurity Solutions, and IT Consulting Services and Products.




14





Segment
operating income consists of the revenues generated by a segment, less the
direct costs of revenue and selling, general and administrative costs that are
incurred directly by the segment.  Unallocated corporate costs include
costs related to administrative functions that are performed in a centralized
manner that are not attributable to a particular segment.  These
administrative function costs include costs for corporate office support, all
office facility costs, costs relating to accounting and finance, human
resources, legal, marketing, information technology and company-wide business
development functions, as well as costs related to overall corporate
management.





The
following tables set forth selected segment and consolidated operating results
and other operating data for the periods indicated. Segment operating income
consists of the revenues generated by a segment, less the direct costs of
revenue and selling, general and administrative costs that are incurred directly
by the segment. Unallocated corporate costs include costs related to
administrative functions that are performed in a centralized manner that are not
attributable to a particular segment.  Management does not analyze
assets for decision making purposes as it relates to the segments below.
Accordingly, information is not available for long-lived assets or total
assets.




Three
Month Period Ending June 30, 2010




Wireless
            
            
            Cyber
            
            
            Consulting
            
            
            Corp
            
            
            ConsolRevenue
            
            $
            6,885,987
            
            
            $
            2,486,820
            
            
            $
            3,079,313
            
            
            $
            -
            
            
            $
            12,452,120Operating
      incomeincluding
      amortization anddepreciation
      expense
            
            
            567,288
            
            
            
            596,061
            
            
            
            54,803
            
            
            
            (706,853
            )
            
            
            511,299Interest
      Income (expense), net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (20,562
            )
            
            
            (20,562
            )Pretax
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            490,737Income
      tax expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (78,055
            )
            
            
            (78,055
            )Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            412,682




Three
Month Period Ending June 30, 2009







Wireless
            
            
            Cyber
            
            
            Consulting
            
            
            Corp
            
            
            ConsolRevenue
            
            $
            7,114,365
            
            
            $
            1,336,238
            
            
            $
            1,941,679
            
            
            $
            -
            
            
            $
            10,392,282Operating
      income (loss) including
      amortization and depreciation expense
            
            
            608,314
            
            
            
            259,663
            
            
            
            151,485
            
            
            
            (700,537
            )
            
            
            318,925Interest
      Income (expense), net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (29,050
            )
            
            
            (29,050
            )Pretax
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            289,875Income
      tax expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (39,223
            )
            
            
            (39,223
            )Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            250,652





15




Six Month
Period Ending June 30, 2010




Wireless
            
            
            Cyber
            
            
            Consulting
            
            
            Corp
            
            
            ConsolRevenue
            
            $
            13,805,799
            
            
            $
            3,912,327
            
            
            $
            5,897,050
            
            
            $
            -
            
            
            $
            23,615,176Operating
      incomeincluding
      amortization anddepreciation
      expense
            
            
            1,246,532
            
            
            
            881,427
            
            
            
            162,217
            
            
            
            (1,479,594
            )
            
            
            810,582Interest
      Income (expense), net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (41,325
            )
            
            
            (41,325
            )Pretax
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            769,257Income
      tax expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (117,277
            )
            
            
            (117,277
            )Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            651,980




Six Month
Period Ending June 30, 2009






Wireless
            
            
            Cyber
            
            
            Consulting
            
            
            Corp
            
            
            ConsolRevenue
            
            $
            13,470,825
            
            
            $
            2,744,090
            
            
            $
            4,312,749
            
            
            $
            -
            
            
            $
            20,527,664Operating
      income (loss) including
      amortization and depreciation expense
            
            
            1,210,668
            
            
            
            485,092
            
            
            
            168,162
            
            
            
            (1,310,639
            )
            
            
            553,283Interest
      Income (expense), net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (95,261
            )
            
            
            (95,261
            )Pretax
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            458,022Income
      tax expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (78,445
            )
            
            
            (78,445
            )Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            379,577




8.  Advanced Response
Concepts Corporation Asset Purchase.





On
January 29, 2010, the Company, together with its wholly-owned subsidiary,
Advanced Response Concepts Corporation, a Delaware corporation (“Advanced
Response Concepts”), entered into an Asset Purchase Agreement with Vuance, Inc.
(“Vuance”), a Delaware corporation, and Vuance’s sole shareholder, Vuance, Ltd.,
a public company organized in the State of Israel under the Israeli Companies
Law (the “Vuance Agreement”), pursuant to which Advanced Response Concepts
acquired certain assets and assumed certain liabilities of Vuance as further
specified in the Vuance Agreement.  Advanced Response Concepts
acquired all assets of the collective business of Vuance relating to its
Government Services Division. The purchased assets include, but are not limited
to, the operation by Vuance of identity assurance and priority resource
management solutions; crime scene management and information protection, and
other activities related or incidental thereto; and the development,
maintenance, enhancement and provision of software, services, products and
operations for identity management and information protection, which are offered
primarily to state and local government agency markets.





The
acquisition of Vaunce was accounted for using the acquisition method of
accounting.  The fair value of the consideration was approximately
$684,000.  Based upon a review of the costs of performing certain
assumed obligations we increased the amount reserved to perform these obligation
approximately $76,000 increasing the consideration to approximately
$759,000.




16





The
Company has engaged a valuation consultant to assist in finalizing the
determination of the purchase price and fair value of assets and liabilities
acquired. This process has not been completed as of the end of the quarter. As
such, amounts disclosed are provisional and subject to change based on the final
determination of the purchase price and fair value of assets and liabilities
acquired.  The purchase price was based upon management’s estimates
and assumptions using the latest available information.  The following
table summarizes the estimated fair values of the assets acquired and
liabilities assumed in this business combination:




Advanced
              Response
              Concepts
              Jan.
      29,
              2010Consideration:Cash
            
            $
            370,000Cash
      to be paid (post-closing adjustments)
            
            
            89,478Contingent
      consideration arrangement
            
            
            300,000Fair
      value of total consideration transferred
            
            $
            759,478Approximate
      acquisition related costs (including general & administrative expenses
      in WidePoint’s income statement for the period ending June 30,
      2010)
            
            $
            70,000Recognized
      amounts of identifiable assets acquired & liabilities
      assumed:Current
      Assets
            
            $
            42,000Property,
      plant, and equipment, net
            
            
            43,675Identifiable
      intangible assets
            
            
            381,420Current
      liabilities assumed
            
            
            (412,483
            )Total
      identifiable net assets & liabilities assumed
            
            
            54,612Goodwill
            
            
            704,866Total
            
            $
            759,478





The
operations of Advanced Response Concepts have been included in the Company’s
results of operations beginning on January 29, 2010, the acquisition
date.





The
earnout provision of the Vuance Agreement provides for additional consideration
of up to $1,500,000 during the earnout period of the calendar years 2010 - 2012,
subject to Advanced Response Concepts receiving minimum qualified revenues of at
least $4,000,000 per year.  In the event Advanced Response Concepts
receives at least $4,000,000 in qualified revenues in an earnout year, then
Vuance will have the right to receive an earnout payment equal to twenty percent
(20%) of the amount by which such qualified revenues for that earnout year
exceed $4,000,000; provided, however, that the first $270,000 of any such
earnout payment will be retained by the Company for its sole account as
reimbursement for certain accounts payable and deferred revenue liabilities
assumed by Advanced Response Concepts in connection with the Vuance
Agreement.




17





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





The
following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and the notes thereto which appear elsewhere in this quarterly report
and the Company’s Annual Report on Form 10-K for the year ended December 31,
2009.





The
information set forth below includes forward-looking
statements.  Certain factors that could cause results to differ
materially from those projected in the forward-looking statements are set forth
below.  Readers are cautioned not to put undue reliance on
forward-looking statements.  The Company disclaims any intent or
obligation to update publicly these forward-looking statements, whether as a
result of new information, future events or otherwise.





Overview





WidePoint
Corporation is a technology-based provider of products and services to both the
government sector and commercial markets. WidePoint was incorporated in Delaware
on May 30, 1997. We have grown through the merger with and acquisition of
highly specialized regional IT consulting companies.




Our
expertise lies in three business segments operated through six wholly-owned
operational entities.  Our three business segments include: Wireless
Mobility Management (formerly referred to as our “Wireless Telecommunications
Expense Management Services” segment), Cybersecurity Solutions (formerly
referred to as our “Identity Management” segment), and IT Consulting Services
and Products.  These segments offer unique solutions and proprietary
intellectual property (“IP”) in mobile and wireless full life cycle management
solutions; cybersecurity solutions with specific subject matter expertise, U.S.
government certifications and authorizations, and IP in identity management and
information assurance services utilizing certificate-based security solutions;
and other associated IT consulting services and products through which we
provide specific subject matter expertise in IT Architecture and Planning,
Software Implementation Services, IT Outsourcing, and Forensic
Informatics.





See Note
7 to the Condensed Consolidated Financial Statements included in this report for
a description of the operating results for each segment.





We intend
to continue to market and sell our technical capabilities into the governmental
and commercial marketplace. Further, we are continuing to actively search out
new synergistic acquisitions that we believe may further enhance our present
base of business and service offerings, which has already been augmented by our
acquisitions of ORC and iSYS, our asset purchases of Protexx and Advanced
Response Concepts, and our internal growth initiatives.





With the
addition of the customer base and the increase in revenues attributable to our
iSYS acquisition, WidePoint’s opportunity to leverage and expand further into
the federal government marketplace has improved substantially. iSYS’s past
client successes, top security clearances for their personnel, and additional
breadth of management talent have expanded the Company’s reach into markets that
previously were not fully accessible to WidePoint. Further supplemented by the
addition of the Protexx and Advanced Response Concepts asset acquisitions, the
Company intends to continue to leverage the synergies between its newly-acquired
operating subsidiaries, and cross sell its technical capabilities into each
separate marketplace serviced by our respective business segments.





Our
revenues and operating results may vary significantly from quarter-to-quarter,
due to revenues earned on contracts, the number of billable days in a quarter,
the timing of the pass-through of other direct costs, the commencement and
completion of contracts during any particular quarter, the schedule of the
government agencies for awarding contracts, the term of each contract that we
have been awarded and general economic conditions.  Because a
significant portion of our expenses, such as personnel and facilities costs, are
fixed in the short term, successful contract performance and variation in the
volume of activity, as well as in the number of contracts commenced or completed
during any quarter, may cause significant variations in operating results from
quarter to quarter.





As a
result of our ORC and iSYS acquisitions, which predominantly operate in the U.S.
federal government marketplace, we rely upon a larger portion of our revenues
from the federal government directly or as a subcontractor. The federal
government’s fiscal year ends September 30.  If a budget for the
next fiscal year has not been approved by that date, our clients may have to
suspend engagements that we are working on until a budget has been
approved.  Such suspensions may cause us to realize lower revenues in
the fourth calendar quarter (first quarter of the government’s fiscal
year).  Further, a change in senior government officials, or
realignment of responsibilities, may negatively affect the rate at which the
federal government purchases the services that we offer.




18





As a
result of the factors above, period-to-period comparisons of our revenues and
operating results may not be meaningful. These comparisons are not indicators of
future performance and no assurances can be given that quarterly results will
not fluctuate, causing a possible material adverse effect on our operating
results and financial condition.





In
addition, most of WidePoint’s current costs consist primarily of the salaries
and benefits paid to WidePoint’s technical, marketing and administrative
personnel as well as vendor-related costs in connection with our Wireless
Mobility Management segment.  As a result of our plan to expand
WidePoint’s operations through a combination of internal growth initiatives
and merger and acquisition opportunities, WidePoint expects such costs
to increase.  WidePoint’s profitability also depends upon both the volume
of services performed and the Company’s ability to manage costs.  As a
significant portion of the Company’s cost is labor related, WidePoint must
effectively manage these costs to achieve and grow its profitability.  The
Company must also manage our telephony airtime plans and other vendor related
offerings under our mobile telecom managed services provided to our customers as
they also represent a significant portion of our costs.  To date, the
Company has attempted to maximize its operating margins through efficiencies
achieved by the use of its proprietary methodologies, and by offsetting
increases in consultant salaries with increases in consultant fees received from
its clients.  The uncertainties relating to the ability to achieve and
maintain profitability, obtain additional funding to partially fund the
Company’s growth strategy and provide the necessary investment to continue to
upgrade its management reporting systems to meet the continuing demands of the
present regulatory changes affect the comparability of the information reflected
in the financial information presented above.





Our staff
consists of business process and computer specialists who help our government
and civilian customers augment and expand their resident technological skills
and competencies, drive technical innovation, and help develop and maintain a
competitive edge in today’s rapidly changing technological environment in
business.  Our organization emphasizes an intense commitment to our
people, our customers, and the quality of our solutions offerings.  As
a services organization, our customers are our primary focus.





Results
of Operations





Three Months Ended June 30,
2010 as Compared to Three Months Ended June 30, 2009





Revenues,
net.Revenues for the three month period ended June 30, 2010,
were approximately $12.5 million as compared to approximately $10.4 million for
the three month period ended June 30, 2009.  The increase in revenues
was primarily attributable to increases in our Cyber security and consulting
segments as a result of the performance of recent contract awards and
expansions.





·
            Our
      Wireless Mobility
      Management segment experienced decreased revenue of approximately
      3% from approximately $7.1 million for the quarter ended June 30, 2009 to
      approximately $6.9 million for the quarter ended June 30,
      2010.  The decrease in revenue was predominately the result of a
      one-time sale of equipment of approximately $500,000 that occurred in the
      second quarter of 2009 that did not recur in the second quarter of
      2010.   Excluding the one-time equipment sale in the second
      quarter of 2009, we witnessed revenue growth of approximately 5% in the
      second quarter of 2010 as compared to the second quarter of
      2009.  Effective
      July 31, 2010, WHS pass-through billing services contract lapsed. Over the
      past six months this represented approximately $6 million in
      revenue.Short-term, we may witness a reduction or
      variability in revenue growth as the revenue mix in this segment
      experiences a reduction of billable calling minutes as compared to managed
      fees as we shift our attention to expanding the fee portion of our sales
      mix.  We are presently pursuing several significant service
      contract award opportunities at a number of federal agencies and are also
      initiating a new strategy to expand into state and local municipalities
      and commercial enterprises by utilizing intermediary sales channels to
      potentially expand our reach beyond the federal sector and help to support
      the long-term growth of this
segment.





·
            Our
      Cyber Security Solutions
      segment experienced revenue growth of approximately 86% from
      approximately $1.3 million for the three month period ended June 30, 2009
      to approximately $2.5 million for the three month period ended June 30,
      2010.  This growth was primarily a result of increases in our
      credential sales associated with several initiatives requiring the use of
      those credentials by government agencies and a result of contract awards
      made during the quarter to our newly established subsidiary Advanced
      Response Concepts.  We anticipate that this segment should
      continue to demonstrate revenue growth in the future as various federal
      agency mandates continue to be implemented in order to strengthen their
      requirements for greater levels of identity management and better protect
      the federal information technology infrastructure within federal
      agencies.  We have entered into a number of affiliations with
      partners who support the end user base, which facilitate access to these
      various federal agencies and the related technology infrastructure in
      order to take advantage of these identity management improvement
      mandates.  We believe these new partnerships should widen our
      sales reach.




19




·
            OurIT Consulting Services and
      Products segment experienced revenue growth of approximately
      59%.  Revenues increased from approximately $1.9 million for the
      three month period ended June 30, 2009 to approximately $3.1 million for
      the three month period ended June 30, 2010.  This positive
      revenue performance primarily resulted from new contract awards and
      renewals and expansion work from our current customer base occurring in
      this quarter.  We anticipate that this segment should continue
      to grow at a moderate rate but given the nature and variability of the
      products and services we offer within this segment the growth may be
      erratic.




Cost of
sales.Cost of salesfor the three month
period ended June 30, 2010 was approximately $9.5 million (or 76% of revenues),
as compared to cost of sales of approximately $8.2 million (or 79% of revenues),
for the three month period ended June 30, 2009.  This overall increase
in cost of sales was primarily attributable to an increase in
revenues.  The decrease in our cost of sales as a percentage of
revenues was primarily attributable to margin improvements in all three of our
segments.  Our Wireless Mobility Management and Cyber Security
Solutions segments realized greater margins from the benefit of economies of
scale, with our direct costs centers realizing greater
efficiencies.  Our IT Consulting Services and Products segment
realized greater margins as a result of a larger mix of higher margin consulting
services, versus a lesser amount of lower margin software reselling that was
realized during the quarter.  We anticipate improvements in our costs
of sales as a percentage basis as our Wireless Mobility Management and Cyber
Security Solutions segments add economies of scale, which may be partially
offset at times by the fluctuation in our IT Consulting Services and Products
segment revenue mix.





Gross
profit.  Gross profit for the three month period ended June 30,
2010 was approximately $2.9 million (or 24% of revenues), as compared to gross
profit of approximately $2.2 million (or 21% of revenues) for the three month
period ended June 30, 2009.  The percentage of gross profit was higher
in the second quarter of 2010 as compared to the second quarter of 2009 as a
result of higher margins associated with improved economies of scale in our
Wireless Mobility Management and Cyber Security Solutions segments, and a
greater mix of higher margin direct consulting services as compared to lower
margin software reselling in our IT Consulting Services and Products
segment.  We anticipate gross profit as a percentage of revenues
should increase as cost of sales as a percentage of revenues decreases due to a
greater mix of higher margin services.  We believe that as revenues
expand in the future, there will be periods of variability in margin growth
associated with changes in our product mix.





Sales and
marketing.  Sales and marketing expense for the three month
period ended June 30, 2010 was approximately $488,000 (or 4% of revenues), as
compared to approximately $265,000 (or 3% of revenues) for the three month
period ended June 30, 2009.  The absolute dollar amount of sales and
marketing expanded as we increased our sales and marketing capabilities through
the addition of several new hires, tools, and services infrastructure
improvements.  We believe that with our niche capabilities and the
present latent demand for our services the investment within our sales and
marketing will support our ability to continue to expand our
revenues.





General and
administrative.  General and administrative expenses for the
three month period ended June 30, 2010 were approximately $1.9 million (or 15%
of revenues) as compared to approximately $1.6 million (or 15% of revenues) for
the three month period ended June 30, 2009.  This increase in general
and administrative expenses was primarily attributable to increases in general
and administrative costs, including those related to the Company’s addition of a
new subsidiary, Advanced Response Concepts, that added to our general and
administrative expense base, additional non-recurring associated carrying costs
for consultants incurred in connection with security clearance approvals, as
well as the payments of certain performance bonuses that were
awarded.  As we continue our efforts to comply with pending additional
financial compliance requirements, we anticipate that our general and
administrative costs may rise slightly in the future as our support costs rise
to facilitate our expectations of a greater revenue base.  We believe
that our general and administrative costs on a percentage of
revenue  will level out or decrease in future financial reporting
periods.





Depreciation.  Depreciation
expense for the three month period ended June 30, 2010, was approximately
$49,000 (or less than 1% of revenues), as compared to approximately $41,000 of
such expenses (or less than 1% of revenues) for the three month period ended
June 30, 2009.  This increase in depreciation expense over such
expenses for the three month period ended June 30, 2009 was primarily
attributable to recent acquisitions of additional depreciable
assets.  We do not anticipate any material changes within depreciation
expense in the short-term.  However, as our revenue base increases
within our Wireless Mobility Management  and Cyber Security Solutions
segments, there may be a need from time to time to increase the purchase of
equipment in support of new revenue streams that may then raise our depreciation
expenses.




20





Interest
income.  Interest income for the three month period ended June
30, 2010 was approximately $2,000 (or less than 1% of revenues), as compared to
approximately $5,000 (or less than 1% of revenues) for the three month period
ended June 30, 2009.  This decrease in interest income for the three
month period ended June 30, 2010 was primarily attributable to lesser amounts of
invested cash and cash equivalents, combined with lower short-term interest
rates that were available to the Company on investments in interest bearing
accounts.  We do not anticipate any material changes in trends in our
interest income for the near-term as a result of continuing low short-term
interest rates presently payable by financial institutions in connection with
the present monetary policy of the U.S. federal government.





Interest
expense.  Interest expense for the three month period ended
June 30, 2010 was approximately $23,000 (or less than 1% of revenues) as
compared to approximately $34,000 (or less than 1% of revenues) for the three
month period ended June 30, 2009.  This decrease in interest expense
for the three month period ended June 30, 2010 was primarily attributable to
lesser expenses associated with the debt instruments held by the Company. We
anticipate our interest expense will continue to decrease as the Company
continues to pay down the principal on its term note held by Cardinal
Bank.





Income
taxes.Income taxes for the three month periods ended June 30, 2010 and June 30,
2009 were approximately $78,000 and $39,000, respectively. The increase was
predominately attributable to the inclusion of our estimate for alternative
minimum taxes.  The Company also incurred a deferred income tax
expense of approximately $39,000 for each three month period, as a result of the
recognition of a deferred tax liability attributable to the differences in our
treatment of the amortization of goodwill for tax purposes versus book purposes
as it relates to our acquisition of iSYS in January 2008.  As goodwill
is amortized for tax purposes but not book purposes and is considered a
permanent asset rather than a temporary asset, the related deferred tax
liability cannot be reversed until some indeterminate future period when the
goodwill either becomes impaired and/or is disposed of.





Net income.As a
result of the above, the net income for the three month period ended June 30,
2010 was approximately $413,000 as compared to the net income of approximately
$251,000 for the three month period ended June 30, 2009.





Six Months Ended June 30,
2010 as Compared to Six Months Ended June 30, 2009





Revenues,
net.Revenues for the six month period ended June 30, 2010
were approximately $23.6 million as compared to approximately $20.5 million for
the three month period ended June 30, 2009.  The increase in revenues
was primarily attributable to increases in all three of our segments as a result
of the performance of recent contract awards and expansions.





·
            Our
      Wireless Mobility
      Managementsegment experienced revenue growth of approximately 2% from
      approximately $13.5 million for the six months ended June 30, 2009 to
      approximately $13.8 million for the six months ended June 30,
      2010.  The positive revenue performance primarily resulted from
      the execution of new contract awards and renewals and expansion work from
      our current customer base.  Effective
      July 31, 2010, WHS pass-through billing services contract lapsed. Over the
      past six months this represented approximately $6 million in
      revenue.  Short-term we may witness a reduction or variability
      in revenue growth as the revenue mix in this segment experiences a
      reduction of billable calling minutes as compared to managed fees as we
      shift our attention to expanding the fee portion of our sales
      mix.  We are presently pursuing several significant service
      contract award opportunities at a number of federal agencies and are also
      initiating a new strategy to expand into state and local municipalities
      and commercial enterprises by utilizing intermediary supply channels to
      potentially expand our reach beyond the federal sector and help to support
      the long-term growth of this
segment.





·
            Our
      Cyber Security Solutions
      segment experienced solid revenue growth of approximately 43% to
      approximately $3.9 million for the six month period ended June 30, 2010
      from approximately $2.7 million for the six month period ended June 30,
      2009.  This growth was primarily a result of increases in our
      credential sales associated with several initiatives requiring the use of
      those credentials by government agencies and as a result of contract
      awards made during the second quarter to our newly established subsidiary,
      Advanced Response Concepts.  We have entered into a number of
      affiliations with partners who support the end user base, which facilitate
      access to these various federal agencies and the related technology
      infrastructure in order to take advantage of these identity management
      improvement mandates.  We believe these new partnerships should
      widen our sales reach, which we anticipate should support the continued
      long-term growth of this segment.




21




·
            Our
      IT Consulting Services
      and Products segment experienced revenue growth of approximately
      37% during the six month period ended June 30, 2010.  Revenues
      increased from approximately $4.3 million for the six month period ended
      June 30, 2009 to $5.9 million for the six month period ended June 30,
      2010.  This positive revenue performance primarily resulted from
      new contract awards and renewals and expansion work from our current
      customer base. We anticipate that this segment should continue to realize
      modest growth but given the nature and variability of the products and
      services we offer within this segment, the growth may be
      erratic.





Cost of
sales.Cost of salesfor the six month
period ended June 30, 2010 was approximately $18.2 million (or 77% of revenues),
as compared to cost of sales of approximately $16.3 million (or 79% of
revenues), for the six month period ended June 30, 2009.  This
absolute increase in cost of sales was primarily attributable to an increase in
revenues.  The decrease in our cost of sales as a percentage of
revenues was primarily attributable to margin improvements in all three of our
segments.  Our Wireless Mobility Management and Cyber Security
Solutionssegments
realized greater margins from the benefit of economies of scale with our direct
costs centers realizing greater efficiencies.  Our IT Consulting
Services and Products segment realized greater margins as a result of a larger
mix of higher margin consulting services, versus a lesser amount of lower margin
software reselling that was realized during the quarter.  We
anticipate improvements in our costs of sales on a percentage basis as our
Wireless Mobility Management and Cyber Security Solutions segments add economies
of scale, which may be partially offset at times by the fluctuation in our IT
Consulting Services and Products segment revenue mix.





Gross
profit.  Gross profit for the six month period ended June 30,
2010 was approximately $5.5 million (or 23% of revenues) as compared to gross
profit of approximately $4.2 million (or 21% of revenues), for the six month
period ended June 30, 2009.  The percentage of gross profit was higher
in the first quarter of 2010 as compared to the first quarter of 2009 as a
result of higher margins associated with improved economies of scale in our
Wireless Mobility Management and Cyber Security Solutions segments and a greater
mix of higher margin direct consulting services as compared to lower margin
software reselling in our IT Consulting Services and Products
segment.  We anticipate gross profit as a percentage of revenues
should increase as cost of sales as a percentage of revenues decreases due to a
greater mix of higher margin services.  We believe as revenues expand
in the future there will be periods of variability in margin growth associated
with changes in our product mix.





Sales and
marketing.  Sales and marketing expense for the six month
period ended June 30, 2010 was approximately $831,000 (or 4% of revenues), as
compared to approximately $495,000 (or 2% of revenues), for the six month period
ended June 30, 2009.  The dollar amount of sales and marketing
increased substantially as we increased our sales and marketing capabilities
through the addition of several new hires, tools, and services infrastructure
improvements, as well as business development expenditures in support of our
Protexx and Advanced Response Concepts emerging market
initiatives.  We believe that with our niche capabilities and the
present latent demand for our services the investment within our sales and
marketing will support our ability to continue to expand our
revenues.





General and
administrative.  General and administrative expenses for the
six month period ended June 30, 2010 were approximately $3.7 million (or 16% of
revenues), as compared to approximately $3.1 million (or 15% of revenues) for
the six month period ended June 30, 2009.  This increase in general
and administrative expenses over those for the six months ended June 30, 2009,
was primarily attributable to increases in general and administrative costs as
we added a new subsidiary Advanced Response Concepts that added to our general
and administrative expense base, along with; a one time increase in legal
expenses associated with the purchase of the assets of the government business
of Vuance, Inc., which we are operating as Advanced Response Concepts; some
additional non-recurring associated carrying costs for consultants that we
incurred in connection with pending security clearance approvals; and the
payments of certain performance bonuses that were
awarded.    We anticipate that our general and
administrative costs may rise slightly in the future as our support costs rise
to facilitate our expectations of a greater revenue base as we continue our
efforts to comply with pending additional financial compliance
requirements.  We believe that our general and administrative costs on
a percentage of revenue basis will level out or decrease in future financial
reporting periods.





Depreciation.  Depreciation
expense for the six month period ended June 30, 2010 was approximately $98,000
(or less than 1% of revenues), as compared to approximately $84,000 of such
expenses (or less than 1% of revenues) for the six month period ended June 30,
2009.  This increase in depreciation expense over those for the six
month period ended June 30, 2009 was primarily attributable to recent
acquisitions of additional depreciable assets.  We do not anticipate
any material changes within depreciation expense in the
short-term.  However, as our revenue base increases within our
Wireless Mobility Management and Cyber Security Solutions segments, there may be
a need from time to time to increase the purchase of equipment in support of new
revenue streams that may then raise our depreciation expenses.




22





Interest
income.  Interest income for the six month period ended June
30, 2010 was approximately $9,000 (or less than 1% of revenues), as compared to
approximately $19,000 (or less than 1% of revenues), for the six month period
ended June 30, 2009.  This decrease in interest income for the six
month period ended June 30, 2010, was primarily attributable to lesser amounts
of invested cash and cash equivalents, and combined with lower short-term
interest rates that were available to the Company on investments in interest
bearing accounts.  We do not anticipate any material changes in trends
in our interest income for the near-term as a result of continuing low
short-term interest rates presently payable by financial institutions in
connection with the present monetary policy of the U.S. federal
government.





Interest
expense.  Interest expense for the six month period ended June
30, 2010 was approximately $50,000 (or less than 1% of revenues), as compared to
approximately $114,000 (or less than 1% of revenues), for the six month period
ended June 30, 2009.  This decrease in interest expense for the six
month period ended June 30, 2010, was primarily attributable to lesser expenses
associated with the debt instruments held by the Company. We anticipate our
interest expense will continue to decrease as the Company continues to pay down
the principal on its term note held by Cardinal Bank.





Income
taxes.Income taxes for the six month periods ended June 30, 2010 and
June 30, 2009 were approximately $117,000 and $78,000, respectively. The
increase was predominately attributable to the inclusion of our estimate for
alternative minimum taxes.  The Company also incurred a deferred
income tax expense of approximately $78,000 for each six month period, as a
result of the recognition of a deferred tax liability attributable to the
differences in our treatment of the amortization of goodwill for tax purposes
versus book purposes as it relates to our acquisition of iSYS in January
2008.  As goodwill is amortized for tax purposes but not book purposes
and is considered a permanent asset rather than a temporary asset, the related
deferred tax liability cannot be reversed until some indeterminate future period
when the goodwill either becomes impaired and/or is disposed of.





Net income.As a
result of the above, the net income for the six month period ended June 30, 2010
was approximately $652,000 as compared to the net income of approximately
$380,000 for the six months ended June 30, 2009.





Liquidity
and Capital Resources





The
Company has, since inception, financed its operations and capital expenditures
through the sale of preferred and common stock, seller notes, convertible notes,
convertible exchangeable debentures, senior secured loans and the proceeds from
the exercise of the warrants related to a convertible exchangeable
debenture.  During 2009 and through the period ended June 30, 2010,
operations were primarily financed with working capital, senior debt, and stock
option and warrant exercises.





Net cash
used in operating activities for the three months ended June 30, 2010 was
approximately $0.5 million, as compared to cash used in operating activities of
$1.1 million for the three months ended June 30, 2009.  This increase
in cash used in operating activities for the three months ended June 30, 2010
was primarily a result of a decrease in accounts payable during the second
quarter of 2010.  The decrease in accounts payable resulted from an
acceleration of payments to certain vendors who requested shorter payment terms
and as a result of shorter payment terms associated with new vendors that we are
establishing credit with in support of our newly established subsidiary Advanced
Response Concepts.  Net cash used in investing activities for the
three months ended June 30, 2010 was approximately $43,000, as compared to
$74,000 in cash used in investing activities for the three months ended June 30,
2009.  The decrease in net cash used in investing activities was
primarily attributable to decreased purchases of property and equipment by the
Company. Net cash used in financing activities amounted to approximately
$196,000 in the three months ended June 30, 2010, as compared to net cash used
in financing activities of approximately $177,000 in the three months ended June
30, 2009. This increase in net cash used in financing activities primarily
related to the reduction of debt during the three months ended June 30, 2010 as
compared to the three months ended June 30, 2009.  As a result of the
Company’s capital raising in 2008 and its profitability in 2009 and in the first
six months of 2010, the Company has had excess liquidity to pay down short-term
and long-term debt, while still maintaining sufficient levels of capital
resources to fund operations.




23





As of
June 30, 2010, the Company had a net working capital of approximately $4.3
million.  The Company’s primary source of liquidity consists of
approximately $2.6 million in cash and cash equivalents and approximately $10.1
million of accounts receivable and unbilled accounts
receivable.  Current liabilities include approximately $7.8 million
inaccounts payable
and accrued expenses.





The
Company’s business environment is characterized by rapid technological change,
periods of high growth and contraction and is influenced by material events such
as mergers and acquisitions, with each of the foregoing able to substantially
change the Company’s outlook.





The
Company has embarked upon several new initiatives to expand revenue growth which
has included both acquisitions and organic growth.  The Company
requires substantial working capital to fund the future growth of its business,
particularly to finance accounts receivable, sales and marketing efforts, and
capital expenditures.




Currently
there are no material commitments for capital expenditures and software
development costs. Future capital requirements will depend on many factors,
including the rate of revenue growth, if any, the timing and extent of spending
for new product and service development, technological changes and market
acceptance of the Company’s services.




Management
believes that its current cash position is sufficient to meet capital
expenditure and working capital requirements for the near
term.  However, the growth and technological change of the market make
it difficult to predict future liquidity requirements with
certainty.  Over the longer term, the Company must successfully
execute its plans to increase revenue and income streams that will generate
significant positive cash flows if it is to sustain adequate liquidity without
impairing growth or requiring the infusion of additional funds from external
sources. Additionally, a major expansion, such as that which occurred with the
acquisition of iSYS or any other potential new subsidiaries, might require
external financing that could include additional debt or equity capital. There
can be no assurance that additional financing, if required, will be available on
acceptable terms, if at all, for future acquisitions and/or growth
initiatives.   The Company presently has a unused credit facility
for $5 million that is expiring on September 1, 2010.  We are
presently completing the renewal of this credit facility with Cardinal Bank and
expect that it will be renewed prior to the expiration of the present credit
facility.




Off-Balance
Sheet Arrangements





The
Company has no existing off-balance sheet arrangements as defined under SEC
regulations.




ITEM 4. CONTROLS AND
PROCEDURES




Disclosure
Controls and Procedures





We
maintain disclosure controls and procedures designed to provide reasonable
assurance that material information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that the information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
We performed an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on the existence of the material weaknesses discussed below in “Material
Weakness in Internal Control Over Financial Reporting,” our management,
including our Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were not effective at the reasonable
assurance level as of the end of the period covered by this report.




24




We do not
expect that our disclosure controls and procedures will prevent all errors and
all instances of fraud. Disclosure controls and procedures, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the disclosure controls and procedures are met. Further,
the design of disclosure controls and procedures must reflect the fact that
there are resource constraints, and the benefits must be considered relative to
their costs. Because of the inherent limitations in all disclosure controls and
procedures, no evaluation of disclosure controls and procedures can provide
absolute assurance that we have detected all our control deficiencies and
instances of fraud, if any. The design of disclosure controls and procedures
also is based partly on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.





Material
Weakness in Internal Control Over Financial Reporting





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company's annual or interim financial
statements will not be prevented or detected on a timely basis.





Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009.  In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework.





Based on
this assessment, management concluded that our internal control over financial
reporting was not effective as of December 31, 2009 due to the existence of the
following material weaknesses:





Inadequate segregation of duties
within a significant account or process. Management determined that it
did not have appropriate segregation of duties within our internal controls that
would ensure the consistent application of procedures in our financial reporting
process by existing personnel. This control deficiency could result in a
misstatement to substantially all of our financial statement accounts and
disclosures that would result in a material misstatement to the annual or
interim financial statements that would not be prevented or detected.
Accordingly, management has concluded that this control deficiency constitutes a
material weakness.





Lack of sufficient subject matter
expertise.Management determined that it lacks certain subject
matter expertise accounting for and the disclosure of complex transactions. Our
financial staff currently lacks sufficient training or experience in accounting
for complex transactions and the required disclosure therein.





Remediation
Plan for Material Weaknesses





The
material weaknesses described above in "Material Weaknesses in Internal Control
Over Financial Reporting" comprise control deficiencies that we discovered
during the financial close process for the December 31, 2009 fiscal
period.




Management
commenced a remediation plan during the first quarter of 2010 that will be
implemented during our fiscal year 2010, which includes (i) recruiting and
adding specific financial subject matter experts as consultants or employees to
the financial staff, and (ii) augmenting and allowing for additional training
and education for select members of our financial staff.  Management
is presently recruiting additional staff and has allowed for additional training
and education of its present staff in addressing the material
weaknesses.





We
believe that these measures, if effectively implemented and maintained, will
remediate the material weaknesses discussed above.





Changes
in Internal Control Over Financial Reporting





We are
currently undertaking the measures discussed above to remediate the material
weaknesses discussed under “Material Weaknesses in Internal Control Over
Financial Reporting” above.  Those measures, described under
“Remediation Plan for Material Weaknesses,” were commenced during the first
quarter of 2010, will continue to be implemented during our fiscal year 2010,
and will materially affect, or are reasonably likely to materially affect, our
internal control over financial reporting.




25





Other
than as described above, there have been no changes in our internal control over
financial reporting during the three-month period ended June 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements.  Further, because of changes in conditions,
effectiveness of internal controls over financial reporting may vary over
time.  Our system contains self-monitoring mechanisms, and actions are
taken to correct deficiencies as they are identified.





PART
II – OTHER INFORMATION





ITEM
5.  OTHER INFORMATION.




On August
13, 2010, the Company entered into new employment agreements with each of Steve
L. Komar, the Company’s Chairman of the Board and Chief Executive Officer, and
James T. McCubbin, the Company’s Executive Vice President, Chief Financial
Officer, Secretary and Treasurer.  The prior employment agreements,
each dated as of July 1, 2002 and as previously amended from time to time,
between the Company and each of Messrs. Komar and McCubbin, respectively,
expired on July 25, 2010.  The following is a description of the new
employment agreements between the Company and each of Messrs. Komar and
McCubbin.




Steven
L. Komar




On August
13, 2010, Mr. Komar, the Company’s Chairman of the Board and Chief Executive
Officer, entered into a new Employment Agreement with the Company (the “Komar
Employment Agreement”), a complete copy of which is filed herewith as an exhibit
to this Form 10-Q.   The effective date of the Komar Employment
Agreement is July 1, 2010 and the term of the Komar Employment Agreement
continues until June 30, 2012, unless extended for a period of twelve months by
mutual agreement of the parties.




Per the
terms of the Komar Employment Agreement, Mr. Komar will receive a base salary of
$205,000 for the first year of the term, $230,000 for the second year of the
term, and $255,000 for the optional third year of the term.  Mr. Komar
will also be eligible for annual bonus awards at the discretion of the Board of
Directors, and will be eligible to participate in Company incentive stock,
option and bonus plans.  The Komar Employment Agreement entitles Mr.
Komar to all employee benefits the Company makes available to its senior
executives, as well as to certain benefits that have been offered to him to
complete his overall annual compensation package. These benefits include a
monthly home office and automobile expense allowance and a monthly phone
allowance to cover expenses incurred in pursuit of Company
business.




The Komar
Employment Agreement contains a severance provision which provides that upon the
termination of his employment without Cause (as defined in the Komar Employment
Agreement) or his voluntary resignation for a Good Reason (as defined in the
Komar Employment Agreement), Mr. Komar will receive severance compensation equal
to the greater of (a) an amount equal to twelve (12) months of his base salary
then in effect, or (b) an amount equal to Mr. Komar’s base salary for the
remainder of the term of the Komar Employment Agreement.  The Komar
Employment Agreement further provides that if within two years after a change in
control of the Company there occurs any termination of Mr. Komar for any reason
other than for Cause or a voluntary resignation without a Good Reason, then the
Company will be required to pay to Mr. Komar a one time severance payment equal
to the greater of (a) an amount equal to eighteen (18) months of his base salary
then in effect, or (b) an amount equal to Mr. Komar’s base salary for the
remainder of the term of the Komar Employment Agreement.  If Mr.
Komar’s employment terminates for any reason other than for Cause or a voluntary
retirement without Good Reason, Mr. Komar will be eligible to participate, at
the Company’s expense, in all executive medical and dental plans provided by the
Company for the remainder of the term of the Komar Employment
Agreement.  Mr. Komar will receive a payment equal to any excise,
income and other taxes resulting from the imposition of parachute penalties of
the Internal Revenue Code or applicable state tax law.




In the
event of his disability or death, Mr. Komar or his estate will receive a one
time payment equal to the amount of base salary owed to Mr. Komar for the
remainder of the term as if the Komar Employment Agreement had not been
terminated by Mr. Komar’s disability or death.




The Komar
Employment Agreement also contains non-compete and non-solicitation provisions
that provide that upon the termination of Mr. Komar’s employment for Cause or
Mr. Komar’s resignation without Good Reason, Mr. Komar will be unable to engage
in any business that is competitive with the Company anywhere in the United
States or Puerto Rico and he will be unable to solicit any of the Company’s
employees, suppliers or customers for a period of twelve months (or eighteen
(18) months if Mr. Komar is terminated with Cause or voluntarily resigns without
Good Reason in connection with a change of control of the Company).




26




The
foregoing description of the Komar Employment Agreement is qualified in its
entirety by reference to the complete copy of such Komar Employment Agreement
that is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is
incorporated by reference herein.




James
T. McCubbin




On August
13, 2010, James T. McCubbin, the Company’s Executive Vice President, Chief
Financial Officer, Secretary and Treasurer, entered into a new Employment
Agreement with the Company (the “McCubbin Employment Agreement”), a complete
copy of which is filed herewith as an exhibit to this Form 10-Q.  The
effective date of the McCubbin Employment Agreement is July 1, 2010 and the term
of the McCubbin Employment Agreement continues until June 30, 2012, unless
extended for a period of twelve months by mutual agreement of the
parties.




Per the
terms of the McCubbin Employment Agreement, Mr. McCubbin will receive a base
salary of $205,000 for the first year of the term, $230,000 for the second year
of the term, and $255,000 for the optional third year of the
term.  Mr. McCubbin will also be eligible for annual bonus awards at
the discretion of the Board of Directors, and will be eligible to participate in
Company incentive stock, option and bonus plans.  The McCubbin
Employment Agreement entitles Mr. McCubbin to all employee benefits the Company
makes available to its senior executives, as well as to certain benefits that
have been offered to him to complete his overall annual compensation package.
These benefits include a monthly home office and automobile expense allowance
and a monthly phone allowance to cover expenses incurred in pursuit of Company
business.




The
McCubbin Employment Agreement contains a severance provision which provides that
upon the termination of his employment without Cause (as defined in the McCubbin
Employment Agreement) or his voluntary resignation for a Good Reason (as defined
in the McCubbin Employment Agreement), Mr. McCubbin will receive severance
compensation equal to the greater of (a) an amount equal to twelve (12) months
of his base salary then in effect, or (b) an amount equal to Mr. McCubbin’s base
salary for the remainder of the term of the McCubbin Employment
Agreement.  The McCubbin Employment Agreement further provides that if
within two years after a change in control of the Company there occurs any
termination of Mr. McCubbin for any reason other than for Cause or a voluntary
resignation without a Good Reason, then the Company will be required to pay to
Mr. McCubbin a one time severance payment equal to the greater of (a) an amount
equal to eighteen (18) months of his base salary then in effect, or (b) an
amount equal to Mr. McCubbin’s base salary for the remainder of the term of the
McCubbin Employment Agreement.  If Mr. McCubbin’s employment
terminates for any reason other than for Cause or a voluntary retirement without
Good Reason, Mr. McCubbin will be eligible to participate, at the Company’s
expense, in all executive medical and dental plans provided by the Company for
the remainder of the term of the McCubbin Employment Agreement.  Mr.
McCubbin will receive a payment equal to any excise, income and other taxes
resulting from the imposition of parachute penalties of the Internal Revenue
Code or applicable state tax law.




In the
event of his disability or death, Mr. McCubbin or his estate will receive a one
time payment equal to the amount of base salary owed to Mr. McCubbin for the
remainder of the term as if the McCubbin Employment Agreement had not been
terminated by Mr. McCubbin’s disability or death.




The
McCubbin Employment Agreement also contains non-compete and non-solicitation
provisions that provide that upon the termination of Mr. McCubbin’s employment
for Cause or Mr. McCubbin’s resignation without Good Reason, Mr. McCubbin will
be unable to engage in any business that is competitive with the Company
anywhere in the United States or Puerto Rico and he will be unable to solicit
any of the Company’s employees, suppliers or customers for a period of twelve
months (or eighteen (18) months if Mr. McCubbin is terminated with Cause or
voluntarily resigns without Good Reason in connection with a change of control
of the Company).




The
foregoing description of the McCubbin Employment Agreement is qualified in its
entirety by reference to the complete copy of such McCubbin Employment Agreement
that is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is
incorporated by reference herein.




27




ITEM
6.  EXHIBITS.




EXHIBIT
              NO.
            
            DESCRIPTION10.1
            
            Employment
      Agreement by and between the Company and Steve L. Komar, dated as of
      August 13, 2010 (Filed herewith).10.2
            
            Employment
      Agreement by and between the Company and James T. McCubbin, dated as of
      August 13, 2010 (Filed herewith).31.1
            
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (Filed herewith).31.2
            
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (Filed herewith).32
            
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002 (Filed
  herewith).





28




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.




WIDEPOINT
      CORPORATIONDate: August
      16, 2010
              
              /s/
      STEVE L. KOMARSteve
      L. KomarPresident
      and Chief Executive Officer
  Date: August
      16, 2010
              
              /s/
      JAMES T. MCCUBBINJames
      T. McCubbinVice
      President – Principal Financialand
      Accounting Officer





29