UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549







FORM
10-Q


(Mark
One)





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




For the
quarterly period ended September 30,
2009





OR


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




For the
transition period from to______________





Commission
file number 001-33035





WIDEPOINT CORPORATION





(Exact
name of registrant as specified in its charter)





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





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.  YesxNo ̈





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 ̈   No ̈





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





Large
accelerated filer  ̈
     Accelerated filer  ̈   
Non-accelerated filer  ̈
   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 ̈Nox





As of
November 12, 2009, 60,684,823 shares of common stock, $.001 par value per share,
were outstanding.








WIDEPOINT
CORPORATION





INDEX


Page No.Part
      I.FINANCIAL
      INFORMATIONItem
      1.
                      Condensed
      Consolidated Financial StatementsCondensed
      Consolidated Balance Sheets as of September 30, 2009 (unaudited) and
      December 31, 2008 (unaudited)
                      2Condensed
      Consolidated Statements of Operations for the three months and nine months
      ended September 30, 2009 and 2008 (unaudited)
                      3Condensed
      Consolidated Statements of Cash Flows for the three months and nine months
      ended September 30, 2009 and 2008 (unaudited)
                      4Notes
      to Condensed Consolidated Financial Statements
                      5Item
      2.
                      Management's
      Discussion and Analysis of Financial Condition
      and Results of Operations
                      22Item
      4.
                      Controls
      and Procedures
                      29Part
      II.OTHER
      INFORMATIONItem
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      31Item
      6.
                      Exhibits
                      31SIGNATURES
                      32CERTIFICATIONS




1





PART
I. FINANCIAL
INFORMATION





ITEM 1. CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.


WIDEPOINT
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





September 30,
                
                
                December 31,2009
                
                
                2008(unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                3,300,508
                
                
                $
                4,375,426Accounts
      receivable, net of allowance of $52,650 and $0,
    respectively
                
                
                6,590,753
                
                
                
                5,282,192Unbilled
      accounts receivable
                
                
                1,339,235
                
                
                
                2,301,893Prepaid
      expenses and other assets
                
                
                367,238
                
                
                
                267,666Total
      current assets
                
                
                11,597,734
                
                
                
                12,227,177Property
      and equipment,
      net
                
                
                444,375
                
                
                
                431,189Goodwill
                
                
                8,562,254
                
                
                
                8,575,881Intangibles,
      net
                
                
                1,576,439
                
                
                
                2,236,563Other
      assets
                
                
                103,609
                
                
                
                110,808Total
      assets
                
                $
                22,284,411
                
                
                $
                23,581,618Liabilities
      and stockholders’ equityCurrent
      liabilities:Related
      party note payable
                
                $
                —
                
                
                $
                2,140,000Short
      term note payable
                
                
                29,176
                
                
                
                97,158Accounts
      payable
                
                
                4,468,584
                
                
                
                2,465,394Accrued
      expenses
                
                
                1,293,214
                
                
                
                2,548,106Deferred
      revenue
                
                
                963,607
                
                
                
                1,667,969Short-term
      portion of long-term debt
                
                
                512,077
                
                
                
                486,707Short-term
      portion of capital lease obligation
                
                
                118,899
                
                
                
                107,141Total
      current liabilities
                
                
                7,385,557
                
                
                
                9,512,475Deferred
      income tax liability
                
                
                274,559
                
                
                
                156,891Long-term
      debt, net of current portion
                
                
                735,735
                
                
                
                1,117,230Deferred
      rent, net of current
      portion
                
                
                71,596
                
                
                
                —Capital
      lease obligation, net of current portion
                
                
                91,772
                
                
                
                95,248Total
      liabilities
                
                $
                8,559,219
                
                
                $
                10,881,844Stockholders’
      equity:Common
      stock, $0.001 par value; 110,000,000 shares authorized; 60,684,823 and
      58,275,514 shares issued and outstanding, respectively
                
                
                60,685
                
                
                
                58,276Stock
      warrants
                
                
                38,666
                
                
                
                38,666Additional
      paid-in capital
                
                
                67,322,809
                
                
                
                67,194,788Accumulated
      deficit
                
                
                (53,696,968
                )
                
                
                (54,591,956
                )Total
      stockholders’ equity
                
                
                13,725,192
                
                
                
                12,699,774Total
      liabilitiesand
      stockholders’ equity
                
                $
                22,284,411
                
                
                $
                23,581,618





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


2




WIDEPOINT
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS





Three
      Months
                    
                    
                    Nine
      MonthsEnded
      September 30,
                    
                    
                    Ended
      September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(unaudited)Revenues,
      net
                    
                    $
                    11,378,793
                    
                    
                    $
                    8,878,431
                    
                    
                    $
                    31,906,457
                    
                    
                    $
                    25,293,069Cost
      of sales (including amortization and depreciation of $245,876, $ 261,134,
      $731,767, and $ 701,739, respectively)
                    
                    
                    8,704,275
                    
                    
                    
                    7,381,674
                    
                    
                    
                    24,986,779
                    
                    
                    
                    21,075,234Gross
      profit
                    
                    
                    2,674,518
                    
                    
                    
                    1,496,757
                    
                    
                    
                    6,919,678
                    
                    
                    
                    4,217,835Sales
      and marketing
                    
                    
                    333,130
                    
                    
                    
                    262,970
                    
                    
                    
                    827,913
                    
                    
                    
                    675,501General
      and administrative (including share-based compensation expense of $20,093,
      $51,253, $126,680, and $527,333, respectively)
                    
                    
                    1,711,688
                    
                    
                    
                    1,484,878
                    
                    
                    
                    4,824,670
                    
                    
                    
                    4,642,526Depreciation
      expense
                    
                    
                    46,887
                    
                    
                    
                    41,171
                    
                    
                    
                    130,999
                    
                    
                    
                    117,204Income
      (loss) from operations
                    
                    
                    582,813
                    
                    
                    
                    (292,262
                    )
                    
                    
                    1,136,096
                    
                    
                    
                    (1,217,396
                    )Interest
      income
                    
                    
                    3,548
                    
                    
                    
                    33,713
                    
                    
                    
                    22,287
                    
                    
                    
                    105,773Interest
      expense
                    
                    
                    (31,678
                    )
                    
                    
                    (76,019
                    )
                    
                    
                    (145,678
                    )
                    
                    
                    (262,146
                    )Other
      expense
                    
                    
                    (49
                    )
                    
                    
                    -
                    
                    
                    
                    (49
                    )
                    
                    
                    (1,698
                    )Net
      income (loss) before income tax expense
                    
                    
                    554,634
                    
                    
                    
                    (334,568
                    )
                    
                    
                    1,012,656
                    
                    
                    
                    (1,375,467
                    )Deferred
      income tax expense
                    
                    
                    39,223
                    
                    
                    
                    -
                    
                    
                    
                    117,668
                    
                    
                    
                    -Net
      income (loss)
                    
                    $
                    515,411
                    
                    
                    $
                    (334,568
                    )
                    
                    $
                    894,988
                    
                    
                    $
                    (1,375,467
                    )Basic
      earnings (loss) per share
                    
                    $
                    0.009
                    
                    
                    $
                    (0.006
                    )
                    
                    $
                    0.015
                    
                    
                    $
                    (0.024
                    )Basic
      weighted average shares outstanding
                    
                    
                    60,348,616
                    
                    
                    
                    58,090,697
                    
                    
                    
                    58,990,406
                    
                    
                    
                    56,197,675Diluted
      earnings (loss) per share
                    
                    $
                    0.008
                    
                    
                    $
                    (0.006
                    )
                    
                    $
                    0.015
                    
                    
                    $
                    (0.024
                    )Diluted
      weighted average shares outstanding
                    
                    
                    62,063,726
                    
                    
                    
                    58,090,697
                    
                    
                    
                    61,440,208
                    
                    
                    
                    56,197,675




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


3





WIDEPOINT
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS





Three
      Months
                  Ended
      September 30,
                
                
                Nine
      Months
                  Ended
      September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(unaudited)Cash
      flows from operating activities:Net
      income (loss)
                
                $
                515,411
                
                
                $
                (334,568
                )
                
                $
                894,988
                
                
                $
                (1,375,467
                )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Deferred
      income tax expense
                
                
                39,223
                
                
                
                -
                
                
                
                117,668
                
                
                
                -Depreciation
      expense
                
                
                63,879
                
                
                
                55,421
                
                
                
                176,112
                
                
                
                158,085Amortization
                
                
                228,884
                
                
                
                246,884
                
                
                
                686,654
                
                
                
                660,859Amortization
      of deferred financing costs
                
                
                2,912
                
                
                
                2,143
                
                
                
                6,665
                
                
                
                6,429Share-based
      compensation expense
                
                
                20,093
                
                
                
                51,253
                
                
                
                126,680
                
                
                
                527,333Loss
      (gain) on disposal of equipment
                
                
                49
                
                
                
                -
                
                
                
                49
                
                
                
                (2,378
                )Changes
      in assets and liabilities (net of business combinations):Accounts
      receivable and unbilled accounts receivable
                
                
                (477,688
                )
                
                
                1,198,275
                
                
                
                (345,903
                )
                
                
                3,262,334Prepaid
      expenses and other current assets
                
                
                (89,692
                )
                
                
                259,656
                
                
                
                (99,572
                )
                
                
                74,553Other
      assets
                
                
                (2,948
                )
                
                
                6,885
                
                
                
                12,534
                
                
                
                (43,838
                )Accounts
      payable and accrued expenses
                
                
                618,603
                
                
                
                (946,744
                )
                
                
                817,045
                
                
                
                (398,515
                )Deferred
      revenue
                
                
                (277,411
                )
                
                
                1,817,380
                
                
                
                (704,362
                )
                
                
                1,791,265Net
      cash (used in) provided by operating activities
                
                
                641,315
                
                
                
                2,356,585
                
                
                
                1,688,558
                
                
                
                4,660,660Cash
      flows from investing activities:Purchase
      of asset/subsidiary, net of cashacquired
                
                
                17,109
                
                
                
                (5,878
                )
                
                
                13,627
                
                
                
                (4,907,623
                )Purchase
      of property and equipment
                
                
                (111,549
                )
                
                
                (9,948
                )
                
                
                (189,347
                )
                
                
                (73,534
                )Software
      development costs
                
                
                (14,078
                )
                
                
                -
                
                
                
                (26,530
                )
                
                
                -Net
      cash used in investing activities
                
                
                (108,518
                )
                
                
                (15,826
                )
                
                
                (202,250
                )
                
                
                (4,981,157
                )Cashflows
      from financing activities:Borrowings
      on notes payable
                
                
                -
                
                
                
                -
                
                
                
                400,737
                
                
                
                3,800,000Principal
      payments on notes payable
                
                
                (156,290
                )
                
                
                (123,358
                )
                
                
                (2,867,593
                )
                
                
                (2,168,298
                )Principal
      payments under capital  leaseObligation
                
                
                (29,410
                )
                
                
                (29,842
                )
                
                
                (86,120
                )
                
                
                (87,823
                )Proceeds
      from exercise of stock options
                
                
                -
                
                
                
                -
                
                
                
                3,750
                
                
                
                14,400Proceeds
      from issuance of stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,080,000Costs
      related to issuance of stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (140,298
                )Costs
      related to renewal fee for line of credit
                
                
                -
                
                
                
                -
                
                
                
                (12,000
                )
                
                
                -Costs
      related to financing purchase ofSubsidiary
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (13,713
                )Net
      cash (used in) provided byfinancing
      activities
                
                
                (185,700
                )
                
                
                (153,200
                )
                
                
                (2,561,226
                )
                
                
                5,484,268Net
      increase (decrease) in cash and cash equivalents
                
                
                347,097
                
                
                
                2,187,559
                
                
                
                (1,074,918
                )
                
                
                5,163,771Cash
      and cash equivalents, beginning of period
                
                
                2,953,411
                
                
                
                4,808,203
                
                
                
                4,375,426
                
                
                
                1,831,991Cash
      and cash equivalents, end of period
                
                $
                3,300,508
                
                
                $
                6,995,762
                
                
                $
                3,300,508
                
                
                $
                6,995,762Non-cash
      investing activities:Capital
      leases for acquisition of property and Equipment
                
                $
                94,
      402
                
                
                $
                -
                
                
                $
                94,
      402
                
                
                $
                -Non-cash
      financing activities:Promissory
      Note issued for iSYS acquisition
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2,000,000Liabilities
      incurred but not yet paid relating tostock
      issuance
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                41,949Value
      of 1.5 million common shares issued asconsideration
      in the acquisition of iSYS
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,800,000Supplemental cash flow
      information:Cash
      paid for interest
                
                $
                29,523
                
                
                $
                28,529
                
                
                $
                293,498
                
                
                $
                110,322




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


4


WIDEPOINT
CORPORATION AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.
            Basis
      of Presentation, Organization and Nature of
  Operations




WidePoint
Corporation (“WidePoint” or the “Company”) is a technology-based provider of
product 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 of highly specialized regional IT consulting
companies.





Our
expertise lies within three business segments. The three segments offer unique
solutions in identity management services utilizing certificate-based security
solutions; wireless telecommunication expense management systems; and other
associated IT consulting services and products in 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., along with a development stage
company, Protexx Acquisition Corporation doing business as Protexx. In
January 2008, we completed the acquisition of iSYS. iSYS specializes in
mobile telecommunications expense management services and forensic informatics,
and information assurance services predominantly to the U.S. Government. In July
2008, we completed the purchase of the operating assets and proprietary
intellectual property of Protexx, Inc. Protexx specializes in identity assurance
and mobile and wireless data protection services. ORC specializes in IT
integration and secure authentication processes and software, and providing
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.





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 September 30, 2009, the condensed
consolidated statements of operations for the three and nine months ended
September 30, 2009 and 2008, respectively, and the condensed consolidated
statements of cash flows for the three and nine months ended September 30, 2009
and 2008, respectively, have been prepared by the Company and are
unaudited.  The condensed consolidated balance sheet as of December
31, 2008 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,
2008.





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 regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
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 and nine months
ended September 30, 2009 are not indicative of the operating results for the
full year.





2.
            Significant
      Accounting Policies




Principles
of Consolidation




The
accompanying condensed consolidated financial statements include the accounts of
acquired entities since their respective dates of acquisition.  All
significant inter-company amounts have been eliminated in
consolidation.


5





Use
of Estimates




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  The more significant areas requiring use of
estimates and judgment relate to revenue recognition, accounts receivable
valuation reserves, realizability of intangible assets, realizability of
deferred income tax assets and the evaluation of contingencies and
litigation.  Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances.  Actual results could differ from those
estimates.





Reclassifications





Certain
amounts in prior year financial statements have been reclassified to conform to
the current year presentation.





Recent
Accounting Pronouncements




Effective
July 2009, the Company adopted the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) and the Hierarchy of Generally
Accepted Accounting Principles (ASC 105), (formerly SFAS No. 168, the“FASB Accounting Standards
Codification”and theHierarchy of Generally Accepted Accounting Principles). This standard
establishes only two levels of U.S. generally accepted accounting principles
(“GAAP”), authoritative and nonauthoritative. The FASB ASC (the “Codification”)
became the source of authoritative, nongovernmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for
SEC registrants. All other non-grandfathered, non-SEC accounting literature not
included in the Codification became nonauthoritative.  The Company
began using the new guidelines and numbering system prescribed by the
Codification when referring to GAAP for the three months and nine months ended
September 30, 2009.  As the Codification was not intended to change or
alter existing GAAP, it did not have any impact on the Company’s consolidated
financial statements.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS No.
165 has been codified under ASC-855, which establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. This
sets forth (1) the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and (3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. ASC-855 is effective for interim or
annual financial periods ending after June 30, 2009. The Company has evaluated
and determined that there were no material subsequent events through November
16, 2009, which is the date that these financial statements were filed with the
SEC.





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 (“VSOE”) or third party evidence (“TPE”).  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 process of
evaluating whether the update will materially change the pattern and timing of
the Company's recognition of revenue.


6


Significant
Customers




For the
quarter ended September 30, 2009, three customers, the Department of Homeland
Security (“DHS”), the Transportation Security Administration (“TSA”), and the
Washington Headquarters Services (“WHS”), an agency of the Department of Defense
(“DoD”) that provides services for many DoD agencies and organizations,
represented approximately 21%, 21%, and 17% of revenues, respectively.  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 results.  For
the quarter ended September 30, 2008, three customers, the TSA, DHS, and the WHS
represented approximately 27%, 21%, and 12% of revenues, respectively.  For
the nine-month period ended September 30, 2009, three
customers, DHS, TSA, and WHS, represented approximately 23%, 22%, and 18%
of revenues, respectively.  For the nine-month period
ended September 30, 2008 three customers, TSA, DHS, and WHS,
represented approximately 26%, 19%, and 12% of revenues,
respectively.





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 September
30, 2009, three customers, DHS, WHS, and TSA accounted for approximately 16%,
13%, and 11%, respectively, of accounts receivable and unbilled accounts
receivable.  As of December 31, 2008, three clients, DHS, TSA, and
WHS, represented approximately 24%, 17%, and 14%, respectively, of accounts
receivable and unbilled accounts receivable.





Fair
value of financial instruments




The
Company’s financial instruments include cash equivalents, deferred revenue,
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.




The
Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157,
“Fair Value Measurements” (“SFAS 157”) on January 1, 2008.  SFAS 157
has been codified as ASC 820-10, “Fair Value Measurements.”  ASC
820-10, among other things, defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure for each major asset
and liability category measured at fair value on either a recurring or
nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such assumptions, ASC 820-10 establishes a
three-tier fair value hierarchy, which prioritizes the inputs used in measuring
fair value as follows:




Level 1:
Observable inputs such as quoted prices in active markets;




Level 2:
Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly; and




Level 3:
Unobservable inputs in which there is little or no market data, which require
the reporting entity to develop its own assumptions.




Cash
and Cash Equivalents




Investments
purchased with original maturities of three months or less are considered cash
equivalents for purposes of these consolidated financial
statements.  The Company maintains cash and cash equivalents with
various major financial institutions.





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 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.


7





The
Company determines its allowance 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.





Unbilled
Accounts Receivable





Unbilled
accounts receivable on time-and-materials contracts represent costs incurred and
gross profit recognized near the period-end but not billed until the following
period.  Unbilled accounts receivable on fixed-price contracts consist
of amounts incurred that are not yet billable under contract
terms.  At September 30, 2009 and December 31, 2008, unbilled
accounts receivable totaled approximately $1,339,000 and $2,302,000,
respectively.





Revenue
Recognition




Revenue
from our mobile telecom expense management services (“MTEMS”) is recognized upon
delivery of services as they are rendered.  Arrangements with
customers on MTEMS-related contracts are recognized ratably over a period of
performance.





Revenue
from the sale of PKI credentials is recognized when delivery
occurs.  Arrangements with customers on PKI related contracts may
involve multiple deliverable elements.  In these cases, the Company
applies the principles prescribed in ASC 605-25, “Multiple-Element
Arrangements,” formerly known as Emerging Issues Task Force Abstract (“EITF”)
00-21, Revenue Arrangements with Multiple Deliverables.  The Company
analyzes various factors, including a review of the nature of the contract or
product sold, the terms of each specific transaction, the relative fair values
of the elements required by ASC 605-25, any contingencies that may be present,
its historical experience with like transactions or with like products, the
creditworthiness of the customer, and other current market and economic
conditions.





Additionally,
revenues are derived from the delivery of non-customized software. In such cases
revenue is recognized when there is persuasive evidence that an arrangement
exists (generally a purchase order has been received or contract signed),
delivery has occurred, the charge for the software is fixed or determinable, and
collectability is probable.





Should
the sale of products or software involve an arrangement with multiple elements
(for example, the sale of PKI Credential Seats along with the sale of
maintenance, hosting and support to be delivered over the contract period), the
Company allocates revenue to each component of the arrangement using the
residual value method based on the fair value of the undelivered elements. The
Company defers revenue from the arrangement equivalent to the fair value of the
undelivered elements and recognizes the remaining amount at the time of the
delivery of the product or when all other revenue recognition criteria have been
met.





A portion
of our revenues are derived from cost-plus or time-and-materials contracts.
Under cost-plus contracts, revenues are recognized as costs are incurred and
include an estimate of applicable fees earned. For time-and-material contracts,
revenues are computed by multiplying the number of direct labor-hours expended
in the performance of the contract by the contract billing rates and adding
other billable direct costs.





In the
event of a termination of a contract, all billed and unbilled amounts associated
with those task orders where work has been performed would be billed and
collected. The termination provisions of the contract would be accounted for at
the time of termination. Any deferred and/or amortization cost would either be
billed or expensed depending upon the termination provisions of the contract.
Further, the Company has had no material history of losses nor has it identified
any material specific risk of loss at September 30, 2009 and December 31, 2008,
respectively, due to termination provisions and thus has not recorded provisions
for such events.


8





Income
Taxes




The
Company accounts for income taxes in accordance with ASC 740, “Income Taxes”
(formerly known as SFAS No. 109 (“SFAS 109”), “Accounting for Income
Taxes”).  Under ASC 740, 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.  ASC 740 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.





Property
and Equipment




Property
and equipment are stated at cost, net of accumulated depreciation and
amortization.  Property and equipment consisted of the
following:





September 30,
                  2009
              
              
              December 31,
                  2008Automobiles,
      computers, equipment and software
              
              $
              1,031,527
              
              
              $
              867,013Less–
      Accumulated depreciation and amortization
              
              
              (587,152
              )
              
              
              (435,824
              )$
              444,375
              
              
              $
              431,189





Depreciation
expense is computed using the straight-line method over the estimated useful
lives of between two and five years depending upon the classification of the
property and/or equipment.





In
accordance with ASC 350-40, “Internal-Use Software” (formerly the American
Institute of Certified Public Accountants Statement of Position 98-1 “Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use”), the
Company capitalizes costs related to software and implementation in connection
with its internal use software systems.





Software
Development Costs





WidePoint
accounts for software development costs (or “internally developed intangible
assets”) related to software products for sale, lease or otherwise marketed in
accordance with ASC 985-20, “Cost of Software to be Sold, Leased or Marketed”
(formerly known as SFAS No. 86, “Accounting for the Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed”).  For projects fully
funded by the Company, significant development costs are capitalized from the
point of demonstrated technological feasibility until the point in time that the
product is available for general release to customers.  Once the
product is available for general release, capitalized costs are amortized based
on units sold, or on a straight-line basis over a six-year period or such other
such shorter period as may be required. WidePoint recorded approximately $67,000
of amortization expense for the three month period ended September 30, 2009, as
compared to approximately $63,000 for the three month period ended September 30,
2008.  WidePoint capitalized approximately $14,000 for the three month
period ended September 30, 2009.  There were no capitalized costs for
the three month period ended September 30, 2008. Capitalized software
development costs, net, included in Intangibles, net, on the Company’s condensed
consolidated balance sheets at September 30, 2009 were approximately $0.4
million, compared to approximately $0.6 million at December 31,
2008.  During the first half of 2009, we estimated that we will be
capitalizing approximately $50,000 more prior to the issuance of the Authority
To Operate (“ATO”), but the project timeframe has been extended into the
remainder of 2009 with the same estimated costs of $50,000.  Upon
completion, we will commence amortizing the ATO over an approximate three year
life.





Goodwill,
Other Intangible Assets, and Long-Lived Assets




Goodwill
represents costs in excess of fair values assigned to the underlying net assets
acquired. The Company has adopted the provisions of ASC 805, “Business
Combinations” (formerly known as SFAS No. 141R, “Business Combinations”) and
ASC 350-20, “Goodwill” (formerly known as SFAS No. 142, “Goodwill and Other Intangible
Assets”).These standards require the use of the purchase method of
accounting for business combinations, set forth the accounting for the initial
recognition of acquired intangible assets and goodwill and describe the
accounting for intangible assets and goodwill subsequent to initial
recognition.  Under the provisions of these standards, goodwill is not
subject to amortization and annual review is required for
impairment.  The impairment test under ASC 350-20 is based on a
two-step process involving (i) comparing the estimated fair value of the related
reporting unit to its net book value and (ii) comparing the estimated implied
fair value of goodwill to its carrying value.  Impairment losses are
recognized whenever the implied fair value of goodwill is less than its carrying
value.  The Company’s annual impairment testing date is December 31.
As of December 31, 2008, no impairment had occurred.  We have not
identified any impairments as of September 30, 2009.


9





The
Company recognizes an acquired intangible apart from goodwill whenever the
intangible arises from contractual or other legal rights, or when it can be
separated or divided from the acquired entity and sold, transferred, licensed,
rented or exchanged, either individually or in combination with a related
contract, asset or liability.  Such intangibles are amortized over
their useful lives.  Impairment losses are recognized if the carrying
amount of an intangible subject to amortization is not recoverable from expected
future cash flows and its carrying amount exceeds its fair value.





The
Company reviews its long-lived assets, including property and equipment,
identifiable intangibles, and goodwill annually or whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable.  To determine recoverability of its long-lived assets,
the Company evaluates the probability that future undiscounted net cash flows
will be less than the carrying amount of the assets.





Basic
and Diluted Net Earnings (Loss) Per Share




Basic
earnings or loss per share includes no dilution and is computed by dividing net
earnings or loss by the weighted-average number of common shares outstanding for
the period. Diluted earnings or loss 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.  The treasury stock effect
of the conversion of options and warrants to purchase 1,715,110 and 2,449,802
shares of common stock outstanding for the three and nine months ended September
30, 2009, respectively, has been included in the calculations of the diluted net
income per share. Options and warrants to purchase 633,921 and 1,371,966 shares
of common stock, respectively, for the three and nine months ended September 30,
2009 have not been included in the calculation of the net income per share as
such effect would have been anti-dilutive.  Outstanding options and
warrants to purchase 8,619,457 and 7,176,257 shares, respectively, for the three
and nine months ended September 30, 2008 have not been included in the
calculation of the net loss per share as such effect would have been
anti-dilutive. As a result of these items, the basic and diluted net loss per
share for the three and nine months ended September 30, 2008 are presented as
identical.  Earnings per common share
were computed as follows for the three and nine months ended September 30, 2009
and September 30, 2008, respectively:





Three
      Months Ended
                
                
                Nine
      Months EndedSep.
      30,
                
                
                Sep.
      30,
                
                
                Sep.
      30,
                
                
                Sep.
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Basic
      Earnings Per Common Share:Net
      income (loss)
                
                $
                515,411
                
                
                $
                (334,568
                )
                
                $
                894,988
                
                
                $
                (1,375,467
                )Weighted
      average number of common shares
                
                
                60,348,616
                
                
                
                58,090,697
                
                
                
                58,990,406
                
                
                
                56,197,675Earnings
      (loss) per common share.
                
                $
                0.009
                
                
                $
                (0.006
                )
                
                $
                0.015
                
                
                $
                (0.024
                )Diluted
      Earnings Per Common Share:Net
      income (loss)
                
                $
                515,411
                
                
                $
                (334,568
                )
                
                $
                894,988
                
                
                $
                (1,375,467
                )Weighted
      average number of common shares
                
                
                60,348,616
                
                
                
                58,090,697
                
                
                
                58,990,406
                
                
                
                56,197,675Incremental
      shares from assumed conversions of stock options
                
                
                1,715,110
                
                
                
                0
                
                
                
                2,449,802
                
                
                
                0Adjusted
      weighted average number of common shares
                
                
                62,063,726
                
                
                
                58,090,697
                
                
                
                61,440,208
                
                
                
                56,197,675Earnings
      (loss) per common share
                
                $
                0.008
                
                
                $
                (0.006
                )
                
                $
                0.015
                
                
                $
                (0.024
                )




10





Stock-based
compensation





The
Company previously adopted the provisions of ASC 718-10, “Stock Compensation”
(formerly known as SFAS No. 123R), using the modified prospective application
transition method.  Under this method, compensation cost for the
portion of awards for which the requisite service has not yet been rendered that
are outstanding as of the adoption date is recognized over the remaining service
period.  The compensation cost for that portion of awards is based on
the grant-date fair value of those awards as calculated for pro forma
disclosures under ASC 718-10, as originally issued.  All new awards
that are modified, repurchased, or cancelled after the adoption date are
accounted for under provisions of ASC 718-10.  Prior periods have not
been restated under this transition method.  The Company recognizes
share-based compensation ratably using the straight-line attribution method over
the requisite service period.  In addition, pursuant to ASC 718-10,
the Company is required to estimate the amount of expected forfeitures when
calculating share-based compensation, instead of accounting for forfeitures as
they occur, which was the Company’s practice prior to the adoption of ASC
718-10.





The
amount of compensation expense recognized under ASC 718-10 during the three and
nine month periods ended September 30, 2009 and 2008, respectively, under our
plans was comprised of the following:





Three Months ended
                      September
      30
                    
                    
                    Nine Months ended
                      September
      302009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008General
      and administrative expense
                    
                    $
                    20,093
                    
                    
                    $
                    51,253
                    
                    
                    $
                    126,680
                    
                    
                    $
                    527,333Share-based
      compensation before taxes
                    
                    
                    20,093
                    
                    
                    
                    51,253
                    
                    
                    
                    126,680
                    
                    
                    
                    527,333Total
      net share-based compensation expense
                    
                    $
                    20,093
                    
                    
                    $
                    51,253
                    
                    
                    $
                    126,680
                    
                    
                    $
                    527,333Net
      share-based compensation expenses per basic and diluted common
      share
                    
                    nil
                    
                    
                    nil
                    
                    
                    nil
                    
                    
                    $
                    0.01





Since we
have cumulative operating tax losses as of September 30, 2009 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 nine months
ended September 30, 2009, 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 (“Black-Scholes model”), which uses the
assumptions of no dividend yield, risk free interest rates of between 2.04% and
4.83%, volatility of between 57% to 156% and expected life in years of
approximately 3 years.  The option awards are for the period from 1999
through 2009. 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. 
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 three month and nine month periods ended September 30, 2009 and
2008 is presented below:


11





NON-VESTED


#
      of Shares
                
                
                Weighted
      average
                  grant date fair value
                  per
      shareNon-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
                
                
                $
                0.39Granted
                
                
                -
                
                
                
                -Vested
                
                
                4,000
                
                
                $
                0.58Forfeited
                
                
                -
                
                
                
                -Non-vested
      at September 30, 2009
                
                
                1,215,004
                
                
                $
                0.39Non-vested
      at January 1, 2008
                
                
                457,044
                
                
                $
                0.73Granted
                
                
                870,000
                
                
                $
                0.77Vested
                
                
                57,044
                
                
                $
                0.49Forfeited
                
                
                -
                
                
                
                -Non-vested
      at March 31, 2008
                
                
                1,270,000
                
                
                $
                0.77Granted
                
                
                -
                
                
                
                -Vested
                
                
                390,000
                
                
                $
                0.80Forfeited
                
                
                -
                
                
                
                -Non-vested
      at June 30, 2008
                
                
                880,000
                
                
                $
                0.76Granted
                
                
                610,000
                
                
                $
                0.01Vested
                
                
                176,000
                
                
                
                0.60Forfeited
                
                
                -
                
                
                
                -Non-vested
      at September 30, 2008
                
                
                1,314,000
                
                
                $
                0.43




12





OUTSTANDING AND
EXERCISABLE





#
      of Shares
                
                
                Weighted
      average
                  grant date fair value
                  per
      shareTotal
      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
                
                
                $
                0.32Issued
                
                
                -Cancelled
                
                
                1
                
                
                $
                0.24Exercised
                
                
                3,999,999
                
                
                $
                0.24Total
      outstanding at September 30, 2009
                
                
                4,517,411
                
                
                $
                0.54Total
      exercisable at September 30, 2009
                
                
                3,302,407
                
                
                $
                0.43Total
      outstanding at January 1, 2008
                
                
                7,085,211
                
                
                $
                0.37Issued
                
                
                870,000
                
                
                $
                0.90Cancelled
                
                
                -
                
                
                
                -Exercised
                
                
                32,000
                
                
                $
                0.45Total
      outstanding at March 31, 2008
                
                
                7,923,211
                
                
                $
                0.42Total
      exercisable at March 31, 2008
                
                
                6,653,211
                
                
                $
                0.32Issued
                
                
                -
                
                
                
                -Cancelled
                
                
                4,800
                
                
                $
                0.45Exercised
                
                
                -
                
                
                
                -Total
      outstanding at June 30, 2008
                
                
                7,918,411
                
                
                $
                0.42Total
      exercisable at June 30, 2008
                
                
                7,038,411
                
                
                $
                0.35Issued
                
                
                610,000
                
                
                $
                0.82Cancelled
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Total
      outstanding at September 30, 2008
                
                
                8,528,411
                
                
                $
                0.45Total
      exercisable at September 30, 2008
                
                
                7,214,411
                
                
                $
                0.37




The
aggregate remaining contractual lives in years for the options outstanding and
exercisable on September 30, 2009 were 4.95 and 4.20,
respectively.  In comparison, the aggregate remaining contractual
lives in years for the options outstanding and exercisable on September 30, 2008
were 3.51 and 2.76, respectively.




Aggregate
intrinsic value represents total pretax intrinsic value (the difference between
WidePoint’s closing stock price on September 30, 2009 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
September 30, 2009. 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 September 30, 2009 were $975,896 and $944,096,
respectively. The total intrinsic value of options exercised for the third
quarter of fiscal 2009 was approximately $1,380,000. The Company issues new
shares of common stock upon the exercise of stock options.  At
September 30, 2009, 4,511,438 shares were available for future grants under the
Company's 2008 Stock Incentive Plan.




13


At
September 30, 2009, the Company had approximately $332,000 of total unamortized
compensation expense, net of estimated forfeitures, related to stock option
plans that will be recognized over the weighted average period of 4.09
years.





On May
11, 2009, the Company’s Compensation Committee of the Board of Directors voted
to cancel 950,000 options held by management and other employees (the "Cancelled
Options") and issue replacement options to such individuals (the "Replacement
Options").  The optionees all concurred with such action by the
Compensation Committee.  The Cancelled Options had varying exercise prices
ranging from $0.85 to $2.80 with a weighted average exercise price of
$1.06.  The exercise price of the Replacement Options was set at
$0.54.  Other than the exercise price, there are no differences in the
terms between the Cancelled Options and the Replacement Options.  The
incremental additional fair value of the Replacement Options was calculated to
be approximately $64,000, which was determined by calculating the fair value of
the Cancelled Options as they existed on May 11, 2009 immediately prior to
cancellation as compared to the fair value on the same date of the exercise
price of the Replacement Options.  This amount of additional fair value of
the Replacement Options will be recognized over the vesting period of the
Replacement Options.  Since some of the Replacement Options were fully
vested at May 11, 2009, there was an expense of approximately $45,000 recognized
in the three months ended September 30, 2009 as a result of the cancellation of
the Cancelled Options and the issuance of the Replacement Options.





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




The
Company entered into a senior lending agreement with Cardinal Bank on August 16,
2007.  In January of 2008, the Company modified this credit facility
with Cardinal Bank to allow for up to $7 million, which included a four-year
term note for $2 million that the Company had entered into with Cardinal Bank in
January 2008. The Company borrowed approximately $1.8 million under this credit
facility to finance the acquisition of iSYS, LLC in January of 2008 and repaid
the advance in full in May 2008 from the proceeds raised in a subsequent capital
raise that occurred in April and May of 2008.  As of September 30,
2009, the Company had no borrowings under this credit facility, which previously
had a $5 million borrowing cap at an interest rate of 6.5%.  As
explained below, this credit facility was superseded by the Company’s new
revolving credit facility entered into with Cardinal Bank.





On March
17, 2009, the Company entered into a Debt Modification Agreement and Commercial
Loan Agreement (“2009 Commercial Loan Agreement”) with Cardinal Bank. This new
revolving credit facility replaced the Company’s prior $5 million revolving
credit facility with Cardinal Bank. The 2009 Commercial Loan Agreement allows
for the Company to borrow up to $5 million. The repayment date of the revolving
credit facility was extended to June 1, 2010 and advances under the revolving
credit facility 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 were 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 September 30, 2009.





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 September 30,
2009, we owed approximately $1.2 million under the term
note.


14


The
Company also had a subordinated seller financed note for $2 million in favor of
Jin Kang, a related party of the Company and the former owner and current
officer of iSYS, LLC, which was due the earlier of April 1, 2009 or upon the
filing of the Company’s Form 10-K. The note bore interest at the simple rate of
7% through December 31, 2008, that increased to 10% on January 1 and remained in
effect at 10% through the repayment of the note. As mentioned above, on March
17, 2009, the Company entered into the 2009 Commerical Loan Agreement with
Cardinal Bank. The 2009 Commercial Loan Agreement excluded the subordination
agreement of Jin Kang from our prior credit facility, which allowed for the
repayment of the seller’s note on March 27, 2009.  As of September
30th, 2009
the Company does not have any outstanding balances due Mr. Kang under any
seller’s notes.  The Seller’s note was paid from excess cash balances
held by the Company as a result of positive cashflows from
operations.





4. Goodwill
and Intangible Assets





WidePoint
previously adopted ASC 350-20, “Goodwill” (formerly known as SFAS No. 142,
Goodwill and Other Intangible
Assets). ASC 350-20 requires, among other things, the discontinuance of
goodwill amortization. Under ASC 350-20, 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. As of December 31, 2008, no
impairment had occurred.  We have not identified any impairments as of
September 30, 2009.  These reviews have resulted in no adjustments in
goodwill.





The
changes in the carrying amount of goodwill for the nine-month period ended
September 30, 2009 and for the years ended December 31, 2008 and December
31, 2007, respectively, are as follows:





TotalBalance
      as of December 31, 2007
                      
                      $
                      2,526,110iSYS
      acquisition
                      
                      
                      6,049,771Balance
      as of December 31, 2008
                      
                      $
                      8,575,881iSYS
      acquisition-related costs
                      
                      
                      (13,627
                      )Balance
      as of September 30, 2009
                      
                      $
                      8,562,254





In 2008,
$6,049,771 in goodwill was acquired as a result of the acquisition of iSYS, LLC.
Management believes that as of September 30, 2009 the carrying value of our
goodwill was not impaired.  For the three month period ended September
30, 2009 there were no goodwill adjustments made.




15




Purchased
and Internally Developed Intangible Assets





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





As
      of September 30, 2009Gross
      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
                                            
                                            
                                            $
                                            (1,086,966
                                            )
                                            
                                            
                                            5iSYS
      (includes customer relationships, internal use software and trade
      name)
                                            
                                            $
                                            1,230,000
                                            
                                            
                                            $
                                            (450,917
                                            )
                                            
                                            
                                            5Protexx
      (Identity Security Software)
                                            
                                            $
                                            506,463
                                            
                                            
                                            $
                                            (196,958
                                            )
                                            
                                            
                                            3$
                                            2,881,986
                                            
                                            
                                            $
                                            (1,734,841
                                            )
                                            
                                            
                                            4Internally
      Developed Intangible AssetsORC
      PKI-I Intangible (Related to internally generated
software)
                                            
                                            $
                                            334,672
                                            
                                            
                                            $
                                            (286,169
                                            )
                                            
                                            
                                            6ORC
      PKI-II Intangible (Related to internally generated
    software)
                                            
                                            $
                                            649,991
                                            
                                            
                                            $
                                            (511,020
                                            )
                                            
                                            
                                            6ORC
      PKI-III Intangible (Related to internally generated
    software)
                                            
                                            $
                                            211,680
                                            
                                            
                                            $
                                            (99,960
                                            )
                                            
                                            
                                            3ORC
      PKI-IV Intangible (Related to internally generated
    software)
                                            
                                            $
                                            42,182
                                            
                                            
                                            $
                                            (19,920
                                            )
                                            
                                            
                                            3ORC
      PKI-V Intangible (Related to internally generated
software)
                                            
                                            $
                                            107,838
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            31,346,363
                                            
                                            
                                            $
                                            (917,069
                                            )
                                            
                                            
                                            5Total
                                            
                                            $
                                            4,228,349
                                            
                                            
                                            $
                                            (2,651,910
                                            )
                                            
                                            
                                            5Aggregate
      Amortization Expense:For
      the three months ended 9/30/09
                                            
                                            $
                                            228,884For
      the nine months ended 9/30/09
                                            
                                            $
                                            686,654Estimated
      Amortization Expense:For
      the year ended 12/31/09
                                            
                                            $
                                            894,368For
      the year ended 12/31/10
                                            
                                            $
                                            652,134For
      the year ended 12/31/11
                                            
                                            $
                                            350,300For
      the year ended 12/31/12
                                            
                                            $
                                            214,626For
      the year ended 12/31/13
                                            
                                            $
                                            151,665Total
                                            
                                            $
                                            2,263,093





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




There
were no amounts of research and development assets acquired during the three
month period ended September 30, 2009 nor any written-off in the
period.


16





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”). Under ASC
740, 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.  ASC 740 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 has
further adopted the provisions of ASC 740-10-15 (formerly known as
Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes”).  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 in
accordance with ASC 740 did not result in changes that had a material impact on
results of operations, financial condition or liquidity. As of December 31, 2008
and at September 30, 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.





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 2001 through 2008. Additionally,
the Company may be subject to examinations by various state taxing jurisdictions
for tax years 2001 through 2008. The Company is currently not under examination
by the IRS or any state tax jurisdiction.





As of
September 30, 2009, the Company had net operating loss (NOL) carry forwards of
approximately $21,000,000 to offset future taxable income. These carry forwards
expire between 2010 and 2028. In assessing the ability to realize of 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.
To date the Company has not completed a “Section 382”
analysis.





No tax
benefit has been realized associated with the exercise of stock options in the
three and nine months ended September 30, 2009 and 2008, respectively,
because of the existence of net operating loss carryforwards. There will be no
credit to additional paid in capital for such 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 set forth in ASC 740 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 $118,000 for the
nine months ended September 30, 2009. 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. ASC 740 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.


17





6. Stockholders’
Equity




The
Company is authorized to issue 110,000,000 shares of common stock, $.001 par
value per share.  As of September 30, 2009, there were 60,684,823
shares of common stock outstanding.  During the quarter ended
September 30, 2009, 2,379,309 shares of common stock were issued as the result
of the exercise of management warrants.




As of
September 30, 2009 there were 60,684,823 shares of common stock
outstanding.




Common
Stock





On July
8, 2009, each of Steve L. Komar, James T. McCubbin and Mark F. Mirabile
exercised, in the form of a cashless exercise, his respective warrant to
purchase 1,333,333 shares of common stock of the Company, which warrant was
previously issued to such individual pursuant to a Warrant Purchase Agreement,
dated July 14, 2004, by and between the Company and each such
individual.  As a result of his respective cashless exercise of such
warrant, each of Steve L. Komar, James T. McCubbin and Mark F. Mirabile, as
applicable, was issued 793,103 shares of common stock of the Company, with
540,230 shares of common stock of the Company being withheld by the Company from
each such warrant as payment of the respective exercise price of each such
warrant.  The shares issued pursuant to the exercise of these warrants
have not been registered under the Securities Act of 1933, as amended (the
“Securities Act”).  Such shares are exempt from the registration
requirements under the Securities Act pursuant to the “private offering”
exemption under Section 4(2) of the Securities Act.





On May
11, 2009, the Company’s Compensation Committee of the Board of Directors voted
to cancel 950,000 options held by management and other employees (the “Cancelled
Options”) and issue replacement options to such individuals (the “Replacement
Options”). The optionees all concurred with such action by the Compensation
Committee. The Cancelled Options had varying exercise prices ranging from $0.85
to $2.80 with a weighted average exercise price of $1.06 per share. The exercise
price of the Replacement Options was set at $0.54 per share. Other than the
exercise price per share, there are no differences in the terms between the
Cancelled Options and the Replacement Options. The incremental additional fair
value of the Replacement Options was calculated to be approximately $64,000,
which was determined by calculating the fair value of the Cancelled Options as
they existed on May 11, 2009 immediately prior to cancellation as compared to
the fair value on the same date of the exercise price of the Replacement
Options. This amount of additional fair value of the Replacement Options will be
recognized over the vesting period of the Replacement Options. Since some of the
Replacement Options were fully vested at May 11, 2009, there was an expense of
approximately $45,000 recognized in the three months ended June 30, 2009 as a
result of the cancellation of the Cancelled Options and the issuance of the
Replacement Options.





The
Company granted Mr. Oxley 250,000 options in connection with the commencement of
his employment with the Company in May of 2008, with such options being granted
on July 25, 2008 at a price per common share of $0.81 and with an intrinsic
value of $202,500.





On
January 8, 2008, pursuant to the terms of a Membership Interest Purchase
Agreement (the “Membership Agreement”) between the Company, iSYS, LLC and Jin
Kang, dated January 4, 2008, the Company issued 1,500,000 shares of Company
common stock on January 8, 2008 at a stock price of $1.20 per common share
(based on the closing market price of the Company’s common shares the issuance
date) for a value of $1,800,000. The Company also issued an additional 3,000,000
shares of Company common stock on January 8, 2008, which shares were
delivered into escrow to be held subject to the satisfaction of certain earnout
provisions under the Membership Agreement. Under the Membership Agreement the
initial $1.4 million in earnings before interest, taxes, depreciation and
amortization (“EBITDA”) from iSYS is excluded from the earnout for the initial
3 years, with 66% of the value in excess of such initial $1.4 million
being paid to the former owner of iSYS, with 50% of the amount being paid in
cash and 50% being valued and released in escrow shares. In the fourth year the
value in excess of 50% is used instead of 66%, with the total earnout capped at
$6 million, with $3 million payable in cash and $3 million payable in
the release of earnout shares. Performance of the earnout is measured annually
and awarded within 30 days following the end of the Company’s fiscal year
and filing of the Company’s Form 10-K for that year. As of December 31,
2008 performance measures were attained allowing for the release of 184,817
common shares valued at $1.00 per common share from the common shares placed
into escrow at the time of the acquisition of iSYS by the
Company.


18





On
April 29, 2008, the Company entered into a Common Stock Purchase Agreement
(the “Purchase Agreement”) with Deutsche Bank AG, London Branch (“Deutsche
Bank”), and related agreements, as part of a private equity financing to raise
additional funds for working capital. Under the Purchase Agreement, Deutsche
Bank agreed to purchase 2,500,000 shares of WidePoint common stock for a total
purchase price of $2,550,000, or $1.02 per share. Pursuant to the Purchase
Agreement, the Company issued 2,500,000 shares of its common stock to Deutsche
Bank on May 2, 2008. The offer and sale of the shares were not registered
under the Securities Act of 1933, as amended, in reliance on the “private
offering” exemption provided under Section 4(2) thereof.





On
May 16, 2008, the Company entered into two Common Stock Purchase Agreements
(collectively, the “Endurance Purchase Agreements”) with Endurance Partners,
L.P. and Endurance Partners (Q.P), L.P., and related agreements, as part of a
private equity financing to raise additional funds for working capital. Under
the Endurance Purchase Agreements, Endurance Partners, L.P. agreed to purchase
428,954 shares of WidePoint common stock for a total purchase price of $437,533,
or $1.02 per share, and Endurance Partners (Q.P.), L.P. agreed to purchase
1,071,046 shares of WidePoint common stock for a total purchase price of
$1,092,467, or $1.02 per share. Pursuant to the Endurance Purchase Agreements,
on May 19, 2008, the Company issued 428,954 shares of its common stock to
Endurance Partners, L.P. and 1,071,046 shares of its common stock to Endurance
Partners (Q.P.), L.P. The offer and sale of the shares were not registered under
the Securities Act of 1933, as amended, in reliance on the “private offering”
exemption provided under Section 4(2) thereof.





As a
result of the equity transactions to raise additional capital that we entered
into during the second quarter of 2008, the Company issued a combined cumulative
total of 4,000,000 common shares of the Company which provided gross proceeds of
approximately $4.1 million and net proceeds after various legal and other
expenses of $3.9 million.




On
July 31, 2008, pursuant to the terms of the Asset Purchase Agreement
between the Company, Protexx Acquisition Corporation, a Delaware corporation,
Protexx Incorporated, a Delaware corporation (“Protexx”), and Peter Letizia,
Charles B. Manuel, Jr. and William Tabor, the Company issued 2,500,000 shares of
its common stock in the name of Protexx and delivered such shares to the
parties’ escrow agent to be held in escrow pending the possible release of such
shares as part of the potential earnout to which Protexx may be entitled under
the Purchase Agreement for calendar year 2008. The 2008 earnout was not
attained. For calendar year 2009, Protexx shall have the opportunity to earn an
additional Two Million Two Hundred Fifty Thousand Dollars ($2,250,000) worth of
privately issued shares of WidePoint common stock as part of the earnout for
that calendar year. The maximum number of shares of WidePoint common stock that
Protexx shall have the opportunity to earn for calendar year 2009 shall be equal
to the number of shares of WidePoint common stock that results from Two Million
Two Hundred Fifty Thousand Dollars ($2,250,000) divided by the greater of
(x) One Dollar and Twenty-Five Cents ($1.25) or (y) the average
closing sale price of the WidePoint common stock for the twenty
(20) trading days immediately preceding December 31,
2009.





Stock
Warrants




On
November 1, 2005, the Company issued a warrant to purchase 54,878 shares of
common stock at a price of $0.80 per share to Hawk Associates as part of a
consulting agreement in which Hawk Associates agreed to act as the Company’s
investor relations representative. The warrant has a term of 5 years. We are
accounting for this award in accordance with ASC 505-50, “Equity-Based Payments
to Non-Employees” (formerly known as EITF 96-18).




On
October 27, 2004 and November 22, 2004, the Company issued two warrants to
purchase 30,612 shares and 5,556 shares of common stock at a price of $0.49 and
$0.45 per share, respectively, to Liberty Capitol as part of a consulting
agreement in which Liberty Capitol assisted the Company in arranging its senior
debt financing with RBC-Centura Bank. The warrants have a term of 5 years. The
Company used a fair-value option pricing model to value these stock warrants at
approximately $14,291.  This value has been reflected as part of stock
warrants in the stockholders’ equity section of the consolidated balance
sheet.




7.  Segment
reporting





Segments
are defined by ASC 280, “Segment Reporting” (formerly known as SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information”), 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.


19





Until
December 31, 2005 the Company was comprised of a single segment, which was
comprised of our consulting services segment within our Commercial and Federal
Government Marketplaces.  As of January 1, 2006, the Company added a
second segment, which consists of PKI credentialing and managed
services.  As of January 4, 2008, the Company added a third segment
upon the acquisition of iSYS, LLC for mobile telecom expense
management.





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 table presents information about reported segments along with the
items necessary to reconcile the segment information to the totals reported in
the accompanying consolidated financial statements:





Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Mobile
      Telecom Managed Services:Revenues
                  
                  $
                  6,761,176
                  
                  
                  $
                  5,284,138
                  
                  
                  $
                  20,232,001
                  
                  
                  $
                  14,579,042Operating
      income after depreciation expense
                  
                  
                  963,141
                  
                  
                  
                  296,628
                  
                  
                  
                  2,173,809
                  
                  
                  
                  685,448Consulting
      services:Revenues
                  
                  $
                  3,059,677
                  
                  
                  $
                  2,432,951
                  
                  
                  $
                  7,372,426
                  
                  
                  $
                  7,768,633Operating
      income after depreciation expense
                  
                  
                  60,448
                  
                  
                  
                  85,358
                  
                  
                  
                  228,610
                  
                  
                  
                  385,591PKI
      Credentialing and Managed Services:Revenues
                  
                  $
                  1,557,940
                  
                  
                  $
                  1,161,342
                  
                  
                  $
                  4,302,030
                  
                  
                  $
                  2,945,394Operating
      income (loss) (includes amortization expense of $66,993, $63,477,
      $200,980, and $166,913, respectively)
                  
                  
                  245,853
                  
                  
                  
                  (38,549
                  )
                  
                  
                  730,945
                  
                  
                  
                  (306,319
                  )Total
      CompanyRevenues
                  
                  $
                  11,378,793
                  
                  
                  $
                  8,878,431
                  
                  
                  $
                  31,906,457
                  
                  
                  $
                  25,293,069Operating
      income (loss) before depreciation expense
                  
                  
                  629,700
                  (1)
                  
                  
                  (251,091
                  )
      (2)
                  
                  
                  1,267,095
                  (3)
                  
                  
                  (1,100,192
                  ) (4)Depreciation
      expense
                  
                  
                  (46,887
                  )
                  
                  
                  (41,171
                  )
                  
                  
                  (130,999
                  )
                  
                  
                  (117,204
                  )Interest
      income (expense), net
                  
                  
                  (28,130
                  )
                  
                  
                  (42,306
                  )
                  
                  
                  (123,391
                  )
                  
                  
                  (156,373
                  )Other
      expense
                  
                  
                  (49
                  )
                  
                  
                  -
                  
                  
                  
                  (49
                  )
                  
                  
                  -Income
      tax expense
                  
                  
                  (39,223
                  )
                  
                  
                  -
                  
                  
                  
                  (117,668
                  )
                  
                  
                  -Net
      income (loss)
                  
                  $
                  515,411
                  
                  
                  $
                  (334,568
                  )
                  
                  $
                  894,988
                  
                  
                  $
                  (1,375,467
                  )


20





(1)  Includes
$55,269 in amortization expense in cost of sales associated with the purchase of
ORC and $64,417 in amortization expense in cost of sales associated with the
purchase of iSYS and $42,205 in amortization expense in cost of sales associated
with internally developed intangibles, which are not allocated among the
segments and includes $524,738 in unallocated corporate costs in general and
administrative expense of which $20,093 is comprised of stock options
expense.


(2)
Includes $55,269 in amortization expense in cost of sales associated with the
purchase of ORC and $100,000 in amortization expense in cost of sales associated
with the purchase of iSYS and $28,137 in amortization expense in cost of sales
associated with internally developed intangibles, which are not allocated among
the segments and includes $411,121 in unallocated corporate costs in general and
administrative expense of which $51,253 is comprised of stock options
expense.


(3)
Includes $165,808 in amortization expense in cost of sales associated with the
purchase of ORC and $193,250 in amortization expense in cost of sales associated
with the purchase of iSYS and $126,616 in amortization expense in cost of sales
associated with internally developed intangibles, which are not allocated among
the segments and includes $1,511,594 in unallocated corporate costs in general
and administrative expense of which $126,680 is comprised of stock options
expense.


(4)
Includes $165,808 in amortization expense in cost of sales associated with the
purchase of ORC and $300,000 in amortization expense in cost of sales associated
with the purchase of iSYS and $28,137 in amortization expense in cost of sales
associated with internally developed intangibles, which are not allocated among
the segments and includes $1,370,967 in unallocated corporate costs in general
and administrative expense of which $527,333 is comprised of stock options
expense.


21


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,
2008.





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 product 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 of highly specialized
regional IT consulting companies.





Our
expertise lies within three business segments. The three segments offer unique
solutions in identity management services utilizing certificate-based security
solutions; wireless telecommunication expense management systems; and other
associated IT consulting services and products in 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), which we acquired in January 2008; and WidePoint
IL, Inc., operated together with Protexx Acquisition Corp., doing business as
Protexx, which we acquired in July 2008:





ORC
specializes in IT integration and secure authentication processes and software,
and providing 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, forensic
informatics, and information assurance services, predominantly to various
agencies and departments of the U.S. Government.





Protexx,
which was a development stage company when we acquired it, specializes in
identity assurance, and mobile and wireless data protection products and
services.





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 purchase of Protexx, 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 governmental 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. The Company intends to
continue to leverage the synergies between its newly-acquired operating
subsidiary, and cross sell its technical capabilities into each separate
marketplace serviced by our respective subsidiaries.


22





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 acquisitions, which predominantly operate in the U.S. federal
governmental 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 may
negatively affect the rate at which the federal government purchases the
services that we offer.





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 Mobile Telecom
Managed Services 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 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.





Results
of Operations





Three Months Ended September
30, 2009 as Compared to Three Months Ended September 30,
2008





Revenues,
net.Revenues for the three month period ended September 30,
2009 were approximately $11,379,000 as compared to approximately $8,878,000 for
the three month period ended September 30, 2008.  The increase in
revenues was primarily attributable to increases in all three of our segments as
a result of recent contract awards and expansions made predominately by our
federal agency customers.





§
            Our
      Mobile Telecom Managed
      Services (“MTEM”) segment experienced revenue growth of
      approximately 28% from approximately $5,284,000 for the quarter ended
      September 30, 2008, to approximately $6,761,000 for the quarter ended
      September 30, 2009.  The 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 demonstrate positive revenue growth in the future as federal
      agencies continue to adopt the Company’s services under the recent
      contract award associated with the federal strategic sourcing initiative,
      or FSSI, by the General Services Administration.  In addition,
      we expect future revenue growth of this segment to be further bolstered by
      the drive of federal agencies and departments to expand the efficiencies
      and savings that services such as our Mobile Telecom Managed Services have
      to date proven to generate for these groups.  Also, 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 through a sales channel strategy utilizing intermediaries to
      potentially expand our reach beyond the federal sector and help to support
      the long-term growth of this
segment.


23





§
            Our
      PKI credentialing and
      managed services segment experienced revenue growth of
      approximately 34%. Revenues increased approximately $397,000 from
      $1,161,000 for the three month period ended September 30, 2008, to
      $1,558,000 for the three month period ended September 30,
      2009.  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 demonstrate positive 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 thereof.  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 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.





§
            Our
      consulting services
      segment experienced revenue growth of approximately
      26%.  Revenues increased from $2,433,000 for the three month
      period ended September 30, 2008 to $3,060,000 for the three month period
      ended September 30, 2009.  This positive revenue performance
      primarily resulted from new contract awards and renewals and expansion
      work from our current customer base occurring in this
      quarter.  Timing delays that occurred in the second quarter of
      2009 pushed sales of certain products and services into the third
      quarter.  While this segment experiences fluctuations from
      quarter to quarter, we are hopeful that the current growth represents a
      bottoming trend in revenues as the economy slowly
  recovers.





Cost of
sales.Cost of sales for the three month period ended
September 30, 2009, was approximately $8,704,000 (or 76% of revenues), as
compared to cost of sales of approximately $7,382,000 (or 83% of revenues), for
the three month period ended September 30, 2008.  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 MTEM and PKI segments realized greater margins from the
benefit of economies of scale with our direct costs centers realizing greater
efficiencies.  Our consulting services 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 MTEM and PKI segments add economies of scale, which may
be partially offset at times by the fluctuation in our consulting services
segment revenue mix.





Gross
profit.  Gross profit for the three month period ended
September 30, 2009, was approximately $2,675,000 (or 24% of revenues), as
compared to gross profit of approximately $1,497,000 (or 17% of revenues), for
the three month period ended September 30, 2008.  The percentage of
gross profit was higher in the third quarter of 2009 as compared to the third
quarter of 2008 as a result of higher margins associated with improved economies
of scale in our MTEM and PKI segments and a greater mix of higher margin direct
consulting services as compared to lower margin software reselling in our
consulting services segment.  We anticipate gross profit as a
percentage of revenues should increase in the near term 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 three month
period ended September 30, 2009, was approximately $333,000, (or 3% of revenues)
as compared to approximately $263,000 (or 3% of revenues), for the three month
period ended September 30, 2008.  The absolute dollar amount of sales
and marketing expanded slightly 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.


24





General and
administrative.  General and administrative expenses for the
three month period ended September 30, 2009, were approximately $1,712,000 (or
15% of revenues), as compared to approximately $1,485,000 (or 17% of revenues)
recorded by the Company for the three month period ended September 30,
2008.  This increase in general and administrative expenses over those
for the three months ended September 30, 2008, was primarily attributable to
slight increases in general and administrative costs incurred to support our
increasing revenue base.  We anticipate that our general and
administrative costs in absolute dollars 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 basis will level out or decrease to the extent our revenue growth
expands at a greater pace than our general and administrative costs
rise.





Depreciation.  Depreciation
expense for the three month period ended September 30, 2009, was approximately
$47,000 (or less than 1% of revenues), as compared to approximately $41,000 of
such expenses (or less than 1% of revenues) recorded by the Company for the
three month period ended September 30, 2008.  This increase in
depreciation expense over those for the three month period ended September 30,
2008, was primarily attributable to greater amounts of depreciable
assets.  We do not anticipate any material changes within depreciation
expense in the short-term.  However, as our revenue base increases
within our MTEM and PKI segments, there may be a need from time to time to
increase the purchase of equipment in support of new revenue streams that may
raise our depreciation expenses.





Interest
income.  Interest income for the three month period ended
September 30, 2009, was approximately $4,000 (or less than 1% of revenues), as
compared to approximately $34,000 (or less than 1% of revenues), for the three
month period ended September 30, 2008.  This decrease in interest
income for the three month period ended September 30, 2009, 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 federal
government.





Interest
expense.  Interest expense for the three month period ended
September 30, 2009, was approximately $32,000 (or less than 1% of revenues), as
compared to approximately $76,000 (or less than 1% of revenues), for the three
month period ended September 30, 2008.  This decrease in interest
expense for the three month period ended September 30, 2009 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 period ended September 30, 2009 were approximately $39,000
as compared to no income taxes for the three month period ended September 30,
2008. The Company incurred a deferred income tax expense of approximately
$39,000 for the three month period ended September 30, 2009, 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
(loss).As a result of the above, the net income for the three
month period ended September 30, 2009, was approximately $515,000 as compared to
the net loss of approximately $335,000 for the three months ended September 30,
2008.





Nine Months Ended September
30, 2009 as Compared to Nine Months Ended September 30, 2008





Revenues,
net.    Revenues for the nine month period ended
September 30, 2009 were approximately $31,906,000 as compared to approximately
$25,293,000 for the nine month period ended September 30, 2008. This increase in
revenues was primarily attributable to increases in our MTEM and PKI
credentialing and managed services segments, partially offset by a decline in
our consulting services segment.


25


§
            Our
      MTEM segment
      experienced revenue growth of approximately 39%, from approximately
      $14,579,000 for the nine months ended September 30, 2008 to approximately
      $20,232,000 for the nine months ended September 30, 2009. 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 demonstrate positive
      revenue growth in the future as federal agencies continue to adopt the
      Company’s services under the recent contract award associated with the
      federal strategic sourcing initiative, or FSSI, by the General Services
      Administration.   In addition, we expect future revenue
      growth of this segment to be further bolstered by the drive by federal
      agencies and departments to expand the efficiencies and savings that
      services such as our Mobile Telecom Managed Services have to date proven
      to generate for these groups.  Also, we are presently pursuing
      several significant service contract opportunities to potentially provide
      our services, and we are also initiating a new strategy to expand into
      state and local municipalities and commercial enterprises through a sales
      channel strategy utilizing intermediaries.  We believe that
      these efforts should further expand our reach beyond the federal sector
      and help to support the long-term growth of this
  segment.





§
            Our
      PKI credentialing and managed services segment experienced revenue growth
      of approximately 46%. Revenues increased approximately $1,357,000 from
      $2,945,000 for the nine month period ended September 30, 2008 to
      $4,302,000 for the nine month period ended September 30, 2009 as a result
      of various mandates to roll out credential programs to various agencies
      and contractors.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 demonstrate positive
      revenue growth in the future as various federal agency mandates continue
      to be implemented to strengthen their requirements for greater levels of
      identity management and better protect the federal information technology
      infrastructure thereof.  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 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 will support the continued long-term
      growth of this segment.





§
            Our
      consulting services segment experienced decreasing revenue of
      approximately 5%.  Revenues decreased approximately $397,000,
      from $7,769,000 for the nine month period ended September 30, 2008, as
      compared to $7,372,000 for the nine month period ended September 30,
      2009.  This revenue decrease primarily resulted from lesser
      revenues being recognized during the nine month period as a result of
      timing differences that have delayed the recognition of some expected
      second-quarter revenues into the second half of
  2009.





Cost of sales. Cost of sales
for the nine month period ended September 30, 2009, was approximately
$24,987,000 (or 78% of revenues), as compared to cost of sales of approximately
$21,075,000 (or 83% of revenues), for the nine month period ended September 30,
2008. 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
of our segments.  Our MTEM and PKI segments realized greater margins
from the benefit of economies of scale with our direct costs centers realizing
greater efficiencies. Our consulting services 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
nine month period. We anticipate improvements in our costs of sales on a
percentage basis as our MTEM and PKI segments add economies of scale, which may
be partially offset at times by the fluctuation in our consulting services
segment revenue mix.





Gross profit. Gross profit
for the nine month period ended September 30, 2009, was approximately $6,920,000
(or 22% of revenues), as compared to a gross profit of approximately $4,218,000
(or 17% of revenues), for the nine month period ended September 30, 2008. The
percentage of gross profit was higher in the first nine months of 2009 as
compared to the first nine months of 2008 as a result of higher margins
associated with improved economies of scale in our MTEM and PKI segments and a
greater mix of higher margin direct consulting services as compared to lower
margin software reselling in our consulting services segment.  We
anticipate gross profit as a percentage of revenues should increase in the near
term 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 nine month period ended September 30, 2009, was
approximately $828,000 (or 3% of revenues), as compared to approximately
$676,000 (or 3% of revenues), for the nine month period ended September 30,
2008. This increase was materially attributable to the expansion of our sales
and marketing outreach efforts.


26





General and administrative.General and administrative expenses for the nine month period ended
September 30, 2009, were approximately $4,825,000 (or 15% of revenues.as
compared to approximately $4,643,000 (or 18% of revenues), recorded by the
Company for the nine month period ended September 30, 2008. This increase in
general and administrative expenses over those for the nine months ended
September 30, 2008, was primarily attributable to slight increases in general
and administrative costs incurred to support our increasing revenue
base.  We anticipate that our general and administrative costs in
absolute dollars 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 basis will level out or decrease to the extent our revenue growth
expands at a greater pace than our general and administrative costs
rise.





Depreciation expense.Depreciation expense for the nine month period ended September 30, 2009,
was approximately $131,000 (or less than 1% of revenues), as compared to
approximately $117,000 (or less than 1% of revenues), recorded by the Company
for the nine month period ended September 30, 2008. This increase in
depreciation expenses for the nine month period ended September 30, 2009, was
primarily attributable to the greater amounts of depreciable
assets.





Interest income.Interest
income for the nine month period ended September 30, 2009, was approximately
$22,000 (or less than 1% of revenues), as compared to approximately $106,000 (or
less than 1% of revenues), for the nine month period ended September 30, 2008.
This decrease in interest income for the nine month period ended September 30,
2009, was primarily attributable to lesser amounts of cash and cash equivalents
available to the Company over this time period.





Interest expense.Interest
expense for the nine month period ended September 30, 2009, was approximately
$146,000 (or less than 1% of revenues), as compared to approximately $262,000
(or less than 1% of revenues), for the nine month period ended September 30,
2008. This decrease in interest expense for the nine month period ended
September 30, 2009 was primarily attributable to the reduction in the
outstanding balance of debt instruments held by the Company.





Income taxes.Income taxes
for the nine month period ended September 30, 2009 were approximately $118,000
as compared to no income taxes for the nine month period ended September 30,
2008. The Company incurred a deferred income tax expense of approximately
$118,000 for the nine month period ended September 30, 2009 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 for 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 (loss).As a
result of the above, the net income for the nine month period ended September
30, 2009, was approximately $895,000, as compared to the net loss of
approximately $1,375,000 for the nine months ended September 30,
2008.





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 2008 and through the period ended September 30,
2009, operations were materially financed with working capital, borrowings
against the Company’s credit facilities with Cardinal Bank and through the
private sale of securities.  During the first quarter of 2009 the
Company modified its senior lending facility with Cardinal Bank, which senior
lending facility now allows for the Company to borrow up to $5 million at a rate
of prime plus 50 basis points.  The new senior lending facility
replaced the prior senior lending facility with Cardinal Bank. This senior
lending facility matures on June 1, 2010.  This senior lending
facility, as modified, provides the Company with continuing liquidity to fund
the operations of the business supporting additional contract awards and
opportunities to expand the Company’s strategic goals and objectives. Further,
on November 5, 2007, the Company entered into a series of agreements with
Protexx, Inc., a company from which WidePoint acquired substantially all of that
company’s assets and intellectual property in July of 2008.  These
agreements allowed for Protexx, Inc. to borrow up to $250,000 from WidePoint on
an installment basis between November 5, 2007 and July 31,
2008.   The short-term borrowing facility was converted and
eliminated by WidePoint at the time of the asset purchase of Protexx,
Inc.


27





Net cash
provided by operating activities for the nine months ended September 30, 2009,
was approximately $1.7 million, as compared to cash provided by operating
activities of $4.7 million for the nine months ended September 30,
2008.  This decrease in cash generated from operating activities for
the nine months ended September 30, 2009 was primarily a result of a decrease in
unbilled accounts receivable, a reduction in stock compensation expense,
decreases in accounts payable and accrued expenses, offset by improvements to
net income from a net loss.  Net cash used in investing activities for
the nine months ended September 30, 2009, was approximately $0.2 million, as
compared to $5.0 million used in investing activities for the nine months ended
September 30, 2008.  The decrease in net cash used in investing
activities was primarily attributable to no acquisition activity during the
period as compared to the prior period in which we had purchased
iSYS.  Net cash used in financing activities amounted to approximately
$2.6 million in the nine months ended September 30, 2009, as compared to net
cash provided by financing activities of approximately $5.5 million in the nine
months ended September 30, 2008. This increase in net cash used in financing
activities primarily related to the reduction of acquisition indebtedness and
our Cardinal Bank loans.As a result of
the Company’s capital raising in 2008 and profitability in 2009, the Company has
had excess liquidity to absorb the pay-down of short-term and long-term debt,
while still maintaining sufficient levels of capital resources to fund
operations.





As of
September 30, 2009, the Company had a net working capital of approximately $4.2
million.  The Company’s primary source of liquidity consists of
approximately $3.3 million in cash and cash equivalents and approximately $7.9
million of accounts receivable and unbilled accounts
receivable.  Current liabilities include approximately $5.8 million
inaccounts payable
and accrued expenses.   The reduction in Current liabilities for
the nine months ended September 30, 2009 was predominately associated with the
payment of seller’s notes.





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.  The Company added to its working capital during the second
quarter of 2008 by selling shares of its common stock in private
transactions.  The approximate $4.1 million in proceeds has bolstered
the Company’s ability to finance working capital requirements.  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.




Off-Balance
Sheet Arrangements





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


28




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 under the
heading “Material Weaknesses,” 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.





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
Weaknesses





In our
Management’s Report on Internal Control Over Financial Reporting included in our
Form 10-K for the year ended December 31, 2008, management concluded that our
internal control over financial reporting was not effective due to the existence
of the material weaknesses as of December 31, 2008, discussed below. A material
weakness is a control deficiency, or a combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected.





§
            Inadequate segregation of
      duties within a significant account or process.We 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.





§
            Inadequate documentation of
      the components of internal control.We did not maintain documented
      policies and evidence of compliance with 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.


29





§
            Income Tax Accounting.We engage outside parties to assist us in accounting for income
      taxes. We have not implemented an effective review process for accounting
      for income taxes which could lead to errors occurring in the amounts and
      disclosures for income taxes. Accordingly, management has concluded that
      this control deficiency constitutes a material
  weakness.





Remediation
Plan for Material Weaknesses





The
material weaknesses described above comprise control deficiencies that we
discovered in the fourth quarter of fiscal year 2007 and during the financial
close process for fiscal year 2008. Upon our acquisition of iSYS in
January 2008, we further determined that the material weaknesses described
above were also present in iSYS’s internal controls. We specifically noted
weaknesses associated with the process of recognizing a certain segment of the
iSYS revenue and associated direct costs.





Beginning
and during the fourth quarter of fiscal 2007, we formulated a remediation plan
and initiated remedial action to address those material weaknesses at WidePoint.
During the first quarter of 2008, we expanded the scope of our remediation plan
to address the material weaknesses related to the internal controls and
procedures of iSYS. We have continued our remediation actions through the third
quarter of 2009 and expect to continue working on our remediation plan through
December 31, 2009.  The elements of the remediation plan are as
follows:





§
            Inadequate segregation of
      duties within a significant account or process.We commenced a
      thorough review of our accounting staff’s duties and where necessary we
      have begun segregating such duties with other
  personnel.





§
            Inadequate documentation of
      the components of internal control. We commenced a thorough review
      of our documentation and where necessary we are putting into place
      policies and procedures to document such evidence to comply with our
      internal control requirements. We are specifically addressing policies to
      properly review and recognize a certain segment of the iSYS revenue and
      associated direct costs. We have also retained a financial consultant to
      assist us in further reviewing and improving our internal control
      processes.





§
            InadequateIncome Tax Accounting review
      process.We commenced a
      search and review of outside experts to assist us in developing an
      effective review process for accounting for income
  taxes.





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





Changes
in Internal Control Over Financial Reporting





During
the first three quarters of fiscal year 2009, we undertook a number of measures
to remediate the material weaknesses discussed above. Those measures, described
under the heading “Remediation Plan for Material Weaknesses,” have been
undertaken during the first three quarters of fiscal year 2009 and will continue
into the remainder of 2009.  We anticipate these measures will have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting when such "remediation Plan for Material
Weaknesses" is completed.





Other
than as described above, there have been no changes in our internal control over
financial reporting during the nine months ended September 30, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.


30





PART
II – OTHER INFORMATION





ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS.




On July
8, 2009, each of Steve L. Komar, James T. McCubbin and Mark F. Mirabile
exercised, in the form of a cashless exercise, his respective warrant to
purchase 1,333,333 shares of common stock of the Company, which warrant was
previously issued to such individual pursuant to a Warrant Purchase Agreement,
dated July 14, 2004, by and between the Company and each such individual. As a
result of his respective cashless exercise of such warrant, each of Steve L.
Komar, James T. McCubbin and Mark F. Mirabile, as applicable, was issued 793,
103 shares of common stock of the Company, with 540,230 shares of common stock
of the Company being withheld by the Company from each such warrant as payment
of the respective exercise price of each such warrant. The shares issued
pursuant to the exercise of these warrants have not been registered under the
Securities Act of 1933, as amended (the “Securities Act”). Such shares are
exempt from the registration requirements under the Securities Act pursuant to
the “private offering” exemption under Section 4(2) of the Securities
Act.




ITEM
6.  EXHIBITS.





EXHIBITNO.
                
                DESCRIPTION31.1
                
                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).


31





SIGNATURES





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





WIDEPOINT
      CORPORATIONDate:
                            November
      16, 2009
                            
                            /s/ STEVE L. KOMARSteve
      L. KomarPresident
      and Chief Executive OfficerNovember
      16, 2009
                            
                            /s/ JAMES T. MCCUBBINJames
      T. McCubbinVice
      President – Principal Financialand
      Accounting Officer


32