**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,DC 20549**

 

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**FORM 10-Q**

 

**Mark One**

**ý****Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**for the Quarterly Period Ended September 30,2005.**

 

**or**

 

**o****Transition Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**for the Transition Period From            To                 .**

 

**Commissionfile number:  000-25755**

 

**WORLDGATE COMMUNICATIONS, INC.**

(Exact Name of Registrant asSpecified in Its Charter)

 
| **Delaware**              | ** ** | **23-2866697**                        |
|---------------------------|------------|---------------------------------------|
| (State of  Incorporation) |       | (I.R.S.  Employer Identification No.) |

 

**3190Tremont Avenue**

**Trevose,Pennsylvania 19053**

(Address of Principal ExecutiveOffices)                            (ZipCode)

 

**(215) 354-5100**

(Registrant’s Telephone Number,Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes  o  No  ý

 

As of November 1, 2005, there were 39,291,119 shares of commonstock, par value $.01 per share, outstanding.

 

 

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WORLDGATE COMMUNICATIONS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED SEPTEMBER 30,2005

 

TABLE OF CONTENTS

 
| PART I. FINANCIAL INFORMATION                                                                  | 3      |
|-----------------------------------------------------------------------------------------------------|--------|
|                                                                                                |   |
| Item 1. Financial Statements                                                                        | 3      |
| Item 2. Management’s Discussion and Analysis  of Financial Condition and Results of Operations | 14     |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 | 19     |
| Item 4. Controls and Procedures                                                                     | 19     |
|                                                                                                |   |
| PART II. OTHER INFORMATION                                                                     | 20     |
|                                                                                                |   |
| Item 1. Legal Proceedings                                                                           | 20     |
| Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds                                | 20     |
| Item 3. Defaults Upon Senior Securities                                                             | 20     |
| Item 4. Submission of Matters to a Vote of  Security Holders                                        | 20     |
| Item 5. Other Information                                                                           | 20     |
| Item 6. Exhibits                                                                                    | 21     |

 

2

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PART I.FINANCIAL INFORMATION 

ITEM 1. FINANCIAL STATEMENTS

 

**WORLDGATECOMMUNICATIONS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(DOLLARSIN THOUSANDS, EXCEPT SHARE AMOUNTS)**

 
| ** **                                                                                                                                                                                                | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | **(Unaudited)**              | ** ** | **(Audited)**               | ** ** |
| ** **                                                                                                                                                                                                | ** ** | ** **                   | ** ** | **(As restated)**           | ** ** |
|                                                                                                                                                                                                      |       |                         |       |                        |       |
| ASSETS                                                                                                                                                                                                    |       |                         |       |                        |       |
| Current  assets:                                                                                                                                                                                          |       |                         |       |                        |       |
| Cash and  cash equivalents                                                                                                                                                                                |       | $                            | 21,891     |                        | $          | 11,840 |   |
| Accounts receivable                                                                                                                                                                                       |       | 1,186                        |       | 0                           |       |
| Other  receivables                                                                                                                                                                                        |       | 41                           |       | 28                          |       |
| Inventory,  net                                                                                                                                                                                           |       | 255                          |       | 46                          |       |
| Prepaid and  other assets                                                                                                                                                                                 |       | 291                          |       | 184                         |       |
| Total current assets                                                                                                                                                                                      |       | 23,664                       |       | 12,098                      |       |
| Property and  equipment                                                                                                                                                                                   |       | 3,958                        |       | 3,530                       |       |
| Less:  accumulated depreciation and amortization                                                                                                                                                          |       | (2,332                       | )          | (1,815                      | )          |
| Property and  equipment, net                                                                                                                                                                              |       | 1,626                        |       | 1,715                       |       |
| Deposits and  other assets                                                                                                                                                                                |       | 9                            |       | 9                           |       |
| Total assets                                                                                                                                                                                              |       | $                            | 25,299     |                        | $          | 13,822 |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIENCY)                                                                                                                                                   |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                                                      |       |                         |       |                        |       |
| Accounts  payable                                                                                                                                                                                         |       | $                            | 1,233      |                        | $          | 222 |   |
| Accrued  expenses                                                                                                                                                                                         |       | 1,350                        |       | 951                         |       |
| Accrued  compensation and benefits                                                                                                                                                                        |       | 299                          |       | 540                         |       |
| Dividend  payable on Preferred Stock                                                                                                                                                                      |       | 13                           |       | 85                          |       |
| Detachable  Warrants                                                                                                                                                                                      |       | 1,629                        |       | 5,583                       |       |
| Conversion  option on Preferred Stock                                                                                                                                                                     |       | 276                          |       | 8,612                       |       |
| Notes  payable                                                                                                                                                                                            |       | 0                            |       | 37                          |       |
| Warranty reserve                                                                                                                                                                                          |       | 336                          |       | 0                           |       |
| Deferred  revenues                                                                                                                                                                                        |       | 19                           |       | 369                         |       |
| Total  current liabilities                                                                                                                                                                                |       | 5,155                        |       | 16,399                      |       |
| Commitments                                                                                                                                                                                               |       | 0                            |       | 0                           |       |
| Redeemable  Preferred Stock; 1,000 shares outstanding at September 30, 2005, and  6,775 outstanding at December 31, 2004                                                                        |       | 702                          |       | 2,995                       |       |
|                                                                                                                                                                                                      |       |                         |       |                        |       |
| Stockholders’  equity (deficiency):                                                                                                                                                                  |       |                         |       |                        |       |
| Preferred  Stock, $.01 par value, 13,500,000 shares authorized; redeemable shares issued  7,550 at September 30, 2005 and December 31, 2004                                                     |       | 0                            |       | 0                           |       |
| Common  Stock, $.01 par value; 80,000,000 shares authorized, 39,286,351 shares issued  and outstanding at September 30, 2005 and 30,865,777 shares issued and  outstanding at December 31, 2004 |       | 393                          |       | 308                         |       |
| Additional  paid-in capital                                                                                                                                                                               |       | 237,256                      |       | 212,439                     |       |
| Accumulated  deficit                                                                                                                                                                                      |       | (218,207                     | )          | (218,319                    | )          |
| Total  stockholders’ equity (deficiency)                                                                                                                                                             |       | 19,442                       |       | (5,572                      | )          |
| Total  liabilities and stockholders’ equity (deficiency)                                                                                                                                             |       | $                            | 25,299     |                        | $          | 13,822 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

3

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**WORLDGATECOMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

**(Dollarsin Thousands, Except Share and per Amounts)**

 
| ** **                                                                                                                                                                                                                                                            | ** ** | **Three Months ended September 30,** | ** ** | **Nine Months ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                            | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                                                                                            | ** ** | ** **                                | ** ** | ** **                               | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Gross  revenues                                                                                                                                                                                                                                                       |       | $                                         | 3,333      |                                     | $          | 106 |   | $ | 5,300 |   | $ | 106 |   |
| Less:  Product launch discount and refunds                                                                                                                                                                                                                            |       | (1,043                                    | )          | 0                                        |       | (1,434 | ) | 0 |   |
| Net revenues                                                                                                                                                                                                                                                          |       | 2,290                                     |       | 106                                      |       | 3,866 |   | 106 |   |
| Cost of  revenues                                                                                                                                                                                                                                                     |       | 2,450                                     |       | 50                                       |       | 3,840 |   | 50 |   |
| Gross  margins                                                                                                                                                                                                                                                        |       | (160                                      | )          | 56                                       |       | 26 |   | 56 |   |
| Engineering  and development (excluding depreciation and amortization amounts of $81 and  $2 for the three months ended September 30, 2005 and 2004, respectively,  and $220 and $2 for the nine months ended September 30, 2005 and 2004,  respectively)   |       | 1,468                                     |       | 1,038                                    |       | 4,146 |   | 2,637 |   |
| Sales and  marketing (excluding depreciation and amortization amounts of $13 and $6 for  the three months ended September 30, 2005 and 2004, respectively, and  $31 and $6 for the nine months ended September 30, 2005 and 2004,  respectively)            |       | 392                                       |       | 324                                      |       | 1,410 |   | 924 |   |
| General and  administrative (excluding depreciation and amortization amounts of $82 and  $99 for the three months ended September 30, 2005 and 2004,  respectively, and $267 and $302 for the nine months ended September 30,  2005 and 2004, respectively) |       | 1,248                                     |       | 1,762                                    |       | 2,982 |   | 3,805 |   |
| Depreciation  and amortization                                                                                                                                                                                                                                        |       | 176                                       |       | 107                                      |       | 518 |   | 310 |   |
| Total  expenses from continuing operations before interest, other income (expense),  change in fair value of warrants and conversion options                                                                                                                          |       | 3,284                                     |       | 3,231                                    |       | 9,056 |   | 7,676 |   |
| Loss from  continuing operations                                                                                                                                                                                                                                      |       | (3,444                                    | )          | (3,175                                   | )          | (9,030 | ) | (7,620 | ) |
| Interest and  other income                                                                                                                                                                                                                                            |       | 292                                       |       | 37                                       |       | 466 |   | 56 |   |
| Change in  fair value of detachable warrants and conversion options                                                                                                                                                                                                   |       | 1,759                                     |       | 1,623                                    |       | 9,401 |   | 1,971 |   |
| Interest and  other expense                                                                                                                                                                                                                                           |       | (4                                        | )          | (2                                       | )          | (6 | ) | (5 | ) |
| (Loss)  income from continuing operations                                                                                                                                                                                                                             |       | (1,397                                    | )          | (1,517                                   | )          | 831 |   | (5,598 | ) |
| Income from  discontinued operations                                                                                                                                                                                                                                  |       | 0                                         |       | 7                                        |       | 0 |   | 36 |   |
| Net (loss)  income                                                                                                                                                                                                                                                    |       | (1,397                                    | )          | (1,510                                   | )          | 831 |   | (5,562 | ) |
| Accretion on  preferred stock and dividends                                                                                                                                                                                                                           |       | (85                                       | )          | (400                                     | )          | (719 | ) | (431 | ) |
| Net (loss)  income available to common stockholders                                                                                                                                                                                                                   |       | $                                         | (1,482     | )                                        | $          | (1,910 | ) | $ | 112 |   | $ | (5,993 | ) |
| (Loss)  income from continuing operations per common share:                                                                                                                                                                                                           |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                                 |       | $                                         | (0.04      | )                                        | $          | (0.05 | ) | $ | 0.02 |   | $ | (0.20 | ) |
| Fully  Diluted                                                                                                                                                                                                                                                        |       | $                                         | (0.04      | )                                        | $          | (0.05 | ) | $ | 0.02 |   | $ | (0.20 | ) |
| Income from  discontinued operations per common share:                                                                                                                                                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                                 |       | $                                         | 0.00       |                                     | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
| Fully  Diluted                                                                                                                                                                                                                                                        |       | $                                         | 0.00       |                                     | $          | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
| Net (loss)  income per common share:                                                                                                                                                                                                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                                 |       | $                                         | (0.04      | )                                        | $          | (0.05 | ) | $ | 0.02 |   | $ | (0.20 | ) |
| Fully  Diluted                                                                                                                                                                                                                                                        |       | $                                         | (0.04      | )                                        | $          | (0.05 | ) | $ | 0.02 |   | $ | (0.20 | ) |
| Net (loss) income  available to common shareholders per common share:                                                                                                                                                                                                 |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                                 |       | $                                         | (0.04      | )                                        | $          | (0.07 | ) | $ | 0.00 |   | $ | (0.22 | ) |
| Fully  Diluted                                                                                                                                                                                                                                                        |       | $                                         | (0.04      | )                                        | $          | (0.07 | ) | $ | 0.00 |   | $ | (0.22 | ) |
| Weighted  average common shares outstanding:                                                                                                                                                                                                                          |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                                 |       | 37,246,811                                |       | 28,235,349                               |       | 34,145,802 |   | 27,662,870 |   |
| Fully  Diluted                                                                                                                                                                                                                                                        |       | 37,246,811                                |       | 28,235,349                               |       | 38,644,166 |   | 27,662,870 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

4

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**WORLDGATECOMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(Dollarsin Thousands)**

 
| ** **                                                                                                                    | ** ** | **Nine Months ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                                                                                          |       |                                     |       | **(As restated)** |   |
|                                                                                                                          |       |                                     |       |   |   |
| Cash flows  from operating activities:                                                                                        |       |                                     |       |   |   |
| Net income  (loss)                                                                                                            |       | $                                        | 831        |   | $ | (5,562 | ) |
| Income from  discontinued operations                                                                                          |       | 0                                        |       | (36 | ) |
| Adjustments  to reconcile net income (loss) to net operating cash flow from operating  activities from continuing operations: |       |                                     |       |   |   |
| Depreciation  and amortization                                                                                                |       | 518                                      |       | 310 |   |
| Change in  fair value of detachable warrants and conversion options                                                           |       | (9,401                                   | )          | (1,971 | ) |
| Non-cash  stock based compensation                                                                                            |       | 2                                        |       | 608 |   |
| Changes in  operating assets and liabilities:                                                                                 |       |                                     |       |   |   |
| Accounts  receivable                                                                                                          |       | (1,186                                   | )          | 37 |   |
| Other  receivables                                                                                                            |       | (13                                      | )          | 11 |   |
| Inventory                                                                                                                     |       | (209                                     | )          | 0 |   |
| Prepaid and  other assets                                                                                                     |       | (107                                     | )          | 201 |   |
| Accounts  payable                                                                                                             |       | 1,011                                    |       | (330 | ) |
| Accrued  expenses                                                                                                             |       | 399                                      |       | 962 |   |
| Accrued  compensation and benefits                                                                                            |       | (241                                     | )          | (10 | ) |
| Other                                                                                                                         |       | (14                                      | )          | 472 |   |
| Net cash  used in continuing operations                                                                                       |       | (8,410                                   | )          | (5,308 | ) |
| Net cash  provided by discontinued operations                                                                                 |       | 0                                        |       | 52 |   |
| Net cash  used in operating activities                                                                                        |       | (8,410                                   | )          | (5,256 | ) |
| Cash flows  from investing activities of continuing operations:                                                               |       |                                     |       |   |   |
| Capital  expenditures                                                                                                         |       | (428                                     | )          | (197 | ) |
| Net cash  used in investing activities                                                                                        |       | (428                                     | )          | (197 | ) |
| Cash flows  from financing activities of continuing operations:                                                               |       |                                     |       |   |   |
| Payment of  note payable                                                                                                      |       | (37                                      | )          | 0 |   |
| Proceeds  from issuance of common stock                                                                                       |       | 16,634                                   |       | 2,521 |   |
| Proceeds  from issuance of redeemable preferred stock                                                                         |       | 0                                        |       | 7,111 |   |
| Proceeds  from the exercise of stock options                                                                                  |       | 818                                      |       | 126 |   |
| Proceeds  from the exercise of stock rights and warrants                                                                      |       | 1,474                                    |       | 620 |   |
| Net cash  provided by financing activities                                                                                    |       | 18,889                                   |       | 10,378 |   |
| **Net  increase in cash and equivalents**                                                                                     |       | 10,051                                   |       | 4,925 |   |
| **Cash and  cash equivalents, beginning of period**                                                                           |       | 11,840                                   |       | 3,365 |   |
| **Cash and  cash equivalents, end of period**                                                                                 |       | $                                        | 21,891     |   | $ | 8,290 |   |
| Cash paid  for interest                                                                                                       |       | $                                        | 7          |   | $ | 15 |   |
| Non-cash  financing activities:                                                                                               |       |                                     |       |   |   |
| Conversion  of preferred stock to common stock                                                                                |       | $                                        | 5,775      |   | $ | 0 |   |
| Issuance of  common stock for payment of dividend                                                                             |       | $                                        | 198        |   | $ | 0 |   |
| Issuance of  note payable to finance D & O insurance                                                                 |       | $                                        | 230        |   | $ | 256 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

5

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WORLDGATE COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Dollar Amounts are inThousands, Except for per Share and Share Data)

(Unaudited)

 

1.                                       Basisof Presentation.

 

The unaudited financial statements ofWorldGate Communications, Inc. (“WorldGate” or the “Company”) for thethree and nine months ended September 30, 2005 and September 30, 2004presented herein have been prepared by the Company pursuant to the rules andregulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations.  These financial statements should be read inconjunction with the consolidated financial statements for the year ended December 31,2004 and the notes thereto included in the Company’s Annual Report on Form 10-K.

 

The financial information in this Reportreflects, in the opinion of management, all adjustments of a normal recurringnature necessary to present fairly the results for the interim period.Quarterly operating results are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2005.

 

2.                                       Liquidityand Going Concern Considerations.

 

As of September 30, 2005 the Company hadcash and cash equivalents of $21,891. The operating cash usage from continuingoperations for the three and nine months ended September 30, 2005 was $2,488and $8,410, respectively. The funds we received as a result of privateplacements of our securities on December 1, 2003, December 4, 2003, January 21,2004, April 22, 2004, June 23, 2004, December 15, 2004, August 5,2005 and August 11, 2005, have permitted us to fund the development of ournew business.

 

In December 2003 and January 2004,WorldGate received proceeds from investments aggregating $3,100 by certaininstitutional investors. These investors purchased an aggregate of 3,000,000shares of newly issued common stock. The investors also received a right, for alimited period of time, to purchase additional shares of up to 20% of thecommon stock purchased by the investors in their investment, at the same priceas their investment, and five-year warrants to purchase up to 30% of the commonstock purchased by the investors in their investment, at an exercise priceequal to a twenty-five percent premium to their purchase price for theinvestment. The purchase price for the 2,000,000 shares purchased in the December 2003transactions were $0.80 per share, with the warrants having a $1.00 per shareexercise price. The purchase price for the 1,000,000 shares purchased in the January 2004transaction was $1.50 per share, with the warrants having a $1.875 per shareexercise price. All additional investment rights associated with the December 2003transaction were exercised during January and February of 2004,resulting in an incremental investment of $320. All additional investmentrights associated with the January 2004 transaction were exercised in May 2004,resulting in an incremental investment of $300. A portion of the warrants andadditional investment right warrants associated with the December 2003 andJanuary 2004 transactions were exercised in December 2004 and January 2005,resulting in an incremental investment of $925.

 

In December 2003, WorldGate reachedagreement with Mototech, Inc. (not an affiliate of Motorola) for thepurchase of 625,000 shares of newly issued common stock at $0.80 per share, inreturn for future design and engineering services by Mototech. WorldGate hadpreviously contracted with Mototech to assist the Company with the design andvolume manufacture of WorldGate’s Ojo personal video phone. The purchase pricefor these shares has been fully paid as of December 31, 2004 by anequivalent reduction in the development and initial procurement payments thatwould otherwise be due to Mototech. The value of this transaction was $600(based on the closing stock price of $0.96 on the date of the transaction) ofwhich $200 was recorded as an expense for the year ended December 31, 2003 and$400 was expensed for the year ended December 31, 2004. Mototech is anaffiliate of Accton Technology Group. Mototech currently manufactures anddistributes a full range of high performance high speed data and computernetworking products, including cable set top boxes, home gateways, wirelessLANs, hubs, switches, routers, and other related products. In addition, in April 2004,Mototech invested $1,000 to purchase 666,666 shares of newly issued commonstock at $1.50 per share.

 

In June 2004, WorldGate completed aprivate placement of 7,550 shares of Preferred Stock at a stated value of$1,000 per share. The Preferred Stock has attached warrants and conversionoptions. Specifically, the holders of the Preferred Stock may convert theirshares into our common

 

6

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stock at a conversion price of $2.35 per share. In addition, theCompany may force conversion of the Preferred Stock into common stock if theCompany achieves certain price targets for its common stock and satisfaction ofcertain other conditions. In either event the conversion price is subject toadjustment in the event the Company enters into another transaction which isdilutive to the subject transaction. As part of this transaction, the Companyhas also issued five-year warrants to purchase 1,606,383 shares of the Company’scommon stock, one-half of the warrants at an exercise price of $2.69 per shareand the remaining half at an exercise price of $3.14 per share. The investorsalso received an additional investment right, for a limited period of time, topurchase 1,606,383 additional shares of common stock shares at $3.14 a share.  The preferred stock has a dividend rate of 5%per annum, payable quarterly, either by cash or through the issuance of commonstock at the Company’s option. The Preferred Stock has a staged maturity overthree years with one-third of the preferred stock to be redeemed after 18months, one-third after 24 months and one-third after 36 months, and may beredeemed at maturity in cash or, subject to certain conditions, through theissuance of common stock, at the Company’s option (with stock payments beingmade at the then current market price). Of the 7,550 preferred shares issuedunder this private placement, all but 1,000 shares have been redeemed as of September 30,2005. In December 2004 and January 2005, 1,606,383 additionalinvestment rights were exercised, resulting in an incremental investment of$5,044.

 

In December 2004, WorldGate completed aprivate placement of 208,333 shares of our common stock to K.Y. Chou, Presidentand General Manager of Mototech, at a sales price of $2.40 per share, whichresulted in additional gross proceeds to the Company of $500. In connectionwith this placement the Company granted warrants to Mr. Chou to purchaseup to 62,500 shares of our common stock at an exercise price of $2.88 pershare.

 

In August 2005, the Company completed aprivate placement of $17,500 of its common stock and warrants with severalinstitutional investors. The Company issued 4,666,664 shares of its commonstock at $3.75 per share to the participating investors. The Company alsoissued five-year warrants to purchase a total of 1,633,333 shares of its commonstock, with an exercise price of $5.00 per share. The investors also receivedan additional investment right, for a period of 60 days from the time theshares become registered, to purchase 1,554,000 additional shares of commonstock at $4.12 per share. The accounting for these warrants and investmentrights is established by analogy to APB No. 14 *“Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants,”*which addresses detachable stock purchase warrants issued in conjunction withconvertible debt and prescribes that such warrants be accounted for asadditional paid in capital measured at fair value. 

 

The Company had $5,155 of liabilities and itsassets are not pledged as collateral as of September 30, 2005. Theseliabilities include $1,918 of dividends, detachable warrants and conversionoptions related to the Company’s private placement of Preferred Stock.

 

Our Company has suffered recurring lossesfrom operations and had a net accumulated deficiency of $218,000 as of December31, 2004, and these issues raise substantial doubt about our Company’s abilityto continue as a going concern. Our short term cash requirements andobligations include inventory, accounts payable and capital expenditures from continuingoperations, operating expenses, and the redemption of stock, of which $333 isrequired to be redeemed in December 2005 and $333 in June 2006,although these redemptions can be made in common stock if certain conditionsare met. We expect, based on our internal forecasts and assumptions relating toour operations (including among others, assumptions regarding our short termcash requirements and our projected revenue growth) that we have sufficientcash on hand to meet our obligations for at least the next twelve months.

 

Our ability to generate cash is dependant onthe sale of our Ojo product and on obtaining cash through capital markets. Webegan generating revenue from commercial shipment of our Ojo product in April 2005and we expect revenues to increase as the product continues to roll out to themarketplace. This increased level of sales activity is projected to have apositive impact on our cash flows from operations, which will support ourability to meet our obligations beyond the next twelve months. Given that ourvideo phone business involves the development of a brand new product line withno market penetration, in an undeveloped market sector, no assurances can begiven that sufficient sales, if any, will materialize.

 

7

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Additionally, as needed, we plan to generatecash upon the sale of our Ojo product and on obtaining cash through capitalmarkets for funding. No assurances can be given that, if pursued, additionalfinancing transactions can be consummated. We continue to evaluatepossibilities to obtain additional financing through public or private equityor debt offerings, bank debt financing, asset securitizations, or from othersources, should we need to obtain such financing. Such additional financingwould be subject to the risk of availability, may be dilutive to ourshareholders, or could impose restrictions on operating activities. There canbe no assurance that this additional financing will be available on termsacceptable to us, if at all.

 

We, however, remain hopeful that sufficientsales will materialize and/or that sufficient funding can be developed throughongoing operations or additional financings to continue our operations beyondthe next twelve months.

 

Our long term cash requirement obligationsare primarily comprised of the items noted above. We have no long term debt andour contractual cash requirements and obligations existing beyond the nexttwelve months are comprised solely of operating lease commitments and redemptionof preferred stock, which are not considered material. We have limited capacityto further reduce our workforce and scale back on capital and operationalexpenditures to decrease our cash usage.

 

3.                                       RecentAccounting Pronouncement.

 

In November 2004, the FASB issued SFASno. 151 “Inventory Costs” which amends the guidance in ARB No. 43, Chapter4 “Inventory Pricing,” to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage).  Paragraph 5 of ARB 43, Chapter 4, previouslystated that under some circumstances, items such as idle facility expense,excessive spoilage, double freight and rehandling costs may be so abnormal asto require treatment as current period charges.”  SFAS No. 151 requires that those itemsbe recognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.”  In addition,SFAS No. 151 requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities.  SFAS No. 151 iseffective for inventory costs incurred during fiscal years beginning after June 15,2005.  Earlier application is permittedfor inventory costs incurred during fiscal years beginning after the date SFAS No. 151was issued.  SFAS No. 151 is to beapplied prospectively.  The Company doesnot expect the adoption of SFAS No. 151 to have a material effect on itsconsolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 153“Exchanges of Nonmonetary Assets” which amends APB Opinion No. 29, “Accountingfor Nonmonetary Transactions.”  APB No. 29is based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of the assets exchanged.  The guidance in that Opinion, however,included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance.  A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange.  SFAS No. 153 is effective fornonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005.  Earlier application is permittedfor nonmonetary asset exchanges occurring in fiscal periods beginning after thedate SFAS No. 153 was issued.  SFAS No. 153is to be applied prospectively.  TheCompany does not expect the adoption of SFAS No. 153 to have a materialeffect on its consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” that focuses primarily on accounting fortransactions in which an entity obtains employee services in share-basedpayment transactions. This statement replaces SFAS No. 123, “Accountingfor Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” Beginning with our annual periods that beginafter June 15, 2005, we will be required to expense the fair value ofemployee stock options and similar awards. As a public company, we are allowedto select from two alternative transition methods, each having different reportingimplications.

 

Subsequently, in April 2005, the SECissued Release 2005-57, which allows companies to implement Statement No. 123(R) at the beginning of their next fiscal year, instead of the next reportingperiod that begins after June 30, 2005 as disclosed in the originalstatement No. 123 (R) release in December 2004. We are currentlyevaluating the impact of this standard and its transitional alternatives.

 

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In March 2005, the Financial AccountingStandards Board (FASB) issued Interpretation No. 47 (FIN 47) to clarifythe guidance included in SFAS No. 143, “Accounting for Asset RetirementObligations”.  FIN 47 requires companiesto recognize a liability for the fair value of a legal obligation to performasset retirement activities that are conditional on a future event if theamount can be reasonably estimated.  Ifamounts cannot be reasonably estimated, certain disclosures will be requiredabout the unrecognized asset retirement obligations.  The interpretation is required to be adoptedin the first quarter of 2006.  We arecurrently evaluating the interpretation to determine the effect on ourfinancial statements and related disclosures.

 

In May 2005, SFAS No. 154, “AccountingChanges and Error Corrections – replacement of APB Opinion No. 20 and FASBStatement No. 3,” (SFAS No. 154) was issued. SFAS No. 154changes the accounting for and reporting of a change in accounting principle byrequiring retrospective application to prior periods’ financial statements ofchanges in accounting principle unless impracticable. SFAS No. 154 iseffective for accounting changes made in fiscal years beginning after December 15,2005. The Company does not expect the adoption of SFAS No. 154 to have amaterial impact on its results of operations, financial position or cash flows.

 

4.                                       Inventories.

 

Inventoriesas of September 30, 2005 and December 31, 2004 are summarized asfollows:

 
| ** **                                  | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Raw material (from discontinued operations) |       | $                           | 0          |                       | $          | 1,622 |   |
| Finished goods (from continuing operations) |       | 255                         |       | 46                         |       |
| Total Inventory                             |       | 255                         |       | 1,668                      |       |
| Inventory Reserve                           |       | 0                           |       | (1,622                     | )          |
| Inventory, net                              |       | $                           | 255        |                       | $          | 46 |   |

 

5.                                       Accountingfor Preferred Shares and Derivative Shares

 

In June 2004, WorldGate completed aprivate placement of Preferred Stock. The Preferred Stock has a dividend rateof 5% per annum, payable quarterly, either by cash or through the issuance ofcommon stock at the Company’s option. The Preferred Stock has a staged maturityover three years with one-third of the Preferred Stock to be redeemed after 18months, one-third after 24 months and one-third after 36 months, and may beredeemed at maturity in cash or, at the Company’s option, subject to certainconditions that may not be solely under the control of the Company, through theissuance of the number of shares of common stock determined by dividing theliquidation preference of the preferred shares by the then current marketprice. If the effectiveness of the registration statement lapses, the Companyceases to be listed on certain specified exchanges and trading in the Company’sstock is suspended or a change in control occurs with respect to the Company,the Company may be required to settle redemption of the preferred stock with cashinstead of its common shares. Furthermore, since the market price of theCompany’s common stock cannot be predicted, the actual number of shares of theCompany’s common stock that will be required if a redemption is made throughthe issuance of common stock, can also not be predicted. Similarly the amountof the cash penalties may not be determinable until such time as the eventtriggering the cash payment is cured or removed.

 

The preferred stock has embedded conversionoptions. Specifically, the holders of the Preferred Stock may convert theirshares into the Company’s common stock at a conversion price of $2.35 pershare. In addition, the Company may force conversion of the Preferred Stockinto common stock if the Company achieves certain price targets for its commonstock and satisfaction of certain other conditions, such as the existence of aneffective registration statement. In either event the conversion price issubject to adjustment if, at any time after the date the preferred shares wereissued, the Company issues or sells, or is deemed to have issued or sold, anyshares of the Company’s common stock for per share consideration less than theconversion price of the preferred shares on the date of such issuance or sale.Accordingly, the number of common shares issuable upon the conversion of thepreferred shares cannot be predicted. Furthermore, net-cash settlement may berequired in the event of conversion default under certain circumstances thatmay not be solely under the control of the Company. If the effectiveness of theregistration statement lapses, the Company ceases to be listed on certainspecified exchanges and trading in the Company’s stock is suspended or a changein control occurs with respect to the

 

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Company, the Company may be required to settle a conversion of thepreferred stock with cash instead of its common shares.

 

Also as part of the private placement theCompany issued five-year warrants to purchase up to 803,190 shares of ourcommon stock at an exercise price of $2.69 per share and five-year warrants topurchase up to 803,190 shares of our common stock at an exercise price of $3.14per share. The investors also received an additional investment right, for alimited period of time, to purchase 1,606,383 additional shares of common stockshares at $3.14 a share. This exercise price of the warrants is subject toadjustment if, at any time after the date the warrants were issued, the Companyissues or sells, or is deemed to have issued or sold, any shares of the Company’scommon stock for per share consideration less than the exercise price of thewarrants on the date of such issuance or sale. Accordingly, the number of common shares that will be issued upon theexercise of the warrants cannot be predicted. As of September 30, 2005, 125,000 warrants exercisable at $2.69 hadbeen exercised and 51,915 warrants exercisable at $3.14 had beenexercised.  All of the additionalinvestment rights had been exercised as of September 30, 2005.

 

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Of the 7,550 preferred shares issued underthis private placement, 1,625 shares were redeemed in the quarter ended September 30,2005 and all but 1,000 shares have been redeemed as of September 30, 2005.

 

With respect to the Company’s accounting forthe Preferred Stock, EITF Topic D-98, paragraph 4, states that Rule 5-02.28of Regulation S-X requires securities with redemption features that are notsolely within the control of the issuer to be recorded outside of permanentequity. As described above, the terms of the Preferred Stock include certainredemption features that may be triggered by events that are not solely withinthe control of the Company, such as a potential failure in the Company’s abilityto maintain an effective registration statement. Furthermore, the actual numberof shares of common stock required to satisfy redemption is based upon themarket value of the common stock at the time of the redemption, which cannot bepredicted. Accordingly, the Company has classified the Preferred Stock astemporary equity and the value ascribed to the redeemable preferred stock uponinitial issuance, i.e. at June 23, 2004, was the amount received in thetransaction minus the fair value ascribed to the conversion options andwarrants. The initial value of the redeemable preferred stock is accreted up tothe redemption value (the amount received in the transaction) over the futurerelevant periods using the interest method. The value of the redeemable preferredstock at September 30, 2005 was $702.

 

The terms of the Preferred Stock includecertain conversion options that represent derivative financial instrumentsunder paragraph 12 of SFAS No. 133 and thus were separated from thePreferred Stock and valued using the Black-Scholes option pricing model. Theconversion options include certain provisions that could result in a variablenumber of shares to be issued upon conversion, adjustment to the strike priceat which conversion shares will be determined, or the requirement for theCompany to settle the conversion options in cash. EITF 00-19, “Accounting forDerivative Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock,” state that if the conversion options require net cash settlement in theevent of circumstances that are not solely within the Company’s control theyshould be classified as a liability measured at fair value on the balancesheet.

 

The terms of the five-year warrants includecash penalty provisions in the event that the Company fails to meet itsobligations to deliver registered shares to the warrant holder upon exerciseand an anti-dilution provision that could result in a variable number of sharesto be issued upon warrant exercise. Additionally, the terms and conditions ofthe warrants provide for net settlement via cashless exercise whereby theshares delivered to the warrant holder would be readily convertible to cash. Inaccordance with EITF 00-19 and given the terms and conditions of thewarrants as outlined above, the Company has classified the warrants as aliability on its balance sheet measured at fair value using the Black-Scholesoption pricing model.

 

The Company accounts for both the conversionoptions and warrants using the fair value method at the end of each quarter,with the resultant gain or loss recognition recorded against earnings. Both thewarrants and conversion options are valued using the Black-Scholes valuationmodel. Actual period close common stock prices, applicable volatility rates,and the period close risk-free interest rate for the instrument’s expectedremaining life (continuously compounded), are the key assumptions used in thevaluation calculation. The WorldGate share price changed from $3.24 per shareas of June 30, 2005 to $2.52 per share at September 30, 2005, makingthe warrants and preferred stock conversion elements less valuable, andtherefore less costly, relative to their strike price. The result was a $1,759non cash gain for the quarter ended September 30, 2005.

 

6.                                       WarrantyReserve.

 

We provide a warranty covering defectsarising from the sales of our video phone product. This warranty is limited toa specific time period. The Company, as of September 30, 2005, establishedan initial reserve of $336 that is based on a percentage of product sales. Asof September 30, 2005, the Company has not incurred any material warrantycosts related to our product. Warranty costs are charged to cost of revenueswhen they are probable and reasonably estimable. While we believe our estimateat September 30, 2005 is reasonable and

 

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adequate, it is subject to change based on our future sales andexperience, which may require an increase or decrease in our reserve.

 

7.                                       Stock-BasedCompensation (Restated).

 

The Company accounts for stock-basedcompensation in accordance with Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure.”

 

TheCompany applies Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” and related interpretations in accounting forits plans, and accordingly, no compensation cost has been recognized for theCompany’s fixed stock based compensation. Had compensation cost been determined consistent with SFAS No. 123,as amended by SFAS No. 148, the Company’s net loss would have beenincreased to the following pro forma amounts:

 
| ** **                                                                                                                          | ** ** | **For the Three Month Period  Ended September 30** | ** ** | **For the Nine Month Period  Ended September 30** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2005**                                                | ** ** | **2004**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                |       |                                                    |       |                                                   |       |   |   | **(as restated)** |   |
| Net (loss)  income                                                                                                                  |       | (1,397                                                  | )          | (1,510                                                 | )          | 831 |   | (5,562 | ) |
| Add:  Stock-based employee compensation expense included in reported net (loss)  income, net of related tax effects                 |       | 0                                                       |       | 0                                                      |       | 0 |   | 0 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of tax of $0 |       | (215                                                    | )          | (544                                                   | )          | (615 | ) | (1,627 | ) |
| Pro forma  net (loss) income                                                                                                        |       | $                                                       | (1,612     | )                                                      | $          | (2,054 | ) | $ | 216 |   | $ | (7,189 | ) |
|                                                                                                                                |       |                                                    |       |                                                   |       |   |   |   |   |
| Net (loss)  income per share:                                                                                                       |       |                                                    |       |                                                   |       |   |   |   |   |
| Net (loss)  income:                                                                                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                                                                                               |       | $                                                       | 0.04       |                                                   | $          | (0.05 | ) | $ | 0.02 |   | $ | (0.20 | ) |
| Fully  Diluted                                                                                                                      |       | $                                                       | 0.04       |                                                   | $          | (0.05 | ) | $ | 0.02 |   | $ | (0.20 | ) |
| Net (loss)  income – pro forma:                                                                                                |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                                                                                               |       | $                                                       | 0.04       |                                                   | $          | (0.07 | ) | $ | 0.01 |   | $ | (0.26 | ) |
| Fully  Diluted                                                                                                                      |       | $                                                       | 0.04       |                                                   | $          | (0.07 | ) | $ | 0.01 |   | $ | (0.26 | ) |

 

Such proforma disclosures may not be representative of future compensation expensebecause options vest over several years and additional grants are made eachyear.

 

8.                                       Commitmentsand Contingencies.

 

*Leases*

 

In 1998 the Company entered into a leasingarrangement for a building with an entity formed by non-employee investors. TheCompany stopped paying rent on this lease in May 2003, and in lieu of rentpayments the Company’s landlord, 3190 T General, Inc. (an entity formed bynon-employee investors in the Company), began drawing down the security depositfor the facility. Prior to stopping rent payments, the Company had commencednegotiations with its landlord for an amendment of its lease to reduce thespace commitment and the rent payable. These negotiations were not successful,and in September 2003, the Company’s landlord filed an action in the Courtof Common Pleas, Bucks County, Pennsylvania to perfect its interest to takepossession of the Company’s facility, and to establish damages for past rentand expenses. Although a judgment was granted allowing the Company’s landlordto regain possession of the facility, the Company remained in the facility andcontinued negotiations with its landlord. During 2004, the landlord deeded thefacility to its mortgage holders and negotiations commenced with GMAC asrepresentative for the mortgage holders. These negotiations were successful andin November 2004 the Company’s lease was amended with an effective date ofJune 2004 to reduce the lease obligation in line with the Company’s thencurrent space requirements, and to bring the Company current with respect toall outstanding back rent.  Subsequently,GMAC sold the building and we have negotiated a new lease with the new owner on

 

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September 1, 2005. The current lease covers 42,500 square feet atan annual rate of $11 per square foot, cancelable by either party with 8 monthsnotice, with a termination by tenant also including six months termination fee.

 

In November 2003, the Company enteredinto a 60 month lease for office equipment. As of September 30, 2005 thereremains a total of $18 to be paid over the remaining period of the lease.

 

*Significant Agreements and Transactions*

 

Net revenues from continuing operationsrecognized from an investor were approximately $2,265 and $106, respectively,for the three months ended September 30, 2005 and 2004, and approximately$3,841 and $106, respectively, for the nine months ended September 30,2005 and 2004. This investor accounted for approximately 99% of the revenuesfor the three and nine months ended September 30, 2005. This investorpreviously provided a cash advance against product shipments. The balance ofthis advance received from this investor was $0 as of September 30, 2005.Accounts receivable from this investor were $1,176 as of September 30,2005 and $0 at December 31, 2004. In April and September 2004,we issued to this investor warrants to purchase shares of our common stock,with the April warrants having an exercise price of $1.4375 per share andthe September warrants having an exercise price of $1.75 per share.Included with General and Administrative expenses in September 2004 were$606 of expenses relating to the valuation of these warrants. This valuationwas determined by using the Black-Scholes fair value option model. Thefollowing assumptions were used: expected volatility of 65%; average risk-freeinterest rate of 3.43 percent; dividend yield of 0%; and an expected life of5.0 years.

 

The Company has a current two year agreementwith an investor to provide the Company with engineering and developmentsupport. As a result of this agreement, the Company has expensed approximately$97 (included in continuing operations) and $0 (included in discontinuedoperations), for the three months ended September 30, 2005 and September 30,2004, respectively, and approximately $255 (included in continuing operations)and $0 (included in discontinued operations), for the nine months ended September 30,2005 and 2004, respectively. Accounts payable to this investor amounted to$1,097 and $117 at September 30, 2005 and December 31, 2004,respectively. This agreement provided for contracted services, includinghardware and software development, and the creation and development of tools tofacilitate the Company’s engineering efforts. This agreement does not providefor ongoing royalties, purchase provisions, or for any requirement to provideadditional funding to the Company.

 

On April 28, 2004, we entered into aDevelopment and Distribution Agreement with General Instrument Corporationd/b/a the Broadband Communication Sector of Motorola, Inc., or Motorola.In connection with the Development and Distribution Agreement with Motorola, weissued warrants to Motorola to purchase 600,000 shares of our common stock,300,000 at an exercise price of $1.4375 per share and 300,000 at an exerciseprice of $1.75, and agreed to issue additional warrants to purchase up to anadditional 1,650,000 shares of our common stock, upon the achievement ofcertain product and sales milestones, at an exercise price based upon the averageclosing sales price of our common stock during the 20 day period precedingthe issuance of each warrant.

 

In June 2004,WorldGate completed a private placement of 7,550 shares of Preferred Stock at astated value of $1,000 per share. The Preferred Stock has attached warrants andconversion options. Specifically, the holders of the Preferred Stock mayconvert their shares into our common stock at a conversion price of $2.35 pershare. The private placement includes numerous provisions intended to protectthese institutional investors including a cash payment penalty of 1.0% permonth for unredeemed preferred shares once registration of the shares lapse anduntil the registration again becomes effective. A registration statement forthese securities was originally filed containing fiscal 2003 financial statements,and an amendment to this registration statement which would include fiscal 2004financial statements has not yet been filed. 

 

In August2005, the Company completed a private placement of $17,500 of its common stockand warrants with several institutional investors. The Company issued 4,666,664shares of its common stock at $3.75 per share to the participating investors.The Company also issued five-year warrants to purchase a total of 1,633,333shares of its common stock, with an exercise price of $5.00 per share.  The private placement includes numerousprovisions intended to protect these institutional investors including a cashpayment penalty of 1.5% per month for the period above 120  days from the effective date of the Agreement that the shares in the transaction failto be registered.  As of September 30,2005, no such penalty had been incurred. On December 1, 2005 the shares underthis private placement had not been registered and until such time as theshares become registered the Company is subject to the penalty provision underthis private placement.

 

9.                                       Net(Loss) Income per Share.

 

Basic and diluted net (loss) income percommon share is computed by dividing the net (loss) income available to commonstockholders for the period by the weighted average number of shares of commonstock outstanding during the period.  Thecalculation of diluted net (loss) income per common share excludes potentialcommon shares if the effect is antidilutive. Potential common shares comprised of shares of common stock issuableupon the exercise of stock options and warrants and the conversion of preferredstock.  For the nine month periods ended September 30,2005 and 2004, there would have been a potential additional 4,887,190 and13,590,347, respectively, shares assumed to be converted, that would have adilutive effect, if the Company had income from continuing operations, or ifthe options’ exercise price was less than the average market price of thecommon shares.

 

10.           Revenue recognition

 

Revenue is recognizedwhen persuasive evidence of an arrangement exists, the price is fixed ordeterminable, the collectibility is reasonably assured, and the delivery andacceptance of the equipment has occurred or services have been rendered.  Management exercises judgment in evaluatingthese factors in light of the terms and conditions of its customer contractsand other existing facts and circumstances to determine appropriate revenuerecognition. Due to our limited commercial sales history, our ability toevaluate the collectibility of customer accounts requires significant judgment.The Company evaluates its equipment customer, and service customers’, accountsfor collectibility at the date of sale and on an ongoing basis.

 

Presently the Company hasonly one customer for the purchase of its equipment and the agreement with thiscustomer includes several elements relevant to revenue recognition including: (a) Thecustomer has no general right to return the product.  (b) The customer can earn warrants uponthe purchase of significant video telephony units and the value of thesewarrants would result in a reduction of recognized revenue (the value of thesewarrants is routinely monitored by the Company and is currently deemed to beinsignificant, however, should the value of these warrants become material anoffset would be made against revenues). (c) Penalties are payable to thecustomer if certain excessive field failure rates are exceeded.  (d) The Company and the customer sharein the benefit achieved by product cost reductions. (e) Penalties are payableto the customer if the Company fails to deliver shipments on a timely basis. (f) TheCompany extends to the customer a limited product warranty for a term not toexceed three years (the Company maintains a warranty reserve based upon thepercentage of product sales consistent with industry comparable failure ratesand the warranty period provided by the agreement.)

 

Revenues are also offsetwith a reserve for any price refunds and consumer rebates consistent with theEmerging Task Force (“EITF”) Issue 01-9, Accounting for Consideration Given bya vendor to a Customer.

 

As anincentive to promote delivery of the units, a special product launch discountwas provided by the Company to our distributor as a quantity restrictedreduction to the unit contract based price in effect. For the three and ninemonths ended September 30, 2005, this discount was $831 and $1,222,respectively. In addition, the Company has offered a forward pricing program toour distributor and a rebate program to consumers, as further incentives forthe holiday season. These incentive programs begin in the fourth quarter of2005 and will terminate during the first quarter of 2006. Consistent with theEmerging task Force (“EITF”) Issue 01-9, Accounting for Consideration Given bya vendor to a Customer, the Company has offset the September 30, 2005revenue by $212 with a reserve for the total estimated liability for theforward pricing program.  The liabilityassociated with the rebate, $91, will be recorded in the quarter ending December 31,2005.  The total of the “Product launchdiscount, rebate and refunds for the three and nine months ended September 30,2005 were $1,043 and $1,434, respectively.

 

11.           Risks and uncertainties

 

Our primaryline of business is the development of video phone products and technology. Weare still in the process of launching our first product based on thistechnology and, although we have realized some revenues for the commercial saleof our product, the revenues to date have not been substantial. Given the earlystage of our product and the lack of operating history in the video phonebusiness, it is difficult to predict our future results.

 

We haveentered into a six year distribution agreement with Motorola, Inc. for themarketing and distribution of our Ojo video phone. This agreement provides forMotorola to be WorldGate’s exclusive distributor of its broadband video phoneproducts and for WorldGate to be Motorola’s exclusive supplier of its broadbandvideo phone products.  Although theagreement requires Motorola to provide for certain marketing and promotionalactivities for the Ojo video phone, there are no required sales quotas for theagreement to remain in effect, and Motorola controls the volume of theCompany’s products being distributed. Neither party can terminate the agreement except in cases of uncuredbreaches of the agreement or as a result of insolvency events suffered by theother party. After a period of 18 months following the commercial availabilityof the Ojo video phone the mutual exclusivity will terminate unless Motorolaelects to continue the mutual exclusivity after having achieved certain minimumsales targets for the Ojo video phone. Motorola may, however, at its option,elect to terminate the exclusivity at any time. In the event mutual exclusivity terminates or is terminated, then for aperiod of twelve months thereafter, WorldGate will continue to be Motorola’sexclusive supplier of broadband video phones but will be free to sell videophones to customers other than certain defined Motorola accounts. During thistwelve month period, Motorola has a right of first refusal to accept and fillany orders for video phone products that WorldGate obtains from non-Motorolaaccounts, and is obligated to use good faith efforts to solicit and acceptproduct orders from Motorola accounts in a commercially reasonable manner.During any period of exclusivity under this agreement we are reliant uponMotorola and its distribution partners, including, for example, wholesalers,retailers and service providers, to provide the worldwide sales anddistribution of the Ojo video phone. If Motorola and its partners are notsuccessful, or if their activities do not lead to significant sales of ourproduct, our operating results will be adversely affected, our revenue could besignificantly reduced and we could lose potential customers.

 

We also dependon relationships with third parties such as contract manufacturing companies,chip design companies and others who may be sole source providers of keycomponents and services critical for the product we are developing in our videophone business. A formal relationship with Mototech, Inc. (not an affiliate ofMotorola) has been established for the volume manufacture of Ojo. Mototech iscurrently the sole volume manufacturer of Ojo. Our agreement with Mototechallows either party to terminate the agreement with 90 days prior notice.  If Mototech, Inc. or other providers ofcomponents and/or manufacturing services do not produce these components orprovide their services on a timely basis, if the components or services do notmeet our specifications and quality control standards, or if the components orservices are otherwise flawed, we may have to delay product delivery, or recallor replace unacceptable products. In addition, such failures could damage ourreputation and could adversely affect our operating results. As a result, wecould lose potential customers and any revenues that we may have at that timemay decline dramatically.

 

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

 

**FORWARD-LOOKINGAND CAUTIONARY STATEMENTS**

 

We may from time to time make written or oralforward-looking statements, including those contained in the followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.  The words “estimate,” “project,”“believe,” “intend,” “expect,” and similar expressions are intended to identifyforward-looking statements, although not all forward-looking statements containthese identifying words.  In order totake advantage of the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, we are hereby identifying certain importantfactors that could cause our actual results, performance or achievement todiffer materially from those that may be contained in or implied by anyforward-looking statement made by or on our behalf.  The factors, individually or in the aggregate,that could cause such forward-looking statements not to be realized include,without limitation, the following: (1) difficulty in developing andimplementing marketing and business plans, (2) industry competitionfactors and other uncertainty that a market for our products will develop, (3) challengesassociated with broadband service operators (including, uncertainty that theywill offer our products, inability to predict the manner in which they willmarket and price our products and existence of potential conflicts of interestsand contractual limitations impeding their ability to offer our products), (4) continuedlosses, (5) difficulty or inability to raise additional financing on termsacceptable to us, (6) departure of one or more key persons, (7) delistingof our Common Stock from the NASDAQ Small Cap Market, (8) changes inregulatory requirements, and (9) other risks identified in our filingswith the Securities and Exchange Commission. We caution you that the foregoing list of important factors is notintended to be, and is not, exhaustive. We do not undertake to update any forward-looking statement that may bemade from time to time by or on our behalf.

 

Results of Operations:

 

General.

 

Our ITV business has historically accountedfor substantially all of our revenue. In the third quarter of 2003, wecompleted a sale of significant assets, including our ITV intellectual propertyrights and our membership interest in TV Gateway, LLC. This transaction markeda shift in our business away from the ITV business and toward a new video phoneproduct and related business. Although we continued to support our remainingITV business into the first quarter of 2004, the development of our video phoneand product became a primary business focus.

 

Our video phone business has not producedsignificant revenues to date. The extent and timing of future revenues for ourbusiness depends on several factors, including the rate of market acceptance ofour products and the degree of competition from similar products. We cannotpredict to what extent our video phone product will produce revenues, or when,or if, we will reach profitability.

 

Critical Accounting Policies and Estimates.

 

The consolidated financial statements areprepared in conformity with accounting principles generally accepted in the UnitedStates of America.  The preparation ofthese financial statements required management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

The significant accounting policies of theCompany are described in the notes to the consolidated financial statementsincluded in the annual report on Form 10-K.  Judgments and estimates of uncertainties arerequired in applying the Company’s accounting policies in many areas.  Following are some of the areas requiringsignificant judgments and estimates:  revenuerecognition, accounts receivable, inventories, cash flow and valuationassumptions in performing asset impairment tests of long-lived assets, value ofredeemable preferred stock, related warrants and conversion options.

 

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Discontinued Operations

 

During the first quarter of 2004, wetransitioned from the business of developing and selling interactivetelevision, or ITV, technology, products and services for use in conjunctionwith cable TV broadband networks (the “ITV business”) to the development of ourvideo phone products as our primary business focus. During the three and ninemonths ended September 30, 2004, the Company had revenues from ourdiscontinued ITV business operations of $0 and $82, respectively. Cost ofrevenues for the three and nine months ended September 30, 2004 was $0 and$43, respectively. Operating expenses from discontinued operations were $0 and$16, respectively, for the three and nine months ended September 30, 2004.For the three and nine months ended September 30, 2004, other income, netof other expenses, relating to our discontinued ITV business operations were $7and $13, respectively. There were no revenues, cost of revenues, operatingexpenses, and other income and other expenses from discontinued operationsduring the three and nine months ended September 30, 2005.

 

The information in our quarter-to-quartercomparisons below represents only our results from continuing operations.

 

Three and nine Months Ended September 30, 2005 and September 30,2004 (Restated)

 

Revenues.

 

Revenues.  Total gross revenues from continuingoperations for the three and nine months ended September 30, 2005 were$3,333 and $5,300, respectively. Net revenues for the three and nine monthsended September 30, 2005 were $2,290 and $3,866, respectively. Theserevenues represent deliveries of video phones for pre-market testing, for theinitial launch of video phones for the consumer market and for filling thechannel distribution pipelines prior to the holiday selling season. As anincentive to promote delivery of the units, a special product launch discountwas provided by the Company to our distributor as a quantity restrictedreduction to the unit contract based price in effect. For the three and ninemonths ended September 30, 2005, this discount was $831 and $1,222,respectively. In addition, the Company has offered a forward pricing program toour distributor and a rebate program to consumers, as further incentives forthe holiday season. These incentive programs begin in the fourth quarter of2005 and will terminate during the first quarter of 2006. Consistent with theEmerging task Force (“EITF”) Issue 01-9, Accounting for Consideration Given bya vendor to a Customer, the Company has offset the September 30, 2005revenue by $212 with a reserve for the total estimated liability for theforward pricing program.  The liabilityassociated with the rebate, $91, will be recorded in the quarter ending December 31,2005.  The total of the “Product launchdiscount, rebate and refunds for the three and nine months ended September 30,2005 were $1,043 and $1,434, respectively. 

 

Costs and Expenses.

 

Cost of Revenues. The cost of revenues fromcontinuing operations, which consisted of product and delivery costs relatingto the delivery of video phones, was $2,450 and $3,840, respectively, for thethree and nine months ended September 30, 2005. In addition, included incost of revenues for the three and nine months ended September 30, 2005,is an initial product warranty reserve of $336 (refer to footnote 6 to thefinancial statements). There was no warranty reserve for the same periods in2004. Costs of revenues from continuing operations during the three and ninemonths ended September 30, 2004 were $50.

 

Engineering and Development.  Engineering and development expensesprimarily consist of compensation, and the cost of design, programming,testing, documentation and support of the Company’s video phone product.  Engineering and development costs were $1,468for the three months ended September 30, 2005, compared with $1,038 forthe three months ended September 30, 2004, and $4,146 and $2,637,respectively, for the nine months ended September 30, 2005 and 2004. Thisincrease of $430, or 41%, and $1,509, or 57%, respectively, for the three andnine months ended September 30, 2005 over 2004, reflects the Company’sincreased concentration of its engineering staff, and related costs, for thefurther and continuing development of its video phone product.

 

Sales and Marketing.  Sales and marketing expenses consistprimarily of compensation, attendance at conferences and trade shows, travelcosts, promotions and other marketing programs related to the marketing of theCompany’s video phone product.  Sales andmarketing costs were $392 for the three months ended September 30, 2005,compared with $324 for the three months ended September 30, 2004, and$1,410 and $924, respectively, for the nine months ended September 30,2005 and 2004.  This increase of $68, or21%, and $486, or 53%, respectively, for the three and nine months ended September 30,2005 over 2004, reflects the increased effort of staff, and related marketing,service and promotional expenditures associated with the launch and growth ofthe Company’s video phone business.

 

General and Administrative (Restated).  General and administrative expenses consistprimarily of expenditures for administration, office and facility operations,finance and general management activities, including legal, accounting and professionalfees.  General and administrativeexpenses were $1,248 for the three months ended September 30, 2005,compared with $1,762 for the three months ended September 30, 2004, and$2,982 and

 

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$3,805, respectively, for the nine months ended September 30, 2005and 2004.  This decrease of $514, or 29%,and $823, or 22%, respectively, for the three and nine months ended September 30,2005 over 2004, is attributable to certain expenses incurred during the threeand nine months ended September 30, 2004 that were not incurred during thethree and nine months ended September 30, 2005. These expenses consistedof a non cash charge of $606 reflecting a Black Scholes estimate of the valueof the warrants issued to a related investor in September 2004, an expensefor sales taxes of $125 incurred in the first quarter of 2005, and a reductionin rent expense of $186 and $624, respectively, for the three and nine monthsended September 30, 2005 compared to the three and nine months ended September 30,2004. These decreases were partially offset by increased professional feesincurred of $278 and $516, respectively, for the three and nine months ended September 30,2005 when compared to the same periods in 2004.

 

Interest, Other Income and InterestExpense.  Interest, other income andinterest expense consist of interest earned on cash and cash equivalents, andinterest expense on short-term debt. Interest and other income increased from$37 for the three months ended September 30, 2004 to $292 for the threemonths ended September 30, 2005, and increased from $56 for the ninemonths ended September 30, 2004 to $466 for the nine months ended September 30,2005, primarily due to additional interest income earned on a higher level ofinvested funds and an insurance refund settlement of $36. During the threemonths ended September 30, 2005, the Company earned interest on averagecash balances of approximately $12,890 and incurred interest expense related toits insurance financing. In comparison, during the three months ended September 30,2004 the Company earned interest on average cash balances of approximately$6,693 and incurred interest expense related to its insurance financing. Forthe nine months ended September 30, 2005, the Company earned interest onaverage cash balances of approximately $12,111 compared to $6,049 for the ninemonths ended September 30, 2004.

 

IncomeTaxes.  The Company has incurred netoperating losses since inception and accordingly had no income taxes and hasnot recorded any income tax benefit for those losses.

 

Liquidity and Capital Resources.

 

As of September 30, 2005, our primarysource of liquidity consisted of cash and cash equivalents that are highlyliquid, are of high quality investment grade and have original maturities ofless than 90 days.

 

At September 30, 2005, we had cash andcash equivalents of $21,891 (and no short-term investments) as compared to cashand equivalents of $11,840 (and no short-term investments) at December 31,2004.  Net cash used in continuingoperations was $2,488 for the three months ended September 30, 2005, ascompared to $1,867 used for the same period in 2004. The net cash used incontinuing operations was $8,410 for the nine months ended September 30,2005 as compared to $5,308 used for the same period in 2004.  This increase in net cash used for continuingoperations was primarily attributable to the Company’s increase in expendituresrelated to the video phone business.  TheCompany recorded bad debt expense in the amount of $0 and $16, respectively,from discontinued operations during the three and nine months ended September 30,2004 to reflect its current assessment of the collectability of certainreceivables.

 

Cash provided by financing activities fromcontinuing operations during the three months ended September 30, 2005,totaled $16,966 compared to $12 provided during the same period in 2004. Cashprovided by financing activities from continuing operations during the ninemonths ended September 30, 2005 was $18,889 as compared to $10,378provided during the same period in 2004. Capital expenditures were $107 and$167 for the three months ended September 30, 2005 and 2004,respectively.  For the nine months ended September 30,2005 and 2004 capital expenditures were $428 and $197, respectively.

 

Operations and Liquidity.

 

Todate, the Company has funded operations primarily through private sales ofequity securities and through an initial public offering of common stock in April 1999.  As of September 30, 2005 the Company hadcash, and cash equivalents of $21,891. The operating cash usage from continuing operations for the three monthsended September 30, 2005 and 2004 was $2,488 and $1,867, respectively.Operating cash usage from continuing operations for the nine months ended September 30,2005 and 2004 was $8,410 and $5,308, respectively.  As of September 30, 2005 we have nooutstanding debt and our assets are not pledged as collateral.

 

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TheCompany has funded operations through the private placement of our common stockin January 2004, which provided proceeds of $1,500, the private placementof our common stock in April 2004 providing proceeds of $1,000, the June 2004private placement of our redeemable preferred stock providing proceeds of$7,550, the private placement of common stock in December 2004 providing$500, the exercise of additional investment rights and warrants providing$6,800 in January, February, May and December 2004 and January,February, and April 2005, the exercise by employees and former employeesof options throughout 2004 and January through September 2005providing aggregate proceeds of $1,171, and the August 2005 privateplacement of common stock, together with additional rights and warrants,providing $17,500. We do however have an obligation to pay dividends on, aswell as to redeem, our outstanding Preferred Stock upon maturity, or at theearlier option of a holder of these securities. Under certain limitedcircumstances we may be forced to make such payments and redemptions with cashinstead of shares of our common stock. In such event our ability to fundcontinuing operations would be negatively impacted.

 

Thereport of the independent registered public accounting firm for the year ended December 31,2004 included an explanatory paragraph stating that the Company had sufferedrecurring losses from operations and had a net accumulated deficiency of$218,000, and that these issues raised substantial doubt about the Company’sability to continue as a going concern. Our short term cash requirements andobligations include inventory, accounts payable and capital expenditures fromcontinuing operations, operating expenses, and the redemption of preferredstock, of which $333 is required to be redeemed in December 2005 and $333in June 2006, although these redemptions can be made in common stock ifcertain conditions are met. We expect, based on our internal forecasts andassumptions relating to our operations (including among others, assumptionsregarding our short term cash requirements and our projected revenue growth)that we have sufficient cash on hand to meet our obligations for at least thenext twelve months.

 

Ourability to generate cash is dependant upon the sale of our Ojo product and onobtaining cash through capital markets. We began generating revenue from commercial shipment of our Ojo productin April, 2005 and we expect revenues to increase as the product continues toroll out to the marketplace. This increased level of sales activity isprojected to have a positive impact on our cash flows from operations, whichwill support our ability to meet our obligations beyond the next twelve months.Given that our video phone business involves the development of a new productline with no market penetration, in an underdeveloped market sector, noassurances can be given that sufficient sales, if any, will materialize.

 

Additionally,as needed, we plan to generate cash by turning to the capital markets forfunding. No assurances can be given that, if pursued, additional financingtransactions can be consummated. We continue to evaluate possibilities toobtain additional financing through public or private equity or debt offerings,bank debt financing, asset securitizations, or from other sources, should weneed to obtain such financing. Such additional financing would be subject tothe risk of availability, may be dilutive to our shareholders, or could imposerestrictions on operating activities. There can be no assurance that this additionalfinancing will be available on terms acceptable to us, if at all.

 

Wedo, however, remain hopeful that sufficient sales will materialize and/or thatsufficient funding can be developed through ongoing operations or additionalfinancings to continue our operations beyond the next twelve months.

 

Ourlong term cash requirement obligations are primarily comprised of the itemsnoted above. We have no long term debt and our contractual cash requirementsand obligations existing beyond the next twelve months are comprised solely ofoperating lease commitments and redemption of preferred stock, which are notconsidered material. We have limited capacity to further reduce our workforceand scale back on capital and operational expenditures to decrease our cashusage.

 

In December 2003,WorldGate reached an agreement with Mototech, Inc. (not an affiliate ofMotorola) for the purchase of 625,000 shares of newly issued common stock at$0.80 per share, in return for future design and engineering services by Mototech.WorldGate had previously contracted with Mototech to assist the Company withthe design and volume manufacture of WorldGate’s Ojo personal video phone. Thepurchase price for these shares has been fully paid as of December 31,2004 by an equivalent reduction in the development and initial procurementpayments that would otherwise be due to Mototech. The value of this transactionwas $600 (based on the closing stock price of $0.96 on the date of thetransaction) of which $200 was recorded as an expense for the year endedDecember 31, 2003 and $400 was expensed for the year ended December 31, 2004.Mototech is an affiliate of Accton Technology Group, a group of Taiwanesemanufacturers that we believe are well-known in the electronics industry.Mototech currently manufactures and distributes a full range of highperformance high speed data and computer networking products, including cableset top boxes, home gateways, wireless LANs, hubs, switches, routers, and otherrelated

 

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products.In addition, in April 2004, Mototech invested $1,000 to purchase 666,666shares of newly issued common stock at $1.50 per share.

 

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ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Interest Rate Risk.  Our exposure to market risk related tochanges in interest rates relates primarily to our investment portfolio.  We invest in instruments that meet high creditquality standards, and we limit the amount of credit exposure with respect toany one issue, issuer and type of investment.

 

As of September 30, 2005, the Company’scash and cash equivalents were $21,891, having an original maturity of lessthan 90 days, and it had no short-term investments.  Due to the average maturity and conservativenature of our investment portfolio, management believes a sudden change ininterest rates would not have a material effect on the value of the portfolio.Management estimates that had the average yield of our investments decreased by100 basis points, our interest income for the nine months ended September 30,2005 would have decreased by approximately $87. This estimate assumes that thedecrease occurred on the first day of 2005 and reduced the yield of eachinvestment instrument by 100 basis points. The impact on our future interest income of future changes in investmentyields will depend largely on our total investments.

 

Foreign Currency Exchange Risk.  Although we transact business in variousforeign countries, the principal portion of our business is in the UnitedStates and substantially all of our revenues and costs to date have beendenominated in U.S. dollars.  Althoughour agreement with Mototech (not an affiliate of Motorola), our contractmanufacturer in Taiwan, is denominated in U.S. dollars, their materialacquisition costs are subject to exchange rate changes that could impact ourproduct costs.

 

ITEM 4.  CONTROLS AND PROCEDURES.

 

As of the endof the period covered by this Form 10-Q, our management, with the participationof our chief executive officer and chief financial officer, conducted anevaluation of the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of1934, as amended (the “Exchange Act”)).

 

Based on thatevaluation, our chief executive officer and chief financial officer determinedthat we have a material weakness (as defined under the standards established bythe American Institute of Certified Public Accountants) that exists withrespect to our reporting of complex transactions. As a result of this materialweakness, on November 17, 2004 we restated our financial statements in ourannual and quarterly reports from our Form 10-Q for the quarter ended March 31,2004 through this report.

 

To addressthis material weakness, we have engaged outside experts to provide counsel andguidance in areas where we cannot economically maintain the required expertiseinternally (e.g., with the appropriate classifications and treatments ofcomplex and non-routine transactions).

 

As a result ofthe material weakness identified with respect to our reporting of complextransactions, the chief executive officer and chief financial officer concludedthat our disclosure controls and procedures are not designed and effective inensuring that the information required to be disclosed by our company in thereports that we file and submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Commission’srules and forms.  Except as identifiedabove, there have been no changes in our internal control over financialreporting that occurred during the quarter ended September 30, 2005, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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PART II.OTHER INFORMATION

 

(Dollar Amounts are inThousands, Except per Share Amounts)

 

ITEM 1.  LEGAL PROCEEDINGS.

 

None

 

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

 

On August 3, 2005, the Company completeda private placement of $17,500 of its common stock and warrants with severalinstitutional investors. The Company issued 4,666,664 shares of its common stockat $3.75 per share to the participating investors. The Company also issuedfive-year warrants to purchase a total of 1,633,333 shares of its common stock,with an exercise price of $5.00 per share. The investors also received anadditional investment right, for a limited period of time, to purchase1,554,000 additional shares of common stock at $4.12 per share.

 

ITEM 3.  DEFAULTS UPON SENIORSECURITIES.

 

None.

 

ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS.

 

None.

 

ITEM 5.  OTHER INFORMATION.

 

None.

 

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ITEM 6.  EXHIBITS.

 

(a) Exhibits.

 

The following is a list of exhibits filed aspart of this report on Form 10-Q. Where so indicated by footnote, exhibits that were previously filed areincorporated by reference.  For exhibitsincorporated by reference, the location of the exhibit in the previous filingis indicated parenthetically except in those situations where the exhibitnumber was the same as set forth below.

 
| **Exhibit** | ** ** | **Description**                                                                                                                                       |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Amended and Restated Certificate of  Incorporation (3)                                                                                                |
| 3.2         |       | Amended and Restated Bylaws (1)                                                                                                                       |
| 3.3         |       | Certificate of Amendment to Certificate of  Incorporation, dated October 18, 2004 (3)                                                            |
| 3.4         |       | Certificate of Designations, Preferences  and Rights of the Series A Convertible Preferred Stock of the Company  dated June 23, 2004 (2)    |
| 31.1        |       | Certification of Chief Executive Officer  Pursuant to Rule 13a-14(a)*                                                                            |
| 31.2        |       | Certification of Chief Financial Officer  Pursuant to Rule 13a-14(a)*                                                                            |
| 32.1        |       | Certification of Chief Executive Officer  Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of  the Sarbanes-Oxley Act of 2002* |
| 32.2        |       | Certification of Chief Financial Officer  Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of  the Sarbanes-Oxley Act of 2002* |

 

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* Filed herewith

(1) Incorporated by reference to the exhibits to our Form 10-QReport for the quarter ended March 31, 1999.

(2) Incorporated by reference to the exhibits to our Form 8-KCurrent Report filed on June 25, 2004 (Exhibit 3.1).

(3)Incorporated by reference to the exhibits to our Form 10-QReport for the quarter ended September 30, 2004, as filed on November 17,2004.

 

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SIGNATURES

 

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

 

 
|                                                                                                                                     | WORLDGATE COMMUNICATIONS, INC. |
|------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|
|                                                                                                                                     |                           |   |
|                                                                                                                                     |                           |   |
| Date:                    January 23, 2006 |                           |   | /s/ Hal M. Krisbergh |   |
|                                                                                                                                     |                           | Hal M. Krisbergh |
|                                                                                                                                     |                           | Chairman and Chief Executive Officer |
|                                                                                                                                     |                           | (Principal Executive Officer) |
|                                                                                                                                     |                           |   |
|                                                                                                                                     |                           |   |
| Date:                    January 23, 2006 |                           |   | /s/ Joel Boyarski |   |
|                                                                                                                                     |                           | Joel Boyarski |
|                                                                                                                                     |                           | Vice President and Chief Financial Officer |
|                                                                                                                                     |                           | (Principal Financial and Accounting  Officer) |

 

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