UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-Q
  x
                    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended June 30, 2010OR ̈
                    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from ________________ to
      ________________
 
 Commission
file number:  000-25755
 
 WORLDGATE
COMMUNICATIONS, INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              
              23-2866697(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      No.)3190
      Tremont Avenue
                Trevose,
      Pennsylvania
              
              19053(Address
      of principal executive offices)
              
              (Zip
      Code)
 
 (215)
354-5100
 (Registrant’s
telephone number, including area code)
 
 [None]
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes ý                                           No  o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
 Yes o                                           No  o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Securities Exchange Act of 1934.
 Large accelerated
      filer o
                    Accelerated filer
      oNon-accelerated
      filer o
                    Smaller reporting
      company x(Do
      not check if a smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the SecuritiesExchange Act
of
1934).                     
Yes  oNo  ý
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
 
 Class
                
                Outstanding at August 6, 2010Common
      Stock, par value $0.01 per share
                
                339,357,652
      shares
  
 
 WORLDGATE
COMMUNICATIONS, INC.
 
 QUARTERLY
REPORT ON FORM 10-Q
 FOR
THE THREE MONTHS ENDED JUNE 30, 2010
 
 TABLE
OF CONTENTS
 
 PART
      I. FINANCIAL INFORMATION
                                        
                                        2ITEM
      1.  FINANCIAL STATEMENTS
                                        
                                        2ITEM
      2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
                                        
                                        18ITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                                        
                                        24ITEM
      4T.  CONTROLS AND PROCEDURES.
                                        
                                        24PART
      II. OTHER INFORMATION
                                        
                                        25ITEM
      1.  LEGAL PROCEEDINGS.
                                        
                                        25ITEM
      5.  OTHER INFORMATION.
                                        
                                        25ITEM
      6.  EXHIBITS.
                                        
                                        25
  
  PART
I. FINANCIAL INFORMATION
  ITEM
1.  FINANCIAL STATEMENTS
 
 WORLDGATE
COMMUNICATIONS, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Dollars
in thousands except share amounts)
 
 June 30,
                            
                            
                            December 31,2010
                            
                            
                            2009*(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            634
                            
                            
                            $
                            578Trade
      accounts receivable less allowance for doubtful accounts of $44 at June
      30, 2010 and $42 at December 31, 2009
                            
                            
                            114
                            
                            
                            
                            24Accounts
      receivable – related party
                            
                            
                            1,044
                            
                            
                            
                            -Other
      receivables
                            
                            
                            4
                            
                            
                            
                            15Inventory,  net
                            
                            
                            8,236
                            
                            
                            
                            763Prepaid
      and other current assets
                            
                            
                            252
                            
                            
                            
                            281Total
      current assets
                            
                            
                            10,284
                            
                            
                            
                            1,661Property
      and equipment, net
                            
                            
                            720
                            
                            
                            
                            739Deposits
                            
                            
                            200
                            
                            
                            
                            -Deferred
      debt issuance costs, net
                            
                            
                            3,106
                            
                            
                            
                            -Total
      assets
                            
                            $
                            14,310
                            
                            
                            $
                            2,400LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      liabilities:Accounts
      payable
                            
                            $
                            5,992
                            
                            
                            $
                            535Account
      payable due to related parties
                            
                            
                            352
                            
                            
                            
                            262Accrued
      expenses
                            
                            
                            285
                            
                            
                            
                            409Accrued
      compensation and benefits
                            
                            
                            77
                            
                            
                            
                            100Accrued
      severance
                            
                            
                            -
                            
                            
                            
                            232Warranty
      reserve
                            
                            
                            10
                            
                            
                            
                            15Deferred
      revenues and income
                            
                            
                            9,097
                            
                            
                            
                            1,460Notes
      payable
                            
                            
                            106
                            
                            
                            
                            22Total
      current liabilities
                            
                            
                            15,919
                            
                            
                            
                            3,035Long
      term liabilities:Revolving
      Loan, with related party
                            
                            
                            2,000
                            
                            
                            
                            1,400Total  liabilities
                            
                            
                            17,919
                            
                            
                            
                            4,435Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      Stock, $.01 par value, 13,500,000 shares authorized, and0
      shares issued at June 30, 2010 and December 31,
2009
                            
                            
                            -
                            
                            
                            
                            -Common
      Stock, $.01 par value; 700,000,000  shares authorized at June
      30, 2010 and December 31, 2009;  and 339,357,652 and 337,947,088
      shares issued and outstanding at June 30, 2010 and December 31, 2009,
      respectively
                            
                            
                            3,394
                            
                            
                            
                            3,380Additional
      paid-in capital
                            
                            
                            274,548
                            
                            
                            
                            270,330Accumulated
      deficit
                            
                            
                            (281,551
                            )
                            
                            
                            (275,745
                            )Total
      stockholders’ deficiency
                            
                            
                            (3,609
                            )
                            
                            
                            (2,035
                            )Total
      liabilities and stockholders’ deficiency
                            
                            $
                            14,310
                            
                            
                            $
                            2,400
  *
Condensed from audited financial statement
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  2
  WORLDGATE
COMMUNICATIONS, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (Dollars
in thousands except share and per share amounts)
 
 Three Months Ended June 30,
                              
                              
                              Six Months Ended June 30,2010
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2009Net
      revenues
                              
                              $
                              124
                              
                              
                              $
                              143
                              
                              
                              $
                              411
                              
                              
                              $
                              1,380Cost
      of revenues
                              
                              
                              32
                              
                              
                              
                              5
                              
                              
                              
                              210
                              
                              
                              
                              919Gross
      profit
                              
                              
                              92
                              
                              
                              
                              138
                              
                              
                              
                              201
                              
                              
                              
                              461Expenses
      from operations:Engineering
      and development
                              
                              
                              926
                              
                              
                              
                              618
                              
                              
                              
                              1,847
                              
                              
                              
                              1,120Operations
                              
                              
                              217
                              
                              
                              
                              128
                              
                              
                              
                              432
                              
                              
                              
                              249Sales
      and marketing
                              
                              
                              363
                              
                              
                              
                              55
                              
                              
                              
                              675
                              
                              
                              
                              86General
      and administrative
                              
                              
                              1,176
                              
                              
                              
                              1,605
                              
                              
                              
                              2,472
                              
                              
                              
                              2,496Depreciation
      and amortization
                              
                              
                              99
                              
                              
                              
                              80
                              
                              
                              
                              187
                              
                              
                              
                              119Total
      expenses from operations
                              
                              
                              2,781
                              
                              
                              
                              2,486
                              
                              
                              
                              5,613
                              
                              
                              
                              4,070Loss
      from operations
                              
                              
                              (2,689
                              )
                              
                              
                              (2,348
                              )
                              
                              
                              (5,412
                              )
                              
                              
                              (3,609
                              )Other
      income (expense):Interest
      and other income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              8Change
      in fair value of derivative warrants and conversion
options
                              
                              
                              -
                              
                              
                              
                              284
                              
                              
                              
                              -
                              
                              
                              
                              4,209Income
      from service fee contract termination
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              348Interest
      and other expense
                              
                              
                              -
                              
                              
                              
                              (40
                              )
                              
                              
                              -
                              
                              
                              
                              (102
                              )Related
      party interest
                              
                              
                              (91
                              )
                              
                              
                              -
                              
                              
                              
                              (170
                              )
                              
                              
                              (11
                              )Amortization
      of debt issuance costs
                              
                              
                              (179
                              )
                              
                              
                              -
                              
                              
                              
                              (224
                              )
                              
                              
                              -Amortization
      of debt discount
                              
                              
                              -
                              
                              
                              
                              (2,235
                              )
                              
                              
                              -
                              
                              
                              
                              (2,918
                              )Total
      other income (expense)
                              
                              
                              (270
                              )
                              
                              
                              (1,991
                              )
                              
                              
                              (394
                              )
                              
                              
                              1,534Net
      loss
                              
                              $
                              (2,959
                              )
                              
                              $
                              (4,339
                              )
                              
                              $
                              (5,806
                              )
                              
                              $
                              (2,075
                              )Net
      (loss) income per common share:Basic
      and diluted
                              
                              $
                              (0.01
                              )
                              
                              $
                              (0.01
                              )
                              
                              $
                              (0.02
                              )
                              
                              $
                              (
      0.01
                              )Weighted
      average common shares outstanding:Basic
      and diluted
                              
                              
                              364,433,587
                              
                              
                              
                              308,784,420
                              
                              
                              
                              362,948,583
                              
                              
                              
                              214,369,909
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  3
  WORLDGATE
COMMUNICATIONS, INC.
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 (Unaudited)
 (Dollars
and shares in thousands)
 
 Common StockShares
                  
                  
                  Amount
                  
                  
                  Additional Paid-
                    In Capital
                  
                  
                  Accumulated
                    Deficit
                  
                  
                  Total
                    Stockholders’
                    DeficiencyBalance
      at January 1, 2010
                  
                  
                  337,947
                  
                  
                  $
                  3,380
                  
                  
                  $
                  270,330
                  
                  
                  $
                  (275,745
                  )
                  
                  $
                  (2,035
                  )Issuance
      of Common Stock upon exercise of stock options
                  
                  
                  1,411
                  
                  
                  
                  14
                  
                  
                  
                  139
                  
                  
                  
                  -
                  
                  
                  
                  153Non-cash
      stock based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  749
                  
                  
                  
                  -
                  
                  
                  
                  749Issuance
      of warrants  to WGI (see Note 6)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,330
                  
                  
                  
                  -
                  
                  
                  
                  3,330Net
      Loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,806
                  )
                  
                  
                  (5,806
                  )Balance
      at June 30, 2010
                  
                  
                  339,358
                  
                  
                  $
                  3,394
                  
                  
                  $
                  274,548
                  
                  
                  $
                  (281,551
                  )
                  
                  $
                  (3,609
                  )
  4
  WORLDGATE COMMUNICATIONS,
INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Dollars
in thousands)
 Six Months Ended June 30,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (5,806
                    )
                    
                    $
                    (2,075
                    )Adjustments
      to reconcile net (loss) income to cash used in operating
      activities:Depreciation
      and amortization
                    
                    
                    187
                    
                    
                    
                    119Amortization
      of debt issuance costs
                    
                    
                    224
                    
                    
                    
                    -Amortization
      of debt discount
                    
                    
                    -
                    
                    
                    
                    2,918Change
      in fair value of derivative warrants and conversion
options
                    
                    
                    -
                    
                    
                    
                    (4,209
                    )Loss
      on disposal of fixed assets
                    
                    
                    -
                    
                    
                    
                    1Inventory
      reserve
                    
                    
                    (86
                    )
                    
                    
                    600Non-cash
      stock based compensation
                    
                    
                    749
                    
                    
                    
                    290Bad
      debt expense, net of recoveries
                    
                    
                    2
                    
                    
                    
                    157Changes
      in operating assets and liabilities:Trade
      accounts receivable
                    
                    
                    (92
                    )
                    
                    
                    (56
                    )Accounts
      receivable – related party
                    
                    
                    (1,044
                    )
                    
                    
                    -Other
      receivables
                    
                    
                    11
                    
                    
                    
                    1Inventory
                    
                    
                    (7,387
                    )
                    
                    
                    (472
                    )Prepaid
      and other current assets and deposits
                    
                    
                    (171
                    )
                    
                    
                    (56
                    )Accounts
      payable
                    
                    
                    5,458
                    
                    
                    
                    60Due
      to related parties
                    
                    
                    90
                    
                    
                    
                    -Accrued
      expenses and other current liabilities
                    
                    
                    (124
                    )
                    
                    
                    283Accrued
      severance
                    
                    
                    (232
                    )
                    
                    
                    690Accrued
      compensation and benefits
                    
                    
                    (23
                    )
                    
                    
                    (82
                    )Warranty
      reserve
                    
                    
                    (6
                    )
                    
                    
                    1Deferred
      revenues and income
                    
                    
                    7,637
                    
                    
                    
                    439Net
      cash used in operating activities
                    
                    
                    (613
                    )
                    
                    
                    (1,391
                    )Cash
      flows from investing activities:Capital
      expenditures
                    
                    
                    (168
                    )
                    
                    
                    (256
                    )Net
      cash used in  investing activities
                    
                    
                    (168
                    )
                    
                    
                    (256
                    )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                    
                    
                    153
                    
                    
                    
                    1,581Proceeds
      from the issuance of notes
                    
                    
                    -
                    
                    
                    
                    846Net
      proceeds from revolving loan with related party
                    
                    
                    600
                    
                    
                    
                    -Net
      proceeds from the issuance of note
                    
                    
                    84
                    
                    
                    
                    -Net
      cash provided by financing activities
                    
                    
                    837
                    
                    
                    
                    2,427Net
      increase in cash and cash equivalents
                    
                    
                    56
                    
                    
                    
                    780Cash
      and cash equivalents, beginning of period
                    
                    
                    578
                    
                    
                    
                    429Cash
      and cash equivalents, end of period
                    
                    $
                    634
                    
                    
                    $
                    1,209Supplemental
      disclosures of non-cash financing activities:Cumulative
      effect of a change in accounting principle:Detachable
      warrants
                    
                    $
                    -
                    
                    
                    $
                    885Additional
      paid-in capital
                    
                    
                    -
                    
                    
                    
                    (1,751
                    )Accumulated
      deficit
                    
                    
                    -
                    
                    
                    
                    1,449Issuance
      of warrants to WGI (see Note 6)
                    
                    
                    3,330
                    
                    
                    
                    -Common
      stock issued in payment of convertible debentures
                    
                    
                    -
                    
                    
                    
                    4,080Common
      stock issued in payment of accrued interest
                    
                    
                    -
                    
                    
                    
                    1,046Common
      stock issued in payment of warrant derivative
                    
                    
                    -
                    
                    
                    
                    623Common
      stock issued in payment of notes
                    
                    
                    -
                    
                    
                    
                    750
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  5
  WORLDGATE
COMMUNICATIONS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars in
thousands except per share and per unit amounts)
 
 1.
              Business
      and Basis of presentation
 
 WorldGate
Communications, Inc. and its subsidiaries (“WorldGate” or the “Company”) is a
provider of digital voice and video phone services and next generation video
phones. The Company designs and develops digital video phones featuring
real-time, two-way video. It also provides a turn-key digital voice and video
communication services platform supplying complete back-end support
services.
  The
Company is transitioning from a business model focused primarily on one-time
digital video phone equipment sales to delivering an integrated audio and video
telephony solution. With the new video phone platform, the Company will not only
offer a line of consumer video phones but the Company will also provide a
turnkey digital voice and video phone service.
  The
Company markets its video phone equipment, communications and support services
through two segments.  Through its Consumer Services segment, the
Company markets its video phone equipment, bundled with digital voice and video
phone service and support, principally to end user consumers.  Through
its Original Equipment Manufacturer (the “OEM Direct”) segment the Company
distributes its digital video phones directly to telecommunications service
providers who already have a complete digital voice and video management and
network infrastructure.
 
 The
unaudited condensed consolidated financial statements of the Company for the
three and six months ended June 30, 2010 and 2009 presented herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission for quarterly reports on Form 10-Q.  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with United States generally accepted accounting
principles (“GAAP”) have been condensed or omitted pursuant to such rules and
regulations.  In addition, the December 31, 2009 condensed consolidated
balance sheet was derived from the audited financial statements, but does not
include all disclosures required by GAAP.  These financial statements
should be read in conjunction with the audited financial statements for the year
ended December 31, 2009 and the notes thereto included in the Company’s Annual
Report on Form 10-K.  The accounting policies used in preparing these
unaudited condensed consolidated financial statements are materially consistent
with those described in the audited December 31, 2009 financial
statements.
  The
financial information in these financial statements reflects, in the opinion of
management, all adjustments of a normal recurring nature necessary to present
fairly the results for the interim periods. Quarterly operating results are not
necessarily indicative of the results that may be expected for other interim
periods or the year ending December 31, 2010.  All significant
intercompany accounts have been eliminated in consolidation.
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, as of the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.  Judgments and estimates of uncertainties are required in
applying the Company’s accounting policies in many areas.  Some of the
areas requiring significant judgments and estimates are as
follows:  revenue recognition, inventory valuation, stock-based
compensation, valuation of warrants and deferred tax asset valuation
allowance.
 
 2.
              Liquidity
      Considerations
 
 The
Company’s ability to generate cash is dependent upon the sale of its products
and services, its ability to enter into arrangements to provide services, and on
obtaining cash through the private or public issuance of debt or equity
securities. Given that the Company’s voice and video phone business involves a
newly developed video phone with no market penetration in an underdeveloped
market sector, no assurances can be given that sufficient sales, if any, will
materialize. The lack of success of the Company’s sales efforts could also have
an adverse impact on the Company’s ability to raise additional
financing.
  6
  Based on
management’s internal forecasts and assumptions regarding its short term cash
requirements, the increase in and full utilization of the expanded credit line
of the Revolving Loan (see Note 6 and Note 12), finalization and product
acceptance  by ACN Digital Phone Service, LLC (“ACN DPS”), a
subsidiary of ACN, Inc. (“ACN”)of the Company’s new voice and video phone, the
delivery of these new video phones expected going forward, the expected
placement of purchase orders and receipt of advance funds for the purchase of
units by ACN DPS, pursuant to a Master Purchase Agreement pursuant to which ACN
DPS committed to purchase 300,000 videophones over a two-year period (the
“Master Purchase Agreement”) and the Company’s current forecast for sales for
other products and services, the Company believes that it will have sufficient
working capital to support its current operating plans through at least June 30,
2011.
 
 If these
assumptions do not materialize, or do not materialize in the projected
timeframe, the Company will need to obtain additional funding through the
private or public issuance of debt or equity securities. The Company continues
to evaluate possibilities to obtain additional financing through public or
private equity or debt offerings, asset securitizations, or from other sources
to address the risks inherent in its plans and to help insure that the Company
has the adequate financial resources in the event the realization of its plan
requires additional time or is faced by additional marketplace
challenges.
 
 The
Company continues to focus on the business elements that it believes are
important for its sustainability. The Company continues to explore additional
product and service sales opportunities. The Company believes that growing the
Consumer Services segment of its business, which includes a recurring revenue
stream, is an essential element in the long term sustainability of its
operations. In addition, the Company is focused on reducing the cost of its
voice and video phone which it believes will facilitate the growth of the
Company’s product and services.
 
 There can
be no assurance given, however, that the Company’s efforts will be successful or
that any additional financing will be available and can be consummated on terms
acceptable to the Company, if at all. There can also be no assurance given that
any additional sales can be achieved through additional service and distribution
opportunities. If the Company is unable to obtain additional funds, and its
plans are not achieved in the planned time frame, the Company may be required to
reduce the size of the organization which could have a material adverse impact
on its business.
 
 The
Company has incurred recurring net losses and has an accumulated deficit of
$281,551, stockholder’s deficiency of $3,609 and a working capital deficiency of
$5,635.
 
 3.Summary of
Significant Accounting Policies
 
 Reclassification
 
 Certain
prior year amounts have been reclassified to conform to the current-year
presentation.
 
 Fair
value of financial instruments
 
 The Company’s financial instruments
consist primarily of cash and cash equivalents, accounts receivable and accounts
payable.  The book value of cash and cash equivalents, accounts
receivable and accounts payable is considered to be representative of their
values because of their short term maturities.  The carrying value of
the revolving loan with a related party approximates fair value, as determined
by comparison of rates currently available for obligations with similar terms
and maturities.
 
 Revenue
Recognition
 
 Revenue
is recognized when persuasive evidence of an arrangement exists, the price is
fixed or determinable, the collectability is reasonably assured, and the
delivery and acceptance of the equipment has occurred or services have been
rendered.  Management exercises judgment in evaluating these factors in
light of the terms and conditions of its customer contracts and other existing
facts and circumstances to determine appropriate revenue recognition. Due to the
Company’s limited commercial sales history, its ability to evaluate the
collectability of customer accounts requires significant judgment. The Company
periodically evaluates its equipment customers and service customers’ accounts
for collectability at the date of sale and periodically
thereafter.
 
 The
Company’s revenue is net of any collections of state or municipal taxes, fees or
surcharges on the charges to customers for the products and services that they
purchase (such as sales and use, excise, utility, user, and ad valorem taxes),
and net of other applicable charges related to the Company’s voice over Internet
protocol (“VoIP”) offering (including 911, Telecommunications Relay Services
(“TRS”) and Universal Service Fund (“USF”) fees).  Any permitted
administrative fees for the administration and collection of these taxes and
surcharges is included in revenue.  If the Company is subject to the
above taxes, fees and surcharges, to the extent permitted by law, the Company
generally passes such charges through to its customers.
  7
  Revenues
are also offset by a reserve for any price refunds and consumer rebates
consistent with Accounting Standards Codification (“ASC”) Topic 605-50. In
addition, revenues are also offset to reflect any consideration given by a
vendor to a customer for which an otherwise identifiable benefit has not been
received. This consideration includes warrants given to a customer (see Note
7).
 
 During
the three and six months ended June 30, 2010 the Company shipped $7,804 of
units, receiving full payment for, $6,760 of units, and $1,044 of units
remaining in accounts receivable, that are pending customer product acceptance
by ACN DPS (a related party) and was therefore recorded as deferred revenue by
the Company.  The Company also received $396 as of June 30, 2010 as
partial payment for units that were shipped after June 30, 2010 that were also
pending customer product acceptance by ACN DPS.  Although the Company
expects ACN DPS to accept the product in accordance with the terms of the Master
Purchase Agreement, there are no assurances that such acceptance will be
provided.  If ACN DPS does not accept the product, ACN DPS may return
the product to the Company and the Company would be obligated to return all
payments received to ACN DPS.  If ACN DPS does accept the product, the
Company would recognize as revenue all units shipped. As of the date of the
filing of this Form 10-Q, product acceptance from ACN DPS had not been
received.
  Net
Loss Per Share (Basic and Diluted)
 
 The
Company displays dual presentation of earnings per share as both basic and
diluted earnings per share (“EPS”).  Basic EPS includes no dilution
and is computed by dividing net loss attributable to common stockholders by the
weighted average number of common shares outstanding for the
period.  Basic weighted average shares outstanding at June 30, 2010
includes 25,120,276 and 24,183,845, respectively,  of weighted average
shares for the three and six month periods ended June 30, 2010 issuable in the
future under the terms of the WGI Anti-Dilution Warrant, as this warrant is
exercisable at a nominal amount ($0.01 per share).  Diluted EPS
includes, under the “treasury stock” and “if converted” methods, the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Outstanding stock options,
warrants and other potential stock issuances are not included in the computation
when they are not in the money or their effect would be
anti-dilutive.
  The
following table presents the shares used in the computation of fully diluted
loss per share for the three  and six months ended June 30, 2010 and
2009:
  For the three months ended
                            June30,
                          
                          
                          For the six months ended June
                            30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Numerator
      for diluted EPS calculation:Net
      loss
                          
                          $
                          (2,959
                          )
                          
                          $
                          (4,339
                          )
                          
                          $
                          (5,806
                          )
                          
                          $
                          (2,075
                          )Denominator
      for diluted EPS calculation:Basic
      weighted average common shares outstanding
                          
                          
                          364,433,587
                          
                          
                          
                          308,784,420
                          
                          
                          
                          362,948,583
                          
                          
                          
                          214,369,909Effect
      of dilutive stock options
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          
                          364,433,587
                          
                          
                          
                          308,784,420
                          
                          
                          
                          362,948,583
                          
                          
                          
                          214,369,909Basic
      EPS
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.02
                          )
                          
                          $
                          (0.01
                          )Fully
      Diluted EPS
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.02
                          )
                          
                          $
                          (0.01
                          )
  Potential
common shares excluded from net loss per share for the three and six months
ended June 30, 2010, and  2009 were 173,563,964 and 200,705,382,
respectively because their effect would be anti-dilutive due to the Company’s
net loss.  The following table discloses the shares of common stock
issuable upon the exercise of stock options, unvested restricted stock and
warrants, and upon the conversion of convertible debentures irrespective of
whether such securities are in the money:
  8
  For the three and six months
      endedJune 30, 2010
                          
                          
                          June 30, 2009Warrants
                          
                          
                          152,296,767
                          
                          
                          
                          181,374,949Options
                          
                          
                          20,952,814
                          
                          
                          
                          19,022,433Performance
      shares
                          
                          
                          308,000
                          
                          
                          
                          308,000Total
                          
                          
                          173,557,581
                          
                          
                          
                          200,705,382
 
 Recent
Accounting Pronouncements
 
 In
October 2009, the FASB issued new accounting guidance, under ASC Topic 985
on software, which amends the scope of existing software revenue recognition
accounting. Tangible products containing software components and non-software
components that function together to deliver the product’s essential
functionality would be scoped out of the accounting guidance on software and
accounted for based on other appropriate revenue recognition guidance. 
This guidance is effective for all new or materially modified arrangements
entered into on or after January 1, 2011 with earlier application permitted
as of the beginning of a fiscal year. Full retrospective application of this new
guidance is optional. The Company has adopted this guidance effective for new
arrangements in the year 2010, the effect of which is not deemed to be
material.
 
 The FASB
published FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic
605)-Multiple Deliverable Revenue Arrangements which addresses the
accounting for multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than as a combined
unit. Specifically, this guidance amends the criteria for Subtopic 605-25, Revenue Recognition-Multiple Element
Arrangements,for separating consideration in multiple-deliverable
arrangements. This guidance establishes a selling price hierarchy for
determining the selling price of a deliverable, which is based on: (a)
vendor-specific objective evidence, (b) third-party evidence; or (c)
estimates.  This guidance also eliminates the residual method of allocation
and requires that arrangement consideration be allocated at the inception of the
arrangements to all deliverables using the relative selling price method and
also requires expanded disclosures. FASB Accounting Standards Update 2009-13 is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted.  The adoption of this standard will have an impact on the
Company’s consolidated financial position and results of operations for all
multiple deliverable arrangements entered into or materially modified in
2010.
 
 4.
Inventory
 
 The Company’s inventory consists
primarily of finished goods equipment to be sold to customers. The cost is
determined at the lower of cost or market on a first-in, first-out cost
basis.  As of June 30, 2010, the Company’s inventory balance was
$8,236 net of a reserve of $671 for excess and obsolete inventory that is not
expected to be utilized in the continued development of the video phone.
The Company adjusted its reserve
for excess and obsolete inventory by $86 and $600, respectively, for the six
months ended June 30, 2010 and June 30, 2009.   As of December
31, 2009, the Company’s reserve for excess and obsolete inventory was $757 to
reflect such valuation.  Included in inventory as of June 30, 2010 is
$7,804 of inventory which was shipped to a customer but for which pending
product acceptance by the customer.  As a result, the shipments were
not recognized as revenue and the units are reflected in
inventory.   Included in inventory as of June 30, 2010 and
December 31, 2009 is $0 and $178, respectively, for units purchased in a “Bill
and Hold” arrangement for a single customer.
 
 5.   Accrued
Expenses
 
 The
Company’s non related party accrued expenses consisted of the
following:
 
 June 30, 2010
                    
                    
                    December 31, 2009Interest
      on Notes
                    
                    $
                    -
                    
                    
                    $
                    10Contingent
      penalties
                    
                    
                    157
                    
                    
                    
                    157Board
      fees
                    
                    
                    -
                    
                    
                    
                    94Taxes
                    
                    
                    47
                    
                    
                    
                    33Other
                    
                    
                    81
                    
                    
                    
                    115Totals
                    
                    $
                    285
                    
                    
                    $
                    409
  9
  6.
Revolving Credit Line
 
 On
October 28, 2009, the Company entered into the Revolving Loan and Security
Agreement (the “Revolving Loan”) with WGI Investment LLC (“WGI”), pursuant to
which WGI provided the Company a line of credit in a principal amount of
$3,000.  On March 9, 2010, the Company entered into the First Amendment to
the Revolving Loan with WGI (the Revolving Loan as amended by the First
Amendment, the “First Amended Revolving Loan”), pursuant to which the maximum
principal amount of the line of credit was increased to $5,000.  On
August 11, 2010, the Company entered into the Second Amendment to the Revolving
Loan with WGI (the First Amended Revolving Loan as amended by the Second
Amendment, the “Second Amended Revolving Loan”), pursuant to which WGI will
provide to the Company, a line of credit for an additional $2,000 resulting in
an aggregate principal amount available for borrowing under the Second Amended
Revolving Loan of $7,000.  In addition, on August 11, 2010, pursuant
to the Second Amended Revolving Loan, the Company issued a revised Revolving
Promissory Note, dated October 29, 2009 (the “New Revolving Promissory Note”),
in a principal amount of $7,000, to WGI.  Other than amending the
maximum principal amount available under the Second Amended Revolving Loan from
$5,000 to $7,000, the terms of the Second Amended Revolving Loan and the New
Revolving Promissory Note are the same as previously
disclosed.  Interest accrues on any loan advances at the rate of 10%
per annum.  Interest is payable beginning June 1, 2010 and monthly
thereafter and any principal amount repaid by the Company is available for
re-borrowing.  All outstanding principal and interest outstanding are
required to be repaid on October 28, 2014.  The Company granted WGI a
security interest in substantially all the assets of the Company and the Company
made customary representations and covenants to WGI.  Any loan advance
requires the satisfaction of customary borrowing conditions.  Upon the
occurrence of an event of default, (1) WGI may require repayment of all
outstanding amounts under the Second Amended Revolving Loan, may terminate its
commitment to make additional loans to the Company, and may exercise its rights
with respect to the security interest in substantially all of the assets of the
Company and (2) all outstanding amounts under the Second Amended Revolving Loan
will bear interest at the rate of 15% per annum.  As of June 30, 2010,
the Company received aggregate advances under the First Amended Revolving Loan
of $2,000.   As of August 11, 2010, a total principal balance of
$3,500 has been drawn under the Second Amended Revolving Loan.  During
the three and six months ended June 30, 2010,  the Company made
interest payments aggregating $143 to WGI and as of June 30, 2010, the interest
payable on the Second Amended Revolving Loan was $14.
 
 In
connection with the First Amended Revolving Loan, on March 9, 2010, the Company
granted WGI a warrant to purchase up to approximately 6,000,000 shares of common
stock at an exercise price of $0.574 per share (the “March 2010 WGI
Warrant”).  The March 2010 WGI Warrant was fully vested on issuance
and has a term of 10 years.  The March 2010 WGI Warrant has a value of
$3,330 utilizing the Black-Scholes option pricing model with the following
assumptions: term of 10 years, volatility of 162%, dividends of $0 and a
risk free interest rate of 3.71%.  The value of the March 2010 WGI
Warrant was recorded as a deferred debt issuance cost and will be amortized on a
straight-line basis over the remaining term of the First Amended Revolving
Loan.  As of June 30, 2010, $224 of the March 2010 WGI Warrant of
$3,330 had been amortized and the balance of the deferred debt issuance cost was
recorded as a $3,106 long term asset.  In connection with the Second
Amended Revolving Loan, on August 11, 2010, the Company granted WGI a warrant to
purchase up to 8 million shares of the Company’s common stock at an exercise
price of $0.432 per share (the “August 2010 WGI Warrant”).  The August
2010 WGI Warrant was fully vested on issuance and has a term of 10
years.
 
 7.
Stockholders’ Equity
 
 April
2009 WGI and ACN DPS Transaction.
 
 On April 6,
2009, the Company completed a private placement of securities to WGI pursuant to
the terms of a Securities Purchase Agreement, dated December 12, 2008 (the
“Securities Purchase Agreement”).  In connection with the transaction, the
Company issued to WGI a warrant to purchase up to approximately 140.0 million
shares of common stock in certain circumstances (the “Anti-Dilution
Warrant”).  The Anti-Dilution Warrant entitled WGI to purchase up to
140.0 million shares of common stock at an exercise price of $0.01 per share to
the extent the Company issues any capital stock upon the exercise or conversion
of (i) any warrants, options and other purchase rights that were outstanding as
of April 6, 2009 (“Existing Contingent Equity”), (ii) up to 19.7 million shares
underlying future options, warrants or other purchase rights issued by the
Company after April 6, 2009 (“Future Contingent Equity”), or (iii) the ACN 2009
Warrant (see below).  The Anti-Dilution Warrant is designed to ensure
that WGI may maintain ownership of 63% of the issued and outstanding shares of
the Company’s capital stock in the event that any of the Company’s capital stock
is issued in respect of the Existing Contingent Equity, the Future Contingent
Equity or the ACN 2009 Warrant.  The term of the Anti-Dilution Warrant
is ten years from the date of issuance, and the shares subject to the
Anti-Dilution Warrant will be decreased proportionally upon the expiration of
Existing Contingent Equity, Future Contingent Equity and the ACN 2009
Warrant.
  10
  The
following table summarizes, as of June 30, 2010, each contingent equity category
under the Anti-Dilution Warrant and the exercisability of the Anti-Dilution
Warrant.
 
 Shares
      Under Contingent Equity CategoriesAs
      of June 30, 2010ContingentEquity
                      Categories
                    
                    Issuable
      asof
      April 6,
                      2009
                    
                    
                    Terminated
      or
                      Expired
      Shares
                    
                    
                    Shares
      Not
                      Exercisable
                    
                    
                    Shares
                      Exercisable
                    
                    
                    Total Shares Issuable
                      (Exercisable and Non-
                      Exercisable)Existing
      Contingent Equity
                    
                    
                    24,318,869
                    
                    
                    
                    5,986,147
                    
                    
                    
                    4,538,672
                    
                    
                    
                    13,794,050
                    
                    
                    
                    18,332,722Future
      Contingent Equity
                    
                    
                    19,689,182
                    
                    
                    
                    248,639
                    
                    
                    
                    18,440,543
                    
                    
                    
                    1,000,000
                    
                    
                    
                    19,440,543ACN
      2009 Warrant
                    
                    
                    38,219,897
                    
                    
                    
                    0
                    
                    
                    
                    38,219,897
                    
                    
                    
                    0
                    
                    
                    
                    38,219,897Total
      Contingent Equity
                    
                    
                    82,227,948
                    
                    
                    
                    6,234,786
                    
                    
                    
                    61,199,112
                    
                    
                    
                    14,794,050
                    
                    
                    
                    75,993,162Anti-Dilution
      Warrant
                      (Total
      Contingent Equity * 1.7027027)
                    
                    
                    140,009,750
                    
                    
                    
                    10,615,987
                    
                    
                    
                    104,203,893
                    
                    
                    
                    25,189,869
                    
                    
                    
                    129,393,762
 
 Concurrently
with the closing on April 6, 2009 of the transactions contemplated by the
Securities Purchase Agreement, the Company entered into a commercial
relationship with ACN DPS pursuant to which it agreed to design and sell video
phones to ACN DPS (the “Commercial Relationship”).  As part of the
Commercial Relationship, the Company entered into two agreements with ACN
DPS:  a Master Purchase Agreement pursuant to which ACN DPS committed
to purchase 300,000 videophones over a two-year period (the “Master Purchase
Agreement”) and a Software Development and Integration and Manufacturing
Assistance Agreement pursuant to which ACN DPS committed to provide us with
$1,200 to fund software development costs.  In connection with the
Commercial Relationship, the Company granted ACN DPS a warrant to purchase up to
approximately 38.2 million shares of common stock at an exercise price of
$0.0425 per share (the “ACN 2009 Warrant”).  The ACN 2009 Warrant
granted to ACN DPS will vest incrementally based on ACN DPS’s purchases of video
phones under the Master Purchase Agreement.
  On March
30, 2010, the Company entered into the First Amendment (the “MPA Amendment”) to
the Master Purchase Agreement with ACN DPS. Among other changes, the MPA
Amendment amends the Master Purchase Agreement as follows:
  ·
              As
      soon as practicable after the Company provides a demonstration to ACN DPS
      of the working video phone contemplated by the Master Purchase Agreement,
      ACN DPS will issue its first purchase order under the Master Purchase
      Agreement for 80,000 video phones.
 
 ·
              ACN
      DPS will pay the Company 50% of the purchase price for video phones
      pursuant to a purchase order upon the later of (a) acceptance of the
      purchase order by the Company and (b) five (5) weeks prior to the delivery
      of video phones to ACN DPS at the Company’s manufacturing
      facility.  ACN DPS will pay the Company the remaining 50% of the
      purchase price upon delivery of the video phones to ACN DPS at the
      Company’s manufacturing
facility.
  11
  In
connection with the MPA Amendment, on March 30, 2010 the Company granted ACN DPS
a warrant to purchase up to 3 million shares of common stock at an exercise
price of $0.0425 per share (the “ACN 2010 Warrant”).  The ACN 2010
Warrant will vest incrementally based on ACN DPS’s purchases of video phones
under the Master Purchase Agreement, as amended by the MPA
Amendment.
 
 Applicable
accounting guidance requires that revenue generated from sales to ACN DPS be
reduced to reflect the extent that the ACN 2009 Warrant and ACN 2010 Warrant are
determined to be consideration given by a vendor to a customer for which an
otherwise identifiable benefit has not been received.  The Company will
record a charge for the fair value of the portion of the ACN 2009 Warrant and
ACN 2010 Warrant earned from the point in time when units are accepted by the
customer and shipped to ACN DPS through the vesting date.  Final
determination of fair value of the ACN 2009 Warrant and the ACN 2010 Warrant
will occur upon actual vesting.  Applicable accounting guidance
requires that the fair value of the ACN 2009 Warrant and the ACN 2010 Warrant be
recorded as a reduction of revenue to the extent of cumulative revenue recorded
from ACN DPS.
 
 No
revenue for the units shipped to ACN DPS was recognized as revenue during the
three and six months ended June 30, 2010 and neither the ACN 2009 Warrant nor
the ACN 2010 Warrant vested. If the ACN 2009 Warrant and the ACN 2010 Warrant
were totally vested  as of June 30, 2010, their aggregate value using
a Black Scholes economic model would have been $22,638.  The value of
the ACN 2009 Warrant and the ACN 2010 Warrant for the units shipped as of June
30, 2010 would have been $2,795 if the pro rata portion of these warrants had
vested based on the number of units shipped as of June 30, 2010.  The
Black Scholes economic model was based on  the following
assumptions:
 
 Market
      Price
                    
                    $
                    0.551Exercise
      Price
                    
                    $
                    0.0425Term
                    
                    8.66
      yrsVolatility
      Rate
                    
                    
                    165.12
                    %Interest
      Rate
                    
                    
                    2.726
                    %
  A summary
of the Company’s warrant activity for the six months ended June 30, 2010, is as
follows:
 
 Warrants
                    
                    
                    Weighted Average
                      Exercise Price
                    
                    
                    Weighted Average
                      Remaining Contract
                      LifeOutstanding,
      January 1, 2010
                    
                    
                    168,755,235
                    
                    
                    $
                    0.04
                    
                    
                    
                    9.22GrantedMarch
      2010 WGI Warrant (see Note 6)
                    
                    
                    6,000,000
                    
                    
                    
                    0.57ACN
      2010 Warrant
                    
                    
                    3,000,000
                    
                    
                    
                    0.04Exercised
                    
                    
                    -
                    
                    
                    
                    -Cancelled
      / Forfeited/ Expired
                    
                    
                    (262,216)
                    
                    
                    
                    0.57Outstanding,
      June 30, 2010
                    
                    
                    177,493,019
                    
                    
                    $
                    0.06
                    
                    
                    
                    8.44Exercisable,
      June 30, 2010
                    
                    
                    32,069,228
 
 On August
3, 2010, 879,359 additional warrants expired with a weighted average exercise
price of $4.98.
 
 Stock
Option Plan
  In
December 1996, the Company adopted the 1996 Stock Option Plan (“1996
Plan”). In October 2004, the Company’s stockholders approved the 2003
Equity Incentive Plan (“2003 Plan”).  The 2003 Plan replaced the 1996
Plan for new grants. No additional shares were reserved for the new plan but
rather all available shares under the 1996 Plan were made available for the new
plan.  On May 26, 2009, the Company’s Board of Directors approved the
terms of Amendment No. 1 (the “Amendment”) to the 2003 Plan, subject to
stockholder approval.  The Amendment, among other things, increased
the maximum number of shares of common stock that may be issued or transferred
under the 2003 Plan to 26,500,000 and increased the maximum amount of shares
that may be issued in any fiscal year to any single participant in the 2003 Plan
underlying an option award to 2,000,000 shares.  On May 20, 2010, the
Company’s stockholders approved the Amendment and, immediately thereafter, the
2003 Plan was terminated (except for outstanding awards) upon the approval of
the adoption of the 2010 Plan (as described below) by the
stockholders.
  12
  On
May 20, 2010, the Company’s stockholders approved the adoption of the
WorldGate Communications, Inc. 2010 Stock Incentive Plan (the “2010
Plan”).  The 2010 Plan authorizes the Board of Directors or the
Compensation Committee to provide equity-based compensation in the form of stock
options and restricted stock awards to our directors, officers, other employees
and consultants.  Total awards under the 2010 Plan are limited to
12,000,000 shares of common stock plus any shares relating to awards that expire
or are forfeited or cancelled under the 2010 Plan.
 
 Each of
the 1996 Plan, the 2003 Plan and 2010 Plan are administered by a committee of
the Board of Directors. The committee determines the term of each award,
provided, however, that the exercise period may not exceed ten years from the
date of grant, and for incentive stock options, in certain instances, may not
exceed five years.  As of June 30, 2010, there were 11,682,500 shares
available for grant under the 2010 Plan and 21,260,814 options and restricted
shares outstanding.
  The
weighted-average fair value per share of options granted were $0.54 and $0.28
during the six months ended June 30, 2010 and 2009, respectively. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes
fair value option valuation model. The following weighted-average assumptions
were used for grants in 2010 and 2009, respectively: expected volatility of
151.3% and 194.0%; average risk-free interest rates of 2.70% and 2.40%; dividend
yield of 0%; and expected lives of 6.25 years.
 
 The
Company accounts for all stock based compensation as an expense in the financial
statements and associated costs are measured at the fair value of the award on
the date of grant.  The Company also recognizes the excess tax benefits
related to stock option exercises as financing cash inflows instead of operating
inflows.  As a result, the Company’s net loss before taxes for the
three and six months ended June 30, 2010 included approximately $365 and $749,
respectively, of stock based compensation. The Company’s net loss before taxes
for the three and six months ended June 30, 2009 included approximately $226 and
$290, respectively, of stock based compensation. The stock based compensation
expense is included in general and administrative expense in the condensed
consolidated statements of operations. The Company has selected a
“with-and-without” approach regarding the accounting for the tax effects of
share-based compensation awards.
  A summary
of the Company’s stock options is presented below:
  Stock Options
                    
                    
                    Weighted-Average
                      Exercise Price
                    
                    
                    Aggregate Intrinsic
                      ValueOutstanding,
      January 1, 2010
                    
                    
                    21,641,878
                    
                    
                    $
                    0.14During
      the Period January 1, 2010 through June 30, 2010:Granted
                    
                    
                    877,500
                    
                    
                    $
                    0.
      54Exercised
                    
                    
                    (1,410,564
                    )
                    
                    $
                    (0.11
                    )Cancelled/forfeited
                    
                    
                    (156,000
                    )
                    
                    $
                    (0.77
                    )Outstanding,
      June 30, 2010
                    
                    
                    20,952,814
                    
                    
                    $
                    0.29
                    
                    
                    $
                    5,402,468Exercisable,
      June 30, 2010
                    
                    
                    5,760,014
                    
                    
                    $
                    0.22
                    
                    
                    $
                    1,882,662
  As of
June 30, 2010, there was $4,622 of total unrecognized compensation arrangements
for options granted under all our stock option plans consistent with the
requirements of Topic 718 Compensation – Stock Compensation. The cost is
expected to be recognized through 2014.
 
 Restricted
Stock Grants
 
 The 2003
Plan provided for performance share grants of restricted shares of common stock,
which are bookkeeping entries representing a right to receive a payment in cash,
shares of common stock, or a combination thereof as determined by the
Compensation Committee equal to the value of the shares of common stock on
achievement of performance criteria.  An aggregate of 1,151,000 restricted
shares were granted on October 3, 2007 and December 20, 2007 to certain
executives that vest upon the achievement of certain performance
criteria.  As of June 30, 2010, 308,000 of the restricted shares
remain outstanding with the balance having been cancelled or forfeited (see Note
12).  These awards vest pursuant to the following performance
criteria: (a) 10% of the shares vest upon achieving each of a 10%, 20%, 30% 40%
and 50% increase in the Company’s total gross revenue in a quarter over its
third quarter 2007 total gross revenue shown on its statement of operations as
reported in its SEC filings, (b) 25% of the shares vest upon the Company’s
achievement of a quarterly operating cash break even (defined as zero or
positive “net cash provided by operations” consistent with or as reported on the
“Consolidated Statement  of Cash Flows” in the financial statements
filed with SEC) and (c) 25% of the shares vest upon the Company’s achievement of
10% net income as a percent of revenue.
  13
  It was
determined that it was more likely than not that 58,000 of the remaining 308,000
restricted shares outstanding as of June 30, 2010, with a fair value of $8,
would vest.  The remaining 250,000 restricted shares outstanding as of
June 30, 2010 have been forfeited as part of a severance agreement on July 13,
2010 (See Note 12).  As such, the Company is amortizing the fair value
of 58,000 shares over the expected period that they will vest and has reversed
the previously recorded compensation expense of $22 and $8 for the grant of
250,000 shares for each of the three and six months ended June 30, 2010. For the
three and six months ended June 30, 2009, the Company recorded amortization
expense of $9.
 
 8.  Commitments
and Contingencies
  Leases
  On March
24, 2010, the Company entered into an Office Space Lease (the “Lease”), with
Horizon Office Development I, L.P., pursuant to which the Company will lease
approximately 18,713 square feet of office space at Horizon II, 3800 Horizon
Boulevard, Bensalem, Pennsylvania, at the Horizon Corporate
Center.  The office space comprises part of the second floor of the
building, and will be used for engineering, corporate and administrative
operations and activities.  The new premises are expected to be available
for occupancy in the second half of 2010 following completion of leasehold
improvements.  The Lease has a term of 89 months from the commencement
date.  Following a full abatement of rent for the first 5 months of the
Lease term, the initial annual base rent is approximately $374.  The annual
base rent increases each year to certain fixed amounts over the course of the
term as set forth in the Lease and will be approximately $504 in the seventh
year.  In addition to the base rent, the Company will also pay its
proportionate share of building operating expenses, insurance expenses, real
estate taxes and a management fee.  The Company paid a security deposit of
approximately $187 as security for its full and prompt performance of the terms
and covenants of the Lease.
 
 The
Company has two options to extend the Lease for a period of 60 months
each.  Each option to extend will be at 95% of the then market rent
rate.  The Company is permitted to terminate the Lease as of the 65th
month of the Lease term upon at least 6 months prior notice, compliance with
certain other conditions and the payment of a termination fee equal to the
amount of unamortized broker commissions paid by landlord plus the unamortized
amount of tenant improvement costs and expenses expended by
landlord.  The Company has the right of first offer during the Lease
term, subject to certain conditions, to lease additional space in the
building.
 
 On June
29, 2010, pursuant to Section 3.7 of the Agreement of Lease, dated April 2,
2009, with an effective date of April 1, 2008, between 3190 Tremont LLC, as
landlord, and WorldGate Service, Inc., as tenant, the Company provided written
notice to the landlord of its election to terminate the lease effective
September 27, 2010.  The lease provides for termination by either
party upon ninety days prior written notice of the party’s intent to
terminate the lease.  There were no termination
penalties.
 
 Disclosure
of Contractual Obligations
 
 The
future minimum contractual lease commitments under leases for each of the fiscal
years ending December 31, are as follows:
 
 2010
      (July 1 to December 31, 2010)
                    
                    $
                    62011
                    
                    
                    3852012
                    
                    
                    4682013
                    
                    
                    4662014
                    
                    
                    477Thereafter
                    
                    
                    1,567Total
                    
                    $
                    3,369
  14
  Other
Commitments
 
 The Company has certain minimum usage guarantees with a vendor that provides
VoIP services with a maximum payment of $100 due in August 2010 if the usage
guarantees are not met. The Company is currently in the process of renegotiating
this usage guarantee.
  Legal
Proceedings
  From time
to time, the Company becomes involved in various legal proceedings, claims,
investigations and proceedings that arise in the normal course of operations.
While the results of such claims and litigation cannot be predicted with
certainty, the Company is not currently aware of any such matters that it
believes would have a material adverse effect on its financial position, results
of operations or cash flows.   In accordance with generally
accepted accounting principles, the Company makes a provision for a liability
when it is both probable that a liability has been incurred and the amount of
the loss or range of loss can be reasonably estimated.  These
provisions are reviewed at least quarterly and adjusted to reflect the impacts
of negotiations, settlements, rulings, advice of legal counsel, and other
information and events pertaining to a particular case.
 
 9.  Related
Party Transactions
  As of
June 30, 2010, the Company reported $1,044 of related party receivables related
to inventory delivered to ACN DPS that the Company has not received product
acceptance or payment as of June 30, 2010 (See Note 3).  In addition,
at June 30, 2010, the Company had $352 of related party liabilities, consisting
of $338 of accounts payable to ACN for purchases of inventory and services and
$14 of accrued interest to WGI on loan advances pursuant to the Revolving
Loan.  The Company currently leases administrative, sales and customer
operations office space from a related party in Concord, North Carolina, with
annual lease costs not material to the Company.  During the three
months ended June 30, 2010, the Company returned, at full purchase price
including freight, units previously purchased from ACN valued at $800 with
concurrent reductions made to accounts payable and inventory to reflect these
returns.  At June 30, 2010, the Company also reported $9,097 of
deferred revenues consisting of $7,804 related to inventory delivered to ACN DPS
, but product acceptance has not been received (See Note 3) and $1,200 related
to uncompleted software development with ACN.  As of December 31,
2009, the Company reported $262 of related party liabilities, consisting of $252
of accounts payable to ACN for purchases of services and $10 of accrued interest
to WGI on loan advances pursuant to the Revolving Loan.
  10.   Concentration
of Credit and Business Risk
  Financial
instruments that potentially subject the Company to a concentration of credit
risk principally consist of cash and cash equivalents and accounts
receivable.  At times, the Company’s cash and cash equivalents may be
uninsured or in deposit accounts that exceed the Federal Deposit Insurance
Corporation insurance limit.  At June 30, 2010, all of the Company’s cash
was held at one financial institution.
 
 Sales to
major customers, in excess of 10% of total revenues for each of the six months
ended June 30, 2010 and 2009 were as follows:
 
  Customer
                          
                          SalesFor the Six
                            Months Ended
                            June 30, 2010
                          
                          
                          For the Six
                            Months Ended
                            June 30, 2009A
                          
                          
                          51
                          %
                          
                          
                          60
                          %B
                          
                          
                          0
                          
                          
                          
                          24
                          %
  The above
customers are all related to the OEM Direct business segment of the
Company.
 
 Accounts
receivable-related party as of June 30, 2010 consisted of receivables from the
shipment of video phones to ACN.
 As of
June 30, 2010, Kenmec is the sole direct volume manufacturer of video phones to
the Company.  A formal relationship was established with Kenmec in
November 2009.  Kenmec is a Taiwanese manufacturer and distributor of high
performance, high speed data and computer networking products. The
components and raw materials used in the Company’s video phone are generally
available from a multitude of vendors and are sourced by Kenmec based on, among
other factors, reliability, price and availability.
 
 15
  11.
   Client and Segment Data
 The
Company’s reportable operating segments consist of the following two
business segments principally based upon the sale and distribution channels of
the Company’s products and services: Consumer Services and OEM Direct.  The
reporting for the Consumer Services segment includes the revenue and cost of
revenues for products and related recurring services. The reporting for the OEM
Direct segment includes the revenue and cost of revenues for digital video
phones and maintenance services.
  These
product and service channels are provided to different customer groups, and are
managed under a consolidated operations management. The Company’s
reportable segments have changed from the prior year to accommodate the
refinement of selling and distribution of the Company’s products and services
into these two channels. The Company evaluates performance based on revenue and
gross margin (net revenues less costs of goods sold).
  The
following tables summarize financial information about the Company’s business
segments for the three and six months ended June 30, 2010 and 2009.
 
 For the three months ended June 30,
      2010Consumer
                        Services
                      
                      
                      OEM Direct
                      
                      
                      ConsolidatedRevenues
                      
                      $
                      90
                      
                      
                      $
                      34
                      
                      
                      $
                      124Gross
      Profit
                      
                      $
                      81
                      
                      
                      $
                      11
                      
                      
                      $
                      92
  For the three months ended June 30,
      2009Consumer
                        Services
                      
                      
                      OEM Direct
                      
                      
                      ConsolidatedRevenues
                      
                      $
                      103
                      
                      
                      $
                      40
                      
                      
                      $
                      143Gross
      Profit
                      
                      $
                      92
                      
                      
                      $
                      46
                      
                      
                      $
                      138
  For the six months ended June 30,
      2010Consumer
                        Services
                      
                      
                      OEM Direct
                      
                      
                      ConsolidatedRevenues
                      
                      $
                      172
                      
                      
                      $
                      239
                      
                      
                      $
                      411Gross
      Profit
                      
                      $
                      154
                      
                      
                      $
                      47
                      
                      
                      $
                      201
  For the six months ended June 30,
      2009Consumer
                        Services
                      
                      
                      OEM Direct
                      
                      
                      ConsolidatedRevenues
                      
                      $
                      211
                      
                      
                      $
                      1,169
                      
                      
                      $
                      1,380Gross
      Profit
                      
                      $
                      189
                      
                      
                      $
                      272
                      
                      
                      $
                      461
  Identifiable AssetsConsumer
                        Services
                      
                      
                      OEM Direct
                      
                      
                      ConsolidatedAt
      June 30, 2010
                      
                      $
                      412
                      
                      
                      $
                      8,982
                      
                      
                      $
                      9,394At
      December 31, 2009
                      
                      $
                      165
                      
                      
                      $
                      622
                      
                      
                      $
                      787
  16
  The
identifiable assets noted above include inventory, accounts receivable –related
party  and trade account receivables, as applicable to each
segment.
 
 12.
Subsequent Events
 
 The
Company evaluates events that have occurred after the balance sheet date, but
before the financial statements are issued.
 
 On July
13, 2010, Joel Boyarski resigned as the Chief Financial Officer, Treasurer and
Senior Vice President, Finance and Administration effective
immediately.  Mr. Boyarski will remain in his role as principal
accounting officer and principal financial officer on an interim basis until
August 20, 2010 and will provide transition services in a senior advisory role
through October 20, 2010.  In connection with his resignation, the
Company agreed to enter into a severance agreement with Mr. Boyarski pursuant to
which the Company will provide him with certain severance benefits following the
end of his employment on October 20, 2010, including continuation of salary for
a period of six months, reimbursement of certain health, dental and vision
benefits for a period of six months, and an extension of the period during which
vested options may be exercised.  The severance agreement provides a
general release in favor of the Company and its affiliates.
  Effective
as of July 13, 2010, James G. Dole was appointed as the Company’s Chief
Financial Officer, Treasurer and Senior Vice President, Finance.  Mr.
Dole will become the Company’s principal accounting officer and principal
financial officer as of August 20, 2010.  Pursuant to the letter
agreement, dated June 23, 2010, between the Company and Mr. Dole, the Company
agreed (1) to pay Mr. Dole $210 per year, (2) to grant Mr. Dole an option to
purchase 1,500,000 shares of common stock of the Company at an exercise price of
$0.48 per share and which vests 25% per year, with the first 25% vesting on July
13, 2011, and (3) to provide Mr. Dole severance payments in the amount of six
(6) months’ salary and benefits continuation should the Company terminate his
employment for any reason without Cause, where “Cause” means Mr. Dole’s (i)
willful or continued misconduct, breach of fiduciary duty or gross negligence in
the performance (or failure thereof) of his duties; (ii) intentional failure or
refusal to perform lawfully assigned duties consistent with his position; (iii)
material breach of the letter agreement; or (iv) conviction of or entering a
plea of nolo contendere
to any felony or any crime (whether or not a felony) involving dishonesty or
fraud.
 
 On August
11, 2010, the Company entered into the Second Amendment to the Revolving Loan
with WGI (the First Amended Revolving Loan as amended by the Second Amendment,
the “Second Amended Revolving Loan”), pursuant to which WGI will provide to the
Company a line of credit for an additional $2,000 resulting in an aggregate
principal amount available for borrowing under the Second Amended Revolving Loan
of $7,000 (See Note 6).  In addition, on August 11, 2010, pursuant to
the Second Amended Revolving Loan, the Company issued a revised Revolving
Promissory Note, dated October 29, 2009 (the “New Revolving Promissory Note”),
in a principal amount of $7,000, to WGI.  Other than amending the
maximum principal amount available under the Second Amended Revolving Loan from
$5,000 to $7,000, the terms of the Second Amended Revolving Loan and the New
Revolving Promissory Note are the same as previously disclosed in (See Note
6).
 
 In
connection with the Second Amended Revolving Loan, on August 11, 2010, the
Company granted WGI a warrant to purchase up to 8 million shares of the
Company’s common stock at an exercise price of $0.432 per share.  The
August 2010 WGI Warrant was fully vested on issuance and has a term of 10 years
(See Note 6).
 
 17
  ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Dollar amounts contained in this Item 2 are in thousands,
except for share and per share amounts)
  FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
  From time
to time, we may provide information, whether orally or in writing, including
those contained in the following Management’s Discussion and Analysis of
Financial Condition and Results of Operations, which are deemed to be
“forward-looking” within the meaning of the Private Securities Litigation Reform
Act of 1995.  Any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking
statements.  These forward-looking statements and other information
are based on our beliefs as well as assumptions made by us using information
currently available.  The words  “if,” “will,” “predicts,”
“may,” “should,” “believe,” “anticipate,” “future,” “forward,” “potential,”
“estimate,” “reinstate,” “opportunity,” “goal,” “objective,” “continue,”
“exchange,” “growth,” “outcome,” “could,” “expect,” “intend,” “plan,”
“strategy,” “provide,” “commitment,” “result,” “seek,” “pursue,” “ongoing,”
“include” or in the negative of such terms or comparable terminology and similar
expressions, as they relate to us, are intended to identify forward-looking
statements.  In accordance with the provisions of the Private
Securities Litigation Reform Act of 1995, we are making investors aware that
such forward-looking statements, because they relate to future events, are by
their very nature subject to many important factors that could cause actual
results to differ materially from those contemplated by the forward-looking
statements.  Factors and risks that could cause actual results to
differ materially from those set forth or contemplated in forward looking
statements include the risks identified in our filings with the Securities and
Exchange Commission, including the risks identified in “Item 1A. Risk Factors”
in our Annual Report on Form 10-K for the fiscal year ended December 31,
2009.  Forward-looking statements reflect our current views with
respect to future events and are subject to certain risks, uncertainties and
assumptions.  Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from such forward looking statements or
expectations.  Readers are also cautioned not to place undue reliance
on these forward looking statements which speak only as of the date these
statements were made.  Except as required by law, we do not intend to
update or revise any forward looking statements, whether as a result of new
information, future events or otherwise.
  General
  We are a
leading provider of digital voice and video phone services and next generation
video phones.  We design and develop innovative digital video phones
featuring high quality, real-time, two-way video.  We also provide a
turn-key digital voice and video communication services platform supplying
complete back-end support services with a focus on best-in-class customer
service.  The unique combination of functional design, advanced
technology and use of IP broadband networks provides true-to-life video
communication.  As a result, we bring family and friends closer
together through an immediate video connection allowing them to instantly hear
and see each other for a face-to-face conversation.
  We are
transitioning from a business model focused primarily on one-time digital video
phone equipment sales to delivering an integrated audio and video telephony
solution.  With our new video phone platform, we will not only offer
what we believe is an industry leading line of consumer video phones but we will
also provide a turnkey digital voice and video phone service.  By
building a service that is able to not only provide video telephony, but also
serve as a home’s primary telephone service, we enable a recurring-revenue based
business model that encourages service loyalty and one where we are able to
bundle in the cost of the video phone itself.  The end result is a
lower start-up cost to the consumer driving faster market adoption of our video
phones.  Further, we believe WorldGate will be unique in the market in
that we will offer an end-to-end solution – digital video phones fully
integrated with a digital voice and video phone service – thus ensuring a
quick and trouble-free installation process.
  We have
two reportable business segments: Consumer Services and OEM Direct. The Consumer
Services segment is aimed at the marketing and distribution of products and
related recurring services to end users. In the Consumer Services segment, we
market to three principal groups: (i) directly to retail consumers through the
Internet and our corporate website, (ii) through commissioned independent sales
representatives, and (iii) on a wholesale basis through established
telecommunication providers who will offer our video phone bundle as a product
extension to their existing customer base. The OEM Direct segment is focused on
selling digital video phones and maintenance services directly to
telecommunications service providers who already have a digital voice and video
management and network infrastructure, such as incumbent service providers,
CLECs, international telecom service providers and cable service
providers.
  Critical
Accounting Policies and Estimates.
  Our
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United
States.  These generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of net revenues
and expenses during the reporting period.  Actual results could differ
from those estimates.
  18
  Our
significant accounting policies are described in the Management’s Discussion and
Analysis section and the notes to the consolidated financial statements included
in our annual report on Form 10-K for the fiscal year ended December 31,
2009.  Judgments and estimates of uncertainties are required in
applying our accounting policies in many areas.  Following are some of
the areas requiring significant judgments and estimates:  revenue
recognition, inventory valuation, stock based compensation, valuation of
warrants, and deferred tax asset valuation allowances.  Management has
discussed the development and selection of these policies with the Audit
Committee of our Board of Directors, and the Audit Committee of the Board of
Directors has reviewed our disclosures of these policies.  There have
been no material changes to the critical accounting policies or estimates
reported in the Management’s Discussion and Analysis section or the audited
financial statements for the year ended December 31, 2009 as filed with the
Securities and Exchange Commission.
  During
the three and six months ended June 30, 2010 we shipped $7,804 of units, that
are pending customer product acceptance by ACN DPS (a related party) and was
therefore recorded as deferred revenue by the Company.  Of the $7,804
of units shipped, we received full payment for $6,760 of such units and $1,044
of such units remain in accounts receivable.  The Company also
received $396 as of June, 30, 2010 as partial payment for units that were
shipped after June 30, 2010 that were also pending customer product acceptance
by ACN DPS (See Note 3 of the accompanying condensed consolidated financial
statements).
  Results
of Operations for the Three and Six Months Ended June 30, 2010 and June 30,
2009.
  Revenues.
  For the three months ended June 30,
                          
                          
                          For the six months ended June 30,2010
                          
                          
                          2009
                          
                          
                          Change
                          
                          
                          2010
                          
                          
                          2009
                          
                          
                          ChangeRevenues:Consumer Services
                          
                          $
                          90
                          
                          
                          $
                          103
                          
                          
                          $
                          (13
                          )
                          
                          
                          (13
                          )%
                          
                          $
                          172
                          
                          
                          $
                          211
                          
                          
                          $
                          (39
                          )
                          
                          
                          (19
                          )%OEM Direct
                          
                          $
                          34
                          
                          
                          $
                          40
                          
                          
                          $
                          (6
                          )
                          
                          
                          (15
                          )%
                          
                          $
                          239
                          
                          
                          $
                          1,169
                          
                          
                          $
                          (930
                          )
                          
                          
                          (80
                          )%Total net revenues
                          
                          $
                          124
                          
                          
                          $
                          143
                          
                          
                          $
                          (19
                          )
                          
                          
                          (13
                          )%
                          
                          $
                          411
                          
                          
                          $
                          1,380
                          
                          
                          $
                          (969
                          )
                          
                          
                          (70
                          )%
  Consumer
services revenues consist of shipments of products and related recurring
services to end users.  For the three months ended June 30, 2010
compared with the three months ended June 30, 2009, the decrease of $13 in
Consumer Services revenues primarily reflects reduced recurring retail service
revenues resulting from reduced shipments of video phones.  For the
six months ended June 30, 2010 compared to the six months ended June 30, 2009,
the decrease of $39 in Consumer Services revenues resulted from reduced
shipments of video phones.
  Direct
OEM revenues consist of digital video phones and maintenance services sold
directly to telecommunications service providers who already have a digital
voice and video management and network infrastructure.  For the three
months ended June 30, 2010 compared with the three months ended June 30, 2009,
the decrease of $6 in OEM Direct revenues primarily reflects reduced non
recurring engineering services revenue of $37 recognized in the second quarter
of 2009 related to the settlement of the dispute with Aequus in January 2009,
partially offset by $14 of increased shipments of video phones to our Video
Relay Service (“VSR”) provider customers and $17 of related video phone
products.  For the six months  ended June 30, 2010 compared
to the six months ended June 30, 2009, the decrease of $930 in OEM Direct
revenues primarily reflects $833 of reduced non recurring engineering services
revenue recognized during the six months ended June 30, 2009 related to the
settlement of the dispute with Aequus in January 2009 and reduced shipment of
video phones of $97 primarily to our VSR provider customers during the six
months ended June 30, 2010 compared to the six months ended June 30,
2009.
  Cost
of Revenues and Gross Profit
  For the three months ended June 30,
                    
                    
                    For the six months ended June 30,2010
                    
                    
                    2009
                    
                    
                    Change
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    ChangeCost
      of Revenues:Consumer
      Services
                    
                    $
                    9
                    
                    
                    $
                    10
                    
                    
                    $
                    (1
                    )
                    
                    
                    (10
                    )%
                    
                    $
                    18
                    
                    
                    $
                    22
                    
                    
                    $
                    (4
                    )
                    
                    
                    (18
                    )%OEM
      Direct
                    
                    $
                    23
                    
                    
                    $
                    (5
                    )
                    
                    $
                    28
                    
                    
                    
                    560
                    %
                    
                    $
                    192
                    
                    
                    $
                    897
                    
                    
                    $
                    (705
                    )
                    
                    
                    (79
                    )%Total
      Cost of Revenues
                    
                    $
                    32
                    
                    
                    $
                    5
                    
                    
                    $
                    27
                    
                    
                    
                    540
                    %
                    
                    $
                    210
                    
                    
                    $
                    919
                    
                    
                    $
                    (709
                    )
                    
                    
                    (77
                    )%Gross
      Profit:Consumer
      Services
                    
                    $
                    81
                    
                    
                    $
                    92
                    
                    
                    $
                    (11
                    )
                    
                    
                    (12
                    )%
                    
                    $
                    154
                    
                    
                    $
                    189
                    
                    
                    $
                    (35
                    )
                    
                    
                    (18
                    )%OEM
      Direct
                    
                    $
                    11
                    
                    
                    $
                    46
                    
                    
                    $
                    (35
                    )
                    
                    
                    (76
                    )%
                    
                    $
                    47
                    
                    
                    $
                    272
                    
                    
                    $
                    (225
                    )
                    
                    
                    (83
                    )%Total
      Gross Profit
                    
                    $
                    92
                    
                    
                    $
                    138
                    
                    
                    $
                    (46
                    )
                    
                    
                    (33
                    )%
                    
                    $
                    201
                    
                    
                    $
                    461
                    
                    
                    $
                    (260
                    )
                    
                    
                    (56
                    )%
  19
 
 Cost of
Revenues.  The cost of revenues for the Consumer Services
business segment consists of direct costs related to product and delivery costs
relating to the deliveries of video phones to end user customers.  For
the three months ended June 30, 2010 compared with the three months ended June
30, 2009, the decrease of $1 in cost of revenues for the Consumer Services
business segment primarily reflects slightly reduced shipments of video phones
to our retail customers.  For the six months ended June 30, 2010 compared
with the six months ended June 30, 2009, the decrease of $4 in cost of revenues
for the Consumer Services business segment also primarily reflects slightly
reduced shipments of video phones to our retail customers.
  The cost
of revenues for the OEM Direct business segment consists of direct costs related
to product and delivery costs related to deliveries of video phones primarily to
resellers and costs related to non-recurring engineering services
revenues.  For the three months ended June 30, 2010 compared with the
three months ended June 30, 2009, the increase of $28 in cost of revenues for
the OEM Direct business segment primarily reflects increased shipments of $32
for video phones and video related products.  For the six months ended
June 30, 2010 compared with the six months ended June 30, 2009, the decrease of
$705 in cost of revenues for the OEM Direct business segment primarily reflects
a $600 reserve for excess and obsolete inventory recorded during the six months
ended June 30, 2009.  There was no inventory reserve recorded during
the six months ended June 30, 2010.  In addition to the inventory
reserve in 2009 noted above, for the six months ended June 30, 2010 cost of
revenues were also reduced by $91 as a result of the reduced shipments to our
VSR customers, when compared to the same period in 2009.
  Gross
Profit.
  For the
three months ended June 30, 2010 compared with the three months ended June 30,
2009, the decrease of $11 in gross profit for the Consumer Services business
segment primarily reflects a decrease of $13 in product and service
revenues.   For the three months ended June 30, 2010 compared with the
three months ended June 30, 2009, the decrease of $35 in gross profit for the
OEM Direct business segment primarily reflects reduced non recurring engineering
service revenues. There were no non-recurring engineering service revenues
recorded during the three months ended June 30, 2010.   For the
six months ended June 30, 2010 compared with the six months ended June 30, 2009,
the decrease of $35 in gross profit for the Consumer Services business segment
primarily reflects the decrease in product revenues.  For the six
months ended June 30, 2010 compared with the six months ended June 30, 2009, the
decrease of $225 in gross profit for the OEM Direct business segment primarily
reflects $833 of reduced non recurring engineering services revenue recognized
during the six months ended June 30, 2009 related to the settlement of the
dispute with Aequus in January 2009, partially offset by the $600 reserve for
excess and obsolete inventory recorded during the six months ended June 30,
2009.
  Expenses
From Operations
  For the three months ended June 30,
                    
                    
                    For the six months ended June 30,2010
                    
                    
                    2009
                    
                    
                    Change
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    ChangeExpenses
      from Operations:Engineering
      and development
                    
                    $
                    926
                    
                    
                    $
                    618
                    
                    
                    $
                    308
                    
                    
                    
                    50
                    %
                    
                    $
                    1,847
                    
                    
                    $
                    1,120
                    
                    
                    $
                    727
                    
                    
                    
                    65
                    %Operations
                    
                    $
                    217
                    
                    
                    $
                    128
                    
                    
                    $
                    89
                    
                    
                    
                    70
                    %
                    
                    $
                    432
                    
                    
                    $
                    249
                    
                    
                    $
                    183
                    
                    
                    
                    74
                    %Sales
      and marketing
                    
                    $
                    363
                    
                    
                    $
                    55
                    
                    
                    $
                    308
                    
                    
                    
                    560
                    %
                    
                    $
                    675
                    
                    
                    $
                    86
                    
                    
                    $
                    589
                    
                    
                    
                    685
                    %General
      and administrative
                    
                    $
                    1,176
                    
                    
                    $
                    1,605
                    
                    
                    $
                    (429
                    )
                    
                    
                    (27
                    )%
                    
                    $
                    2,472
                    
                    
                    $
                    2,496
                    
                    
                    $
                    (24
                    )
                    
                    
                    (1
                    )%Depreciation
      and amortization
                    
                    $
                    99
                    
                    
                    $
                    80
                    
                    
                    $
                    19
                    
                    
                    
                    24
                    %
                    
                    $
                    187
                    
                    
                    $
                    119
                    
                    
                    $
                    68
                    
                    
                    
                    57
                    %Total
      Expenses from Operations
                    
                    $
                    2,781
                    
                    
                    $
                    2,486
                    
                    
                    $
                    295
                    
                    
                    
                    12
                    %
                    
                    $
                    5,613
                    
                    
                    $
                    4,070
                    
                    
                    $
                    1,543
                    
                    
                    
                    38
                    %
  Engineering and
Development.  Engineering and development expenses primarily
consist of compensation, and the cost of design, programming, testing,
documentation and support of our video phone product.  For the three
months ended June 30, 2010 compared with the three months ended June 30, 2009,
the increase of $308 in engineering and development expenses primarily reflects
the increased development effort on the next generation video phone consisting
of staff compensation costs that increased by $166 and certain product
developmental expenditures that increased by $146.  For the six months
ended June 30, 2010 compared with the six months ended June 30, 2009, the
increase of $727 in engineering and development expenses primarily reflects the
increased development effort on the next generation video phone consisting of
staff compensation costs that increased by $418 and certain product
developmental expenditures that increased by $317.
  20
  Operations.  Operations
expenses consist primarily of the indirect cost of providing the software
systems that enable us to manage our network and service offering and the
resources necessary to deliver these services, including our
network  systems, customer portal, our customer service center,
billing expenses, and logistics and inventory management.  For the
three months ended June 30, 2010 compared with the three months ended June 30,
2009, the increase of $89 in operations expenses primarily reflects increased
consulting fees of $22, increased customer care and network service costs of
$45, and increased travel expenditures of $31.  For the six months
ended June 30, 2010 compared with the six months ended June 30, 2009, the
increase of $183 in operations expenses primarily reflects increased consulting
fees of $59, increased customer care and network service costs of $106,
increased travel expenditures of $60 and increased bad debt expense of $26,
partially offset by reduced staff compensation costs of $73.
  Sales and
Marketing.  Sales and marketing expenses consist primarily of
compensation, attendance at conferences and trade shows, travel costs,
advertising, promotions and other marketing programs related to sales of our
video phone products and services.  For the three months ended June
30, 2010 compared with the three months ended June 30, 2009, the increases of
$308 in sales and marketing expenses primarily reflects increased staff
compensation cost of $167, increased travel expenditures of $28, and increased
trade show and marketing expenditures of $111.  For the six months
ended June 30, 2010 compared with the six months ended June 30, 2009, the
increase of $589 in sales and marketing expenses primarily reflects increased
staff compensation cost of $275, increased travel expenditures of $59, and
increased trade show and marketing expenditures of $216.
  General and
Administrative.  General and administrative expenses consist
primarily of expenditures for administration, office and facility operations, as
well as finance and general management activities, including legal, accounting
and professional fees.  For the three months ended June 30, 2010
compared with the three months ended June 30, 2009, the decrease of $429 in
general and administrative expenses primarily reflects decreased staff
compensation costs of $616 partially offset by increased non-cash based
compensation costs from the issuance of employee stock options of
$140.  For the six months ended June 30, 2010 compared with the six
months ended June 30, 2009, the decrease of $24 in general and administrative
expenses primarily reflects decreased staff compensation costs of $593 primarily
related to severance for executives paid in the six months ended June 30,2009,
and decreased insurance costs of $37, partially offset with increased non-cash
based compensation costs from the issuance of employee stock options of $461 and
increased consulting fees of $94.
  Other
Income and Expenses
  For the three months ended June 30,
                    
                    
                    For the six months ended June 302010
                    
                    
                    2009
                    
                    
                    Change
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    ChangeOther
      Income and Expenses:Interest
      and other income
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    8
                    
                    
                    $
                    (8
                    )
                    
                    
                    (100
                    )%Change
      in fair value of derivative warrants and conversion
options
                    
                    $
                    -
                    
                    
                    $
                    284
                    
                    
                    $
                    (284
                    )
                    
                    
                    (100
                    )%
                    
                    $
                    -
                    
                    
                    $
                    4,209
                    
                    
                    $
                    (4,209
                    )
                    
                    
                    (100
                    )%Amortization
      of debt issuance costs
                    
                    $
                    (179
                    )
                    
                    $
                    -
                    
                    
                    $
                    (179
                    )
                    
                    
                    (100
                    )%
                    
                    $
                    (224
                    )
                    
                    $
                    -
                    
                    
                    $
                    (224
                    )
                    
                    
                    (100
                    )%Amortization
      of debt discount
                    
                    $
                    -
                    
                    
                    $
                    (2,235
                    )
                    
                    $
                    2,235
                    
                    
                    
                    100
                    %
                    
                    $
                    -
                    
                    
                    $
                    (2,918
                    )
                    
                    $
                    2,918
                    
                    
                    
                    100
                    %Income
      from service fee contract termination
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    348
                    
                    
                    $
                    (348
                    )
                    
                    
                    (100
                    )%Interest  and
      other expense
                    
                    $
                    (91
                    )
                    
                    $
                    (40
                    )
                    
                    $
                    (51
                    )
                    
                    
                    (128
                    )%
                    
                    $
                    (170
                    )
                    
                    $
                    (113
                    )
                    
                    $
                    (57
                    )
                    
                    
                    (50
                    )%Total
      Other Income (Expense)
                    
                    $
                    (270
                    )
                    
                    $
                    (1,991
                    )
                    
                    $
                    1,721
                    
                    
                    
                    86
                    %
                    
                    $
                    (394
                    )
                    
                    $
                    1,534
                    
                    
                    $
                    (1,928
                    )
                    
                    
                    (126
                    )%
  Interest and Other
Income.  Interest and other income consisted of interest earned
on cash and cash equivalents.  For the three months ended June 30,
2010 and the three months ended June 30, 2009 there was no material interest or
other income.  For the six months ended June 30, 2010 compared to the
six months ended June 30, 2009 the decrease of $8 in interest and other income
primarily reflects a refund received from a vendor during the six months ended
June 30, 2009.
  Change in fair value of
derivative warrants.  The fair value adjustments of our
derivative warrants issued in our August 11, 2006 and October 13, 2006 private
placements were primarily a result of changes in our common stock price during
the three months ended June 30, 2009.  These derivative warrants were
terminated upon completion of the April 2009 WGI transactions and therefore
there were no derivative warrants outstanding for the three and six months ended
June 30, 2010.
  Amortization of Debt
Issuance Costs and Debt Discount.   For the three and six
months ended June 30, 2010, the $179 and $224, respectively, of amortization of
debt issuance costs relates to warrants issued to WGI on March 9, 2010 (see Note
6 of the accompanying condensed consolidated financial statements). For the
three and six months ended June 30, 2009, the $2,235 and $2,918 respectively of
amortization of debt discount consists of the amortization of the secured
convertible debentures issued in the August 11, 2006 and October 13, 2006
private placements.
  21
  Income from Service Contract
Termination.During the six months
ended June 30, 2009, we realized $348 of other income resulting from the payment
from a customer for the elimination of previously agreed service
fees.  There were no contract termination fees realized during the
three and six months ended June 30, 2010.
 
 Interest
Expense.  For the three and six months ended June 30, 2010 the
interest expense of $91 and $170 respectively primarily reflects the accrued
interest under our Revolving Loan and Security Agreement, as amended (see Note 6
of the accompanying condensed consolidated financial statements), and the
carrying costs under our ACN Service Agreement (see Note 9 of the accompanying
condensed consolidated financial statements).  The $40 and $113 of
interest expense incurred for the three and six months ended June 30, 2009
respectively reflects interest under the secured convertible debentures issued
in the August 11, 2006 and October 13, 2006 private placements (these secured
convertible debentures were terminated on April 6, 2009).
  Income
Taxes.  We have incurred net operating losses since inception
and accordingly had no current income tax provision and have not recorded any
income tax benefit for those losses, since realization of such benefit is
currently uncertain.
  Liquidity
and Capital Resources
  Our
capitalization as of June 30, 2010 and as of December 31, 2009 is summarized
below:
  June 30, 2010
                    
                    
                    December 31, 2009Capitalization:Short-term
      debt, including current portion of long-term debt
                    
                    $
                    106
                    
                    
                    $
                    22Long-term
      debt
                    
                    $
                    2,000
                    
                    
                    $
                    1,400Total
      debt
                    
                    $
                    2,106
                    
                    
                    $
                    1,422Stockholders’
      deficiency
                    
                    $
                    (3,609
                    )
                    
                    $
                    (2,035
                    )Total
      debt and stockholders’ deficiency (total capitalization)
                    
                    $
                    (1,503
                    )
                    
                    $
                    (613
                    )Percent
      total debt to total capitalization
                    
                    
                    140
                    %
                    
                    
                    232
                    %Percent
      long-term debt to equity
                    
                    
                    55
                    %
                    
                    
                    69
                    %Percent
      total debt to equity
                    
                    
                    58
                    %
                    
                    
                    70
                    %
 
 The
weighted average annual interest rate on total debt at June 30, 2010 was
10.0%.  Total debt increased by $684 as of June 30, 2010 as compared
to December 31, 2009.  As of June 30, 2010, and subject to certain
conditions which may limit the amount that may be borrowed at any particular
time, we had $3,000 of unused borrowing capacity under our Revolving Loan and
Security Agreement, as amended, with WGI Investor LLC (“WGI”). As of August 11,
2010, our long-term debt increased by $1,500 to $3,500 resulting in $3,500 of
unused borrowing capacity under our Revolving Loan and Security Agreement, as
amended (see Note 6 of the accompanying condensed consolidated financial
statements).
  Sources of
Liquidity.  As of June 30, 2010, our primary sources of
liquidity consisted of proceeds from borrowings from WGI under our Revolving
Loan and Security Agreement, as amended, pursuant to which WGI provides us a
line of credit in an aggregate principal amount of $5,000; the sale of video
phones and voice and video services; and the exercise of options on our common
stock.  Cash and cash equivalents are invested in investments that are
highly liquid, are high quality investment grade and have original maturities of
less than three months.    As of June 30, 2010, we had cash
and cash equivalents of $634.
  For the three months ended June 30,
                    
                    
                    For the six months ended June 30,2010
                    
                    
                    2009
                    
                    
                    Change
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    ChangeOther
      Liquidity and Capital Resources:Cash
      Provided By (Used in) Operations
                    
                    $
                    1,830
                    
                    
                    $
                    (529
                    )
                    
                    $
                    2,359
                    
                    
                    
                    446
                    %
                    
                    $
                    (613
                    )
                    
                    $
                    (1,391
                    )
                    
                    $
                    778
                    
                    
                    
                    56
                    %Cash  Provided
      By (Used in) Investing Activities
                    
                    $
                    (158
                    )
                    
                    $
                    (229
                    )
                    
                    $
                    71
                    
                    
                    
                    31
                    %
                    
                    $
                    (168
                    )
                    
                    $
                    (256
                    )
                    
                    $
                    88
                    
                    
                    
                    34
                    %Cash
      Provided By (Used in) Financing Activities
                    
                    $
                    (1,687
                    )
                    
                    $
                    1,647
                    
                    
                    $
                    (3,334
                    )
                    
                    
                    (202
                    )%
                    
                    $
                    837
                    
                    
                    $
                    2,427
                    
                    
                    $
                    (1,590
                    )
                    
                    
                    (66
                    )%
  22
  Cash Provided By (Used in)
Operations.  For the three months ended June 30, 2010 compared
with the three months ended June 30, 2009, the increase of $2,359 in cash
provided from operations primarily reflects the net increase in working capital
related to products shipped to ACN DPS pursuant to the Master Purchase
Agreement, as amended (see Note 2 of the accompanying condensed consolidated
financial statements). For the six months ended June 30, 2010 compared with the
six months ended June 30, 2009, the decrease of $778 in cash used in operations
results primarily from the products shipped to ACN DPS pursuant to the Master
Purchase Agreement, as amended, where the ACN DPS payments terms have been
accelerated.
  Cash Provided By (Used in)
Investing Activities.  For the three and six months ended June
30, 2010 compared with the three and six months ended June 30, 2009, the Company
utilized $71 and $88, respectively, less in investing activities primarily
reflecting reduced purchases in capital expenditures for furniture and
equipment.
  Cash Provided By (Used in)
Financing Activities.  For the three months ended June 30, 2010
compared with the three months ended June 30, 2009, the increase of $3,334 in
cash used in financing activities primarily reflects reduced advances of $1,800
received during the three months ended June 30, 2010 under our Revolving Loan
and Security Agreement, as amended, with WGI and reduced cash of $1,581 provided
by the exercise of common stock issuances during the three months ended June 30,
2009.  For the six months ended June 30, 2010 compared with the six
months ended June 30, 2009, the $1,590 decrease in cash provided by financing
activities primarily reflects the decrease in cash received of $1,581 provided
by the issuance of common stock during the three months ended June 30,
2009.
  Deferred
Revenue.  During the three and six months ended June 30, 2010,
we shipped $7,804 of units, that are pending customer product acceptance by ACN
DPS (a related party) and was therefore recorded as deferred revenue by the
Company.  Of the $7,804 of units shipped, we received full payment of
$6,760 of such units and $1,044 of such units remain in accounts
receivable.  The Company also received $396 as of June, 30, 2010 as
partial payment for units that were shipped after June 30, 2010 that were also
pending customer product acceptance by ACN DPS (See Note 3 of the accompanying
condensed consolidated financial statements).    Although
the Company expects ACN DPS to accept the product in accordance with the terms
of the Master Purchase Agreement, there are no assurances that such acceptance
will be provided.  If ACN DPS does not accept the product, ACN DPS may
return the product to the Company and the Company would be obligated to return
all payments received to ACN DPS.  If ACN DPS does accept the product,
the Company would recognize as revenue all units shipped. As of the date of the
filing of this Form 10-Q, product acceptance from ACN DPS had not been
received.
  Operations and
Liquidity. We have incurred recurring net losses and have an accumulated
deficit of $281,551, stockholder’s deficiency of $3,609 and a working capital
deficiency of $5,635 as of June 30, 2010.  On October 28, 2009, we
entered into a Revolving Loan and Security Agreement with WGI pursuant to which
WGI agreed to provide to the Company a line of credit in a principal amount of
$3,000. On March 9, 2010, the principal amount of the line of credit was
increased to $5,000 (see Note 6 of the accompanying condensed consolidated
financial statements).  As of June 30, 2010, the Company had received
aggregate advances under this agreement of 2,000, and during the period July 1,
2010 through August 11, 2010, the Company received an additional $1,500 in
advances against the increased credit line.  As of August 11, 2010,
there was $3,500 of  unused borrowing capacity under our Revolving
Loan and Security Agreement, as amended.
 
 As of
June 30, 2010, we had $17,919 of liabilities.  These liabilities
primarily included $2,000 under the Revolving Loan and Security Agreement, as
amended, $5,992 of accounts payable and accrued expenses, $9,097 of deferred
revenues and income, $362 of accrued expenses and $352 payable to related
parties.  Substantially all of our assets are pledged pursuant to the
Revolving Loan and Security Agreement, as amended.
  Our
ability to generate cash is dependent upon the sale of our product and services,
our ability to enter into arrangements to provide services, and on obtaining
cash through the private or public issuance of debt or equity securities. 
Given that our voice and video phone business involves a newly developed video
phone with no market penetration in an underdeveloped market sector, no
assurances can be given that sufficient sales, if any, will materialize. The
lack of success of our sales efforts could also have an adverse impact on our
ability to raise additional financing.
  Based on
management’s internal forecasts and assumptions regarding its short term cash
requirements, the increase in and full utilization of the expanded credit line
of the Revolving Loan (see Note 6 and Note 12 of the accompanying condensed
consolidated financial statements), finalization and product
acceptance  by ACN of the Company’s new voice and video phone, the
delivery of these new video phones expected going forward, the expected
placement of purchase orders and receipt of advance funds for the purchase of
units by ACN DPS pursuant to a Master Purchase Agreement pursuant to which ACN
DPS committed to purchase 300,000 videophones over a two-year period, and the
Company’s current forecast for sales for other products and services, the
Company believes that it will have sufficient working capital to support its
current operating plans through at least June 30, 2011.However, there can be no
assurance given that these assumptions are correct or that the revenue
projections associated with sales of products and services will materialize to a
level that will provide us with sufficient capital or that sales will be
sustainable over the short and long term so as to obviate the need for
additional funding.
  23
  If these
assumptions do not materialize, or do not materialize in the timeframe we
project, we will need to obtain additional funding through the private or public
issuance of debt or equity securities.  We continue to evaluate
possibilities to obtain additional financing through public or private equity or
debt offerings, asset securitizations, or from other sources to address the
risks inherent in our plans and to help insure that we have the adequate
financial resources in the event the realization of our plan requires additional
time or is faced by additional marketplace challenges.
  We
continue to focus on the business elements we believe are important for our
sustainability.  We continue to explore additional service and
distribution sales opportunities.  We believe that growing the
Consumer Services segment of our business, which includes a recurring revenue
stream, is an essential element in the long term sustainability our
operations.  In addition, we are focused on reducing the cost of our
video phone which we believe facilitates the growth of our product and
services.  Further, we believe that it is essential to maintain our
video technology leadership in order to support the growth of our
business.
  There can
be no assurance given, however, that our efforts will be successful or that any
additional financing will be available and can be consummated on terms
acceptable to us, if at all.  There can also be no assurance given
that any additional sales can be achieved through additional service and
distribution opportunities.  If we are unable to obtain additional funds,
and our plans are not achieved in the planned time frame we may be required to
reduce the size of the organization which could have a material adverse impact
on our business.
  ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..
 
 Not required.
 
 ITEM
4T.  CONTROLS AND PROCEDURES.
 
 Evaluation of Disclosure
Controls and Procedures.
 
 The
Company maintains disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) of Securities Exchange Act of 1934)  that are
designed to ensure that information required to be disclosed in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and that such information
is accumulated and communicated to its management, including its Chief Executive
Officer and Principal Financial and Accounting Officer , as appropriate to allow
timely decisions regarding the required disclosures. In designing and evaluating
the disclosure controls and procedures, the Company recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
 
 The
Company carried out an evaluation, under the supervision and with the
participation of management, including its Chief Executive Officer and Principal
Financial and Accounting Officer, of the effectiveness of the design and
operation of its disclosure controls and procedures as of June 30,
2010.  The Company’s Chief Executive Officer and Principal Financial
and Accounting Officer concluded that as of June 30, 2010, its disclosure
controls and procedures were designed properly and were effective in ensuring
that the information required to be disclosed by the Company in the reports that
we file and submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Commission’s rules and forms,
and that such information is accumulated and communicated to its management,
including its Chief Executive Officer and Principal Financial and Accounting
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
 
 There is
no assurance that the necessary resources required under the new business model
are available going forward to ensure that our reporting systems will continue
to be appropriately designed or effective, or that a future material weakness
will not be found in our internal controls over financial reporting or
disclosure controls and procedures, which could result in a material
misstatement in future financial statements.
  Change in Internal Control
over Financial Reporting.
 .
 There
were no changes in our internal controls during our quarter ended June 30, 2010,
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.  In addition, the Company
has initiated the implementation of a new Consumer Service business model and
related internal controls.
  24
  We
further believe that there will not be any adverse change in our internal
controls over financial reporting as a result of the recently announced
resignation of Joel Boyarski as Chief Financial Officer and the appointment of
James Dole as the new Chief Financial Officer.
  PART
II. OTHER INFORMATION
  ITEM
1.  LEGAL PROCEEDINGS.
 
 Although
from time to time we may be involved in litigation as a routine matter in
conducting our business, we are not currently involved in any litigation which
we believe is material to our operations or balance sheet.
 
 ITEM
5.  OTHER INFORMATION.
 
 The
following disclosure would otherwise be filed on Form 8-K under Items 1.01, 2.03
and 3.02:
 
 On August
11, 2010, the Company entered into the Second Amendment to the Revolving Loan
with WGI (the First Amended Revolving Loan as amended by the Second Amendment,
the “Second Amended Revolving Loan”), pursuant to which WGI will provide to the
Company a line of credit for an additional $2,000,000 resulting in an aggregate
principal amount available for borrowing under the Second Amended Revolving Loan
of $7,000,000.  In addition, on August 11, 2010, pursuant to the
Second Amended Revolving Loan, the Company issued a revised Revolving Promissory
Note, dated October 29, 2009 (the “New Revolving Promissory Note”), in a
principal amount of $7,000,000, to WGI.  Other than amending the
maximum principal amount available under the Second Amended Revolving Loan from
$5,000,000 to $7,000,000, the terms of the Second Amended Revolving Loan and the
New Revolving Promissory Note are the same as previously disclosed.
 
 In
connection with the Second Amended Revolving Loan, on August 11, 2010, the
Company granted WGI a warrant to purchase up to 8 million shares of the
Company’s common stock at an exercise price of $0.432 per share.  The
August 2010 WGI Warrant was fully vested on issuance and has a term of 10
years.
 
 ITEM
6.  EXHIBITS.
 
 The
following is a list of exhibits filed as part of this report on Form
10-Q.  Where so indicated, exhibits that were previously filed are
incorporated by reference.  For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated
parenthetically.
  3.1
                  
                  Second
      Amended and Restated Bylaws of WorldGate Communications, Inc.
      (Incorporated by reference to Exhibit 3.2 to our Current Report on
      Form 8-K filed May 26, 2010)4.1
                  
                  Revolving
      Promissory Note, dated October 28, 2009, by WorldGate Communications,
      Inc..  WorldGate Service, Inc., WorldGate Finance, Inc., Ojo
      Service LLC, and Ojo Video Phones LLC in favor of WGI Investor LLC in a
      principal amount of $7,000,000*4.2
                  
                  Warrant,
      dated August 11, 2010, issued to WGI Investor LLC*10.1
                  
                  WorldGate
      Communications, Inc. 2003 Equity Incentive Plan, as amended (Incorporated
      by reference to Exhibit 10.1 to our Current Report on Form 8-K filed
      May 26, 2010)10.2
                  
                  WorldGate
      Communications, Inc. 2010 Stock Incentive Plan (Incorporated by reference
      to Exhibit 10.2 to our Current Report on Form 8-K filed May 26,
      2010)10.3
                  
                  Second
      Amendment to Revolving Loan and Security Agreement, dated August 11,2010,
      by and among WGI Investor LLC, WorldGate Communications, Inc., WorldGate
      Service, Inc., WorldGate Finance, Inc., Ojo Service LLC, and Ojo Video
      Phones LLC*14.1
                  
                  WorldGate
      Communications, Inc. Code of Business Conduct and Ethics (Incorporated by
      reference to Exhibit 14.1 to our Current Report on Form 8-K filed May
      26, 2010)31.1
                  
                  Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a)*31.2
                  
                  Certification
      of Principal Financial and Accounting 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 Principal Financial and Accounting Officer Pursuant to 18 U.S.C.
      Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of
      2002**
 
 * Filed
herewith
 **
Furnished herewith
  25
 
 SIGNATURES
 
 Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
 
 WORLDGATE
      COMMUNICATIONS, INC.Dated:          
      August 13, 2010
                  /s/ George E. Daddis Jr.George
      E. Daddis Jr.Chief
      Executive Officer and President(Principal
      Executive Officer)Dated:           August
      13, 2010
                  /s/ Joel BoyarskiJoel
      BoyarskiPrincipal
      Financial and Accounting Officer(Principal
      Financial and Accounting
Officer)
  
  EXHIBIT
INDEX
 
 Exhibit
                    Number
                  
                  Description3.1
                  
                  Second
      Amended and Restated Bylaws of WorldGate Communications, Inc.
      (Incorporated by reference to Exhibit 3.2 to our Current Report on
      Form 8-K filed May 26, 2010)4.1
                  
                  Revolving
      Promissory Note, dated October 28, 2009, by WorldGate Communications,
      Inc..  WorldGate Service, Inc., WorldGate Finance, Inc., Ojo
      Service LLC, and Ojo Video Phones LLC in favor of WGI Investor LLC in a
      principal amount of $7,000,000*4.2
                  
                  Warrant,
      dated August 11, 2010, issued to WGI Investor LLC*10.1
                  
                  WorldGate
      Communications, Inc. 2003 Equity Incentive Plan, as amended (Incorporated
      by reference to Exhibit 10.1 to our Current Report on Form 8-K filed
      May 26, 2010)10.2
                  
                  WorldGate
      Communications, Inc. 2010 Stock Incentive Plan (Incorporated by reference
      to Exhibit 10.2 to our Current Report on Form 8-K filed May 26,
      2010)10.3
                  
                  Second
      Amendment to Revolving Loan and Security Agreement, dated August 11,2010,
      by and among WGI Investor LLC, WorldGate Communications, Inc., WorldGate
      Service, Inc., WorldGate Finance, Inc., Ojo Service LLC, and Ojo Video
      Phones LLC*14.1
                  
                  WorldGate
      Communications, Inc. Code of Business Conduct and Ethics (Incorporated by
      reference to Exhibit 14.1 to our Current Report on Form 8-K filed May
      26, 2010)31.1
                  
                  Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a)*31.2
                  
                  Certification
      of Principal Financial and Accounting 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 Principal Financial and Accounting Officer Pursuant to 18 U.S.C.
      Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of
      2002**
 
 * Filed
herewith
 **
Furnished herewith