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 September 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.)3800
      Horizon Blvd, Suite 103
              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 x                          No   ̈





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  ̈                          No   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Securities Exchange Act of 1934.


Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the SecuritiesExchange Act
of 1934). Yes  ̈No  x





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 November 8,
    2010Common
      Stock, par value $0.01 per share
              
              339,409,102
      shares









WORLDGATE
COMMUNICATIONS, INC.





QUARTERLY
REPORT ON FORM 10-Q


FOR
THE THREE MONTHS ENDED SEPTEMBER 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
                
                17ITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                
                24ITEM
      4.  CONTROLS AND PROCEDURES.
                
                24PART
      II. OTHER INFORMATION
                
                25ITEM
      1.  LEGAL PROCEEDINGS.
                
                25ITEM
      5.  OTHER INFORMATION.
                
                25ITEM
      6.  EXHIBITS.
                
                26







PART
I. FINANCIAL INFORMATION




ITEM
1.  FINANCIAL STATEMENTS




WORLDGATE COMMUNICATIONS, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Dollars
in thousands except share amounts)





September
      30,
                      
                      
                      December
      31,2010
                        (Unaudited)
                      
                      
                      2009*ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      1,108
                      
                      
                      $
                      578Trade
      accounts receivable less allowance for doubtful accounts of $97 at
      September 30, 2010 and $42 at December 31, 2009
                      
                      
                      18
                      
                      
                      
                      24Accounts
      receivable – related party
                      
                      
                      206
                      
                      
                      
                      -Other
      receivables
                      
                      
                      6
                      
                      
                      
                      15Inventory,  net
                      
                      
                      461
                      
                      
                      
                      763Prepaid
      and other current assets
                      
                      
                      247
                      
                      
                      
                      281Total
      current assets
                      
                      
                      2,046
                      
                      
                      
                      1,661Property
      and equipment, net
                      
                      
                      773
                      
                      
                      
                      739Deposits
                      
                      
                      194
                      
                      
                      
                      -Deferred
      debt issuance costs, net
                      
                      
                      6,146
                      
                      
                      
                      -Total
      assets
                      
                      $
                      9,159
                      
                      
                      $
                      2,400LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      liabilities:Accounts
      payable
                      
                      $
                      2,660
                      
                      
                      $
                      535Account
      payable due to related parties
                      
                      
                      349
                      
                      
                      
                      262Accrued
      expenses
                      
                      
                      533
                      
                      
                      
                      409Accrued
      compensation and benefits
                      
                      
                      204
                      
                      
                      
                      100Accrued
      severance
                      
                      
                      -
                      
                      
                      
                      232Warranty
      reserve
                      
                      
                      257
                      
                      
                      
                      15Deferred
      revenues and income
                      
                      
                      2,107
                      
                      
                      
                      1,460Notes
      payable
                      
                      
                      100
                      
                      
                      
                      22Total
      current liabilities
                      
                      
                      6,210
                      
                      
                      
                      3,035Long
      term liabilities:Revolving
      Loan, with related party
                      
                      
                      3,100
                      
                      
                      
                      1,400Total  liabilities
                      
                      
                      9,310
                      
                      
                      
                      4,435Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      Stock, $.01 par value, 13,500,000 shares authorized, and 0 shares issued
      at September 30, 2010 and December 31, 2009
                      
                      
                      -
                      
                      
                      
                      -Common
      Stock, $.01 par value; 700,000,000  shares authorized at
      September 30, 2010 and December 31, 2009;  and 339,409,102 and
      337,947,088 shares issued and outstanding at September 30, 2010 and
      December 31, 2009, respectively
                      
                      
                      3,394
                      
                      
                      
                      3,380Additional
      paid-in capital
                      
                      
                      282,002
                      
                      
                      
                      270,330Accumulated
      deficit
                      
                      
                      (285,547
                      )
                      
                      
                      (275,745
                      )Total
      stockholders’ deficiency
                      
                      
                      (151
                      )
                      
                      
                      (2,035
                      )Total
      liabilities and stockholders’ deficiency
                      
                      $
                      9,159
                      
                      
                      $
                      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 September 30,
                                          
                                          
                                          Nine
      Months Ended September 30,2010
                                          
                                          
                                          2009
                                          
                                          
                                          2010
                                          
                                          
                                          2009Revenues
      (includes $15,264 and $0, respectively, with related parties for the three
      and nine months ended September 30, 2010 and 2009)
                                          
                                          $
                                          15,392
                                          
                                          
                                          $
                                          98
                                          
                                          
                                          $
                                          15,803
                                          
                                          
                                          $
                                          1,477Revenue
      discount  with related party
                                          
                                          
                                          3,634
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          3,634
                                          
                                          
                                          
                                          -Net
      revenues
                                          
                                          
                                          11,758
                                          
                                          
                                          
                                          98
                                          
                                          
                                          
                                          12,169
                                          
                                          
                                          
                                          1,477Cost
      of revenues
                                          
                                          
                                          12,417
                                          
                                          
                                          
                                          14
                                          
                                          
                                          
                                          12,627
                                          
                                          
                                          
                                          932Gross
      profit (loss)
                                          
                                          
                                          (659
                                          )
                                          
                                          
                                          84
                                          
                                          
                                          
                                          (458
                                          )
                                          
                                          
                                          545Expenses
      from operations:Engineering
      and development
                                          
                                          
                                          980
                                          
                                          
                                          
                                          785
                                          
                                          
                                          
                                          2,826
                                          
                                          
                                          
                                          1,904Operations
                                          
                                          
                                          182
                                          
                                          
                                          
                                          159
                                          
                                          
                                          
                                          614
                                          
                                          
                                          
                                          407Sales
      and marketing
                                          
                                          
                                          377
                                          
                                          
                                          
                                          210
                                          
                                          
                                          
                                          1,053
                                          
                                          
                                          
                                          297General
      and administrative
                                          
                                          
                                          1,336
                                          
                                          
                                          
                                          904
                                          
                                          
                                          
                                          3,809
                                          
                                          
                                          
                                          3,401Depreciation
      and amortization
                                          
                                          
                                          97
                                          
                                          
                                          
                                          93
                                          
                                          
                                          
                                          284
                                          
                                          
                                          
                                          212Total
      expenses from operations
                                          
                                          
                                          2,972
                                          
                                          
                                          
                                          2,151
                                          
                                          
                                          
                                          8,586
                                          
                                          
                                          
                                          6,221Loss
      from operations
                                          
                                          
                                          (3,631
                                          )
                                          
                                          
                                          (2,067
                                          )
                                          
                                          
                                          (9,044
                                          )
                                          
                                          
                                          (5,676
                                          )Other
      income (expense):Interest
      and other income
                                          
                                          
                                          2
                                          
                                          
                                          
                                          41
                                          
                                          
                                          
                                          2
                                          
                                          
                                          
                                          49Gain
      on contract termination
                                          
                                          
                                          -
                                          
                                          
                                          
                                          47
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          47Change
      in fair value of derivative warrants and conversion
options
                                          
                                          
                                          -
                                          
                                          
                                          
                                          43
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,252Income
      from service fee contract termination
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          348Interest
      and other expense
                                          
                                          
                                          (1
                                          )
                                          
                                          
                                          (1
                                          )
                                          
                                          
                                          (1
                                          )
                                          
                                          
                                          (103
                                          )Related
      party interest
                                          
                                          
                                          (78
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (248
                                          )
                                          
                                          
                                          (11
                                          )Amortization
      of debt issuance costs
                                          
                                          
                                          (288
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (511
                                          )
                                          
                                          
                                          -Amortization
      of debt discount
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (2,918
                                          )Total
      other income (expense)
                                          
                                          
                                          (365
                                          )
                                          
                                          
                                          130
                                          
                                          
                                          
                                          (758
                                          )
                                          
                                          
                                          1,664Net
      loss
                                          
                                          $
                                          (3,996
                                          )
                                          
                                          $
                                          (1,937
                                          )
                                          
                                          $
                                          (9,802
                                          )
                                          
                                          $
                                          (4,012
                                          )Net
      loss per common share:Basic
      and diluted
                                          
                                          $
                                          (0.01
                                          )
                                          
                                          $
                                          (0.01
                                          )
                                          
                                          $
                                          (0.03
                                          )
                                          
                                          $
                                          (
      0.02
                                          )Weighted
      average common shares outstanding:Basic
      and diluted
                                          
                                          
                                          376,336,380
                                          
                                          
                                          
                                          348,971,268
                                          
                                          
                                          
                                          364,424,910
                                          
                                          
                                          
                                          259,730,073





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
      Stock
                
                
                Additional Paid-
                
                
                Accumulated
                
                
                TotalStockholders’Shares
                
                
                Amount
                
                
                InCapital
                
                
                Deficit
                
                
                DeficiencyBalance
      at January 1, 2010
                
                
                337,947
                
                
                $
                3,380
                
                
                $
                270,330
                
                
                $
                (275,745
                )
                
                $
                (2,035
                )Issuance
      of Common Stock upon exercise of stock options
                
                
                1,462
                
                
                
                14
                
                
                
                152
                
                
                
                -
                
                
                
                166Non-cash
      stock based compensation
                
                
                -
                
                
                
                -
                
                
                
                1,229
                
                
                
                -
                
                
                
                1,229Issuance
      of warrants  to WGI (see Note 7)
                
                
                -
                
                
                
                -
                
                
                
                6,657
                
                
                
                -
                
                
                
                6,657Issuance
      of warrants  to ACN (see Note 7)
                
                
                
                
                
                
                
                
                
                
                3,634
                
                
                
                
                
                
                
                3,634Net
      Loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (9,802
                )
                
                
                (9,802
                )Balance
      at September 30, 2010
                
                
                339,409
                
                
                $
                3,394
                
                
                $
                282,002
                
                
                $
                (285,547
                )
                
                $
                (151
                )





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


4


WORLDGATE COMMUNICATIONS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in thousands)





Nine Months Ended September
    30,2010
                
                
                2009Cash
      flows from operating activities:Net
      loss
                
                $
                (9,802
                )
                
                $
                (4,012
                )Adjustments
      to reconcile net (loss) income to cash used in operating
      activities:Depreciation
      and amortization
                
                
                284
                
                
                
                212Amortization
      of debt issuance costs
                
                
                511
                
                
                
                -Amortization
      of debt discount
                
                
                -
                
                
                
                2,918Change
      in fair value of derivative warrants and conversion
options
                
                
                -
                
                
                
                (4,252
                )Fair
      value of warrants recorded as a sales discount
                
                
                3,634
                
                
                
                0Inventory
      reserve
                
                
                136
                
                
                
                600Non-cash
      stock based compensation
                
                
                1,229
                
                
                
                714Bad
      debt expense, net of recoveries
                
                
                55
                
                
                
                47Changes
      in operating assets and liabilities:Trade
      accounts receivable
                
                
                (49
                )
                
                
                952Accounts
      receivable – related party
                
                
                (206
                )
                
                
                -Other
      receivables
                
                
                9
                
                
                
                1Inventory
                
                
                166
                
                
                
                (511
                )Prepaid
      and other current assets and deposits
                
                
                (160
                )
                
                
                (6
                )Accounts
      payable
                
                
                2,125
                
                
                
                (117
                )Due
      to related parties
                
                
                87
                
                
                
                -Accrued
      expenses and other current liabilities
                
                
                124
                
                
                
                141Accrued
      severance
                
                
                (232
                )
                
                
                453Accrued
      compensation and benefits
                
                
                104
                
                
                
                30Warranty
      reserve
                
                
                242
                
                
                
                (8
                )Deferred
      revenues and income
                
                
                647
                
                
                
                (471
                )Net
      cash used in operating activities
                
                
                (1,096
                )
                
                
                (3,309
                )Cash
      flows from investing activities:Capital
      expenditures
                
                
                (318
                )
                
                
                (525
                )Net
      cash used in  investing activities
                
                
                (318
                )
                
                
                (525
                )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                
                
                166
                
                
                
                3,644Proceeds
      from the issuance of notes
                
                
                -
                
                
                
                846Net
      proceeds from revolving loan with related party
                
                
                1,700
                
                
                
                -Net
      proceeds from the issuance of note
                
                
                78
                
                
                
                -Payment
      on notes
                
                
                -
                
                
                
                (42
                )Net
      cash provided by financing activities
                
                
                1,944
                
                
                
                4,448Net
      increase in cash and cash equivalents
                
                
                530
                
                
                
                614Cash
      and cash equivalents, beginning of period
                
                
                578
                
                
                
                429Cash
      and cash equivalents, end of period
                
                $
                1,108
                
                
                $
                1,043Supplemental
      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 7)
                
                
                6,657
                
                
                
                -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
                
                
                -
                
                
                
                750Common
      stock issued in payment of obligation
                
                
                -
                
                
                
                839Cash
      paid for:Interest
                
                
                214
                
                
                
                8





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 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 Services segment, the Company
markets its video phone equipment, bundled with digital voice and video phone
service and support, principally to residential and commercial
customers.  The Services segment was previously known as the Consumer
Services segment.  Through its Equipment 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 Equipment segment was previously known as
the Original Equipment Manufacturer or OEM segment.





The
unaudited condensed consolidated financial statements of the Company for the
three and nine months ended September 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),  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 September 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. In addition, the Company is focused on
reducing the cost of its 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
$285,547, stockholder’s deficiency of $151 and a working capital deficiency of
$4,164.





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).





On August
23, 2010, ACN DPS provided formal acceptance of our Ojo Vision Digital Video
Phone in accordance with the Master Purchase Agreement.  As a result,
the Company now records revenue when units are shipped to ACN
DPS.  The Company recorded $14,064 of gross revenue during the three
and nine months ended September 30, 2010 for units shipped to ACN
DPS.  Included in the  revenue recorded for the three and
nine months ended September 30, 2010 is $7,804 of units shipped and previously
recorded as deferred revenue in the three months ended June 30,
2010.   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 (the “ACN Warrants”) are determined
to be consideration given by a vendor to a customer for which an otherwise
identifiable benefit has not been received.  The Company recorded a revenue
discount of $2,598 during the quarter ended September 30, 2010 to reflect the
fair value of the portion of the ACN 2009 Warrant and ACN 2010 Warrant earned as
ACN DPS order volume of product exceeded the contract milestone of 50,000 units
shipped.  Additionally, the Company also accrued a revenue discount of
$1,036 for units shipped but unearned through September 30, 2010 in excess of
the 50,000 unit milestone.  Under the terms of the ACN Warrants 1/6 of
each warrant vests for each order of 50,000 units, up to the maximum
of 300,000 units.  In addition, the product acceptance by ACN DPS also
resulted in the recognition of $1,200 in revenue for the three and nine months
ended September 30, 2010 from software development funds provided by ACN DPS to
the Company in April 2009.





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 September 30,
2010 includes 27,969,133 and 25,457,129, respectively, of weighted average
shares for the three and nine month periods ended September 30, 2010 issuable in
the future under the terms of the WGI Anti-Dilution Warrant, ACN 2009 Warrant
and 2010 ACN Warrant, as these warrants are 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.




Potential
common shares excluded from net loss per share for the three and nine months
ended September 30, 2010, and 2009 were 172,764,228 and 169,546,717,
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, irrespective of whether such securities are in the money:




For the three and nine months
      endedSeptember 30, 2010
                        
                        
                        September 30, 2009Warrants
                        
                        
                        150,210,364
                        
                        
                        
                        148,311,939Options
                        
                        
                        22,495,864
                        
                        
                        
                        20,926,778Performance
      shares
                        
                        
                        58,000
                        
                        
                        
                        308,000Total
                        
                        
                        172,764,228
                        
                        
                        
                        169,546,717





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.




8


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 September 30, 2010, the Company’s inventory balance was
$461 net of a reserve of $379 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 $222 and $136,
respectively, during the three and nine months ended September 30, 2010 due to
diminished expectations for sale of the legacy Ojo 900 and 1000 phone
inventory.  In
addition, included in the three and nine months ended September 31, 2010, the
Company reduced inventory and the inventory reserve for $514 for the removal of
parts inventory no longer required for its product distribution. As of December 31, 2009, the Company’s
inventory balance was $763 net of a reserve of $757 for excess and obsolete
inventory that is not expected to be utilized in the continued development of
the video phone.  During the three and nine months ended September 30,
2009 the Company adjusted the reserve for excess and obsolete parts inventory by
$0 and $600, respectively.  Included in inventory as of December 31,
2009 was $178 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:





September 30, 2010
                  
                  
                  December 31, 2009Interest
      on Notes
                  
                  $
                  -
                  
                  
                  $
                  10Contingent
      penalties
                  
                  
                  157
                  
                  
                  
                  157Board
      fees
                  
                  
                  -
                  
                  
                  
                  94Taxes
                  
                  
                  51
                  
                  
                  
                  33Minimum
      usage fee obligation
                  
                  
                  97
                  
                  
                  
                  -Product
      license fee
                  
                  
                  116
                  
                  
                  
                  -Other
                  
                  
                  112
                  
                  
                  
                  115Totals
                  
                  $
                  533
                  
                  
                  $
                  409





6.
Revolving Credit Line





On
October 28, 2009, the Company entered into the Revolving Loan and Security
Agreement (the “Revolving Loan”) with WGI Investor 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 the maximum
principal amount of the line of credit was increased to $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, in a
principal amount of $7,000, to WGI.  Interest accrues on any loan
advances at the rate of 10% per annum.  Interest payments commenced
June 1, 2010 and are payable monthly after such date, 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 September 30, 2010, the Company’s
outstanding balance under the Second Amended Revolving Loan was
$3,100.   During the three and nine months ended September 30,
2010, the Company made interest payments to WGI aggregating $70 and $212,
respectively.  As of September 30, 2010, the interest payable on the
Second Amended Revolving Loan was $29.




9


In
connection with the First Amended Revolving Loan, on March 9, 2010, the Company
granted WGI a warrant to purchase up to 6.0 million 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 Second Amended Revolving
Loan.  As of September 30, 2010, $403 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 $2,927 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 8.0 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.  The August 2010 WGI Warrant has
a value of $3,327 utilizing the Black-Scholes option pricing model with the
following assumptions: term of 10 years, volatility of 161%, dividends of
$0 and a risk free interest rate of 2.72%.  The value of the August
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 Second Amended
Revolving Loan.  As of September 30, 2010, $108 of the August 2010 WGI
Warrant of $3,327 had been amortized and the balance of the deferred debt
issuance cost was recorded as a $3,219 long term asset.





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.





The
following table summarizes, as of September 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 September 30, 2010Contingent
                        Equity
                      
                      Issuable
      asof April 6,
                      
                      
                      Terminated
      or
                      
                      
                      Shares
      Not
                      
                      
                      Shares
                      
                      
                      Total
      Shares Issuable
                        (Exercisable
      and Non-Categories
                      
                      2009
                      
                      
                      Expired
      Shares
                      
                      
                      Exercisable
                      
                      
                      Exercisable
                      
                      
                      Exercisable)Existing
      Contingent Equity
                      
                      
                      24,318,869
                      
                      
                      
                      7,115,506
                      
                      
                      
                      3,406,614
                      
                      
                      
                      13,796,749
                      
                      
                      
                      17,203,363Future
      Contingent Equity
                      
                      
                      19,689,183
                      
                      
                      
                      444,140
                      
                      
                      
                      18,196,293
                      
                      
                      
                      1,048,750
                      
                      
                      
                      19,245,043ACN
      2009 Warrant
                      
                      
                      38,219,897
                      
                      
                      
                      -
                      
                      
                      
                      38,219,897
                      
                      
                      
                      -
                      
                      
                      
                      38,219,897Total
      Contingent Equity
                      
                      
                      82,227,949
                      
                      
                      
                      7,559,646
                      
                      
                      
                      59,822,804
                      
                      
                      
                      14,845,499
                      
                      
                      
                      74,668,303Anti-Dilution
      Warrant (Total Contingent
      Equity * 1.7027027)
                      
                      
                      140,009,750
                      
                      
                      
                      12,871,829
                      
                      
                      
                      101,860,450
                      
                      
                      
                      25,277,471
                      
                      
                      
                      127,137,921





10


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 the Company
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.





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 recorded
a revenue discount of $2,598 during the quarter ended September 30, 2010 to
reflect the fair value of the portion of the ACN 2009 Warrant and ACN 2010
Warrant earned as ACN DPS order volume of product exceeded the contract
milestone of 50,000 units shipped.  Additionally, the Company also
accrued a revenue discount of $1,036 for units shipped but unearned through
September 30, 2010 in excess of the 50,000 unit milestone.  Under the
terms of the ACN Warrants 1/6 of each warrant vests for each
order of 50,000 units, up to the maximum of 300,000 units.   As
of September 30, 2010, the remaining Black Scholes value of the ACN 2009 Warrant
and ACN 2010 Warrant for unshipped products was $11,959 based on the assumptions
provided below.  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.




11








Vested warrant for
                      6,869,982 shares
                    
                    
                    Unvested warrant for
                      34,349,915 sharesMarket
      Price
                    
                    $
                    0.38
                    
                    
                    $
                    0.38Exercise
      Price
                    
                    $
                    0.0425
                    
                    
                    $
                    0.0425Term
                    
                    8.63
      yrs
                    
                    
                    8.52
      yrsVolatility
      Rate
                    
                    
                    165.12
                    %
                    
                    
                    165.23
                    %Interest
      Rate
                    
                    
                    2.200
                    %
                    
                    
                    2.230
                    %





A summary
of the Company’s warrant activity for the nine months ended September 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
                
                
                
                0.04August
      2010 WGI Warrant (See Note 6)
                
                
                8,000,000
                
                
                
                0.04Exercised
                
                
                -
                
                
                
                -Cancelled
      / Forfeited/ Expired
                
                
                (3,397,416)
                
                
                
                1.66Outstanding,
      September 30, 2010
                
                
                182,357,819
                
                
                $
                0.05
                
                
                
                8.63Exercisable,
      September 30, 2010
                
                
                46,147,454





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 with
all available shares under the 1996 Plan 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.





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 the Company’s 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 September 30, 2010, there were 9,892,500
shares available for grant under the 2010 Plan and 22,553,864 options and
restricted shares outstanding.




The
weighted-average fair value per share of options granted were $0.49 and $0.30
during the nine months ended September 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 154% and 194%; average risk-free interest rates of 2.36% and
2.51%; dividend yield of 0%; and expected lives of 6.25 years.




12


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 nine months ended September 30, 2010 included approximately $480 and
$1,229, respectively, of stock based compensation. The Company’s net loss before
taxes for the three and nine months ended September 30, 2009 included
approximately $425 and $714, 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 September 30, 2010:Granted
                  
                  
                  2,667,500
                  
                  
                  $
                  0.49Exercised
                  
                  
                  (1,462,014
                  )
                  
                  $
                  (0.11
                  )Cancelled/forfeited
                  
                  
                  (351,500
                  )
                  
                  $
                  (0.77
                  )Outstanding,
      September 30, 2010
                  
                  
                  22,495,864
                  
                  
                  $
                  0.29
                  
                  
                  $
                  2,234,454Exercisable,
      September 30, 2010
                  
                  
                  6,451,189
                  
                  
                  $
                  0.23
                  
                  
                  $
                  994,133





As of
September 30, 2010, there was $4,979 of total unrecognized compensation
arrangements for options granted under the Company’s 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 September 30, 2010, 58,000 of the restricted shares
remain outstanding with the balance having been cancelled or
forfeited.  During the quarter ended September 30, 2010, 29,000 of
these shares vested based on the achievement of certain performance
criteria.  For the three and nine months ended September 30, 2010, the
Company recorded expense of $5 and $14, respectively, with respect to
performance share grants.





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 leases
approximately 18,713 square feet of office space at 3800 Horizon Boulevard,
Trevose, Pennsylvania.  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 were occupied
in September 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.




13


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.





The
Company terminated its office lease at 3190 Tremont Avenue, Trevose,
Pennsylvania effective September 27, 2010.   There were no termination
penalties.  The Company maintains office space  in Pittsford, New
York for sales, marketing, operations and administrative operations and
activities.  The Company also has warehouse space located in Trevose,
Pennsylvania.





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
      (October 1 to December 31, 2010)
                  
                  $
                  212011
                  
                  
                  4572012
                  
                  
                  5402013
                  
                  
                  5382014
                  
                  
                  529Thereafter
                  
                  
                  1,567Total
                  
                  $
                  3,652





Other
Commitments





The
Company has a minimum usage guarantee with a vendor that provides VoIP services
with a maximum payment of $100 due if the usage guarantees are not met.
Sufficient usage was not generated by operations to meet the minimum usage
guarantee. The Company recorded a charge for $97 relating to this minimum usage
guarantee during the quarter ended September 30, 2010 and is currently in the
process of negotiating payment terms for this liability.





During
the normal course of business, in order to manage manufacturing lead times and
help ensure adequate component supply, the Company entered into an agreement
with its contract manufacturer to allow it to procure component inventory based
upon criteria as defined by the Company.  If the component inventory
procured by the contract manufacturer is not used in production of products for
the Company and is not returnable, usable or saleable to other parties, then the
Company may be responsible for purchasing the component inventory.





Effective
on July 13, 2010, Joel Boyarski resigned as the Chief Financial Officer,
Treasurer and Senior Vice President, Finance and Administration.  Mr.
Boyarski remained in his role as principal accounting officer and principal
financial officer on an interim basis until August 20, 2010 and provided
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.





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.




14


9.  Related
Party Transactions




As of
September 30, 2010, the Company had $206 of related party accounts receivbles
and $349 of related party liabilities, consisting of $311 of accounts payable
for purchases of services, $9 for temporary office space and $29 of accrued
interest on loan advances pursuant to the Second Amended Revolving
Loan.  The Company currently leases office space from a related party
in Concord, North Carolina, with annual lease costs not material to the
Company.  As of December 31, 2009, the Company reported $262 of
related party liabilities, consisting of $252 of accounts payable for purchases
of services and $10 of accrued interest on loan advances pursuant to the
Revolving Loan.





On August
11, 2010, the Company entered into the Second Amended Revolving Loan and granted
WGI the August 2010 WGI Warrant (See Note 6).




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 September 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 nine months
ended September 30, 2010 and 2009 were as follows:





SalesCustomer
                        
                        For
      the Nine Months
                          Ended
      September 30, 2010
                        
                        
                        For
      the Nine Months Ended
                          September
      30, 2009A
                        
                        
                        96
                        %
                        
                        
                        0B
                        
                        
                        0
                        
                        
                        
                        56
                        %C
                        
                        
                        0
                        
                        
                        
                        21
                        %





The above
customers are all related to the Equipment business segment of the
Company.





Accounts
receivable from a related party as of September 30, 2010 consisted of
receivables from the shipment of video phones to ACN
DPS.





As of
September 30, 2010, Kentec is the sole direct volume manufacturer of video
phones for the Company.  A formal relationship was established with
Kentec in November 2009.  Kentec 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
Kentec based on, among other factors, reliability, price and
availability.





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: Services and Equipment.  The reporting
for the Services segment includes the revenue and cost of revenues for products
and related recurring services. The reporting for the Equipment 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 profit (net revenues less costs of goods
sold).




The
following tables summarize financial information about the Company’s business
segments for the three and nine months ended September 30, 2010 and
2009.


15





For the three months ended September 30,
      2010Services
                  
                  
                  Equipment
                  
                  
                  ConsolidatedNet
      revenues
                  
                  $
                  105
                  
                  
                  $
                  11,653
                  
                  
                  $
                  11,758Gross
      profit
                  
                  $
                  (49
                  )
                  
                  $
                  (610
                  )
                  
                  $
                  (659
                  )





For the three months ended September 30,
      2009Services
                  
                  
                  Equipment
                  
                  
                  ConsolidatedNet
      revenues
                  
                  $
                  95
                  
                  
                  $
                  3
                  
                  
                  $
                  98Gross
      profit
                  
                  $
                  90
                  
                  
                  $
                  (6
                  )
                  
                  $
                  84





For the nine months ended September 30,
      2010Services
                  
                  
                  Equipment
                  
                  
                  ConsolidatedNet
      revenues
                  
                  $
                  283
                  
                  
                  $
                  11,886
                  
                  
                  $
                  12,169Gross
      profit
                  
                  $
                  107
                  
                  
                  $
                  (565
                  )
                  
                  $
                  (458
                  )





For the nine months ended September 30,
      2009Services
                  
                  
                  Equipment
                  
                  
                  ConsolidatedNet
      revenues
                  
                  $
                  307
                  
                  
                  $
                  1,170
                  
                  
                  $
                  1,477Gross
      profit
                  
                  $
                  280
                  
                  
                  $
                  265
                  
                  
                  $
                  545





Identifiable AssetsServices
                  
                  
                  Equipment
                  
                  
                  ConsolidatedAt
      September 30, 2010
                  
                  $
                  269
                  
                  
                  $
                  422
                  
                  
                  $
                  691At
      December 31, 2009
                  
                  $
                  165
                  
                  
                  $
                  622
                  
                  
                  $
                  787





The
identifiable assets noted above include inventory, accounts receivable from a
related party and trade account receivables, as applicable to each
segment.





12.
   Subsequent events





The
Company evaluated subsequentevents through
the date the financialstatements were issued
and filed with the Securities and Exchange Commission. There were nosubsequentevents that required recognition or
disclosure.


16


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 have
two reportable business segments:  Services (previously known as the
Consumer Services segment) and Equipment (previously known as the OEM Direct
segment) . The  Services segment is aimed at the marketing and
distribution of products and related recurring services to end users. In
the  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 Equipment 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.




17


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.




Results
of Operations for the Three and Nine Months Ended September 30, 2010 and
2009.




Revenues.




For the three months ended September
      30,
                  
                  
                  For the nine months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  ChangeRevenues:Services,
      gross
                  
                  $
                  105
                  
                  
                  $
                  95
                  
                  
                  $
                  10
                  
                  
                  
                  11
                  %
                  
                  $
                  283
                  
                  
                  $
                  307
                  
                  
                  $
                  (24
                  )
                  
                  
                  (8
                  )%Equipment,
      gross
                  
                  $
                  15,287
                  
                  
                  $
                  3
                  
                  
                  $
                  15,284
                  
                  
                  
                  *
                  
                  
                  $
                  15,520
                  
                  
                  $
                  1,170
                  
                  
                  $
                  14,350
                  
                  
                  
                  *Total
      gross revenues
                  
                  $
                  15,392
                  
                  
                  $
                  98
                  
                  
                  $
                  15,294
                  
                  
                  
                  *
                  
                  
                  $
                  15,803
                  
                  
                  $
                  1,477
                  
                  
                  $
                  14,326
                  
                  
                  
                  970
                  %Equipment,
      revenue discount
                  
                  $
                  (3,634
                  )
                  
                  
                  -
                  
                  
                  $
                  (3,634
                  )
                  
                  
                  (100
                  )%
                  
                  $
                  (3,634
                  )
                  
                  
                  -
                  
                  
                  $
                  (3,634
                  )
                  
                  
                  *Services,
      net
                  
                  $
                  105
                  
                  
                  $
                  95
                  
                  
                  $
                  10
                  
                  
                  
                  11
                  %
                  
                  $
                  283
                  
                  
                  $
                  307
                  
                  
                  $
                  (24
                  )
                  
                  
                  (8
                  )%Equipment,
      net
                  
                  $
                  11,653
                  
                  
                  $
                  3
                  
                  
                  $
                  11,650
                  
                  
                  
                  *
                  
                  
                  $
                  11,886
                  
                  
                  $
                  1,170
                  
                  
                  $
                  10,716
                  
                  
                  
                  *Total
      net revenues
                  
                  $
                  11,758
                  
                  
                  $
                  98
                  
                  
                  $
                  11,660
                  
                  
                  
                  *
                  
                  
                  $
                  12,169
                  
                  
                  $
                  1,477
                  
                  
                  $
                  10,692
                  
                  
                  
                  *





*Not
meaningful.





Services
revenues consist of shipments of products and related recurring services to end
users.  For the three months ended September 30, 2010 compared with
the three months ended September 30, 2009, the increase of $10
in  Services revenues primarily reflects additional recurring retail
service revenues resulting from greater current period shipments of video
phones.  For the nine months ended September 30, 2010 compared to the
nine months ended September 30, 2009, the decrease of $24 in  Services
revenues primarily resulted from reduced shipments of video
phones.




Equipment
revenues consist of digital video phones, engineering and maintenance services
sold directly to telecommunications service providers who already have a digital
voice and video management and network infrastructure.  On August 23,
2010, ACN DPS provided formal acceptance of our Ojo Vision Digital Video Phone
in accordance with our Master Purchase Agreement with ACN DPS.  As a
result, we now record revenue when units are shipped to ACN DPS.  We
recorded $14,064 of gross revenue during the three and nine months ended
September 30, 2010 for units shipped to ACN DPS.  Included in
the  revenue recorded for these periods was $7,804 of units shipped
and previously recorded as deferred revenue in the three months ended June 30,
2010.  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.  We recorded a revenue discount of $3,634 during the quarter
ended September 30, 2010 to reflect the fair value of the portion of the ACN
2009 Warrant and ACN 2010 Warrant earned as a result of the product acceptance
by ACN DPS and the number of units shipped through September 30,
2010.  In addition, the product acceptance by ACN DPS also resulted in
the recognition of $1,200 in revenue for the three and nine months ended
September 30, 2010 from software development funds provided by ACN DPS to us in
April 2009.




For the
three and nine months ended September 30, 2010 compared with the three and nine
months ended September 30, 2009, the increase of $11,650 and $10,716,
respectively, in Equipment net  revenues primarily reflects the
shipment of $14,064 of Ojo Vision video phones to ACN DPS, (see Note
7 of the accompanying condensed financial statements) and a
reduction of $3,634 against these revenues was recorded as a result of the grant
to ACN DPS of warrants to purchase shares of our common stock (see Note 7 of the
accompanying condensed financial statements) that vest incrementally based
on ACN DPS purchases of our video phones.  The revenue recognized
during the three and nine months ended September 30, 2010 relating to the
$14,064 of shipment of Ojo Vision video phones to ACN DPS reflects $7,804 of
shipments that were made prior to the three months ending September 30, 2010,
but which could not be recognized as revenue due to pending customer
acceptance by ACN DPS, which was subsequently received in August
2010.  Concurrently, with product acceptance received in August 2010
from ACN DPS, $1,200 of deferred engineering development revenue was recorded
during the three and nine months ended September 30, 2010 for Ojo Vision
development work performed for ACN DPS (see Note 7 of the accompanying condensed
financial statements).




18


Cost
of Revenues and Gross (Loss) Profit




For the three months ended September
      30,
                  
                  
                  For the nine months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  ChangeCost
      of Revenues:Services
                  
                  $
                  154
                  
                  
                  $
                  5
                  
                  
                  $
                  149
                  
                  
                  
                  *
                  
                  
                  $
                  176
                  
                  
                  $
                  27
                  
                  
                  $
                  149
                  
                  
                  
                  *Equipment
                  
                  $
                  12,263
                  
                  
                  $
                  9
                  
                  
                  $
                  12,254
                  
                  
                  
                  *
                  
                  
                  $
                  12,451
                  
                  
                  $
                  905
                  
                  
                  $
                  11,546
                  
                  
                  
                  *Total
      Cost of Revenues
                  
                  $
                  12,417
                  
                  
                  $
                  14
                  
                  
                  $
                  12,403
                  
                  
                  
                  *
                  
                  
                  $
                  12,627
                  
                  
                  $
                  932
                  
                  
                  $
                  11,695
                  
                  
                  
                  *Gross
      (Loss) Profit:Services,
      gross
                  
                  $
                  (49
                  )
                  
                  $
                  90
                  
                  
                  $
                  (139
                  )
                  
                  
                  (154
                  )%
                  
                  $
                  107
                  
                  
                  $
                  280
                  
                  
                  $
                  (173
                  )
                  
                  
                  (62
                  )%Equipment,
      gross
                  
                  $
                  3,024
                  
                  
                  $
                  (6
                  )
                  
                  $
                  3,030
                  
                  
                  
                  *
                  
                  
                  $
                  3,069
                  
                  
                  $
                  265
                  
                  
                  $
                  2,804
                  
                  
                  
                  *Total,
      gross
                  
                  $
                  2,975
                  
                  
                  $
                  84
                  
                  
                  $
                  2,891
                  
                  
                  
                  *
                  
                  
                  $
                  3,176
                  
                  
                  $
                  545
                  
                  
                  $
                  2,631
                  
                  
                  
                  483
                  %Equipment,
      revenue discount
                  
                  $
                  (3,634
                  )
                  
                  
                  -
                  
                  
                  $
                  (3,634
                  )
                  
                  
                  (100
                  )%
                  
                  $
                  (3,634
                  )
                  
                  
                  -
                  
                  
                  $
                  (3,634
                  )
                  
                  
                  (100
                  )%Services,
      net
                  
                  $
                  (49
                  )
                  
                  $
                  90
                  
                  
                  $
                  (139
                  )
                  
                  
                  (154
                  )%
                  
                  $
                  107
                  
                  
                  $
                  280
                  
                  
                  $
                  (173
                  )
                  
                  
                  (62
                  )%Equipment,
      net
                  
                  $
                  (610
                  )
                  
                  $
                  (6
                  )
                  
                  $
                  (604
                  )
                  
                  
                  *
                  
                  
                  $
                  (565
                  )
                  
                  $
                  265
                  
                  
                  $
                  (830
                  )
                  
                  
                  (313
                  )%Total,
      net
                  
                  $
                  (659
                  )
                  
                  $
                  84
                  
                  
                  $
                  (743
                  )
                  
                  
                  *
                  
                  
                  $
                  (458
                  )
                  
                  $
                  545
                  
                  
                  $
                  (1,003
                  )
                  
                  
                  (184
                  )%





*Not
meaningful.





Cost of
Revenues.  The cost of revenues for the  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 and nine months ended September 30, 2010 compared with the three and
nine months ended September 30, 2009, the increase of $149 and $149,
respectively, in cost of revenues for the Services business segment primarily
reflects increased shipments of video phones to our retail customers and $113 of
VoIP telephony and video service fees, which includes a one-time $97 minimum
usage fee obligation charge.  The cost of revenues for the Equipment
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 and
nine months ended September 30, 2010 compared with the three and nine months
ended September 30, 2009, the increase of $12,254 and $11,546, respectively, in
cost of revenues for the Equipment business segment primarily reflects our first
significant shipments of our video phones and video related products to ACN
DPS.  For the three and nine months ended September 30, 2010, cost of
revenues also include an increase of $242 in product warranty reserves, an
increase of $222 and $136, respectively, to the inventory reserve for
excess and obsolete inventory and a product license fee accrued of
$116.  For the nine months ended September 30, 2009, cost of revenues
for the Equipment business segment included a $600 reserve for excess and
obsolete inventory.




Gross (Loss)
Profit.For the three and nine months ended September 30, 2010
compared with the three and nine months ended September 30, 2009, the decrease
of $139 and $173, respectively, in gross profit for the  Services
business segment primarily reflects the impact of $113 in VoIP
telephony  and video service fees.   For the three and nine
months ended September 30, 2010 compared with the three and nine months ended
September 30, 2009, the decrease of $604 and $830, respectively, in
gross profit for the Equipment business segment primarily reflects a $3,634
revenue discount recorded as a result of vesting of the ACN DPS
warrants.   There were no revenue discounts for warrant vesting
during the three and nine months ended September 31, 2009.  Partially
offsetting the reductions in profit were $1,200 of non-recurring
engineering service revenues performed prior to the third quarter of 2010 and
recorded during the three and nine months ended September 30, 2010 as a result
of our receipt of product acceptance by ACN DPS in August
2010.   For the nine months ended September 30, 2009 there was
$833 of non-recurring engineering service revenues recorded.




Expenses
From Operations




For the three months ended
      September
                        30,
                      
                      
                      For the nine months ended
                        September 30,2010
                      
                      
                      2009
                      
                      
                      Change
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      ChangeExpenses
      from Operations:Engineering
      and development
                      
                      $
                      980
                      
                      
                      $
                      785
                      
                      
                      $
                      195
                      
                      
                      
                      25
                      %
                      
                      $
                      2,826
                      
                      
                      $
                      1,904
                      
                      
                      $
                      922
                      
                      
                      
                      48
                      %Operations
                      
                      $
                      182
                      
                      
                      $
                      159
                      
                      
                      $
                      23
                      
                      
                      
                      14
                      %
                      
                      $
                      614
                      
                      
                      $
                      407
                      
                      
                      $
                      207
                      
                      
                      
                      51
                      %Sales
      and marketing
                      
                      $
                      377
                      
                      
                      $
                      210
                      
                      
                      $
                      167
                      
                      
                      
                      80
                      %
                      
                      $
                      1,053
                      
                      
                      $
                      297
                      
                      
                      $
                      756
                      
                      
                      
                      255
                      %General
      and administrative
                      
                      $
                      1,336
                      
                      
                      $
                      904
                      
                      
                      $
                      432
                      
                      
                      
                      48
                      %
                      
                      $
                      3,809
                      
                      
                      $
                      3,401
                      
                      
                      $
                      408
                      
                      
                      
                      12
                      %Depreciation
      and amortization
                      
                      $
                      97
                      
                      
                      $
                      93
                      
                      
                      $
                      4
                      
                      
                      
                      4
                      %
                      
                      $
                      284
                      
                      
                      $
                      212
                      
                      
                      $
                      72
                      
                      
                      
                      34
                      %Total
      Expenses from Operations
                      
                      $
                      2,972
                      
                      
                      $
                      2,151
                      
                      
                      $
                      821
                      
                      
                      
                      38
                      %
                      
                      $
                      8,586
                      
                      
                      $
                      6,221
                      
                      
                      $
                      2,365
                      
                      
                      
                      38
                      %




19


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 September 30, 2010 compared with the three months ended September
30, 2009, the increase of $195 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 $102 and certain
product developmental expenditures that increased by $101.  For the
nine months ended September 30, 2010 compared with the nine months ended
September 30, 2009, the increase of $922 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 $518 and certain
product developmental expenditures that increased by $398.




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
network  systems, customer portal, customer service center, billing
expenses, and logistics and inventory management.  For the three
months ended September 30, 2010 compared with the three months ended September
30, 2009, the increase of $23 in operations expenses primarily reflects
increased customer care and network service costs of $28.  For the
nine months ended September 30, 2010 compared with the nine months ended
September 30, 2009, the increase of $207 in operations expenses primarily
reflects increased consulting fees of $59, increased customer care and network
service costs of $135, increased travel expenditures of $44 and increased bad
debt expense of $48, partially offset by reduced staff compensation costs of
$96.




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.  For the three
months ended September 30, 2010 compared with the three months ended September
30, 2009, the increases of $167 in sales and marketing expenses primarily
reflects increased staff compensation costs of $38, increased travel
expenditures of $6, and increased trade show and marketing expenditures of
$102.  For the nine months ended September 30, 2010 compared with the
nine months ended September 30, 2009, the increase of $756 in sales and
marketing expenses primarily reflects increased staff compensation costs of
$313, increased travel expenditures of $69, and increased trade show and
marketing expenditures of $311.




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 September 30, 2010
compared with the three months ended September 30, 2009, the increase of $432 in
general and administrative expenses primarily reflects increased staff
compensation costs of $256, non-cash stock based compensation of $54,and travel
and moving costs of $68.  For the nine months ended September 30, 2010
compared with the nine months ended September 30, 2009, the increase of $408 in
general and administrative expenses primarily reflects an increase in stock
based compensation costs of $515 related to employee stock options, increased
consulting fees of $64, increased travel costs of $48, and increased rent and
moving costs of $125, partially offset by $352 in reduced staff compensation
costs primarily related to severance for executives paid in the nine months
ended September 30, 2009.




Adjusted
EBITDA





We use
the term “Adjusted EBITDA” in presentations, quarterly conference calls and
other instances as appropriate. Adjusted EBITDA is defined as net loss before
depreciation and amortization, amortization of debt discount, non-cash stock
based compensation, expenses recorded as a revenue discounts as a result of
warrants that vest incrementally based on ACN DPS’s purchases of video phones
under the Master Purchase Agreement, and interest expense. We present Adjusted
EBITDA because we use the calculation in evaluating our business performance and
it is a measure of performance that is commonly used by investors, financial
analysts and other interested parties, in addition to and not in lieu of
Generally Accepted Accounting Principles (GAAP) results to compare to the
performance of other companies who also publicize this information.  
Adjusted EBITDA is not a measurement of financial performance under GAAP and
should not be considered an alternative to net income as an indicator of our
operating performance or any other measure of performance derived in accordance
with GAAP.





20




The
reconciliation of net loss to Adjusted EBITDA as used by management is set forth
in the table below (in thousands).





Three Months Ended
                  September 30,
                
                
                Nine Months Ended
                  September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      loss
                
                $
                (3,996
                )
                
                $
                (1,937
                )
                
                $
                (9,802
                )
                
                $
                (4,012
                )Depreciation
      and amortization
                
                
                97
                
                
                
                93
                
                
                
                284
                
                
                
                3,212Amortization
      of debt issuance cost
                
                
                288
                
                
                
                —
                
                
                
                511
                
                
                
                —Amortization
      of debt discount
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,918Non-cash
      stock based compensation
                
                
                480
                
                
                
                424
                
                
                
                1,229
                
                
                
                714Warrant
      expense recorded as revenue discount (see Note 7 to consolidated financial
      statements)
                
                
                3,634
                
                
                
                —
                
                
                
                3,634
                
                
                
                0Interest
      expense (income)
                
                
                77
                
                
                
                40
                
                
                
                247
                )
                
                
                65Adjusted
      EBITDA
                
                $
                580
                
                
                $
                (1,380
                )
                
                $
                (3,897
                )
                
                $
                (103
                )





Other
Income and Expenses




For the three months ended September
      30,
                  
                  
                  For the nine months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  ChangeOther
      Income and Expenses:Interest
      and other income
                  
                  $
                  2
                  
                  
                  $
                  41
                  
                  
                  $
                  (39
                  )
                  
                  
                  (95
                  )%
                  
                  $
                  2
                  
                  
                  $
                  49
                  
                  
                  $
                  (47
                  )
                  
                  
                  (96
                  )%Change
      in fair value of derivative warrants and conversion
options
                  
                  $
                  -
                  
                  
                  $
                  43
                  
                  
                  $
                  (43
                  )
                  
                  
                  (100
                  )%
                  
                  $
                  -
                  
                  
                  $
                  4,252
                  
                  
                  $
                  (4,252
                  )
                  
                  
                  (100
                  )%Amortization
      of debt issuance costs
                  
                  $
                  (288
                  )
                  
                  $
                  -
                  
                  
                  $
                  (288
                  )
                  
                  
                  (100
                  )%
                  
                  $
                  (511
                  )
                  
                  $
                  -
                  
                  
                  $
                  (511
                  )
                  
                  
                  (100
                  )%Amortization
      of debt discount
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (2,918
                  )
                  
                  $
                  2,918
                  
                  
                  
                  100
                  %Income
      from contract termination
                  
                  $
                  -
                  
                  
                  $
                  47
                  
                  
                  $
                  (47
                  )
                  
                  
                  (100
                  )%
                  
                  $
                  -
                  
                  
                  $
                  395
                  
                  
                  $
                  (395
                  )
                  
                  
                  (100
                  )%Interest  and
      other expense
                  
                  $
                  (79
                  )
                  
                  $
                  (1
                  )
                  
                  $
                  (78
                  )
                  
                  
                  *
                  
                  
                  $
                  (249
                  )
                  
                  $
                  (114
                  )
                  
                  $
                  (135
                  )
                  
                  
                  (118
                  )%Total
      Other Income (Expense)
                  
                  $
                  (365
                  )
                  
                  $
                  130
                  
                  
                  $
                  (495
                  )
                  
                  
                  (381
                  )%
                  
                  $
                  (758
                  )
                  
                  $
                  1,664
                  
                  
                  $
                  (2,422
                  )
                  
                  
                  (146
                  )%




*Not
meaningful.




Interest and Other
Income.  Interest and other income consisted of interest earned
on cash and cash equivalents.  For the three and nine months ended
September 30, 2010 compared to the three and nine months ended September 30,
2009, interest and other income decreased by $39 and $47, respectively,
primarily reflecting recorded and negotiated cancellation of certain obligations
of $41 and $49 during the three and nine months ended September 30, 2009,
respectively.




Change in fair value of
derivative warrants.




The Company accounted for the warrants
issued as part of the June 2004 private placement of preferred stock as a
derivative liability using the fair value method at the end of each quarter,
with the resultant gain or loss recognition recorded against
earnings.  On June 23, 2009, the Company amended the exercise price
and other provisions of the 2004 Warrants representing rights to purchase shares
of Common Stock in the Company and that would have expired on June 23,
2009.  The exercise price of the 2004 Warrants was amended to $0.25
per share of Common Stock and the expiration date of the 2004 Warrants was
amended to August 7, 2009.  As of September 30, 2009, all of the 2004
Warrants were exercised.  The Company recognized a total non-cash gain
during the three and nine months ended September 30, 2009 of $43 and $4,252,
respectively,  for these derivative warrants, based on the their fair
value using the Black-Scholes valuation model.




Amortization of Debt
Issuance Costs and Debt Discount.   For the three and nine
months ended September 30, 2010, the $288 and $511, respectively, of
amortization of debt issuance costs relates to warrants issued to WGI on March
9, 2010 and August 11, 2010 (see Note 7 of the accompanying condensed
consolidated financial statements). For the nine months ended September 30,
2009, the $2,918 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 three and
nine months ended September 30, 2009, we realized $47 and $395, respectively, 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 nine months ended September 30,
2010.





Interest
Expense.  For the three and nine months ended September 30,
2010 the increase in interest expense of $78 and $135, 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 7
of the accompanying condensed consolidated financial statements).  The
$1 and $114, respectively, of interest expense incurred for the three and nine
months ended September 30, 2009 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 September 30, 2010 and as of December 31, 2009 is
summarized below:




September 30,
                    2010
                  
                  
                  December 31, 2009Capitalization:Short-term
      debt, including current portion of long-term debt
                  
                  $
                  100
                  
                  
                  $
                  22Long-term
      debt
                  
                  $
                  3,100
                  
                  
                  $
                  1,400Total
      debt
                  
                  $
                  3,200
                  
                  
                  $
                  1,422Stockholders’
      deficiency
                  
                  $
                  (151
                  )
                  
                  $
                  (2,035
                  )Total
      debt and stockholders’ deficiency (total capitalization)
                  
                  $
                  3,049
                  
                  
                  $
                  (613
                  )Percent
      total debt to total capitalization
                  
                  
                  105
                  %
                  
                  
                  232
                  %





*Not
meaningful.




The
weighted average annual interest rate on total debt at September 30, 2010 was
10.0%.  Total debt increased by $1,778 as of September 30, 2010, as
compared to December 31, 2009.  As of September 30, 2010, and subject
to certain conditions which may limit the amount that may be borrowed at any
particular time, we had $3,900 of unused borrowing capacity under our Revolving
Loan and Security Agreement, as amended, with 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 September 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 $7,000; 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 September 30, 2010, we had cash and
cash equivalents of $1,108.




For the three months ended September
      30,
                  
                  
                  For the nine months ended September
      30,2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  ChangeOther
      Liquidity and Capital Resources:Cash
      Provided By (Used in) Operations
                  
                  $
                  (483
                  )
                  
                  $
                  (1,918
                  )
                  
                  $
                  1,435
                  
                  
                  
                  75
                  %
                  
                  $
                  (1,096
                  )
                  
                  $
                  (3,309
                  )
                  
                  $
                  2,213
                  
                  
                  
                  67
                  %Cash  Provided
      By (Used in) Investing Activities
                  
                  $
                  (150
                  )
                  
                  $
                  (269
                  )
                  
                  $
                  119
                  
                  
                  
                  44
                  %
                  
                  $
                  (318
                  )
                  
                  $
                  (525
                  )
                  
                  $
                  207
                  
                  
                  
                  39
                  %Cash
      Provided By (Used in) Financing Activities
                  
                  $
                  1,107
                  
                  
                  $
                  2,021
                  
                  
                  $
                  (914
                  )
                  
                  
                  (45
                  )%
                  
                  $
                  1,944
                  
                  
                  $
                  4,448
                  
                  
                  $
                  (2,504
                  )
                  
                  
                  (56
                  )%




22


Cash Used in
Operations.  For the three and nine months ended September 30,
2010 compared with the three and nine months ended September 30, 2009, the
increase of $1,435 and $2,213 in cash used in 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 7 of the accompanying
condensed consolidated financial statements), pursuant to which the ACN DPS
payment terms have been accelerated.




Cash Used in Investing
Activities.  For the three and nine months ended September 30,
2010 compared with the three and nine months ended September 30, 2009, the
Company utilized $119 and $207, respectively, less in investing activities
primarily reflecting reduced purchases in capital expenditures for furniture and
equipment.




Cash Provided By Financing
Activities.  For the three months ended September 30, 2010
compared with the three months ended September 30, 2009, the decrease of $914 in
cash provided by financing activities primarily reflects reduced advances of
$1,100 received during the three months ended September 30, 2010 under our
Revolving Loan and Security Agreement, as amended, with WGI.  For the
nine months ended September 30, 2010 compared with the nine months ended
September 30, 2009, the $2,504 decrease in cash provided by financing activities
primarily reflects the decrease in cash received of $3,478 provided by the
issuance of common stock during the nine months ended September 30, 2009,
partially offset by $1,700 in advances received under our Revolving Loan and
Security Agreement, as amended, with WGI (see Note 6 of the accompanying
condensed consolidated financial statements).




Deferred
Revenue.  During the three and nine months ended September 30,
2010, we received an advanced payment of $2,020 from ACN DPS for units that had
not been shipped as of September 30, 2010 and was therefore recorded as deferred
revenue by the Company (See Note 7 of the accompanying condensed consolidated
financial statements).




Operations and
Liquidity. We have incurred recurring net losses and have an accumulated
deficit of $285,547, stockholder’s deficiency of $151 and a working capital
deficiency of $4,164 as of September 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 us a line of credit in the principal amount of
$3,000. On March 9, 2010, the principal amount of the line of credit was
increased to $5,000, and on August 11, 2010 the principal amount of the line of
credit was increased to $7,000 (see Note 6 of the accompanying condensed
consolidated financial statements).  As of September 30, 2010, we received
aggregate advances under the Revolving Loan and Security Agreement, as amended,
of $3,100.  As of September 30, 2010, there was $3,900 of unused
borrowing capacity under our Revolving Loan and Security Agreement, as
amended.




As of
September 30, 2010, we had $9,310 of liabilities.  These liabilities
primarily included $3,100 under the Revolving Loan and Security Agreement, as
amended, $2,660 of accounts payable, $2,107 of deferred revenues and income,
$737 of accrued expenses, $349 payable to related parties and $257 product
warranty reserve.  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 and Security Agreement, as amended (see Note 6 of the
accompanying condensed consolidated financial statements),  product
acceptance by ACN DPS 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 September 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.





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.




23


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
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
4.  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 Chief Financial 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 Chief
Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures as of September 30, 2010.  The
Company’s Chief Executive Officer and Chief Financial Officer concluded that as
of September 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 Chief Financial 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.


.


We hired our new Chief Financial Officer, James Dole, effective
July 13, 2010.  There were no other changes in our internal controls
during our quarter ended September 30, 2010 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.




24




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 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.




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 (Incorporated by reference to Exhibit 4.1
      to our Quarterly Report on Form 10-Q for the fiscal quarter ended
      June 30, 2010, filed August 13, 2010)4.2
              
              Warrant,
      dated August 11, 2010, issued to WGI Investor LLC (Incorporated by
      reference to Exhibit 4.1 to our Quarterly Report on Form 10-Q for the
      fiscal quarter ended June 30, 2010, filed August 13,
  2010)10.1
              
              Resignation
      Letter, dated as of July 13, 2010, from Joel Boyarski to WorldGate
      Communications, Inc.
                (Incorporated
      by reference to Exhibit 10.1 to our Current Report on Form 8-K filed
      July 14, 2010)10.2
              
              Offer
      Letter, dated June 23, 2010, to James G. Dole
                (Incorporated
      by reference to Exhibit 10.2 to our Current Report on Form 8-K filed
      July 14, 2010)10.3
              
              Form
      of Non-Qualified Stock Option Grant under 2010 Stock Incentive Plan
      (Incorporated by reference to Exhibit 10.3 to our Current Report on
      Form 8-K filed July 14, 2010)10.4
              
              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  (Incorporated by reference to Exhibit 10.3 to our
      Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
      2010, filed August 13, 2010)31.1
              
              Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a)*31.2
              
              Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a)*32.1
              
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
      by Section 906 of the Sarbanes-Oxley Act of 2002**32.2
              
              Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
      by Section 906 of the Sarbanes-Oxley Act of
  2002**








**
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:
              November
      15, 2010
              /s/ George E. Daddis Jr.George
      E. Daddis Jr.Chief
      Executive Officer and President(Principal
      Executive Officer)Dated:
              November
      15, 2010
              /s/ James DoleJames
      DoleChief
      Financial Officer(Principal
      Financial and Accounting
Officer)

























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 (Incorporated by reference to Exhibit 4.1
      to our Quarterly Report on Form 10-Q for the fiscal quarter ended
      June 30, 2010, filed August 13, 2010)4.2
                
                Warrant,
      dated August 11, 2010, issued to WGI Investor LLC (Incorporated by
      reference to Exhibit 4.1 to our Quarterly Report on Form 10-Q for the
      fiscal quarter ended June 30, 2010, filed August 13,
  2010)10.1
                
                Resignation
      Letter, dated as of July 13, 2010, from Joel Boyarski to WorldGate
      Communications, Inc.
                  (Incorporated
      by reference to Exhibit 10.1 to our Current Report on Form 8-K filed
      July 14, 2010)10.2
                
                Offer
      Letter, dated June 23, 2010, to James G. Dole
                  (Incorporated
      by reference to Exhibit 10.2 to our Current Report on Form 8-K filed
      July 14, 2010)10.3
                
                Form
      of Non-Qualified Stock Option Grant under 2010 Stock Incentive Plan
      (Incorporated by reference to Exhibit 10.3 to our Current Report on
      Form 8-K filed July 14, 2010)10.4
                
                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  (Incorporated by reference to Exhibit 10.3 to our
      Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
      2010, filed August 13, 2010)31.1
                
                Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a)*31.2
                
                Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a)*32.1
                
                Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
      by Section 906 of the Sarbanes-Oxley Act of 2002**32.2
                
                Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
      by Section 906 of the Sarbanes-Oxley Act of
  2002**
 
 
 **
Furnished herewith