UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  
  FORM 10-K  (Mark One)x
  
  ANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934For the
  fiscal year ended December 31, 2007Oro
  
  TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934  For the transition period
from         to  Commission file number: 000-25755  
  WorldGate
Communications, Inc. (Exact name of registrant as specified in its charter)  Delaware
  
  23-2866697(State or other jurisdiction of incorporation or organization)
  
  (I.R.S. Employer Identification No.)3190 Tremont Avenue
  Trevose, Pennsylvania
  
  19053(Address of principal executive offices)
  
  (Zip Code)  (215) 354-5100 (Registrants telephone number, including area code)  Securities registered pursuant to Section 12(b) of the Act: None  Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $0.01 Par Value (Title of Class)  
  Indicate by check mark whether
the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yeso   No  x  Indicate
by check mark whether the registrant is not required to file reports pursuant
to Section 13 or Section 15 (d) of the Act.o   No  x  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. Yesx   No  o  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yesx    No  o  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of  accelerated filer, large accelerated filer
and Smaller Reporting Company in Rule 12b-2 of the Exchange Act. Large
  accelerated filero
  
  Accelerated
  filero
  
  Non-accelerated
  filero
  
  Smaller Reporting
  Companyx  Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yeso   No  x  The
aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $17million as of June 29, 2007, based on the
closing sale price of $0.50 per share of common stock, as reported on the
NASDAQ Capital Market.  The
number of shares of the registrants common stock outstanding as of April 16,
2008 was 57,788,747.  DOCUMENTS INCORPORATED BY REFERENCE None


WORLDGATE COMMUNICATIONS, INC.  ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended December 31, 2007  TABLE OF CONTENTS  PART IItem 1. Business
  
  1Item 1A. Risk Factors
  
  5Item 2. Properties
  
  11Item 3. Legal Proceedings
  
  11Item 4. Submission of Matters to a Vote of
  Security Holders
  
  11PART IIItem 5. Market for Registrants Common
  Equity, Related Stockholder Matters and Issuer Purchases
  of Equity Securities
  
  12Item 6. Not required
  
  13Item 7. Managements Discussion and
  Analysis of Financial Condition and Results of Operations
  
  13Item 7A.  Not Required
  
  23Item 8.  Financial Statements
  
  F - 1Item 9. Changes in and Disagreements with
  Accountants on Accounting and Financial Disclosure
  
  24Item 9A. Controls and Procedures
  
  24Item 9B.  Other Information
  
  25PART IIIItem 10. Directors, Executive Officers and
  Corporate Governance
  
  25Item 11. Executive Compensation
  
  28Item 12. Security Ownership of Certain
  Beneficial Owners and Management and Related Stockholder Matters
  
  33Item 13. Certain Relationships and Related
  Transactions and Director Independence
  
  35Item 14. Principal Accountant Fees and
  Services
  
  36Item 15. Exhibits and Financial Statement
  Schedules
  
  37


WORLDGATE COMMUNICATIONS, INC.  This
report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are based on managements
current expectations and are subject to a number of uncertainties and risks
that could cause actual results to differ significantly from those anticipated
in these forward-looking statements. Factors that may cause such a difference
include, but are not limited to, those set forth in the Managements
Discussion and Analysis of Financial Condition and Results of Operations as
well as those discussed elsewhere in this report.  PART I  Item 1. Business  WorldGate
Communications, Inc. was incorporated in Delaware in 1996 to succeed to
the business of our predecessor, WorldGate Communications, L.L.C., which
commenced operations in March 1995. 
In April 1999, we completed our initial public offering of
5,750,000 shares of our common stock. Our common stock is traded on the NASDAQ
OTC Bulletin Board under the symbol WGAT.OB. 
Our executive offices are located at 3190 Tremont Avenue,  Trevose, Pennsylvania 19053.  Overview  Since
our formation in 1995 and until the first quarter of 2004, we were in the
business of developing and selling interactive television, or ITV, technology,
products and services for use in conjunction with cable TV broadband networks
(the ITV Business). Using our solutions, cable TV operators branded,
marketed, and offered a wide variety of ITV packages to consumers. These
packages included walled gardens of information, communications solutions
complete with Internet-based e-mail and chat, and Web surfing, all presented on
the TV set and through the standard television distribution infrastructure.  During 2003 we elected to shift our business
away from the ITV Business and toward a new video phone product and associated
business.  The design of our first video phone product, branded as Ojo,
was substantially completed in late 2004 and field trials were commenced.
Commercial distribution of this product commenced in the spring of 2005. We
began generating revenue from commercial shipment of our Ojo product in April 2005.  On
April 28, 2004, we entered into a multi-year agreement with General
Instrument Corporation d/b/a the Connected Home Solutions Business of Motorola, Inc.
(General Instrument) for the worldwide distribution of the Ojo personal video
phone. This agreement provided for General Instrument to be the Companys
exclusive distributor of its broadband video phone products and for the Company
to be General Instruments exclusive supplier of its broadband video phone
products.  On February 17, 2006, we
mutually agreed with General Instrument to end this agreement which terminated
exclusivity for both parties. In addition to its then current role for
development and manufacture of Ojo, the Company assumed direct responsibility
and control for the advertising, marketing, and distribution of its
products.   Under its agreement with General Instrument, the Company
had been active in marketing and promoting its products, and working with
General Instrument to distribute Ojo after the agreement ended.  The Company continued the rollout of Ojo
using many of the same distributors, retailers and service providers as General
Instrument, and has subsequently expanded distribution to service providers and
retailers around the world.  As part of ending its agreement with General
Instrument, and in anticipation of the Companys inventory requirements as a
result of taking full responsibility for product distribution, we negotiated
the right to buy back about two-thirds of the units sold to General Instrument,
valued at approximately $2,765,000 (based upon the original sales price to
General Instrument), for approximately $1,064,000. This is less than half of
what it would have cost the Company to purchase the same inventory from our
manufacturing sources.  As a result the
Company recorded a reserve for returns and reduced revenue in the amount of
approximately $2,310,000 during the fourth quarter of 2005. In addition the
Company recorded no revenue for units shipped to General Instrument in the
first quarter 2006 and recorded a gain on termination of this agreement of
approximately $1,843,000 for the year ended December 31, 2006 (see Item 7 
Managements Discussion and Analysis of Financial Condition and Results of
Operations).  On
May 9, 2006 the Company entered into a multi-year agreement with Aequus
Technologies Corp.  (Aequus), for
Aequus to purchase Ojo video phones through its wholly owned subsidiary Snap
Telecommunications Inc., (Snap!VRS) , a provider of Video Relay Services (VRS)
and Video Remote Interpreting (VRI) services for the deaf and hard of
hearing.   On June 20, 2007 the
Company announced that it had expanded its relationship with Aequus and
Snap!VRS modifying their earlier agreement to provide for the parties to work
collaboratively to identify the most desired Ojo features and capabilities that
will provide the best video phone experience for the VRS user community and
that would enable Ojo to be the preferred VRS video phone.  In
the later part of the third quarter of 2007 we commenced product shipments to
Snap!VRS  VRS is a form of
Telecommunications Relay Service (TRS) that enables persons with hearing
disabilities who use American Sign Language (ASL) to communicate with voice
telephone users through video equipment, rather than through typed text.  VRI is the use of an interpreter located at a
remote location, which is accessible through a video connection, and provides
interpreting services to two (or more) people who are together and require an
interpreter. The Companys Ojo video phone provides this equipment link for the
hard-of-hearing  1


VRS or VRI user with a TRS operator (called a
Communications Assistant, or CA) so that the VRS or VRI user and the CA can see
and communicate with each other using ASL in signed conversation.  VRS and VRI enable deaf and hard-of-hearing
customers to improve their connection with people in their personal and
business lives. This market is particularly attractive since the use of video
as part of the communication link is critical, and accordingly, the video phone
is a major contributing component.  The
friends and family of the deaf and hard of hearing customers are a natural
expansion to the VRS and VRI markets. 
Entrance in these markets has contributed significantly to the Companys
efforts to increase awareness of and sales of its products.  In the third quarter of 2007, the Company
began to ship its video phone product to Snap!VRS.  As part of its June 2007 agreement with
Aequus, the Company began to recognize product revenue at the time of shipment
of its video phone, and also began to recognize service fee revenues at the
time it receives this customers confirmation of the service fee earned by the
Company.  On
March 31, 2008, the Company entered into a new agreement with Aequus and
Snap!VRS. This new agreement, inter alia, provides for the (i) resolution
of a dispute with Aequus regarding amounts the Company claimed were owed to the
Company by Aequus and the termination by the Company of service to Aequus, (ii) payment
to the Company by Aequus of approximately $5 million in scheduled payments over
the next ten months, (iii) agreement to arbitrate approximately $1.4
million claimed by the Company to be owed by Aequus and (iv) purchase of
an additional $1.5 million of video phones by Aequus (the Aequus Transaction).  As a result of this new agreement Aequus is
planning to build a new data center, with support and training provided by the
Company, and upon completion, directly operating a video phone service for its
customers.  High
speed data (HSD) network users also provide a large, and we believe conducive,
target market for a quality video phone offering.  Video phone sales are
expected to be derived from new technology adopters and regular long distance
communicators such as families and close friends. We also expect that the
business-to-business opportunity will be attractive as a video phone provides
means to improve interpersonal communication and multi-location
productivity.  Furthermore we expect that the growth in the Voice over
Internet Protocol market (VoIP) will also help drive sales of our video phone
since it can also serve as a VoIP endpoint.  Our
business model is based on the sale of video phones and related products and
services. Our products are being marketed to HSD network operators (including
for purposes hereof, Aequus Technologies) as well as to consumers through
traditional consumer electronics distribution channels. We believe that HSD
operators could realize significant recurring revenue streams associated with
offering our product to end users. We have also developed this product to
require very minimal capital investment or incremental costs by such operators.
Our marketing objective is to have our video phones supplement and hopefully
replace ordinary home and business phones worldwide.  General Product Description  We
have developed a video phone, ergonomically designed specifically for in-home
and business, personal video communication. We have identified several issues
that have impeded with commercial success and consumer acceptance of video
phones and sought to address each of these issues within the Ojo video phone.
The Ojo video phone was designed for use on the existing HSD network
infrastructure. Certain models of the Ojo phone will, however, also connect to
the analog phone line for interoperability with the voice only communications
offered by the existing public switched telephone network (PSTN) and VoIP
networks. Ojo, therefore, can be used for video calls, and ordinary voice only
calls as well as VoIP calls. We believe that Ojo is differentiated, both from
competitors and from previous efforts at personal video telephony, by
providing: true to life communication (meaning that images and sounds are
synchronized, that there are minimum delays between the two ends of the
communication, and that the quality of the image is similar to what is
experienced with television), interoperation with the PSTN and VoIP, ease of
deployment by HSD operators, ease of use by consumers, and a highly styled
ergonomic design. We believe Ojo uniquely leverages the recent development of a
state of the art connectivity infrastructure, as well as the convergence of the
latest improvements in compression technology, processing power and bandwidth
availability, to help ensure, enable and maintain dedicated high quality
end-to-end connections.  Material Developments for WorldGate since December 31,
2007  On
February 4, 2008, the Company issued a current report on Form 8K
indicating that it was in a dispute with a customer (Aequus) over the payment
of significant monies which the Company believed were owed to it.  The customers refusal to pay such monies had
contributed to a shortfall in the operating cash available to the Company to
continue operations, and accordingly, on January 30, 2008, the Company
shut down its operations.  The Form 8K
further indicated that this was a first step to winding down its business,
which would occur if the Company was not able to secure payment of the monies
believed to be owed to by the customer, and/or new financing.  On
March 31, 2008, the Company entered into a new agreement with Aequus.  This new agreement, inter alia, provides for
the (i) resolution of a dispute with Aequus regarding amounts the Company
claimed were owed to the Company by Aequus and the termination by the Company
of service to Aequus, (ii) payment to the Company by Aequus of
approximately $5 million in scheduled payments over the next ten months, (iii) agreement
to arbitrate approximately $1.4 million additional dollars claimed by the
Company  2


to be owed by Aequus and (iv) purchase
of an additional $1.5 million of video phones by Aequus (the Aequus
Transaction).  As a result of this new
agreement Aequus is planning to build a new data center, with support and
training provided by the Company, and upon completion, directly operating a
video phone service for its customers. 
In anticipation of completing the contract with Aequus the Company
resumed operations on March 11, 2008.  On
February 5, 2008, February 13, 2008, February 15, 2008, and April 8,
2008, the Company received notices from YA Global, holder of the Companys
convertible debentures, claiming that the Company was in default of the terms
of the debentures for stating its intent to wind down its business, failure to
maintain current financial statements in the registration statement relating to
the sale of the Companys common stock issuable upon conversion of one of those
debentures, to comply with a covenant to their satisfaction that provided for
the disclosure of information they considered material,  and entering into the agreement with Aequus
Technologies, and as a result YA Global was exercising its right to accelerate
payment of the full principal amount of the debentures. While the registration
statement was not effective as of December 31, 2007, the underlying
alleged default with respect to the registration statement was in any event
cured by the amendments to Rule 144 that became effective on February 15,
2008, obviating the need to maintain that registration statement. The Company
has notified YA Global that it disputes these claims and whether they
constitute a continuing event of default under the debentures. The Company has
also notified YA Global that their right to accelerate payment is also
disputed. The Company is working with YA Global in an effort to settle their
disputes regarding the claimed defaults and acceleration. Although the Company
disputes YA Globals claims of default, 
and does not believe YA Global has any basis to accelerate payments on
the debenture, the Company has reclassified the YA convertible debenture to a
current liability on the accompanying consolidated financial statements, solely
in light of the existence of the alleged claims.  As
of December 31, 2007, on a consolidated basis, we had approximately 39
full-time employees. Since December 31 2007 and until April 4, 2008
the Company reduced its staffing by an additional 14 employees to 25 employees.  Our corporate headquarters
is located in Trevose, Pennsylvania in a leased facility consisting of approximately
42,500 square feet at an annual fee of $11.74 per square foot, with a 3%
increase annually. The current lease has a five year term effective September 1,
2005. The lease is cancelable by either party with eight months notice, with a
termination by the tenant including a six months termination fee. In March 2008
the parties agreed in principle to a new lease (and the cancellation of the
current lease with no termination fee) for a smaller space within the current
facility consisting of approximately 17,000 square feet at an annual fee of $7
per square foot. This new lease is expected to be cancelable by either party
upon 90 days notice with no termination cost.  Business
Plan  General. 
Our business model is primarily based upon the sale of Ojo video phones and
related products and services.  It is our
plan for Ojo to be distributed through and in partnership with HSD network
providers, as well as through traditional electronics distribution channels.
Video phone service, using the Ojo video phone, is expected to be offered by
HSD network providers as a means of attracting new HSD subscribers as well as
maintaining existing subscribers. We believe that HSD network providers could
realize potentially significant recurring incremental revenue streams
associated with offering products such as our Ojo video phone, and accordingly
we believe they will embrace the concept and business model. The suggested
consumer offering for video phone service follows the traditional HSD model,
which may involve a subsidy of the required hardware by a recurring service
fee. We anticipate that video phone service subscribers will be able to either
purchase an Ojo video phone or lease a unit from the HSD network provider.  There is also a parallel market for sales of
Ojo video phones directly to consumers through the standard consumer electronic
channels. Sales of Ojo video phones through these retail channels still require
a video phone service and the Company is currently offering such a video phone
service, with an associated monthly service fee, for units sold in this
manner.  It is our plan for Ojo video
phones to be sold to the VRS and VRI markets which are particularly attractive
since the use of video as part of the communication link is critical, and
accordingly, the video phone is a major contributing component.  The friends and family of the deaf and hard
of hearing customers are a natural expansion to the VRS and VRI markets.  Manufacturing. Ojo video phones are manufactured in Asia, to take advantage of
the lower labor, tooling and components costs. A formal relationship with
Mototech Inc. (which is not an affiliate of General Instrument or Motorola) was
established for the volume manufacture of Ojo. Mototech, along with U.S.
Robotics and SMC Networks, are affiliates of the Accton Technology Group, a
group of Taiwanese manufacturers that we believe are well-known in the
electronics industry. Mototechs responsibilities in this role include:  · product design
finalization for manufacturing; · component
selection and procurement; · tool sourcing
and management; · coordination of
Ojo manufacturing; · implementation
and monitoring of Ojos Quality Plan; and · product cost
reduction.  Under
the agreement, Mototech is required to manufacture products in response to purchase
orders issued by our company.  3


Although our company has no obligation to
purchase any particular volume of products under the agreement, Mototech is
generally required to accept all purchase orders, subject to certain limits
described in the agreement.  As part of our agreement with Mototech we
retain formal sign-off control over any product, specification, or component
changes proposed by Mototech. We also maintain all rights to the Ojo technology
and intellectual property, as well as the right to second source the Ojo
product.  Our agreement with Mototech permits either Mototech or our
company to terminate the agreement at any time by giving 90 days written notice
to the other party.  The components and
raw materials used in our Ojo video phone product are generally available from
a multitude of vendors and are sourced based, among other factors, on
reliability, price and availability.  Product Sales and Distribution. Ojo is being marketed to the VRS and VRI markets in particular
as well as being marketed domestically and internationally to both the
residential and business sectors through standard consumer and business
electronics channels. In addition we market our products through HSD providers
in a manner similar to broadband modems and VoIP services.  Competition  Many
of the current video phone manufacturers have focused on two
applicationsbusiness video phones and video conferencing. Business video
phones are designed to be located on an executives desk and used to
communicate with colleagues, employees and customers. Video conferencing units
are designed for conference rooms where multiple people on one end engage with
multiple people on the other end. The following is a brief description of the
potential competitors and their impact on the market.  Business Phone Products.  Most of these products are targeted
for corporate use and are relatively high priced. Generally, the ergonomic
design of these units emulates that of a traditional office telephone with the
addition of a camera and display. The products use standard corporate gray or
black material colors, familiar button shapes and designs, traditional style
handsets for non-speakerphone conversation and often have business feature
sets. For connectivity these products use VoIP, PSTN or ISDN. The main
competitors in this sector include 8x8 Inc., Motion Media PLC, Grandstream, and
Leadtek Research Inc.  Video Conference Products.  D-Link Systems, Inc. produces a
TV-based video phone product that is targeted to consumers as a lower cost
video conferencing device. D-Link uses the home television as the display
device and utilizes either the TVs speaker or connection to a standard analog
phone for the audio portion of the call. The main disadvantage of this product
is that it requires a television to send and receive calls.  In many cases, this would obstruct the
ability to watch television while a call is in progress thereby disrupting
family television watching for the length of the call. Numerous video
conferencing products also exist for the business market.  Typically these
devices cost $2,000 or more and involve complex installations of one or more
cameras, monitors, microphones and speakers within a conference room setting.
The videoconference nature of these products eliminates the ability to
communicate on a private, one-on-one level. The main competitors in this sector
include Sony, Sorenson Media and Polycom Inc.  Web Cam Products.  Web cams are different from other competitive products in that
they did not arise from either business video phones or video conferencing.
Rather, the use of web cams began in the early days of the Internet when techies
were expanding the capabilities of PC-based content and applications with
low-cost computer attachments. Currently, web cams are often used to display
visual information as well as a means for personal communication. Many popular
web sites use web cams to show traffic, weather, adult activities and other
visually interesting subjects. Software such as Net Meeting, Instant Messenger
and MSN Messenger, is being supported by web cams to provide a video chat
option to these Internet-based services. Current web cams typically lack the
quality of dedicated video phone devices. 
They also require the utilization of separate personal computers which
may not be co-located in the same areas where convenient video calls would
occur.  Competitors in this category
include Logitech, Inc., Intel Corporation, 3Com Corporation, and Creative
Technology, Ltd.  Hybrid Web Cam-Business Phone Products.  In recent months, Cisco Systems, Inc.
introduced a hybrid video phone product that is designed for the business phone
market. The Cisco product consists of a web cam device and host software that
enables video phone functionality when used in conjunction with an IP phone and
call processing hardware. We believe this product requires a significant
capital investment for implementing the call processing hardware and IP phones.  Intellectual Property  We
plan to rely on patent, trade secret, trademark and copyright law to protect
our video phone intellectual property.We
have been awarded patents for its distinctive design (a design patent issued in
December 2006 and valid for a 14 year term thereafter) and technology (a technology
patent containing 39 claims issued in April 2007 related to a video phone
system and method and valid for a 14 year term thereafter) and has other
patents pending.  Our patent position is
subject to complex factual and legal issues that may give rise to uncertainty
as to the validity, scope and enforceability of a particular patent.
Accordingly, there can be no assurance that additional patents will be issued
pursuant to our current or future patent applications or that patents issued
pursuant to such applications will not be invalidated, circumvented or
challenged. Moreover, there can be no assurance that the rights granted under
any such patents will provide competitive advantages to us or be adequate to
safeguard and maintain our proprietary rights. In addition, effective patent,
trademark, copyright and trade secret protection may be unavailable, limited or
not applied for in certain foreign countries.  4


Government Regulation  Our
Ojo video phone is required to comply with various laws and government
regulations, including Parts 15 and 68 of the Federal Trade Commissions (FCC)
regulations in the United States, which relate to radio frequency devices and
to terminal equipment that is connected to the telephone network. The legal and
regulatory environment that pertains to our business is uncertain and changing
rapidly. New legislation or regulation, such as that currently being considered
for limiting the environmentally hazardous substances that are currently found
in most electronic devices, could substantially impact our ability to
distribute our Ojo video phone products. Similarly the FCC and other comparable
regulatory authorities could undertake an examination of whether to impose
surcharges or additional regulations upon certain providers of Internet
protocol, or IP, based communication services. The imposition of regulations on
IP communications services may negatively impact our business.  Research and Development  To
date, our engineering and product development has been a significant focus of
the Company. The principal focus of our current engineering activities is the
continued development and enhancement of our Ojo video phone. Development of
the Ojo video phone has required combining technical experience and knowledge
from two historically separate industries, cable and telephony. Our engineering
and development expenditures in connection with our Ojo video phone were
approximately $6,238,000 and $5,315,000 for the years ended December 31,
2006 and 2007 respectively, virtually all of which was spent on the development
of the video phone product and services.  Employees  As
of December 31, 2007, on a consolidated basis, we had approximately 39
full-time employees. With the exception of one employee located in Houston,
Texas, our employees are all located in Trevose, Pennsylvania. None of our
employees are represented by a labor union, and we have no collective
bargaining agreement. We consider our employee relations to be good.  Available
Information  You may access, free of
charge, on our website, www.wgate.com, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act.  We
endeavor to post these reports on our website as soon as reasonably practicable
after we file such material with, or furnish it to, the SEC.  Item 1A. Risk Factors.  In addition to other information in this Form 10-K, the
following risk factors should be carefully considered in evaluating our company
and our business. Investing in our common stock involves a high degree of risk,
and you should be able to bear the complete loss of your investment. We also
caution you that this Form 10-K includes forward-looking statements that
are based on managements beliefs and assumptions and on information currently
available to management. Future events and circumstances and our actual results
could differ materially from those projected in any forward-looking statements.
You should carefully consider the risks described below, the other information
in this Form 10-K ,the documents incorporated by reference herein and the
risk factors discussed in our other filings with the Securities and Exchange Commission
when evaluating our company and our business. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known by us or that we currently deem immaterial
may also impair our business operations. If any of the following risks actually
occur, our business could be harmed. In such case, the trading price of our
common stock could decline and investors could lose all or part of the money
paid to buy our common stock.  We cannot reliably project our continued revenues, and we
expect to incur significant losses for an indefinite period of time.  Our
video phone business involves the continued development of a new product line
with no market penetration, in an undeveloped market sector.  The extent
and timing of our revenues depends on several factors, including the rate of
market acceptance of our products, and the degree of competition we face from
similar products.  We cannot predict to what extent our video phone
product will produce revenues, or whether we will ever reach profitability. We
also cannot predict when, and to what extent, competition will emerge. If we
are unable to achieve significant levels of recurring revenue from our video
phone business, our losses will likely continue indefinitely. If this occurs,
the market price of our common stock and our viability as a going concern could
suffer.  There is substantial doubt about our companys ability to
continue as a going concern.  Our
company has suffered recurring losses from operations and had an accumulated
deficit of $261,575,000, a stockholders  5


deficiency of $1,462,000 and a working capital deficit of $2,380,000
that raised substantial doubt about our companys ability to continue as a
going concern. We have also experienced severe cash shortfalls, deferred
payment of some of our operating expenses, and shut down operations for a
period of time in early 2008 to conserve our remaining cash. The Company will
require cash to continue operations by securing cash investments in the Company
and through the increase of product sales. 
No assurances can be given that we will be able to obtain the necessary
cash for the Company to operate as a going concern, and further curtailment of
our operations could be necessary.  We are subject to complex and changing rules and
regulations concerning corporate governance and financial accounting standards,
which may affect our reported financial results or the way we conduct business,
or our ability to ensure proper financial reporting and adequate internal
controls.  The Sarbanes-Oxley
Act, which was signed into law in July 2002, among other things, mandated
that companies adopt new corporate governance measures and imposed
comprehensive reporting and disclosure requirements.  These rules,
regulations and requirements increased the scope, complexity, and cost of our
corporate governance, reporting, and disclosure practices.  Furthermore,
generally accepted accounting principles in the United States, including those
affecting the accounting for complex financial transactions, have been the
subject of change as well as frequent review and interpretation by the SEC, as
well as by national and international accounting standards bodies.  Such changes,
reviews and interpretations may have a significant effect on our reported
results of operations, including the results of transactions entered into
before the effective date of the changes.  A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a
timely basis.  Additionally, section 404
of the Sarbanes-Oxley Act of 2002 requires us to assess the design and
effectiveness of our internal control systems.  
Based on managements assessment, management concluded that, as of December 31,
2007, due to significant deficiencies, including lack of segregation of duties,
lack of appropriate IT security and program change controls, insufficient
documentation of period-end reviews, the improper recording of revenues, not
recording inventory at the lower of cost or market, and the determination of
the grant date for stock based awards, that when aggregated, resulted in a
material weakness.  The
changes or additions required to our systems and procedures and the staffing
necessary to complete the documentation, evaluation and any required
remediation of our systems of internal control to meet the required compliance
guidelines are costly and will negatively impact future financial
results.  In addition there is no assurance that the necessary resources
required for remedy of our weaknesses will be available, and even if they are
available there is no assurance that we will be able to conclude that our
systems are appropriately designed or effective, or that a material weakness
will not be found in our internal controls over financial reporting, which
could result in a material misstatement in future financial statements.  We are currently reliant primarily on one customer  We currently are heavily dependent on one customer,
Aequus Technologies, for the majority of our revenue. On March 31, 2008,
the Company entered into a new agreement with Aequus Technologies Corp. and
Snap Telecommunications, Inc. (collectively Aequus) This new agreement,
among other things, provides for payment to the Company by Aequus of
approximately $5 million in scheduled payments over the next ten months, an
agreement to arbitrate approximately $1.4 million additional dollars claimed by
the Company to be owed by Aequus and for the purchase of an additional $1.5
million of video phones  If Aequus is not
successful, or if their activities do not lead to significant sales of its
product, their operating results will be adversely affected, and their ability
to pay all or any of the monies obligated pursuant to the agreement, including
payment for products purchased or  the
payment of any monies the Company is awarded as a result of  agreed arbitration with Aequus, may not
materialize or could be significantly reduced, and the Company may, as a
result, have insufficient capital to operate its business.  The loss of business or payments from Aequus
could materially impair our continuing operations.  We are dependent on a single line of business that currently
has no significant history of revenues. We cannot predict our future results
because our video phone business has no significant operating history.  Our
primary line of business is the development of video phone products and
technology.  We began generating revenue
from commercial shipment of our Ojo product in April 2005. Given that our
video phone business involves the development of a new product line with no
market penetration, in an underdeveloped market sector, no assurances can be
given that sufficient sales, if any, will materialize. Should this business
fail to generate sufficient sales to support ongoing operations there can be no
assurance that we will be able to develop alternate business lines.   Investors should consider the risks and
uncertainties that we may encounter as an early-revenue-stage company in a new,
single line of business, in an unproven market. These uncertainties include:  ·  our ability to design, engineer and
manufacture products having the technological features planned for the video
phone product line in a cost efficient manner; ·  our ability to enter into appropriate
distribution relationships for the product; ·  our ability to demonstrate the benefits of
our products and services to end users; ·  our ability to offer our products at
competitive prices;  6


·  consumer and business demand for, and
acceptance of, our video phone products; ·  our unproven and evolving business model; ·  the entrance of significant competitors into
the video phone marketplace; ·  the introduction of newer video phone
technology rendering our technology obsolete; ·  unfavorable economic conditions in the
technology industry; ·  a changing regulatory environment; ·  decreased capital spending on technology due
to adverse economic conditions; and ·  global economic conditions.  Our video phone technology and products remain subject to
significant uncertainty.  Our
video phone technology and products are in the early commercialization stage
and have not been proven over an extended period of time. The market for
products related to video telephony is characterized by uncertain user and
customer requirements, and the emergence of new communications standards and
practices. Each of these characteristics could impact our video phone products,
intellectual property and system designs. The successful development of our
products is subject to the risks that:  ·  our product is found to be ineffective for
the intended purposes; ·  our product is uneconomical to manufacture or
market or does not achieve broad market acceptance; and ·  third parties hold proprietary rights that
preclude us from marketing the product.  Significant
undetected errors or delays in new products or releases may affect market
acceptance of our product. There can be no assurance that, despite our testing,
errors will not be found in the initial product or subsequent releases after
the commencement of commercial shipments, resulting in loss of customers or
failure to achieve market acceptance.  In addition, our video phone
technology and product will need to be compatible with a broad array of
disparate technologies in order to be interoperable with other products
routinely used in HSD operations such as routers, switches, network interfaces,
operating systems, security protocols and techniques, communication protocols and
protocol servers, and billing systems software. Without compatibility, we may
not achieve market acceptance or demand for our products within our target base
of customers because our products will not operate with many of the
applications the target customers currently use.  We rely on third parties to provide certain components and
services for our video phone products. If our vendors fail to deliver their
products in a reliable, timely and cost-efficient manner, our business will
suffer.  We depend on relationships
with third parties such as contract manufacturing companies, chip design
companies and others who may be sole source providers of key components and
services critical for the product we are developing in our video phone
business. A formal relationship with Mototech has been established for the
volume manufacture of Ojo.  Our agreement with Mototech allows either
party to terminate the agreement with 90 days prior notice.  If Mototech
or other providers of components and/or manufacturing services do not produce
these components or provide their services on a timely basis, if the components
or services do not meet our specifications and quality control standards, or if
the components or services are otherwise flawed, we may have to delay product delivery,
or recall or replace unacceptable products. In addition, such failures could
damage our reputation and could adversely affect our operating results. As a
result, we could lose potential customers and any revenues that we may have at
that time may decline dramatically.  We rely on third parties to provide certain marketing and
distribution services for our video phone products. If our vendors fail to
deliver their services in an appropriate, reliable, timely and cost-efficient
manner, our business will suffer.  In addition to direct sales
on our web site, we rely upon a distribution organization of dealers,
distributors, original equipment manufacturers, value added resellers, service
providers and other resellers to market and sell our video phone products. The
Company also plans to expand distribution to service providers and retailers
around the world.    Given our limited
experience in dealing with the retail distribution channel, there can be no
assurance that we will be able to successfully and expeditiously conclude
retail distribution agreements with the necessary retailers and
distributors.   These resellers are able
to set their own policies regarding the pricing of our products and the
advertising, marketing and other promotional efforts applicable to our
products.  In addition they determine how
prominently our products are displayed and demonstrated.  If our resellers policies are not effective
or if our products are not given adequate prominence, sales of our products may
be negatively impacted and our operating results would be adversely affected.
In this event our revenue could be significantly reduced and we could lose
potential customers for our products.  We may not be able to meet our product development objectives
or market expectations.  Our
video phone products are complex and use state of the art technology.  Accordingly, our development efforts are
inherently difficult to manage and keep on schedule and there can be no
assurance that we will be able to meet our development objectives or market
expectations. In addition to development delays, we may experience substantial
cost overruns in completing development of our product. The technological
feasibility for some aspects of the product that we envision is not completely  7


established. The products developed by us may
contain undetected flaws when introduced. There can be no assurance that,
despite testing by us and by potential customers, flaws will not be found in
the product, resulting in loss of or delay in market acceptance. We may be
unable, for technological or other reasons, to develop and introduce products
in a timely manner in response to changing customer requirements. Further,
there can be no assurance that a competitor will not introduce a similar
product. The introduction by a competitor of either a similar product or a
superior alternative to our product, may diminish our technological advantage,
render our product and technologies partially or wholly obsolete, or require
substantial re-engineering of our product in order to become commercially
acceptable. Our failure to maintain our product development schedules, avoid
cost overruns and undetected errors or introduce a product that is superior to
competing products would have a materially adverse effect on our business,
financial condition and results of operations.  We may not be able to achieve competitive pricing in the
marketplace.  Because
video phone products are relatively new to the marketplace there is no established
market pricing.  Our pricing for the Ojo video phone may be considered
high for a consumer product offering. We cannot be assured that we will be able
to provide competitive market pricing.  We may be subject to exchange rate fluctuations that could
impact our product costs and our revenues.  Although
our agreement with Mototech  Inc. (not an
affiliate of General Instruments or Motorola), our contract manufacturer in
Taiwan, is denominated in U.S. dollars, their material acquisition costs are subject
to exchange rate changes that could impact our product costs.  Unfavorable exchange rate fluctuations could
impact our cost of goods and result in increased product pricing that may
hamper our ability to sell the units at a price acceptable to our customers or
consumers.  Our current revenues are all
denominated in US dollars. In the future, should we derive revenues that are
denominated in foreign currency, our revenue would be subject to exchange rate
fluctuations and could be impacted as a result.  We are highly dependent on our key personnel to manage our
business, and because of competition for qualified personnel we may not be able
to recruit or retain necessary personnel.  Our
continued growth and success depend to a significant degree on the continued
services of our senior management and other key employees and our ability to
attract and retain highly skilled and experienced technical, managerial, sales
and marketing personnel. We have historically been a developer of products
related to ITV. Our video phone business represents an expansion into the
development of HSD communications hardware and software products in which we
have limited experience. In our new video phone business, we also expect to
encounter new product development challenges, new customer requirements, new
competitors and other new business challenges, with which our existing
management may be unfamiliar. There can be no assurance that we will be
successful in recruiting new personnel or in retaining existing personnel. None
of our employees are subject to a long-term employment agreement. The loss of
one or more key employees or our inability to attract additional qualified
employees could have a material adverse effect on our business, results of
operations and financial condition. In addition, we may experience increased
compensation costs in order to attract and retain skilled employees.  We may not be successful in developing or maintaining strong
distribution channels for our video phone products.  The
success of the video phone business depends on developing strong relationships
with service providers such as cable and DSL operators and other HSD
communications providers and distribution channel partners who are selling
services and/or consumer electronic devices to end-users. If we are not
successful in creating a strong distribution channel in a timely manner, we may
not gain significant sales.  We may not be able to compete successfully in the highly
competitive and rapidly evolving HSD communications market.  The
market for products that utilize HSD communications is still developing and
there can be no assurance that our product will ever achieve market acceptance.
Businesses, cable operators and other HSD network providers as well as the
users of such HSD networks must be convinced to buy our video phone product. To
the extent we do not achieve growth, it will be difficult for us to generate
meaningful revenue or to achieve profitability.  We may not be able to protect intellectual property of our
video phone business against third-party infringements or claims of
infringement.  Failure
to protect our intellectual property rights may result in a loss of our
exclusivity or the right to use our video phone technology. We plan to rely on
patent, trade secret, trademark and copyright law to protect our video phone
intellectual property. Although WorldGate has been awarded patents for its
distinctive design and technology and has other patents pending, our patent
position is subject to complex factual and legal issues that may give rise to
uncertainty as to the validity, scope and enforceability of a particular
patent. Accordingly, there can be no assurance that any further patents will be
issued pursuant to our current or future patent  8


applications or that patents issued pursuant
to such applications will not be invalidated, circumvented or challenged.
Moreover, there can be no assurance that the rights granted under any such
patents will provide competitive advantages to us or be adequate to safeguard
and maintain our proprietary rights. In addition, effective patent, trademark,
copyright and trade secret protection may be unavailable, limited or not
applied for in certain foreign countries.  We
also seek to protect our proprietary intellectual property, including
intellectual property that may not be patented or patentable, in part by
confidentiality agreements and, if applicable, inventors rights agreements
with our current and future strategic partners and employees. We cannot assure
you that these agreements will not be breached, that we will have adequate
remedies for any breach or that such persons or institutions will not assert
rights to intellectual property arising out of these relationships.  Some
of our video phone intellectual property includes technologies and processes
that may be similar to the patented technologies and processes of third
parties. If we do not adequately secure our freedom to use our video phone
technology, we may have to pay others for rights to use their intellectual
property, pay damages for infringement or misappropriation or be enjoined from
using such intellectual property. If we are found to be infringing third-party
patents, we do not know whether we will be able to obtain licenses to use such
patents on acceptable terms, if at all. While we are not currently engaged in
any material intellectual property disputes or litigation, we could become
subject to lawsuits in which it is alleged that we have infringed the
intellectual property rights of others or commence lawsuits against others who
we believe are infringing upon our rights. Our involvement in intellectual
property litigation could result in significant expense to us, adversely
affecting the development of the challenged product or intellectual property
and diverting the efforts of our technical and management personnel, whether or
not such litigation concludes favorably for our Company.  Legal and regulatory developments could have adverse
consequences for our business.  The
legal and regulatory environment that pertains to our business is uncertain and
changing rapidly. New legislation or regulations could be introduced in any
country that could substantially impact our ability to launch and promote the
Ojo video phone in that country. For example the FCC or a comparable regulatory
authority could undertake an examination of whether to impose surcharges or
additional regulations upon certain providers of Internet protocol, or IP,
based communication services. The imposition of regulations on IP
communications services may negatively impact our business.  Similarly the adoption of regulations
prohibiting the use of certain substances commonly found in electronic
components could likewise increase the costs of our products, delay product introductions
and otherwise negatively impact our business.  The use of the high speed data infrastructure as a commercial
marketplace is at an early stage of development.  Demand and market acceptance
for recently introduced products and services over the high speed data, or HSD,
infrastructure are still uncertain. We cannot predict whether customers will be
willing to shift their traditional telephone activities online. The HSD
infrastructure may not prove to be a viable commercial marketplace for a number
of reasons, including:  ·  concerns about security and varying security
techniques and protocols; ·  changing and non-uniform standards; ·  Internet congestion; ·  quality of service issues; ·  inconsistent service; and ·  lack of cost-effective, high-speed access.  If
the use of the HSD infrastructure as a commercial marketplace does not continue
to grow, we may not be able to grow our customer base, which may prevent us
from achieving profitability.  We may not have sufficient working capital to fund our
continuing video phone business, and we may be unable to obtain additional
capital.  The
extent and timing of our future capital requirements will depend upon several
factors, including the rate of market acceptance of our products, the rate and
timing of product sales and the margin associated with those sales, the degree
of competition for our products, and our level of expenditures, including those
for product development, sales and marketing.  If our capital requirements
vary materially from those currently planned, we may require additional
financing sooner than anticipated.  Despite the receipt of proceeds from
several private placements of our securities, we may need to seek additional
third party investment in order to provide additional operating capital for our
video phone business. We cannot be certain that financing from third parties
will be available on acceptable terms to us or at all.  The levels of
funding of early-stage companies generally by both venture funds and strategic
investors have fallen dramatically in the past few years. If we cannot raise
funds on acceptable terms, we may not be able to develop our products and
services, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, any of which could have a material
adverse effect on our ability to grow our business. If we are unable to secure
such additional financing, we will have to curtail or suspend our business
activities, we may not be able to continue to operate our business  9


as a going concern and we may have to seek
the protection of the bankruptcy courts. If that happens, you could lose your
entire investment.  If we obtain additional financing, you may suffer significant
dilution.  If
we raise additional capital by issuing equity securities, our stockholders may
experience severe dilution of their ownership percentage, which may adversely
affect the value of our common stock.  In addition, the new equity
securities may have rights, preferences or privileges senior to those of our
common stock.  Our common stock is listed on the NASDAQ Over  the-Counter ElectronicBulletin Board which increases the volatility
of our stock and makes it harder to sell our stock.  Our common
stock trades on the NASDAQ Over-the-Counter Electronic Bulletin Board Trading
System (OTCBB).  The Bulletin Board
tends to be highly illiquid, in part because there is no national quotation
system by which potential investors can track the market price of shares except
through information received or generated by a limited number of broker-dealers
that make markets in particular stocks. 
There is a greater chance of market volatility for securities that trade
on the Bulletin Board as opposed to a national exchange or quotation
system.  In a volatile market, you may
experience wide fluctuations in the market price of our securities. These
fluctuations may have an extremely negative effect on the market price of our
securities and may prevent you from obtaining a market price equal to your
purchase price when you attempt to sell our securities in the open market. In
these situations, you may be required to either sell our securities at a market
price which is lower than your purchase price, or to hold our securities for a
longer period of time than you planned. 
Because our common stock falls under the definition of penny stock,
trading in our common stock may be limited because broker-dealers are required
to provide their customers with disclosure documents prior to allowing them to
participate in transactions involving our common stock. These rules impose
additional sales practice requirements on broker-dealers that sell low-priced
securities to persons other than established customers and institutional
accredited investors; and require the delivery of a disclosure schedule
explaining the nature and risks of the penny stock market. As a result, the
ability or willingness of broker-dealers to sell or make a market in our common
stock might decline, and you could find it more difficult to sell your stock.  Our stock price is volatile.  The trading price for our
common stock has been volatile, ranging from a sales price of $6.89 per share
in the first quarter of 2005 to a sales price of $0.11 in December 2007.
The trading price for our common stock during the period from January 3,
2007 to December 31, 2007 ranged from $0.11 to $1.44.  The price has changed dramatically over short
periods with changes of over 50% percent in a single day. An investment in our
stock is subject to such volatility and, consequently, is subject to
significant risk.  A decrease in the price of our stock may trigger significant
dilution of our stock  On
multiple occasions we have issued shares of our common and preferred stock,
issued convertible debentures, as well as issued warrants and additional rights
to acquire our common stock, to certain institutional investors in private
placement transactions.  The various agreements providing for these
private placement transactions include numerous anti-dilution provisions which
have in the past, and may in the future continue to be, triggered by a
reduction in our stock price and which could trigger the repricing of
outstanding shares and warrants and issuance of additional shares or warrants
of our stock.  Prior offerings of our common stock may have an adverse
impact on the market value of our stock.  On
multiple occasions we have issued shares of our common stock as part of various
private placements to certain institutional investors and as part of these
transactions we filed multiple registration statements, which provided for the
sale or distribution of these shares by these institutional investors. When
these investors sell their shares we will not receive any proceeds from the
sales. The sale of these blocks of stock, or even the possibility of their
sale, may adversely affect the trading market for our common stock and reduce
the price available in that market.  In
connection with these private placements, we also issued convertible debentures
and warrants to purchase shares of common stock. The existence of such rights
to acquire common stock at variable as well as fixed prices may prove a
hindrance to our efforts to raise future equity and debt funding, and the
exercise of such rights will dilute the percentage ownership interest of our
stockholders and may dilute the value of their ownership. The possible future
sale of shares issuable on the exercise of outstanding warrants and additional
investment rights could adversely affect the prevailing market price of our common
stock. Further, the holders of the outstanding warrants and additional
investment rights may exercise them at a time when we would otherwise be able
to obtain additional equity capital on terms more favorable to us.  10


The Companys failure to comply with certain covenants
contained in agreements relating to its private placement of securities  may have
an adverse impact on the cash available to the Company.  On
multiple occasions we have issued shares of our common and preferred stock,
issued convertible debentures, as well as issued warrants and additional rights
to acquire our common stock, to certain institutional investors in private
placement transactions.  The various agreements providing for these private
placement transactions included numerous provisions intended to protect such
institutional investors.  For example, the Company is required to
continually maintain effective registration statements permitting the investors
to sell their shares of common stock.  Failure to comply with such
requirements may result in damages to the investors and result in obligations
to make cash payments to the investors.  The investors may also be
entitled to receive more shares than originally allocated in the event the
Company subsequently issues shares to other investors at a lower valuation than
that afforded to the investors.  In addition, the investors may be
entitled to receive cash payments instead of shares upon the redemption of
certain securities in the event that certain defined events occur including a
lapse in the registration statement, being de-listed on certain specified
exchanges, trading in the Companys stock is suspended, or a change in control
occurs with respect to the Company.  The
Company has received notices from YA Global Investments, L.P. (YA Global),
holder of the Companys convertible debentures, claiming various alleged
defaults of the terms of the debentures. 
The Company has notified YA Global that it disputes these claims and
whether they constitute a continuing event of default under the debentures. The
Company is working with YA Global in an effort to settle their disputes
regarding the claimed defaults. There is no certainty that these claims can be
resolved, and, if they are not, it may have an adverse effect on the continuing
operations of the Company.  Our board of directors right to authorize additional shares
of preferred stock could adversely impact the rights of holders of our common
stock.  Our
board of directors currently has the right to designate and authorize the
issuance of one or more series of our preferred stock with such voting,
dividend and other rights as our directors may determine. The board of
directors can designate new series of preferred stock without the approval of
the holders of our common stock. The rights of holders of our common stock may
be adversely affected by the rights of any holders of shares of preferred stock
that may be issued in the future, including, without limitation, dilution of
the equity ownership percentage of our holders of common stock and their voting
power if we issue preferred stock with voting rights. Additionally, the
issuance of preferred stock could make it more difficult for a third party to
acquire a majority of our outstanding voting stock.  Item 2.
Properties.  Our corporate headquarters
is located in Trevose, Pennsylvania in a leased facility consisting of
approximately 42,500 square feet at an annual fee of $11.74 per square foot,
with a 3% increase annually. The current lease has a five year term effective September 1,
2005. The lease is cancelable by either party with eight months notice, with a
termination by the tenant including a six months termination fee. In March 2008
the parties agreed in principle to a new lease (and the cancellation of the
current lease with no termination fee) for a smaller space within the current
facility consisting of approximately 17,000 square feet at an annual fee of $7
per square foot. This new lease is expected to be cancelable by either party
upon 90 days notice with no termination costs.  Item 3. 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. During the first
fiscal quarter 2008 we were involved in a dispute with Aequus Technologies ,
our largest customer.  With the exception
of certain non-recurring engineering, or NRE, in the amount of approximately
$1.3M, which remains the subject of agreed arbitration between the parties.
This dispute was settled as part of the March 31, 2008 agreement with this
customer as further discussed in Item 6 of this annual report.  When we are involved in disputes or other
legal proceedings we comply with the requirements of currently prevailing
accounting standards and provide for accruals where a liability is probable and
a reasonable estimate can be made as to the probable amount of such liability.  Item 4.
Submission of Matters to a Vote of Security Holders.  At
our annual meeting of stockholders held on December 13, 2007, our
stockholders elected seven members to our Board of Directors.  Those
elected to the Board were Hal M. Krisbergh, Steven C. Davidson, Clarence L. Irving, Jr.,
Martin Jaffe, Jeff Morris, David Tomasello and Lemuel Tarshis.  The
results of the voting for each member of our Board of Directors are as follows:  Nominee
  
  FOR
  
  WITHHELDSteven C. Davidson
  
  33,129,527
  
  3,436,682Martin Jaffe
  
  33,135,874
  
  3,430,335Clarence L. Irving, Jr.
  
  33,676,955
  
  2,889,254  11


Hal M. Krisbergh
  
  33,490,097
  
  3,076,112Jeff Morris
  
  33,568,953
  
  2,997,256Lemuel Tarshis
  
  34,338,710
  
  2,227,499David Tomasello
  
  33,271,816
  
  3,294,393  Our
stockholders also approved the proposed amendment of the Companys Certificate
of Incorporation to increase the authorized shares of the Companys common
stock from 120 million to 200 million with a vote as follows:  FOR:
  
  27,796,017AGAINST:
  
  8,599,813ABSTENTIONS:
  
  170,379  Additionally
our stockholders rejected the proposed plan of recapitalization that would
have, upon implementation by the Company at the discretion of the Companys
board of directors, resulted in the amendment of our Certificate of
Incorporation to effect up to a one-for-ten reverse stock split of the Companys
common stock, with a vote as follows:  FOR:
  
  10,216,926AGAINST:
  
  2,567,003ABSTENTIONS:
  
  119,043BROKER NON-VOTES:
  
  23,663,238  PART II  Item 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.  Price
Range of Common Stock  Our common stock, $0.01 par
value, is traded on the OTCBB under the symbol WGAT.OB.  The following table shows the high and low
sales price as reported by the OTCBB, for each quarter of 2006 and 2007.  High
  
  LowYear Ended December 31, 2006First Quarter
  
  $
  2.30
  
  $
  1.06Second Quarter
  
  2.16
  
  1.14Third Quarter
  
  1.85
  
  1.08Fourth Quarter
  
  1.60
  
  1.14  Year Ended December 31, 2007First Quarter
  
  $
  1.44
  
  $
  0.64Second Quarter
  
  0.92
  
  0.45Third Quarter
  
  0.56
  
  0.33Fourth Quarter
  
  0.40
  
  0.11  As
of April 6, 2008, we had 341 holders of record of our common stock.  Dividends  We have never paid or
declared any cash dividends on our common stock. We do not anticipate paying
any cash dividends in the foreseeable future. We currently expect to retain
future earnings, if any, to finance the growth and development of our business.
The terms of our currently issued preferred stock impose a preference to the
payment of any dividend on our common stock.  Securities
Authorized for Issuance Under Equity Compensation Plans  The following table sets
forth information as of December 31, 2007 regarding securities authorized
for issuance under the Companys equity compensation plans:  12


Equity Compensation Plan Information  Plan Category
  
  Number of securities to
  be issued upon exercise
  of outstanding options,
  warrants and rights
  (a)
  
  Weighted-average
   exercise price of
  outstanding
  options, warrants
  and rights
  (b)
  
  Number of securities
  remaining available
  for future issuance
  under equity
  compensation plans
  (excluding securities
  reflected in column (a))
  (c)Equity compensation plans approved by
  security holders (1)
  
  6,808,342
  
  $
  1.37
  
  1,197,029
  (1)Equity compensation plans not approved by
  security holders (2)
  
  
  
  
  
  Total
  
  6,808,342
  
  1.37
  
  1,197,029
  (1)  
 (1)  2003
Equity Incentive Plan.  The 2003 Equity
Plan has an automatic annual increase in the number of shares reserved for
issuance in an amount equal to the lesser of 4% of the then outstanding shares
of our Common Stock or 1,000,000 shares. (2)  The
Company does not maintain any equity compensation plans that have not been
approved by its stockholders.  In
2003 the Company adopted an equity incentive plan (the Equity Plan) which was
approved by stockholders in November, 2004. 
The principal features of our Equity Plan are summarized below, but the
summary is qualified in its entirety by reference to our Equity Plan, which was
filed as exhibit 10.6 to the Companys Proxy Statement to shareholders filed September 3,
2004.  This
plan provides for the grant of equity awards to such officers, other employees,
consultants and directors of WorldGate and our affiliates as the Compensation
and Stock Option Committee may determine from time to time. Although various
types of awards are available under the Equity Plan, including non-qualified
and incentive stock options, restricted stock and performance based awards,
currently only stock options and performance based stock have been
granted.  Stock options vest in equal
installments over a four-year period, and expire ten years following the date
of grant, subject to acceleration in the event of some changes of control of
WorldGate, and earlier termination upon cessation of employment. In 2007 the
Company awarded 1,151,000 shares of restricted stock subject to vesting under
certain performance criteria of which 250,000 were forfeited. Performance based
shares vesting criteria are as follows: 10% of the shares vest upon achieving
each of a 10%, 20%, 30% 40% and 50% increase in Company total gross revenue in
a quarter over its third quarter 2007 total gross revenue shown on its
statement of operations as reported in its SEC filings and 25% of the shares
vest upon the Company achieving each of (1) a quarterly operating cash
break even (defined as zero or positive net cash provided by operations
consistent with or as reported on the Consolidated Statement  of Cash Flows in the financial statements
filed with SEC) and (2) a 10% net income as a percent of revenue. The
Equity Plan has an automatic annual increase in the number of shares reserved
for issuance in an amount equal to the lesser of 4% of the then outstanding
shares of our Common Stock or 1,000,000 shares.  To
administer our Equity Plan, the Compensation and Stock Option Committee must
consist of at least two members of our board of directors, each of whom is a non-employee
director for purposes of Rule 16b-3 under the Securities Exchange Act of
1934, or the Exchange Act and, with respect to awards that are intended to
constitute performance-based compensation under Section 162(m) of the Internal
Revenue Code of 1986, an outside director for the purposes of Section 162(m).
The Compensation and Stock Option Committee, among other things, interprets our
Equity Plan, selects award recipients, determines the type of awards to be
granted to such recipients and determines the number of shares subject to each
award and the terms and conditions thereof. The Compensation and Stock Option
Committee may also determine if or when the exercise price of an option may be
paid in the form of shares of our common stock and the extent to which shares
or other amounts payable with respect to an award can be deferred by the
participant. Our board of directors may amend or modify our Equity Plan at any
time. In addition, our board of directors is also authorized to adopt, alter
and repeal any rules relating to the administration of our Equity Plan and
to rescind the authority of the Compensation and Stock Option Committee and
thereafter directly administer our Equity Plan. However, subject to certain
exceptions, no amendment or modification will impair the rights and obligations
of a participant with respect to an award unless the participant consents to
that amendment or modification.  Our
Equity Plan will continue in effect until terminated by us in accordance with
its terms, although incentive stock options may not be granted more than 10
years after the adoption of our Equity Plan.  Item 6. Selected Financial Data.  Not
required  13


Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.(Dollar amounts contained in this Item 7 are
in thousands, except per share amounts)  FORWARD-LOOKING AND CAUTIONARY STATEMENTS  We
may from time to time make written or oral forward-looking statements,
including those contained in the following Managements Discussion and Analysis
of Financial Condition and Results of Operations.  The words estimate, project,
believe, intend, expect, and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words.  In order to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, we are
hereby identifying certain important factors that could cause our actual
results, performance or achievement to differ materially from those that may be
contained in or implied by any forward-looking statement made by or on our
behalf.  The factors, individually or in the aggregate, that could cause
such forward-looking statements not to be realized include, without limitation,
the following: (1) difficulty in developing and implementing marketing and
business plans, (2) industry competition factors and other uncertainty
that a market for our products will develop, (3) challenges associated
with distribution channels, including both the retail distribution channel
and  HSD operators (e.g., uncertainty
that they will offer our products, inability to predict the manner in which
they will market and price our products and existence of potential conflicts of
interests and contractual limitations impeding their ability to offer our
products), (4) continued losses, (5) difficulty or inability to raise
additional financing on terms acceptable to us, (6) departure of one or
more key persons, (7)default under, or acceleration of the
maturity of, our convertible debentures,  (8) changes in regulatory
requirements, (9) delisting of our common stock from the OTCBB and (10) other
risks identified in our filings with the Securities and Exchange
Commission.  We caution you that the foregoing list of important factors
is not intended to be, and is not, exhaustive.  We do not undertake to
update any forward-looking statement that may be made from time to time by us
or on our behalf.  Results of Operations:  General  Our
video phone business has not produced significant revenues to date.  The
extent and timing of future revenues for our business depends on several
factors, including the rate of market acceptance of our products and the degree
of competition from similar products.  We cannot predict to what extent
our video phone product will produce revenues, or when, or if, we will reach
profitability.  On
April 28, 2004, we entered into a multi-year agreement with General
Instrument for the worldwide distribution of the Ojo personal video phone. This
agreement provided for General Instrument to be WorldGates exclusive
distributor of its broadband video phone products and for WorldGate to be
General Instruments exclusive supplier of its broadband video phone
products.  On February 17, 2006, we
mutually agreed with General Instrument to end this agreement which terminated
exclusivity for both parties. In addition to its current role for development
and manufacture of Ojo, WorldGate assumed direct responsibility and control for
the advertising, marketing, and distribution of its products.  As
part of ending the development and distribution agreement, General Instrument
has agreed to certain restrictions on its development of a stand-alone video
phone product which has as a primary function of making or receipt of video
phone calls over a broadband network.  Such restrictions ended in January 2007.
For more details, refer to Note 2 of the accompanying consolidated financial
statements for the year ended December 31, 2007.  On
May 9, 2006 the Company entered into a multiyear agreement with Aequus to
purchase Ojo video phones through its wholly owned subsidiary Snap
Telecommunications Inc., (Snap!VRS), a provider of VRS and VRI services for
the deaf and hard of hearing.   On June 20,
2007 the Company announced it had expanded its relationship with Aequus and
Snap!VRS modifying their earlier agreement to allow for the parties to work
collaboratively to identify the most desired Ojo features and capabilities that
will provide the best video phone experience for the VRS user community and
that would enable Ojo to be the preferred VRS video phone. As part of the
modified agreement the Company agreed to contract to provide development and
engineering resources to accomplish these features and capabilities and in
addition, as a result of Snap!VRSs utilization of the Ojo network, Snap!VRS
also placed a purchase order for 10,000 Ojos to begin to fill the current
Snap!VRS order backlog.  In the later
part of the third quarter of 2007 product shipments were commenced to Snap!VRS
VRS customers.  On
February 4, 2008, the Company issued a current report on Form 8-K
indicating that it was in a dispute with Aequus over the payment of significant
monies which the Company believed were owed to it.  The customers refusal to pay such monies had
contributed to a shortfall in the operating cash available to the Company to
continue operations, and accordingly, on January 30, 2008, the Company
shut down its operations.  The Form 8K
further indicated that this was a first step to winding down its business,
which would occur if the Company was not able to secure payment of the monies
believed to be owed to by the customer, and/or new financing.  On
March 31, 2008, the Company entered into a new agreement with Aequus and
Snap!VRS.  This new agreement, inter  14


alia, provides for the (i) resolution of
a dispute with Aequus regarding amounts the Company claimed were owed to the
Company by Aequus and the termination by the Company of service to Aequus, (ii) payment
to the Company by Aequus of approximately $5 million in scheduled payments over
the next ten months, (iii) agreement to arbitrate approximately $1.4
million additional dollars claimed by the Company to be owed by Aequus and (iv) purchase
of an additional $1.5 million of video phones by Aequus (the Aequus
Transaction).  As a result of this new
agreement Aequus is planning to build a new data center, with support and
training provided by the Company, and upon completion, directly operating a
video phone service for its customers. In anticipation of completing the
contract with Aequus the Company resumed operations on March 11, 2008.  As of December 31,
2007, on a consolidated basis, we had approximately 39 full-time employees.
Since December 31, 2007  and until April 4,
2008 the Company reduced its staffing by an additional 14 employees to 25
employees.  Critical Accounting Policies and Estimates  Our 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.  Our significant accounting policies are described in Note 2 to the
accompanying consolidated financial statements for the year ended December 31,
2007.  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, accounts
receivable, inventories, cash flow and valuation assumptions in performing
asset impairment tests of long-lived assets, income taxes, stock based
compensation, value of redeemable preferred stock, convertible debentures,
related warrants and conversion options.  Revenue Recognition  Revenue is
recognized when persuasive evidence of an arrangement exists, the price is
fixed or determinable, the collectibility 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 our
limited commercial sales history, our ability to evaluate the collectibility of
customer accounts requires significant judgment. The Company evaluates its
equipment customer and service customers accounts for collectibility at the
date of sale and on an ongoing basis.  Revenues are also
offset by a reserve for any price refunds and consumer rebates consistent with
the EITF Issue 01-9, Accounting for Consideration Given by a Vendor to a
Customer.  As
part of ending our agreement with General Instrument, and in anticipation of
WorldGate inventory requirements as a result of taking full responsibility for
product distribution, we negotiated the right to buy back about two-thirds of
the units sold to General Instrument, valued at approximately $2,765 (based
upon the original sales price to General Instrument), for approximately $1,064.
This is less than half of what it would have cost us to purchase the same
inventory from our manufacturing sources. 
As a result we recorded a reserve for returns and reduced revenue in the
amount of approximately $2,310, during the fourth quarter of 2005.  In
addition, the Company has recorded no revenue for units shipped to General
Instrument in the first quarter 2006 and for the year ended December 31,
2006 the Company recorded a gain on termination of this agreement of
approximately $1,843 as a result of the lower purchase price of the inventory
repurchased from General Instrument ($1,393, net of the cost of rework for
rebranding the product and the adjustment of the inventory to its current
replacement value) and reversal of the product refund program reserve ($212) as
well as an adjustment of the warranty reserve for products repurchased ($233),
both of which resulted from termination of the Companys agreement with General
Instrument.  15


During the twelve
months ended December 31, 2007 we shipped approximately 400 units with a
sales value of approximately $128 to customers subject to a right of return
should the units not be sold through to their customer. Revenue and cost of
goods sold of $16 for these units was deferred as of December 31, 2007 in
accordance with SFAS 48 Revenue Recognition when a Right of Return Exists.  In the third
quarter of 2007, the Company began to ship its video phone product to its VRS
customer (See Note 2).  As part of its June 2007
agreement with this customer, the Company began to recognize product revenue at
the time of shipment of its video phone. In addition, the Company also began to
receive a service fee revenues based on a percentage of the fees earned by
Aequus. The Company recognizes this service fee revenue upon confirmation from
the VRS customer of the fees they have earned and for which the customer has
received service. The Company also receives service fee revenues from end
consumers which is recognized after the service has been performed. In
addition, the Company had provided non-recurring engineering (NRE) services
to Aequus valued at $1,354 for the year ended December 31, 2007. These
services are subject to agreed arbitration between the parties. As such the
Company did not recognize revenues related to these NRE services during the
year ended December 31, 2007 but rather will treat similar to a gain
contingency.  Accounts Receivable  The Company records
accounts receivable at the invoiced amount. 
Management reviews the receivable balances on a monthly basis.  Management analyzes collection trends,
payment patterns and general credit worthiness when evaluating collectibility
and requires letters of credit whenever deemed necessary.  Additionally, the Company may establish an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends related to past losses and other
relevant information.  Account balances
would be charged off against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote.  As of December 31, 2006 and 2007, the
Company did not have an allowance for doubtful accounts or any off-balance
sheet credit exposure related to its customers. 
At December 31, 2007, approximately 82% of accounts receivable was
concentrated with one domestic customer. At December 31, 2006,
approximately 95% of accounts receivable were concentrated with five
customers.  The Company had two distribution
customers that represented 8% of accounts receivable, and had two major
international telecommunications customers that represented 82% of accounts
receivable at December 31, 2006. 
Trade accounts receivable at December 31, 2006 and 2007 were $1,005
and $166, respectively.  Bad debt expense
was recorded for the twelve months ended December 31, 2006 and 2007 of $0
and $19, respectively.  Inventory.  Our inventory
consists primarily of finished goods equipment to be sold to customers. The
cost is determined on First-in, First-out (FIFO) cost basis. A periodic
review of inventory quantities on hand is performed in order to determine and
record a provision for excess and obsolete inventories. Factors related to
current inventories such as technological obsolescence and market conditions
are analyzed to determine estimated net realizable values. A provision is
recorded to reduce the cost of inventories to the estimated net realizable
values. To motivate trials and sales of its Ojo product, the Company has
historically subsidized, and plans in the future to continue to subsidize,
certain of its product sales to customers that result in sales of inventory
below cost.  In accordance with
Accounting Research Bulletin No. 43, the Company reflects such inventory
at the lower of cost or market and has reduced its inventory at December 31,
2007 and 2006 by $293 and $97, respectively, 
to reflect such valuation.  Any
significant unanticipated changes in the factors noted above could have an
impact on the value of the Companys inventory and its reported operating
results.   Our inventory balance was
$1,057 and $1,600 at December 31, 2007 and 2006, respectively. In 2006,
the Companys inventory was reduced by $585 to their estimated net realizable
values.  Long-Lived
Assets.  Our long-lived assets
consist of property and equipment. These long-lived assets are recorded at cost
and are depreciated or amortized using the straight-line method over their
estimated useful lives. The carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flows from such assets are
separately identifiable and are less than the carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined by
using the anticipated cash flows discounted at a rate commensurate with the
risk involved. If useful life estimates or anticipated cash flows change in the
future, we may be required to record an impairment charge.  Accounting
for Income Taxes.  As part of the process of
preparing our consolidated financial statements we are required to estimate our
income taxes in each of the jurisdictions in which we operate. This process
involves us estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
depreciation of property and equipment and valuation of inventories, for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe that
it is more likely than not that we will not recover the deferred tax asset, we
must establish valuation allowances. To the extent we establish valuation  16


allowances or increase
the allowances in a period, we must include an expense within the tax provision
in the statement of operations.  We have a full valuation
allowance against the net deferred tax asset of $103,537 as of December 31,
2007, due to our lack of earnings history and the uncertainty as to the
realizability of the asset. In the future, if sufficient evidence of our
ability to generate sufficient future taxable income becomes apparent, we would
be required to reduce our valuation allowance, resulting in a benefit from
income tax in the consolidated statements of operations.  The Company has adopted the provisions of Financial
Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109(FIN
48), on January 1, 2007.  FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes, and prescribes a recognition threshold and measurement
process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. 
FIN 48 also provides guidance on recognition, classification, interest
and penalties, accounting in interim period, disclosure and transition.  The Companys ability to utilize its net
operating loss carryforwards and credit carryforwards may be subject to annual
limitations as a result of prior or future changes in ownership and tax law as
defined under Section 382 of the Internal Revenue Code of 1986. Such
limitations are based on the market value of the Company at the time of
ownership change multiplied by the long-term exempt rate supplied by the
Internal Revenue Service. As part of this assessment the Company completed a
preliminary analysis under Section 382 of the Internal Revenue Code. Based
on this analysis it was determined that it was more likely than not that a
change of control pursuant to Section 382 has not occurred. Future
issuances of common stock may affect this analysis which might cause limitation
in the Companys ability to utilize net operating loss carryforwards.  Stock-Based
Compensation.  Effective January 1,
2006, the Company adopted the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based
Payment, using the modified-prospective-transition method which requires us
the recognition of compensation expense on a prospective basis.  SFAS No. 123(R) requires that all
stock based compensation be recognized as an expense in the financial
statements and that such cost be measured at the fair value of the award.  Under this method, in addition to reflecting
compensation for new share-based awards, expense is also recognized to reflect
the remaining service period of awards that had been included in pro-forma
disclosure in prior periods.  SFAS No. 123(R) also
requires that excess tax benefits related to stock option exercises be
reflected as financing cash inflows instead of operating inflows.   As a result, the Companys net loss before
taxes for the year ended December 31, 2007 and 2006 included approximately
$1,075 ($0.02 per share) and $837 ($0.02 per share), respectively, of stock
based compensation.  The stock based
compensation expense is included in general and administrative expense in the
consolidated statements of operations.  Accounting
for Preferred Shares and Related Warrants.  The Company accounted for
redeemable preferred stock in accordance with EITF topic D-98 Classification
and Measurement of Redeemable Securities, and the Redeemable Preferred Stock was
recorded in the consolidated financial statements as temporary equity.
Additionally, the fair value of warrants and preferred stock conversion options
were recorded into the consolidated financial statements as liabilities as a
result of their features that require accounting under SFAS 133 Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS 133).  At each reporting balance sheet date, an
evaluation is made of these valuations and marked to market.  Fair value is determined using the
Black-Scholes method.  Key assumptions
used in the Black-Scholes method include actual period close stock price,
applicable volatility rates, remaining contractual life and period close risk
free interest rate. There was no preferred shares outstanding as of December 31,
2007. On June 23, 2007, the holder converted the remaining 166 shares of
preferred stock. As a result only the warrants are still accounted for under
SFAS 133.  Accounting
for Secured Convertible Debentures and Related Warrants.  The Company
accounted for conversion options embedded in convertible notes in accordance
with SFAS No. 133 and EITF 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19).  SFAS 133 generally requires companies to
bifurcate conversion options embedded in convertible notes from their host
instruments and to account for them as free standing derivative financial
instruments in accordance with EITF 00-19.  
EITF 00-19 states that if the conversion option requires net cash
settlement in the event of circumstances that are not solely within the Companys
control that they should be classified as a liability embedded measured at fair
value on the balance sheet.  On May 18,
2007, the Company and the investor of the August 11, 2006 transaction
amended the terms of the secured convertible debentures to remove the investors
ability, upon conversion of the debentures, to demand cash in lieu of shares of
common stock, and to clarify that the Company may issue restrictive shares if
there is no effective registration statement at the time of conversion. The
terms of the convertible debentures were amended to permit the Company to
reclassify the derivative conversion option liability embedded in the
convertible debentures from debt to equity.  17


The Company
initially accounted for the warrants issued in the August 11, 2006
convertible debenture transaction as a liability at fair value in accordance
with SFAS 133 and EITF 00-19 as there were insufficient authorized shares.  On October 11, 2006, the Company
received shareholder approval to increase the number of authorized shares and
the warrants were reclassified to equity at fair value. Fair value is
determined using the Black-Scholes method. 
Key assumptions used in the Black-Scholes method include conversion
price, actual period close stock price, applicable volatility rates, remaining
contractual life and period close risk free interest rate.  2007 versus 2006  Revenues.  Revenues.Net revenues for
the twelve months ended December 31, 2007 and 2006 were $3,445 and $2,776,
respectively.  This increase of $669, or
24%, primarily reflects the initial product and service revenues from Aequus
which started in the third quarter of 2007. Revenue from increased product
sales was $54 while service revenues increased by $440, primarily the result of
$250 of initial service revenues realized in 2007 from our VRS customer.   In addition, in 2007 the Company realized
$175 of revenues from certain engineering development work for our VRS
customer.  Revenues during the twelve
months ended December 31, 2006 reflects the product inventory build up by
our former distributor.  During the
twelve months ended December 31, 2007 we shipped approximately 400 units
to customers subject to a right of return. 
Revenue and cost of sales of $16 was deferred as of December 31,
2007 in accordance with SFAS 48 Revenue Recognition when a Right of Return
Exists.  On March 13,
2006, as an incentive to promote delivery of the units, the Company announced a
special price protection program to certain retailers and a rebate program to
consumers. These incentive programs began on April 1, 2006 and terminated
at the end of the second quarter of 2006. Consistent with the EITF Issue 01-9, Accounting
for Consideration Given by a Vendor to a Customer, we offset our revenues for
the twelve months ended December 31, 2006 by $31 for the price protection
program and  $22 for the consumer rebate
program.    During the twelve months
ended December 31, 2006, we provided forward pricing discounts to
retailers and certain service operator sales in order to help promote
distribution and consumer purchases.  In
the case of retail sales, the Company expects that recurring revenues from
service fees will offset any loss on the sale of the product.  This forward pricing, coupled with inventory
adjustments for obsolescence and lower market valuations, resulted in a net
margin loss in 2006 of $593. There were no special price protection programs or
forward pricing discounts to retailers and certain service operator sales
during the twelve months ended December 31, 2007.  As
part of ending our agreement with General Instrument, and in anticipation of
our inventory requirements as a result of taking full responsibility for
product distribution, we negotiated the right to buy back about two-thirds of
the units sold to General Instrument, valued at approximately $2,765 (based
upon the original sales price to General Instrument), for approximately $1,064.
This is less than half of what it would cost us to purchase the same inventory
from its manufacturing sources.  As a
result we recorded a reserve for returns and reduced revenue in the amount of
approximately $2,310 during the fourth quarter of 2005. In addition we recorded
no revenue for units shipped to General Instrument in the twelve months ended December 31,
2006 and recorded a gain on termination of this agreement of approximately
$1,843 during the twelve months ended December 31, 2006 as a result of the
lower purchase price of this inventory (net of the cost of rework for
rebranding the product).  Costs and
Expenses.  Cost of
Revenues. The
cost of revenues, consisting of product and delivery costs relating to the
delivery of video phones, was $3,046 and $3,369, respectively, for the twelve
months ended December 31, 2007 and 2006. 
Included in these costs for 2007 and 2006 were inventory adjustments for
lower of cost or market valuations of $293 and $585, respectively. In 2007,
costs for freight, warranty, royalty and other costs related to the product
further increased the cost of revenues by $242 for the twelve months ended December 31,
2007.   For the year ended December 31,
2006, the charge for the lower of cost or market adjustments, freight charges,
product rework expenses, reserves for warranty and other costs related to the
product further increased the cost of revenues by $234.  Engineering
and Development.  Engineering and development expenses
primarily consist of compensation, and the cost of design, programming,
testing, documentation and support of the Companys video phone product.  Engineering and development costs were $5,315
for the year ended December 31, 2007, compared with $6,238 for year ended December 31,
2006.    This decrease of $923, or 15%,
reflects the Companys reduced engineering staff, and related costs, in the
third and fourth quarters of 2007 related to the Companys efforts to reduce
its expenses.  Sales and
Marketing.  Sales and marketing expenses consist
primarily of compensation (which includes compensation to manufacturers
representatives and distributors), and attendance at conferences and trade
shows, travel costs, advertising, promotions and other marketing programs
(which includes expenditures for co-op advertising and new market development)
related to the continued introduction of the Companys video phone
product.  Sales and marketing costs were
$2,479 for the twelve months ended December 31, 2007, compared with $3,395
for the twelve months ended December 31, 2006.  This decrease of $916, or 27%, for the twelve
months ended December 31, 2007, when compared to the same period in 2006,
reflects primarily a decrease in consumer  18


marketing
promotional expenditures, associated with the Companys distribution and
marketing support of its video phone product and staffing reductions and
suspension of a portion or all salaries for a time period in the third and
fourth quarters of 2007 for certain senior marketing  management partially offset by a $300
non-cash stock based consulting fee associated with the marketing of our video
phone product, issued in the form of 375,737 shares of common stock ($267) and
100,000 common stock options($33).  General
and Administrative.  General and administrative expenses consist
primarily of expenditures for administration, office and facility operations,
finance and general management activities, including legal, accounting and
professional fees.  General and
administrative expenses were $5,260 for the twelve months ended December 31,
2007, compared with $6,983 for the twelve months ended December 31,
2006.  This decrease of $1,723, or 25%,
is primarily attributable to reduced staffing and suspension of a portion or
all salaries for a time period in the third and fourth quarters of 2007 for
certain senior administrative management. 
In addition, the decrease for the twelve months ended December 31,
2007 also reflects a reduction of $1,114 of accrued penalties compared to the
twelve months ended December 31, 2006 which was related to the private
placement in August 2005 (for more details, refer to Note 2 of the
accompanying consolidated financial statements for the twelve months ended December 31,
2007).  Interest
and Other Income and Interest Expense.  Interest and
other income consist of interest earned on cash and cash equivalents.  The interest and other income of $178 for the
twelve months ended December 31,2007 decreased by $283 versus the twelve
months ended December 31, 2006  This
decrease is related to  reduced interest
income earned on cash and cash equivalents. 
During the twelve months ended December 31, 2007 and 2006, the
Company earned interest on average cash balances of approximately $3,670 and
$13,423, respectively.  Interest expense
for the year ended December 31, 2007 was $466 compared to $194 for
2006.  This increase of $272, or 140%,
primarily reflected accrued interest on the convertible debentures ($464)
issued on August 11, 2006 and October 13, 2006 (see Note 2 of the
accompanying consolidated financial statements for the year ended December 31,
2007).  Gain on
trademark assignment.In July, 2007, the Company sold its Shadow
trademark to T-Mobile USA, Inc. and received $500.  In addition, the Company obtained a license
to continue its use of the mark until July 7, 2009.  Shadow is the non-registered trademark
currently used with respect to the Companys Ojo PVP 900.  The Company has retained all ownership in
Ojo, which is its primary registered mark.  Non
Cash Change in Fair Value of Derivative Warrants and Conversion Options.For the twelve months ended December 31,
2007 the non cash change in fair value of derivative warrants and conversion
options was a gain of $2,432.  For the twelve
months ended December 31, 2006, the non cash change in fair value of
derivative warrants and conversion options was a loss of $435.  These marked to market adjustments are
primarily a result of changes in our common stock price at each reporting period
related to our June 24, 2004 private placement of our Series A
Convertible Preferred Stock and Warrants and our August 11, 2006 and October 13,
2006 private placements of secured Convertible Debentures and Warrants.  Future mark to market adjustments will relate
only to the derivative warrant liability.  Amortization
of Debt Discount.  For the twelve months ended December 31,
2007 and 2006 the amortization of the debt discount was $4,126 and $1,354
respectively, relating to the August 11, 2006 and October 13, 2006
private placements of secured convertible debentures.  This increase of $2,772, or 205%, reflects an
increase of $2,299 in converted debt in 2007 compared to $1,321 in 2006.  The unamortized discount recognized upon
conversion for the year 2007 was $3,212, compared to $1,350 for the year
2006.  The amortization of discount not
related to debt conversions was $914 and $4, respectively, for the years 2007
and 2006. This discount for the August 11, 2006 convertible debenture
issuance was initially recorded as $4,446, and the discount for the October 13,
2006 convertible debenture issuance was initially recorded as $3,979.  These discounts are being amortized using the
effective interest rate method over the three year term of the convertible
debentures (see Note 2 of the accompanying consolidated financial statements
for the twelve months ended December 31, 2007).  .  Income
Taxes.We
have incurred net operating losses since inception and accordingly have had no
current income tax provision and have not recorded any income tax benefit for
those losses.  Liquidity and
Capital Resources.  As of December 31,
2007, our primary source of liquidity consisted of cash and cash equivalents
that are highly liquid, are of high quality investment grade and have original
maturities of less than three months.  At December 31,
2007, we had cash and cash equivalents of $1,081 as compared to cash and
equivalents of $10,067 at December 31, 2006.  Net cash used in operating activities was
$10,378 for the twelve months ended December 31, 2007, as compared to
$16,154 used for the same period in 2006. This decrease of $5,776, or 36%, in
net cash used in operating activities was primarily attributable to our
decrease in expenditures during the twelve months ended December 31, 2007
compared to the same period in 2006, related primarily to decreases in staffing
and suspension of a portion or all salaries for a time period in the third and
fourth quarters of 2007 for certain senior management of approximately $710,
decreases in product development expenditures of $485 and reduced advertising
expenditures of $748.  In addition,
reductions in accounts receivable of $925 and inventory of $1,179 contributed
to the  19


decrease of cash used in
operations. Bad debt expense was recorded for the twelve months ended December 31,
2007 and 2006 of $19 and $0,  Cash used for investing
activities was primarily a result of investments in equipment for product
development and manufacture as well as for certain office equipment and
leasehold improvements.   For the year
ended December 31, 2007 and 2006, such investments were $132 and $410,
respectively.  In addition, the Company
received $500 for the assignment of certain trademarks in the year ended December 31,
2007..  Cash provided by
financing activities is primarily a result of various private placements of our
Companys securities, the issuance of convertible debt,  the exercise of warrants, the exercise of
non-executive employees and prior employees stock options and the sale of a
certain Company  trademark during the
twelve months ended December 31, 2007. 
Total cash provided by financing activities was $1,024 for the year
ended December 31, 2007, primarily related to the private equity placement
of $1,000 of our Companys securities, compared to $10,354 during the same
period in 2006 primarily related to the issuance of convertible debt
respectively.  Operations and Liquidity.  As shown in the
accompanying consolidated financial statements, the Company has incurred
recurring net losses and has an accumulated deficit of $261,575, stockholders
deficiency of $1,462 and a working capital deficit of $2,380 as of December 31,
2007.  These factors raise substantial
doubt about the Companys ability to continue as a going concern.  The accompanying financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern.  Our short term cash
requirements and obligations include, inventory, accounts payable and capital
expenditures from continuing operations, and operating expenses.  Long
term cash requirement obligations are primarily related to convertible
debenture issued on August 11 and October 13, 2006 and which mature
on August 11 and October 13, 2009, respectively. The convertible
debentures have an interest rate of 6% per annum and can be convertible into
the common stock of the Company at the holders option.  As of December 31, 2007 the convertible
debentures have an outstanding principle balance of $6,001 (before discount)
and accrued interest of $658.  On February 5, 2008,
February 13, 2008, February 15, 2008, and April 8, 2008 the
Company received notices from YA Global, holder of the Companys convertible
debentures, claiming that the Company was in default of the terms of the
debentures for stating its intent to wind down its business, failure to
maintain current financial statements in the registration statement relating to
the sale of the Companys common stock issuable upon conversion of one of those
debentures, failure to comply with a covenant to their satisfaction that
provided for the disclosure of information they considered material,  and entering into the agreement with Aequus,
and as a result YA Global was exercising its right to accelerate payment of the
full principal amount of the debentures. While the registration statement was
not effective as of December 31, 2007, the underlying alleged default with
respect to the registration statement was in any event cured by the amendments
to Rule 144 that became effective on February 15, 2008, obviating the
need to maintain that registration statement. The Company has notified YA
Global that it disputes these claims and whether they constitute a continuing
event of default under the debentures. The Company has also notified YA Global
that their right to accelerate payment is also disputed. The Company is working
with YA Global in an effort to settle their disputes regarding the claimed
defaults and acceleration. Although the Company disputes YA Globals claims of
default, and does not believe YA Global has any basis to accelerate payments on
the debenture, the Company has reclassified the YA convertible debenture to a
current liability on the accompanying consolidated financial statements, solely
in light of the existence of the alleged claims.  To date, we have
funded operations primarily through multiple private sales of equity
securities, through the issuance of convertible debentures and through an
initial public offering of common stock in April 1999. The financing
secured on August 11, 2006 (see Note 2 of the accompanying consolidated
financial statements for the year ended December 31, 2007) has added long
term debt to the balance sheet and we have pledged substantially all of our
assets as collateral.  We continue to
evaluate the possibilities to obtain further additional financing through
public or private equity or debt offerings, bank debt financing, asset
securitizations, or from other sources. In addition, during 2007 the Company
has significantly cut its operating expenses, including a suspension of a
portion or all salaries for a time period in the third and fourth quarters of
2007 for certain senior management of the Company.  Although no assurances can be made, the Company
remains hopeful that sufficient working capital will be obtained.  If the Company is unable to obtain sufficient
funds the Company may suspend operations which could have a material adverse
impact on its business prospects.  Our
ability to generate cash is dependent upon the sale of our Ojo product and on
obtaining cash through capital markets.  We began generating revenue from
commercial shipment of our Ojo product in April 2005 and we expect
revenues to increase as the product continues to roll out to the marketplace.
Depending on the ramp up of sales and the achievable margins, the increased
level of sales activity should have a positive impact on our cash flows from
operations, and could support our ability to meet our cash requirements in the
long term. Given that our video phone business involves the development of a
new product line with no market penetration, in an underdeveloped market
sector, no assurances can be given that sufficient sales, if any, will
materialize. The lack of  20


success of our sales
efforts could also have an adverse ability to raise additional financing.  The Company began
generating revenue from commercial shipment of the Ojo product in April 2005.  Initially all product sales were conducted
through General Instrument, the Companys exclusive distributor, and all
revenue was based upon sales of the Companys products to General Instrument
for their distribution to resellers.  In February 2006,
its distributor relationship with General Instrument ended and the Company
began to directly distribute and sell its products. Since the completion of the
transition activities from General Instrument, the Company has been directly
responsible for all of the sales and marketing efforts related to its Ojo
products.   Although the Company was able
to increase the number of distribution relationships with service providers and
retailers carrying its products, incremental sales remained low, at least in
part due to the nature of the product as one of the first entrants in a new
product category, namely, personal video phones.  In the later part of the third quarter of
2007product
shipments commenced to VRS customers. 
VRS is a form of Telecommunications Relay Service (TRS) that enables persons
with hearing disabilities who use American Sign Language (ASL) to communicate
with voice telephone users through video equipment, rather than through typed
text.  The Companys Ojo video phone
provides this equipment link for the hard-of-hearing VRS user with a TRS
operator (called a Communications Assistant, or CA) so that the VRS user and
the CA can see and communicate with each other using ASL in signed
conversation.  VRS enables deaf and
hard-of-hearing customers to improve their connection with people in their
personal and business lives. This market is particularly attractive since the
use of video as part of the communication link is critical, and accordingly,
the video phone is a major contributing component.  Entrance to the VRS market has contributed
significantly to the Companys efforts to increase product awareness and
sales.  Depending on the continued ramp
up of sales, and the achievable margin, the increased level of sales and
service activity should have a positive impact on the Companys cash flows from
operations.  On February 4, 2008,
the Company issued a current report on Form 8K indicating that it was in a
dispute with Aequus over the payment of significant monies which the Company
believed were owed to it.  The customers
refusal to pay such monies had contributed to a shortfall in the operating cash
available to the Company to continue operations, and accordingly, on January 30,
2008, the Company shut down its operations. 
The Form 8K further indicated that this was a first step to winding
down its business, which would occur if the Company was not able to secure
payment of the monies believed to be owed to by the customer, and/or new
financing.  On March 31,
2008, the Company entered into a new agreement with Aequus and Snap!VRS.  This new agreement, inter alia, provides for
the (i) resolution of a dispute with Aequus regarding amounts the Company
claimed were owed to the Company by Aequus and the termination by the Company
of service to Aequus, (ii) payment to the Company by Aequus of
approximately $5 million in scheduled payments over the next ten months, (iii) agreement
to arbitrate approximately $1.4 million additional dollars claimed by the
Company to be owed by Aequus and (iv) purchase of an additional $1.5
million of video phones by Aequus (the Aequus Transaction).  As a result of this new agreement Aequus is
planning to build a new data center, with support and training provided by the
Company, and upon completion, directly operating a video phone service for its
customers.  Based
on managements internal forecasts and assumptions, including, among others,
the receipt of the payments per our agreement with Aequus of March 31,
2008, assumptions regarding the proceeds that would result from the arbitration
with Aequus of amounts the Company claims is owed to it by Aequus and
assumptions regarding our short term cash requirements and our projected
revenue growth, the Company might have sufficient cash on hand to meet its
obligations into 2009. However,Aequus is a new company with an unproven track recordand if Aequus is not successful, or if
their activities do not lead to significant sales of its product, their
operating results will be adversely affected, and their ability to pay all or
any of the monies obligated per the agreement, including payment for products
purchased or  the payment of any monies
the Company is awarded as a result of 
agreed arbitration with Aequus, may not materialize or could be
significantly reduced and the Company may have insufficient capital to operate
its business.  On October 4,
2007, the Company was delisted from the NASDAQ Capital Market and on October 10,
2007 was listed on the NASDAQ OTC Bulletin Board which made it subject to the
SEC penny stock rules, and could adversely affect the market liquidity of the
Companys common stock and its ability to raise additional capital.  The
Company continues to evaluate possibilities to obtain additional financing
through public or private equity or debt offerings, bank debt financing, asset
securitizations, or from other sources, to obtain such financing.  There
can be no assurance that this additional financing will be available on terms
acceptable to the Company, if at all. No assurances can be given that
additional financing transactions can be consummated. If the Company is
unable to obtain sufficient funds the Company may further reduce the size of
the organization or suspend operations which could have a material adverse
impact on its business prospects. In order to stretch its current working capital
to provide more time for the Company to obtain additional financing, in 2007
the Company significantly cut its operating expenses, including suspension of a
portion or all salaries for a time period in the third and fourth quarters of
2007 for certain senior management of the Company.  No assurances can, however, be made that any
of these efforts will be successful.  Related Parties  The Company has a current multi-year agreement with
Mototech , an investor, to provide the Company with engineering and  21


development support. As a result of this agreement, the Company has
expensed approximately $415, and $64, respectively for the years ended December 31,
2006 and 2007.  Accounts payable to this
investor amounted to $1,377 and $809 at December 31, 2006 and December 31,
2007, respectively. This agreement provides for contracted services, including
hardware and software development, and the creation and development of tools to
facilitate the Companys engineering efforts. This agreement does not provide
for ongoing royalties, purchase provisions, or for any requirement to provide
additional funding to the Company.  Net
revenues from operations recognized from Mototech were approximately $406 and
$2 for the years ended December 31, 2006 and 2007, respectively.  This investor accounted for approximately 14%
and 0% of the revenues for the years ended December 31, 2006 and 2007,
respectively.  Accounts receivable from
this investor were $1and $8, respectively, as of December 31, 2006 and December 31,
2007.  Inflation  Inflation affects the
cost of raw materials, goods and services used by the Company.  In recent years, inflation has been
modest.  However, high oil costs can
affect the cost of all raw materials and components.  If inflation were to raise the cost of goods
and services materially, we may be forced to increase the price of our products
which could make the products unattractive to our customers and consumers and
could limit our sales and impact on our viability.  The Company seeks to mitigate the adverse
effects of inflation primarily through improved productivity, technology
advancements and in the future, through scale of volume efficiencies. The
Company does not believe that inflation had a material impact on its results of
operations for the periods presented.  Recent
Accounting Pronouncements  In September 2006,
the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157
Fair Value Measurements, which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. Adoption is required for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Early adoption of SFAS 157 is encouraged. The Company
is currently evaluating the expected effect of SFAS No.157 on its consolidated
financial statements and is currently not yet in a position to determine such
effects.  In September 2006,
FASB ratified Emerging Issue Task Force (EITF) No. 06-1, Accounting for
Consideration Given by a Service Provider to Manufacturers or Resellers of
Equipment Necessary for an End-Customer to Receive Service from the Service
Provider(EITF 06-1). This guidance requires the application of EITF 01-9, Accounting
for Consideration Given by a Vendor to a Customer (EITF 01-9), when
consideration is given to a reseller or manufacturer for benefit to the service
providers end customer. EITF 01-9 requires the consideration given be recorded
as a liability at the time of the sale of the equipment and, also, provides
guidance for the classification of the expense. EITF 06-1 is effective for the
first annual reporting period beginning after June 15, 2007. The Company
has not yet assessed the impact of EITF 06-1 on the Companys consolidated
financial statements.  In December 2006,
the FASB issued FASB Staff Position (FSP) EITF 00-19-2 Accounting for
Registration Payment Arrangements (FSP EITF 00-19-2) which specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies. Adoption of FSP EITF 00-19-02 is required for fiscal years
beginning after December 15, 2006. The adoption of FSP EITF 00-19-02 did
not have a material impact on the Companys consolidated financial position,
results of operations or cash flows.  In February 2007,
the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
(SFAS No. 159), which permits entities to choose to measure many
financial instruments and certain other items at fair value.  The fair value option established by this
Statement permits all entities to choose to measure eligible items at fair
value at specified election dates. A business entity shall report unrealized
gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. 
Adoption is required for fiscal years beginning after November 15,
2007.  Early adoption is permitted as of the beginning of a fiscal year
that begins on or before November 15, 2007, provided the entity also
elects to apply the provisions of SFAS 
No.157. The Company is currently evaluating the expected effect of SFAS
No.159 on its consolidated financial statements and is not yet in a position to
determine such effects.  In December 2007,
the FASB issued SFAS No. 141R, Business Combinations, which replaces
SFAS No. 141, Business Combinations. SFAS No. 141R establishes
principles and requirements for determining how an enterprise recognizes and
measures the fair value of certain assets and liabilities acquired in a
business combination, including noncontrolling interests, contingent
considerations, and certain acquired contingencies. SFAS No. 141R also
requires acquisition-related transaction expenses and restructuring costs to be
expensed as incurred rather than capitalized as a component of the business
combination. SFAS No. 141R will be applicable prospectively to business
combinations for which the acquisition date is on or after January 1,
2009. SFAS No. 141R would have an impact on accounting for businesses
acquired after the effective date of this pronouncement.  In December 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial StatementsAn  22


Amendment of ARB No. 51.
SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary (previously referred to as minority
interests).  SFAS 160 also requires that
a retained noncontrolling interest upon the deconsolidation of a subsidiary be
initially measured at its fair value. Upon the adoption of SFAS No.160, the
Company would be required to report any noncontrolling interests as a separate
component of consolidated stockholders equity. The Company would also be
required to present any net income allocable to noncontrolling interest and net
income attributable to the stockholders of the Company separately in its
consolidated statements of operations. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after January 1, 2009. SFAS No. 160 requires retroactive adoption of
the presentation and disclosure requirements for existing minority interests.
All other requirements of SFAS No. 160 shall be applied prospectively.
SFAS No. 160 would have an impact on the presentation and disclosure of
the noncontrolling interests of any non-wholly owned business acquired in the
future.  In December 2007,
the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 110
( SAB 110).
SAB 110 amends and replaces Question 6 of Section D.2 of Topic
14, Share-Based Paymentof the
Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the simplified method
in developing an estimate of the expected term of plain vanilla share options
and allows usage of the simplified method for share option grants prior to December 31,
2007. SAB 110 allows public companies which do
not have historically sufficient experience to provide a reasonable estimate to
continue use of the simplified method for estimating the expected term of plain
vanilla share option grants after December 31, 2007. We currently use the
simplified method to estimate the expected term for share option grants as we
do not have enough historical experience to provide a reasonable estimate. We
will continue to use the simplified method until we have enough historical
experience to provide a reasonable estimate of expected term in accordance with
SAB 110. SAB 110 will be effective for the Company
on January 1, 2008.  In March 2008,
the FASB issued FAS 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133, which amends
and expands the disclosure requirements of FAS 133 to require qualitative
disclosure about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. This statement will be effective for the Company
beginning on January 1, 2009. The adoption of this statement will change
the disclosures related to derivative instruments held by the Company.  Item 7A.  Quantitative and
Qualitative Disclosures about Market Risk.  Not required.  23


Item 8.  Financial Statements
and Supplementary Data.  WORLDGATE COMMUNICATIONS, INC.  INDEX TO FINANCIAL STATEMENTS  Report
  of Marcum & Kliegman LLP, Independent Registered Public Accounting
  Firm
  
  F-1Consolidated
  Balance Sheets as of December 31, 2006 and 2007
  
  F-2Consolidated
  Statements of Operations for the years ended December 31, 2006, and 2007
  
  F-3Consolidated
  Statements of Stockholders (Deficiency) Equity for the years ended
  December 31, 2006 and 2007
  
  F-4Consolidated
  Statements of Cash Flows for the years ended December 31, 2006 and 2007
  
  F-5Notes to Consolidated Financial Statements
  
  F-6  Report of Independent Registered
Public Accounting Firm  To the Audit Committee of
the Board of Directors and
Stockholders WorldGate Communications, Inc.  We have audited the
accompanying consolidated balance sheets of WorldGate Communications, Inc.
and subsidiaries (the Company) as of December 31, 2007 and 2006, and the
related consolidated statements of operations, stockholders equity
(deficiency), and cash flows for the years then ended.  These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.  We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of WorldGate Communications, Inc.
and its subsidiaries as of December 31, 2007and 2006 and the results of
its operations and its cash flows for the years then ended, in conformity with
United States generally accepted accounting principles.  The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern.  As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations and had an accumulated deficit of $262 million,
stockholders deficiency of $1.5 million and a working capital deficit of $2.4
million at December 31, 2007. The Company also experienced severe cash
shortfalls, deferred payment of some of its operating expenses, and elected to
shut down its operations for a period of time during 2008. Further curtailments
of its operations could be necessary in the near future. These uncertainties
raise substantial doubt about the Companys ability to continue as a going
concern.  The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.   /s/ Marcum &
Kliegman LLP Marcum &
Kliegman LLP Melville, New York April 16, 2008  F-1


WORLDGATE COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)  As of
  December 31,2006
  
  2007ASSETSCurrent assets:Cash and cash equivalents
  
  $
  10,067
  
  $
  1,081Trade accounts receivable less allowance for doubtful accounts of $0
  at December 31, 2006 and 2007
  
  1,005
  
  166Other receivables
  
  17
  
  6Inventory
  
  1,600
  
  1,057Prepaid and other current assets
  
  490
  
  186Total current assets
  
  13,179
  
  2,496Property and equipment
  
  4,494
  
  4,627Accumulated depreciation and amortization
  
  (3,228
  )
  (3,830
  )Property and equipment, net
  
  1,266
  
  797Deposits and other assets
  
  121
  
  121Total assets
  
  $
  14,566
  
  $
  3,414LIABILITIES AND
  STOCKHOLDERS EQUITY (DEFICIENCY)Current liabilities:Accounts payable
  
  $
  1,654
  
  $
  747Accrued expenses
  
  1,240
  
  2,016Accrued compensation and benefits
  
  48
  
  74Dividend payable on Preferred Stock
  
  2
  
  0Detachable Warrants
  
  997
  
  236Conversion option on Preferred Stock
  
  11
  
  0Conversion option on convertible debt
  
  7,044
  
  0Incentive sale claims liability
  
  50
  
  0Warranty reserve
  
  85
  
  49Deferred revenues
  
  267
  
  252Convertible debenture payable (net of unamortized discount of $4,499
  at December 31, 2007)
  
  0
  
  1,502Total current liabilities
  
  11,398
  
  4,876Long term liabilities:Convertible debenture payable (net of unamortized discount of $8,625
  at December 31, 2006)
  
  1,025
  
  0Total liabilities
  
  12,423
  
  4,876Commitments and contingenciesRedeemable Preferred Stock; 7,550 shares authorized, 166 shares
  issued and outstanding at December 31, 2006, and 0 issued and outstanding
  at December 31, 2007
  
  141
  
  0Total Stockholders equity (deficiency):Preferred Stock, $.01 par value, 13,492,450 shares authorized, and 0
  shares issued December 31, 2006 and 2007
  
  0
  
  0Common Stock, $.01 par value; 120,000,000 and 200,000,000 shares
  authorized at December 31, 2006 and 2007, respectively, 41,535,443
  shares issued and outstanding at December 31, 2006 and 56,939,925 shares
  issued and outstanding at December 31, 2007
  
  415
  
  569Additional paid-in capital
  
  248,393
  
  259,544Accumulated deficit
  
  (246,806
  )
  (261,575
  )Total stockholders equity (deficiency)
  
  2,002
  
  (1,462
  )Total liabilities and stockholders equity (deficiency)
  
  $
  14,566
  
  $
  3,414  The accompanying notes are an integral part of these consolidated
financial statements.  F-2


WORLDGATE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, 
EXCEPT PER SHARE AMOUNTS)  Year Ended
  December
  31, 2006
  
  Year Ended
  December
  31, 2007Net revenuesProduct revenues
  
  $
  2,511
  
  $
  2,565Service revenues
  
  265
  
  705Other revenues
  
  0
  
  175Total net revenues
  
  2,776
  
  3,445Cost of revenues
  
  3,369
  
  3,046Gross margins
  
  (593
  )
  399Engineering and development (excluding depreciation and amortization
  amounts of $384, and $382, respectively)
  
  6,238
  
  5,315Sales and marketing (excluding depreciation and amortization amounts
  of $57 and $59, respectively)
  
  3,395
  
  2,479General and administrative (excluding depreciation and amortization
  amounts of $279 and $161, respectively)
  
  6,983
  
  5,260Depreciation and amortization
  
  720
  
  602Total expenses from operations
  
  17,336
  
  13,656Loss from operations
  
  (17,929
  )
  (13,257
  )Other income (expense)Interest and other income
  
  461
  
  178Gain on trademark assignment
  
  0
  
  500Change in fair value of derivative warrants and conversion options
  
  (435
  )
  2,432Gain on contract termination
  
  1,843
  
  0Amortization of debt discount
  
  (1,354
  )
  (4,126
  )Interest expense
  
  (194
  )
  (466
  )Total other income (expense)
  
  321
  
  (1,482
  )Net loss
  
  (17,608
  )
  (14,739
  )Accretion on preferred stock, dividends and deemed dividends
  
  (106
  )
  (30
  )Net loss attributable to common stockholders
  
  $
  (17,714
  )
  $
  (14,769
  )Net loss per common share (Basic and Diluted)
  
  $
  (0.44
  )
  $
  (0.32
  )Weighted average common shares outstanding (Basic and Diluted)
  
  39,992,499
  
  45,934,717  The accompanying
notes are an integral part of these consolidated financial statements.  F-3


WORLDGATECOMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIENCY) (DOLLARS
AND SHARES IN THOUSANDS)  Common Stock
  
  Additional
  Paid-In
  
  Accumulated
  
  Total Stock
  holders EquityShares
  
  Amount
  
  Capital
  
  Deficit
  
  (Deficiency)Balance at January 1, 2006
  
  39,511
  
  395
  
  242,414
  
  (229,092
  )
  13,717Issuance of Common Stock pursuant to employee stock purchase plan
  
  18
  
  
  
  27
  
  
  
  27Issuance of Common Stock with sale of convertible debenture
  
  177
  
  2
  
  (2
  )
  
  
  0Issuance of Common Stock upon settlement of penalties
  
  415
  
  4
  
  479
  
  
  
  483Issuance of Common Stock upon conversion of preferred stock
  
  202
  
  2
  
  332
  
  
  
  334Issuance of Common Stock upon conversion of convertible debenture
  
  1,146
  
  11
  
  1,339
  
  
  
  1,350Reclassification of conversion option liability upon conversion
  
  
  
  
  
  1,020
  
  
  
  1,020Issuance of warrants in connection with sale of convertible debenture
  
  
  
  
  
  230
  
  
  
  230Reclassification of derivative warrants
  
  
  
  
  
  1,521
  
  
  
  1,521Non-cash stock based compensation
  
  
  
  
  
  837
  
  
  
  837Cancellation of accrued investment fees
  
  
  
  
  
  171
  
  
  
  171Deemed dividend upon conversion
  
  
  
  
  
  
  
  (68
  )
  (68
  )Issuance of Common Stock to settle accrued preferred stock dividends
  
  9
  
  
  
  14
  
  
  
  14Exercise of Stock Options
  
  57
  
  1
  
  11
  
  
  
  12Accretion on preferred stock and dividends
  
  
  
  
  
  
  
  (38
  )
  (38
  )Net Loss
  
  
  
  
  
  
  
  (17,608
  )
  (17,608
  )Balance at December 31, 2006
  
  41,535
  
  $
  415
  
  $
  248,393
  
  $
  (246,806
  )
  $
  2,002Issuance of Common Stock upon related party investment
  
  2,564
  
  26
  
  974
  
  
  
  1,000Issuance of Common Stock pursuant to employee stock purchase plan
  
  42
  
  
  
  24
  
  
  
  24Issuance of Common Stock for marketing services
  
  376
  
  4
  
  263
  
  
  
  267Issuance of Common Stock upon conversion of redeemable preferred
  stock
  
  327
  
  3
  
  163
  
  
  
  166Issuance of Common Stock to settle accrued preferred stock dividends
  
  9
  
  
  
  6
  
  
  
  6Issuance of Common Stock upon conversion of convertible debenture
  
  12,087
  
  121
  
  3,529
  
  
  
  3,650Reclassification of derivative liability
  
  
  
  
  
  5,384
  
  
  
  5,384Non-cash stock based compensation
  
  
  
  
  
  808
  
  
  
  808Deemed dividend upon conversion
  
  
  
  
  
  
  
  (4
  )
  (4
  )Accretion on preferred stock and dividends
  
  
  
  
  
  
  
  (26
  )
  (26
  )Net Loss
  
  
  
  
  
  
  
  (14,739
  )
  (14,739
  )Balance at December 31, 2007
  
  56,940
  
  $
  569
  
  $
  259,544
  
  $
  (261,575
  )
  $
  (1,462
  )  The accompanying notes are an integral part of these consolidated
financial statements.  F-4


WORLDGATE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)  Year
  Ended
  December
  31, 2006
  
  Year
  Ended
  December
  31, 2007Cash flows from operating activities:Net loss
  
  $
  (17,608
  )
  $
  (14,739
  )Adjustments to reconcile net loss to cash used in operating
  activities:Depreciation and amortization
  
  720
  
  602Amortization of debt discount
  
  1,354
  
  4,126Change in fair value of derivative warrants and conversion options
  
  435
  
  (2,432
  )Gain on contract termination
  
  (1,843
  )
  0Write down of inventory
  
  585
  
  293Non-cash stock based compensation
  
  837
  
  1,075Gain on trademark assignment
  
  0
  
  (500
  )Bad debt expense
  
  0
  
  19Changes in operating assets and liabilities:Trade accounts receivable
  
  (872
  )
  53Other receivables
  
  9
  
  11Inventory
  
  (162
  )
  1,017Prepaid and other current assets
  
  (272
  )
  304Accounts payable
  
  (41
  )
  (908
  )Accrued expenses
  
  487
  
  726Accrued compensation and benefits
  
  12
  
  26Warranty reserve
  
  (18
  )
  (36
  )Deferred revenue
  
  223
  
  (15
  )Net cash used in operating activities
  
  (16,154
  )
  (10,378
  )Cash flows from investing activities:Purchase of property and equipment
  
  (410
  )
  (132
  )Cash from trademark assignment
  
  0
  
  500Net cash used in (provided by) investing activities
  
  (410
  )
  368Cash flows from financing activities:Proceeds from issuance of convertible debentures
  
  10,315
  
  0Proceeds from issuance of common stock
  
  27
  
  1,024Proceeds from the exercise of stock options
  
  12
  
  0Net cash provided by financing activities
  
  10,354
  
  1024Net decrease in cash and cash equivalents
  
  (6,210
  )
  (8,986
  )Cash and cash equivalents, beginning of year
  
  16,277
  
  10,067Cash and cash equivalents, end of year
  
  $
  10,067
  
  $
  1,081  See Note 13 for supplemental
cash flow information disclosures  The accompanying notes are an integral part of these consolidated
financial statements.  F-5


WORLDGATE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share amounts)  1.  Basis of Presentation  The
consolidated financial statements of WorldGate Communications, Inc. (WorldGate
or the Company) presented herein have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC)
for annual reports on Form 10-K.  WorldGate
was incorporated in Delaware in 1996 to succeed to the business of the predecessor
company, WorldGate Communications, L.L.C., which commenced operations in March 1995.
 WorldGate has developed a video phone
designed specifically for personal video communication, and is differentiated,
both from competitors and from previous efforts at personal video telephony, by
providing: true-to-life communication (meaning that images and sounds are
synchronized, that there are minimum delays between the two ends of the
communication, and that the quality of the images is similar to what is perceived
with traditional television); ease of deployment by high-speed data, or HSD,
operators as well as businesses; a highly styled ergonomic design; and
interoperation with the public switched telephone network, or PSTN.  The
consolidated financial statements of the Company include the accounts of
WorldGate Communications, Inc. and its wholly owned subsidiaries WorldGate
Service, Inc., WorldGate Finance, Inc., Ojo Services LLC, Ojo Video
Phone LLC and WorldGate Acquisition Corp. 
All significant intercompany accounts and transactions have been
eliminated in consolidation.  The
Companys business model is primarily based upon the sale of Ojo video phones
and related products and services.  It is
the Companys plan for Ojo video phones to be sold to the Video Relay Service (VRS)
market (VRS is a form of Telecommunications Relay Service (TRS) that enables
persons with hearing disabilities who use American Sign Language (ASL) to
communicate with voice telephone users through video equipment, rather than through
typed text, which is particularly attractive since the use of video as part of
the communication link is critical, and accordingly, the video phone is a major
contributing component.  The friends and
family of the deaf and hard of hearing customers are a natural expansion to the
VRS market.  It is also the Companys
plan for video phones to be distributed through and in partnerships with HSD
network providers, as well as through traditional electronics distribution
channels.  Video phone service, using the
Ojo video phone, is expected to be offered by HSD network providers as a means
of attracting new HSD subscribers as well as maintaining existing subscribers.  The Company believes that HSD network
providers could realize recurring incremental revenue streams associated with
offering products such as the Companys Ojo video phone, and accordingly the
Company believes they will embrace the concept and business model.  The suggested consumer offering for a video
phone service follows the traditional HSD model, which may involve a subsidy of
the required hardware by the recurring service fee.  The Company anticipates that video phone
service subscribers will be able to either purchase Ojo or lease a unit from
the HSD network provider.  There is also
a parallel market for sales of video phones directly to consumers through the
standard consumer electronic channels.  Sales
of Ojo video phones through these retail channels still require a video phone
service and the Company is currently offering such a video phone service, with
a an associated monthly service fee, for units sold in this manner.  Ojo is being marketed domestically and
internationally to both the residential and business sectors through the
standard consumer and business electronics channels.  2.  Summary of Significant Accounting Policies  Liquidity and Going Concern
Considerations  As of December 31, 2007 the Company had cash and
cash equivalents of $1,081.  The
operating cash used in operations for the year ended December 31, 2007 was
$10,378.  The funds the Company received
as a result of private placements of its securities on December 1, 2003
and December 4, 2003, January 21, 2004, April 22, 2004, June 24,
2004, December 15, 2004, August 3, 2005, August 11, 2006 and October 13,
2006 have permitted it to fund the development of the Companys business.  The
Company had $4,876 of liabilities and substantially all of its assets are
pledged as collateral as of December 31, 2007. These liabilities include
$236 of detachable warrants related to the Companys private placement of
preferred stock in June 2004 and $6,001 (including debt discount of
$4,499) of debt liability related to the Companys financing in August 2006.  The
Companys short term cash requirements and obligations include, inventory, accounts
payable and capital expenditures from operations, and operating expenses.  F-6


The
Company has incurred recurring net losses and has an accumulated deficit of
$261,575, stockholders deficiency of $1,462 and a working capital deficit of
$2,380 as of December 31, 2007. 
These factors raise substantial doubt about the Companys ability to
continue as a going concern.  The
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.  On August 11, 2006 the Company completed a private placement with
an institutional investor of convertible debentures in the aggregate principal
amount of up to $11,000.  These
convertible debentures have a maturity of three years, an interest rate of 6%
per annum, and are convertible at the option of the investors into WorldGate
common stock at a conversion price equal to the lesser of $1.75 per share or
90% of the average of the five lowest daily volume weighted average closing
price (VWAP) of the common stock during the fifteen trading days immediately
preceding the conversion date (subject to adjustment in the event of stock
dividends and splits and certain distributions to stockholders, fundamental
transactions, and future dilutive equity transactions).  Interest is
payable at maturity, and the Company may elect to pay the interest amount in
cash or shares of its common stock.  Through
December 31, 2007 the investors converted $4,999 of the convertible debt
into 13,233,224 shares of the Companys common stock. During the period January 1,
2008 through April 16, 2008 the investors converted an additional $63 of
convertible debt into 840,571 additional shares of the Companys common stock.  As part of this private placement the Company issued five-year warrants
to purchase a total of up to 2,595,000 shares of WorldGate common stock, with
1,145,000 of the warrants having an exercise price of $1.85 per share (with
624,545 of these warrants issued at the initial closing and 520,455 warrants
issued at the closing of the second tranche of funding), 1,100,000 of the
shares having an exercise price of $2.35 per share (with 600,000 of these
warrants issued at the initial closing and 500,000 warrants issued at the
closing of the second tranche of funding), and 350,000 warrants having an
exercise price of $2.60 per share (with 190,909 of these warrants issued at the
initial closing and 159,091 warrants issued at the closing of the second
tranche of funding).  On
February 5, 2008, February 13, 2008, February 15, 2008, and April 8,
2008 the Company received notices from YA Global, holder of the Companys
convertible debentures, claiming that the Company was in default of the terms
of the debentures for stating its intent to wind down its business, failure to
maintain current financial statements in the registration statement relating to
the sale of the Companys common stock issuable upon conversion of one of those
debentures, to comply with a covenant to their satisfaction that provided for
the disclosure of information they considered material, and entering into the
agreement with Aequus Technologies Corp. and Snap Telecommunications, Inc.
(collectively Aequus), a provider of VRS and Video Remote Interpreting (VRI)
services for the deaf and hard of hearing, and as a result YA Global was
exercising its right to accelerate payment of the full principal amount of the
debentures.  While the registration
statement was not effective as of December 31, 2007, the underlying
alleged default with respect to the registration statement was in any event
cured by the amendments to Rule 144 that became effective on February 15,
2008, obviating the need to maintain that registration statement.  The Company has notified YA Global that it
disputes these claims and whether they constitute a continuing event of default
under the debentures.  The Company has
also notified YA Global that their right to accelerate payment is also
disputed.  The Company is working with YA
Global in an effort to settle their disputes regarding the claimed defaults and
acceleration.  Although the Company
disputes YA Globals claims of default, and does not believe YA Global has any
basis to accelerate payments on the debenture, the Company has reclassified the
YA Global convertible debenture to a current liability on the balance sheet,
solely in light of the existence of the alleged claims.  The
Companys ability to generate cash is dependent upon the sale of its Ojo
product and on obtaining cash through capital markets.  The Company began generating revenue from the
commercial shipment of its Ojo product in April 2005 and the Company
expects revenues to increase as the product continues to roll out to the
marketplace.  Depending on the ramp up of
sales and the achievable margins, the increased level of sales activity should
have a positive impact on the Companys cash flows from operations, which will
support its ability to meet its cash requirements in the long term.  Given that the Companys video phone business
involves the development of a new product line 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
ability to raise additional financing.  On April 28, 2004, the Company entered into a
multi-year agreement with General Instrument Corporation d/b/a the Connected
Home Solutions Business of Motorola, Inc. (General Instrument) for the
worldwide distribution of the Ojo personal video phone.  This agreement provided for General Instrument
to be WorldGates exclusive distributor of its broadband video phone products
and for WorldGate to be General Instruments exclusive supplier of its broadband
video phone products.  The Company began
generating revenue from commercial shipment of the Ojo product in April 2005.  Initially all product sales were conducted
through General Instrument, its exclusive distributor and all revenue was based
upon sales of the Companys products to General Instrument for their
distribution to resellers.  In February 2006,
its distributor relationship with General Instrument ended and the Company
began to directly distribute and sell its products.  Since the completion of the transition
activities from  F-7


General Instrument, the Company
has been directly responsible for all of the sales and marketing efforts
related to its Ojo products.  Although
the Company was able to increase the number of distribution relationships with
service providers and retailers carrying its products, incremental sales
remained low, at least in part due to the nature of the product as one of the
first entrants in a new product category, namely, personal video phones.  In the latter part of the third quarter of
2007 product shipments commenced to VRS customers.  The Companys Ojo video phone provides this
equipment link for the hard-of-hearing VRS user with a TRS operator (called a
Communications Assistant, or CA) so that the VRS user and the CA can see and
communicate with each other using ASL in signed conversation.  VRS enables deaf and hard-of-hearing
customers to improve their connection with people in their personal and
business lives.  This market is
particularly attractive since the use of video as part of the communication
link is critical, and accordingly, the video phone is a major contributing
component.  Entrance to the VRS market
has contributed significantly to the Companys efforts to increase product
awareness and sales.  Depending on the
continued ramp up of sales, and the achievable margin, the increased level of
sales and service activity should have a positive impact on the Companys cash
flows from operations.  On
February 4, 2008, the Company announced that it was in a dispute with
Aequus over the payment of significant monies which the Company believed were
owed to it.  The customers refusal to
pay such monies had contributed to a shortfall in the operating cash available
to the Company to continue operations, and accordingly, on January 30,
2008, the Company shut down its operations. 
The announcement further indicated that this was a first step to winding
down its business, which would occur if the Company was not able to secure
payment of the monies believed to be owed to it by the customer, and/or new
financing.  On March 31,
2008, the Company entered into a new agreement with Aequus and Snap!VRS. This
new agreement, inter alia, provides for the (i) resolution of a dispute
with Aequus regarding amounts the Company claimed were owed to the Company by
Aequus and the termination by the Company of service to Aequus, (ii) payment
to the Company by Aequus of approximately $5 million in scheduled payments over
the next ten months, (iii) agreement to arbitrate approximately $1.4
million additional dollars claimed by the Company to be owed by Aequus and (iv) purchase
of an additional $1.5 million of video phones by Aequus (the Aequus
Transaction).  As a result of this new
agreement Aequus is planning to build a new data center, with support and
training provided by the Company, and upon completion, directly operating a
video phone service for its customers.  Based
on managements internal forecasts and assumptions, including, among others,
the receipt of the payments per its agreement with Aequus of March 31,
2008, assumptions regarding the proceeds that might result from the arbitration
with Aequus of amounts the Company claims is owed to it by Aequus and
assumptions regarding its short term cash requirements and its projected
revenue growth, the Company might have sufficient cash on hand to meet its
obligations into 2009. However,Aequus is a new company with an unproven track recordand if Aequus is not successful, or if
their activities do not lead to significant sales of its product, their
operating results will be adversely affected, and its ability to pay all or any
of the monies obligated per the agreement, including payment for products
purchased or the payment of any monies the Company is awarded as a result of
agreed arbitration with Aequus, may not materialize or could be significantly
reduced and the Company may have insufficient capital to operate its business.  On October 4,
2007, the Company was delisted from the NASDAQ Capital Market and on October 10,
2007 was listed on the NASDAQ OTC Bulletin Board which made it subject to the
Securities Exchange Commission (SEC) penny stock rules, and could adversely
affect the market liquidity of the Companys common stock and its ability to
raise additional capital.  No assurances
can be given that additional financing transactions can be consummated. .  The
Company continues to evaluate possibilities to obtain additional financing
through public or private equity or debt offerings, bank debt financing, asset
securitizations, or from other sources, to obtain such financing. There can be
no assurance that this additional financing will be available on terms
acceptable to the Company, if at all.  If
the Company is unable to obtain sufficient funds the Company may suspend
operations which could have a material adverse impact on its business
prospects. No assurances can be given that additional financing transactions
can be consummated. If the Company is unable to obtain sufficient funds
the Company may further reduce the size of the organization or suspend
operations which could have a material adverse impact on its business
prospects. In order to stretch its current working capital to provide more time
for this to happen, in 2007 the Company significantly cut its operating
expenses, including suspension of a portion or all salaries for a time period
in the third and fourth quarters of 2007 for certain senior management of the
Company.  No assurances can, however, be
made that these efforts will be successful.  F-8


Use of Estimates  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,
at the date of the financial statements and the reported amount of revenues and
expenses during the reporting period.  Significant estimates relate to
inventory valuation, deferred tax valuation allowances, deferred revenues,
valuation of derivative liabilities and stock based compensation.  Actual results could differ from those
estimates.  Risks
and uncertainties  The Companys primary line of business is the
development and sale of video phone products and technology. Although the
Company has launched its first product based on this technology and, although
the Company has realized some revenues for the commercial sale of its product, the
revenues to date have not been substantial. Given the early stage of its
product and the lack of operating history in the video phone business, it is
difficult to predict its future results.  On
April 28, 2004, the Company entered into a multi-year agreement with
General Instrument for the worldwide distribution of the Ojo personal video
phone. This agreement provided for General Instrument to be WorldGates
exclusive distributor of its broadband video phone products and for WorldGate
to be General Instruments exclusive supplier of its broadband video phone
products.  On February 17, 2006, the
Company mutually agreed with General Instrument to end this agreement.  The ending of this agreement immediately
terminated this exclusivity for both parties, and accordingly enabled WorldGate
to expand its focus in bringing Ojo to the marketplace. In addition to its
current role for development and manufacture of Ojo, WorldGate assumed direct
responsibility and control for the advertising, marketing, and distribution of
its products.  As part of ending its
agreement with General Instrument, and in anticipation of WorldGate inventory
requirements as a result of taking full responsibility for product
distribution, WorldGate negotiated the right to buy back about two-thirds of
the units sold to General Instrument, valued at approximately $2,765 (based
upon the original sales price to General Instrument), for approximately $1,064.
This is less than half of what it would cost the Company to purchase the same
inventory from its manufacturing sources. 
As a result, the Company recorded a reserve for returns and reduced
revenue in the amount of approximately $2,310 during the fourth quarter of
2005.  In addition, the Company recorded
no revenue for units shipped to General Instrument in the first quarter 2006
and for the year ended December 31, 2006 has recorded a gain on
termination of this agreement of approximately $1,843 as a result of the lower
purchase price of the inventory repurchased from General Instrument ($1,393, net
of the cost of rework for rebranding the product and the adjustment of the
inventory to its current replacement value) and reversal of the product refund
program reserve ($212) as well as an adjustment of the warranty reserve for
products repurchased ($233), both of which resulted from termination of the
Companys agreement with General Instrument. Subsequent to the ending of the
agreement with General Instrument the Company is depending upon distribution
partners, including, for example, wholesalers, retailers and service providers,
to provide the worldwide sales and distribution of the Ojo video phone. If the
Companys partners are not successful, or if their activities do not lead to
significant sales of its product, operating results will be adversely affected,
revenue may not materialize or could be significantly reduced and the Company
could lose potential customers.  On May 9,
2006 the Company entered into a multiyear agreement with Aequus for them to
purchase Ojo video phones through its wholly owned subsidiary Snap
Telecommunications Inc., (Snap!VRS) , a provider of Video Relay Services (VRS)
and Video Remote Interpreting (VRI) services for the deaf and hard of hearing.  On June 20, 2007 the Company announced
that it had expanded its relationship with Aequus and Snap!VRS modifying their
earlier agreement and on March 31, 2008, the Company entered into a new
agreement with Aequus Technologies Corp. and Snap Telecommunications, Inc.
(collectively Aequus.)  This new
agreement, inter alia, provides for the (i) resolution of a dispute with
Aequus regarding amounts the Company claimed were owed to the Company by Aequus
and the termination by the Company of service to Aequus, (ii) payment to
the Company by Aequus of approximately $5 million in scheduled payments over
the next ten months, (iii) agreement to arbitrate approximately $1.4
million claimed by the Company to be owed by Aequus and (iv) purchase of
an additional $1.5 million of video phones by Aequus (the Aequus Transaction).  As a result of this new agreement Aequus is
planning to build a new data center, with support and training provided by the
Company, and upon completion, directly operating a video phone service for its
customers. . The Company currently is heavily dependent on Aequus for the
majority of its revenue.  If Aequus is
not successful, or if their activities do not lead to significant sales of its
product, its operating results will be adversely affected, and their ability to
pay all or any of the monies obligated per the agreement, including for
products purchased or the payment of any monies the Company is awarded as a
result of agreed arbitration with Aequus, may not materialize or could be
significantly reduced and the Company may have insufficient capital to operate
its business.  The loss of business or
payments from Aequus could materially impair the Companys continuing
operations.  F-9


The
Company also depends on relationships with third parties such as contract
manufacturing companies, chip design companies and others who may be sole
source providers of key components and services critical for the product the
Company is developing in its video phone business. The components and raw
materials used in the Companys Ojo video phone product are generally available
from a multitude of vendors and are sourced based, among other factors, on
reliability, price and availability. A formal relationship with Mototech has
been established for the volume manufacture of Ojo. The Companys non exclusive
agreement with Mototech allows either party to terminate the agreement with 90
days prior notice. At the present time Mototech is the Companys sole
manufacturer of its video phones.  If
Mototech or other providers of components and/or manufacturing services do not
produce these components or provide their services on a timely basis, if the
components or services do not meet the Companys specifications and quality
control standards, or if the components or services are otherwise flawed, the
Company may have to delay product delivery, or recall or replace unacceptable
products. In addition, such failures could damage the Companys reputation and
could adversely affect its operating results. As a result, the Company could
lose potential customers and any revenues that it may have at that time may
decline dramatically.  Cash and Cash Equivalents  The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents. At December 31,
2007 the Company maintained cash balances at financial institutions, which
exceeded the $100 FDIC limit.  Accounts Receivable  The Company
records accounts receivable at the invoiced amount.  Management reviews the receivable balances on
a monthly basis.  Management analyzes
collection trends, payment patterns and general credit worthiness when
evaluating collectibility and requires letters of credit whenever deemed
necessary.  Additionally, the Company may
establish an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends related to past losses and
other relevant information.  Account
balances would be charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote.  As of December 31, 2007,
the Company did not have an allowance for doubtful accounts or any off-balance
sheet credit exposure related to its customers. 
At December 31, 2007, approximately 82% of accounts receivable were
concentrated with one domestic customer. 
At December 31, 2006, approximately 95% of accounts receivable was
concentrated with five customers.  The
Company had two distribution customers that represented 8% of accounts
receivable, and had two major international telecommunications customers that
represented 82% of accounts receivable at December 31, 2006.  Trade accounts receivable at December 31,
2006 and 2007 were $1,005 and $166, respectively.  Bad debt expense recorded for the years ended
December 31, 2007 and 2006 was $19 and $0, respectively.  Inventory  The Companys
inventory consists primarily of finished goods equipment to be sold to
customers. The cost is determined on a First-in, First-out (FIFO) cost basis.
A periodic review of inventory quantities on hand is performed in order to
determine and record a provision for excess and obsolete inventories. Factors
related to current inventories such as technological obsolescence and market
conditions are analyzed to determine estimated net realizable values. A
provision is recorded to reduce the cost of inventories to the estimated net
realizable values. To motivate trials and sales of its Ojo product, the Company
has historically subsidized, and plans in the future to continue to subsidize,
certain of its product sales to customers that result in sales of inventory
below cost.  In accordance with
Accounting Research Bulletin (ARB) No. 43, the Company reflects such
inventory at the lower of cost or market and has reduced its inventory at December 31,
2007 and December 31, 2006 by $293 and $97, respectively, to reflect such
valuation.  Any significant unanticipated
changes in the factors noted above could have an impact on the value of the
Companys inventory and its reported operating results. At December 31,
2007 and 2006 the Companys inventory balance was $1,057 and $1,600,
respectively. In 2007 and 2006, the Companys inventory was reduced by $293 and
$585, respectively to their estimated net realizable values.  Property and Equipment  Property and equipment is carried at original cost.
Depreciation is recorded on a straight-line basis over the estimated useful
lives of the related assets. The Company depreciates furniture and fixtures
over seven years; office equipment over five years; and computer equipment and
trade show exhibits over three years. Leasehold improvements are capitalized
and amortized on a straight-line basis over the shorter of their useful life or
the term of the lease. Maintenance and repairs are expensed as incurred. When
the property or equipment is retired or otherwise disposed of, related costs
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is included in operations.  F-10


Long-lived
Assets  The Company periodically evaluates the carrying value
of long-lived assets when events and circumstances warrant such review. The
carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flows from such assets are separately
identifiable and are less than the carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. Fair market value is determined by using
the anticipated cash flows discounted at a rate commensurate with the risk
involved. Measurement of the impairment, if any, will be based upon the
difference between carrying value and the fair value of the asset.  Statements of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets provides
guidance on the recognition of impairment losses on long-lived assets to be
held and used or to be disposed of, and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented.  Accrued
Expenses  Accrued
expenses at December 31, 2007 primarily consist of $802 of inventory
purchases and $658 of interest on convertible debentures as described below in Accounting
for Preferred Shares and Derivative Shares. Accrued expenses at December 31,
2006 primarily consisted of various media advertising cost of $374 and $194 of
interest on convertible debentures.  Accounting for Preferred Shares and
Derivative Shares  In June 2004,
WorldGate completed a private placement of preferred stock. The preferred stock
had a dividend rate of 5% per annum, payable quarterly, either by cash or
through the issuance of common stock at the Companys option. The preferred
stock had a staged maturity over three years with scheduled payments of one
third due after 18 months, one half of the remainder due after 24 months and
the balance due after 36 months, and the ability to be redeemed at maturity in
cash or, at the Companys option, subject to certain conditions had the
potential to not be solely under the control of the Company, through the
issuance of the number of shares of common stock determined by dividing the
liquidation preference of the preferred shares by the then average market price
over the ten consecutive trading days prior to the date of conversion.  If
the effectiveness of the registration statement lapsed, the Company ceased to
be listed on certain specified exchanges and trading in the Companys stock is
suspended or a change in control occurred with respect to the Company, the
Company could have been required to settle redemption of the preferred stock
with cash instead of its common shares.  Furthermore, since the market
price of the Companys common stock cannot be predicted, the actual number of
shares of the Companys common stock that could have been required if a
redemption was made through the issuance of common stock also could not be
predicted. The private placement included numerous provisions intended to
protect these institutional investors including a cash payment penalty of 1.0%
per month for unredeemed preferred shares once registration of the shares
lapsed and until the registration again became effective.  The preferred
stock had embedded conversion options. Specifically, the holders of the
preferred stock could have converted their shares into the Companys common
stock at a conversion price of $2.35 per preferred share. In addition the
Company could have forced conversion of the preferred stock into common stock
if the Company achieved certain price targets for its common stock and
satisfaction of certain other conditions, such as the existence of an effective
registration statement. In either event the conversion price was subject to
adjustment if, at any time after the date the preferred shares were issued, the
Company issues or sells, or is deemed to have issued or sold, any shares of the
Companys common stock for per share consideration less than the conversion
price of the preferred shares on the date of such issuance or sale. 
Accordingly, the number of common shares issuable upon the conversion of the
preferred shares could not be predicted.  Furthermore, net-cash settlement
could have been required in the event of conversion default under certain
circumstances that could not be solely under the control of the Company. 
If the effectiveness of the registration statement lapsed, the Company ceased
to be listed on certain specified exchanges and trading in the Companys stock was
suspended or a change in control occurs with respect to the Company, the
Company could have been required to settle a conversion of the preferred stock
with cash instead of its common shares.  Also, as part of
the private placement the Company issued five-year warrants to purchase up to
803,190 shares of its common stock at an exercise price of $2.69 per share and
five-year warrants to purchase up to 803,190 shares of its common stock at an
exercise price of $3.14 per share. The investors also received an additional
investment right, for a limited period of time, to purchase 1,606,383
additional shares of common stock shares at $3.14 a share. This exercise price
of the warrants is subject to adjustment if, at any time after the date the
warrants were issued, the Company issues or sells, or is deemed to have issued
or sold, any shares of the Companys common  F-11


stock for per share
consideration less than the exercise price of the warrants on the date of such
issuance or sale.  Accordingly, the number of common shares that will be
issued upon the exercise of the warrants cannot be predicted.  As of September 30,
2006, 125,000 warrants exercisable at $2.69 had been exercised and 51,915
warrants exercisable at $3.14 had been exercised.  All of the additional
investment rights had been exercised as of June 30, 2006.  Based on anti-dilution provisions contained
within this private placement the $2.69 warrants were modified to an exercise
price of $0.69 as of December 31, 2007 and the number of outstanding
warrants were increased by 1,978,970 related to the issuance of convertible
debentures and warrants in August 2006 and October 2006 and as a
result of the conversion price related to these issuances.  Based on anti-dilution provisions contained
within this private placement the $3.14 warrants were also modified to an
exercise price of $0.76 as of December 31, 2007 and the number of
outstanding warrants were increased by 2,332,045 related to the issuance of
convertible debentures and warrants in August 2006 and October 2006
and as a result of the conversion price related to these issuances.  Based on anti-dilution provisions contained
within this private placement the $2.69 warrants were further modified to an
exercise price of $0.23 as of March 31, 2008 and the number of outstanding
warrants were increased by an additional 5,202,945 to a total of   7,181,914 related to the issuance of
convertible debentures and warrants in August 2006 and October 2006
and as a result of the conversion price related to these issuances.  Based on anti-dilution provisions contained
within this private placement the $3.14 warrants were also further modified to
an exercise price of $0.25 as of March 31, 2008 and the number of
outstanding warrants were increased by an additional 6,242,552 to a total of
8,574,597 related to the issuance of convertible debentures and warrants in August 2006
and October 2006 and as a result of the conversion price related to these
issuances.  Of the 7,550 preferred shares issued
under this private placement, all shares have been redeemed as of December 31,
2007.  With respect to
the Companys accounting for the preferred stock, Emerging Issues Task Force (EITF)
Topic D-98, paragraph 4, states that Rule 5-02.28 of Regulation S-X
requires securities with redemption features that are not solely within the
control of the issuer to be recorded outside of permanent equity. As described
above, the terms of the preferred stock include certain redemption features that
may be triggered by events that are not solely within the control of the
Company, such as a potential failure in the Companys ability to maintain an
effective registration statement. Furthermore, the actual number of shares of
common stock required to satisfy redemption is based upon the market value of
the common stock at the time of the redemption, which cannot be predicted.
Accordingly, the Company has classified the preferred stock as temporary equity
and the value ascribed to the redeemable preferred stock upon initial issuance,
i.e. at June 24, 2004, was the amount received in the transaction minus
the fair value ascribed to the conversion options and warrants. The initial
value of the redeemable preferred stock is accreted up to the redemption value
(the amount received in the transaction) over the future relevant periods using
the interest method.The value of the redeemable preferred stock at December 31, 2007
was $0.  The terms of the
preferred stock include certain conversion options that represent derivative
financial instruments under paragraph 12 of SFAS No. 133 Accounting for
Derivatives Instruments and Hedging Activities (SFAS 133) and thus were
separated from the preferred stock and valued using the Black-Scholes option
pricing model.  The conversion options include certain provisions that
could result in a variable number of shares to be issued upon conversion,
adjustment to the strike price at which conversion shares will be determined,
or the requirement for the Company to settle the conversion options in
cash.  EITF 00-19, Accounting for
Derivative Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock, (EITF 00-19) states that if the conversion options require net cash
settlement in the event of circumstances that are not solely within the Companys
control they should be classified as a liability measured at fair value on the
balance sheet.  The terms of the
five-year warrants include cash penalty provisions in the event that the
Company fails to meet its obligations to deliver registered shares to the
warrant holder upon exercise and an anti-dilution provision that could result
in a variable number of shares to be issued upon warrant exercise.
Additionally, the terms and conditions of the warrants provide for net
settlement through cashless exercise whereby the shares delivered to the
warrant holder would be readily convertible to cash. In accordance with EITF
00-19 and given the terms and conditions of the warrants as outlined above, the
Company has classified the warrants as a liability on its balance sheet
measured at fair value using the Black-Scholes option pricing model.  The Company
accounts for both the conversion options and warrants using the fair value
method at the end of each quarter, with the resultant gain or loss recognition
recorded against earnings.  On June 23,
2007, the holder converted the remaining 166 shares of preferred stock into
326,471 shares of common stock.  As a
result of this conversion, the conversion option liability was reclassified to
equity.  The remaining warrants are
valued using the Black-Scholes valuation model. At December 31, 2006 and
2007, the closing common stock price was $1.34 and $0.19, respectively,
applicable volatility rates were 99% and 108%, respectively, and the period
close risk-free interest rates as of December 31, 2006 were between 4.70%
and 4.78% for the instruments contractual life of  F-12


between 0.5 for the conversion
option, and 2.5 years for the warrants (continuously compounded), and as of December 31,
2007 the period close risk-free interest rates were 3.20%  for the instruments contractual remaining
life of  1.5 years for the warrants
(continuously compounded), and represent the key assumptions used in the
valuation calculation.  The result was a
$50 non cash charge for the year ended December 31, 2006, and a $772 non
cash gain for the year ended December 31, 2007.  After the mark to
market adjustments, the balances of the conversion option derivative liability
and the warrants derivative liability were $11 and $977, respectively, at December 31,
2006, and $0 and $236, respectively, at December 31, 2007.  Accounting
for Secured Convertible Debenture and Related Warrants.  On
August 11, 2006 the Company completed a private placement with an
institutional investor of a convertible debenture in the aggregate principal
amount of  $11,000.  This convertible debenture has a maturity of
three years, an interest rate of 6% per annum, and is convertible at the option
of the investors into WorldGate common stock at a conversion price equal to the
lesser of $1.75 per share or 90% of the average of the five lowest daily volume
weighted closing price (VWAP) of the common stock during the fifteen trading
days immediately preceding the conversion date (subject to adjustment in the
event of stock dividends and splits and certain distributions to stockholders,
fundamental transactions, and future dilutive equity transactions). The number
of shares available is subject to an overall limit on the number of issuable
shares , as further described below.  Interest is payable at maturity, and
the Company may elect to pay the interest amount in cash or shares of its
common stock. There was $658 of accrued interest as of December 31,
2007.  Through December 31, 2007 the
investors converted $4,999 of the convertible debt into 13,233,225 shares of
the Companys common stock. During the period January 1, 2008 through April 16,
2008 the investors converted an additional $63 into 840,571 additional shares
of the Companys common stock.  The
Company received $6,000 ($5,615, net of transaction costs) upon the closing of
the transaction on August 11, 2006 (the First Tranche) and the remaining
$5,000 ($4,700, net of transaction costs) was received on October 13, 2006
(the Second Tranche) after receiving stockholder approval on October 11,
2006 and obtaining an effective registration of the shares of common stock
issued and issuable upon conversion of the convertible debentures in the First
Tranche of this transaction.  On May 18,
2007 the Company and the investor amended the terms of the secured convertible
debentures to remove the investors ability, upon conversion of the debentures,
to demand cash in lieu of shares of common stock and to clarify that the
Company may issue restrictive shares if there is no effective registration
statement at the time of conversion. The terms of the convertible debentures
were amended to permit the Company to reclassify the derivative conversion
option liability embedded in the convertible debentures from debt to equity.  The
Company has the right to redeem all or any portion of the principal amount of
the convertible debentures in cash at any time upon not less than four business
days notice if the closing price of its stock is less than $1.75 per
share.  Such early redemption will, however, require the Company to pay a
10% prepayment premium.  In addition,
without any prepayment premium, the Company has the right to force the holders
to convert a maximum of $500 of the principal amount of the convertible
debenture in any thirty day period if for five consecutive trading days the
VWAP of its common stock is above $1.925 per share but less then $3.50 per
share and providing the daily trading volume exceeds 200,000 shares for these
five days, and certain other conditions are met.  If the VWAP of the Companys common stock is
greater than $3.50 per share for 30 consecutive trading days, the daily trading
volume exceeds 250,000 shares for five days prior, and if certain other
conditions are met, the Company can also force the holder to convert all or any
portion of the outstanding principal and interest into shares of its common
stock without any prepayment premium.  There are some
restrictions on the holders right to convert the convertible debentures. 
The holder cannot make any conversions below $1.75 per share (i) until the
earlier of the date registered common stock can be issued pursuant to such
conversion or January 1, 2007, (ii) which would exceed $500 in
principal amount in any calendar month, or (iii) which would result in the
issuance of more than 840,000 shares of the Companys common stock per calendar
month (provided that this maximum share limit will be waived by the Company
unless it elects to pay the holder in cash the difference in value between
840,000 shares and the number of shares the holders wishes to convert, up to
the $500 per month conversion limit). On May 31, 2007, the Company waived
this maximum share limit for a certain conversion of $500, and permitted the
issuance of an additional 286,634 shares of common stock, in lieu of making a
cash payment.  If the Company is in
default under the convertible debentures, these limitations are waived. The holder
is also not restricted in making conversions at $1.75.  In no case,
however may the holder convert the convertible debentures if it would result in
beneficial ownership of more than 9.99% of the Companys outstanding common
stock (though this provision can be waived by the holder upon 65 days prior
notice).  If the Company, at any time while the convertible debentures are
outstanding, shall (a) pay a stock dividend or otherwise make a
distribution or distributions on shares of its common stock or any other equity
or equity equivalent securities  F-13


payable in shares of common
stock, (b) subdivide outstanding shares of common stock into a larger
number of shares, (c) combine (including by way of reverse stock split)
outstanding shares of common stock into a smaller number of shares, or (d) issue
by reclassification of shares of the common stock any shares of capital stock
of the Company, then the convertible debenture holder is entitled to have the
conversion price adjusted to correspond to common stock holders rights to any
such stock dividend, stock split, stock combination or reclassification of
shares. The $1.75 conversion price is also subject to a weighted average
dilution adjustment if the Company issues shares (apart from certain excluded
issuances) of its capital stock at an effective price per share less than the
conversion price, as defined above. The Company received a one-time waiver
from its institutional investor of the dilution adjustment related to the
issuance of common stock and warrants to Antonio Tomasello, a private investor
and father of David Tomasello, a director of the Company.  The Company also granted the convertible
debentures holders a security interest in substantially all of its
assets.  Moreover, the Company is required to register the shares of
common stock issuable to the investor for resale to the public pursuant to a
registration rights agreement, containing customary terms, conditions and
indemnities.  The private placement includes numerous provisions intended
to protect the institutional investor, including a cash payment penalty in
which the Company shall pay liquidated damages to the selling security holder
in the event that (i) a registration statement is not timely filed, (ii) a
registration statement is not timely declared effective by the SEC or (iii) sales
cannot be made pursuant to the registration statement.  Such liquidated damages shall be equal to 1%
of the liquidated value of the outstanding convertible debentures for each
thirty day period in which the Company fails to satisfy provisions (i), (ii) or
(iii) above.  In no event, however,
shall liquidated damages exceed 12% of the aggregate purchase price of $11,000,
which is $1,320.  Pursuant to the
Amendment and Waiver, dated November 22, 2006, as amended, between the
Company and the selling security holder, the parties eliminated liquidated
damages for the Companys failure to satisfy clauses (i) and (ii) above
in connection with the Second Tranche. 
Accordingly, the Company has recorded no liability in connection with
these liquidated damage provisions.  In addition, the
aggregate number of shares to be issued upon conversion, exercise of the
warrants, payment for commitment shares, and payment of liquidated damages
pursuant to the registration rights agreement has been limited to 61,111,111
shares of common stock. On September 19, 2006, the Companys registration
statement to register the shares under this private placement was declared
effective.  As
part of this private placement, the Company issued to the investor 177,419
commitment shares of common stock with a fair value at issuance of
approximately $222.  The Company also issued five-year warrants to
purchase a total of up to 2,595,000 shares of WorldGate common stock, with
1,145,000 of the warrants having an exercise price of $1.85 per share (with
624,545 of these warrants issued at the closing of the First Tranche and
520,455 warrants issued at the closing of the Second Tranche), 1,100,000 of the
shares having an exercise price of $2.35 per share (with 600,000 of these
warrants issued at the closing of the First Tranche and 500,000 warrants issued
at the closing of the Second Tranche), and 350,000 warrants having an exercise
price of $2.60 per share (with 190,909 of these warrants issued at the closing
of the First Tranche and 159,091 warrants issued at the closing of the Second
Tranche).  Regarding the
First Tranche, on September 8, 2006, the Company filed an initial
registration statement, No. 333-137216, for 7,975,752 shares of common
stock, which included 7,798,333 shares underlying the convertible debentures
and 177,419 commitment shares.  This
registration statement went effective on September 19, 2006.  On June 25,
2007, the Company filed a post-effective amendment to Registration No. 333-137216,
in which the number of shares to be registered was reduced to 4,828,848.  The registration rights agreement
requires that the Company maintain the effectiveness of such registration
statement until all of the securities have been sold or until they become
eligible for sale pursuant to Rule 144(k).  Failure to maintain the
effectiveness of the registration statement may constitute an event of default.  Regarding the
Second Tranche, on May 29, 2007, the Company filed an initial registration
statement, No. 333-143323, for 22,024,248 shares of common stock, which
included 19,429,248 shares underlying the convertible debentures and 2,595,000
shares issuable upon the exercise of warrants. 
The Company filed an amendment to Registration No. 333-143323 on August 6,
2007.  Among other changes, the number of
shares to be registered was reduced from 22,024,248 to 7,716,416, all of which
are issuable upon the conversion of the convertible debentures.  The registration rights agreement requires
that the Company maintain the effectiveness of such registration statement
until all of the securities have been sold or until they become eligible for
sale pursuant to Rule 144(k). 
Pursuant to waivers granted by the purchaser of these shares, the
Company was given until May 30, 2007 to file a registration statement for
these shares. Furthermore such waiver requires that any failure to file this
registration statement or to cause it to be declared effective will not result
in any damages becoming due thereunder, liquated or otherwise.  Upon
any liquidation, dissolution or winding up of the Company, the holder of the
convertible debenture will be entitled to receive the principal amount of the
convertible debenture, together with accrued and unpaid interest, prior to any
payment to the holders of the Companys common and preferred stock.  F-14


The
terms of the warrant agreements provide for the adjustment of the exercise
price and the number of shares of common stock to be issued upon the Companys
issuance of certain securities deemed to be dilutive under the agreement.  Under certain conditions, the holder may
exercise these warrants on a cashless basis.  On
February 5, 2008, February 13, 2008, February 15, 2008, and April 8,
2008 the Company received notices from YA Global, holder of the Companys
convertible debentures, claiming that the Company was in default of the terms
of the debentures for stating its intent to wind down its business, failure to
maintain current financial statements in the registration statement relating to
the sale of the Companys common stock issuable upon conversion of one of those
debentures, to comply with a covenant to their satisfaction that provided for
the disclosure of information they considered material, and entering into the
agreement with Aequus Technologies, and as a result YA Global was exercising
its right to accelerate payment of the full principal amount of the debentures.
While the registration statement was not effective as of December 31,
2007, the underlying alleged default with respect to the registration statement
was in any event cured by the amendments to Rule 144 that became effective
on February 15, 2008, obviating the need to maintain that registration
statement. The Company has notified YA Global that it disputes these claims and
whether they constitute a continuing event of default under the debentures. The
Company has also notified YA Global that their right to accelerate payment is
also disputed. The Company is working with YA Global in an effort to settle
their disputes regarding the claimed defaults and acceleration.  Although the Company disputes YA Globals
claims of default, and does not believe YA Global has any basis to accelerate
payments on the debenture, the Company has reclassified the YA convertible
debenture to a current liability on the accompanying balance sheet, solely in
light of the existence of the alleged claims.  Prior to the May 18,
2007 amendment, subject to the share limitation, as discussed above, the actual
number of shares of the Companys common stock that would be required if a
conversion of the convertible debenture was made through the issuance of common
stock could not be predicted.  If the
Companys requirements to issue shares under these convertible debenture
agreements had exceeded the share limitation, or if it was not listed or quoted
for trading on at least the NASDAQ OTC Bulletin Board, the Company could have
been required to settle the conversion of the convertible debentures with cash instead
of its common stock.  The Company
initially accounted for conversion options embedded in convertible notes in
accordance with SFAS No. 133 Accounting for Derivative Instruments and
Hedging Activities (SFAS 133) and EITF 00-19 Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock (EITF 00-19)  SFAS 133
generally requires companies to bifurcate conversion options embedded in
convertible notes from their host instruments and to account for them as free
standing derivative financial instruments in accordance with EITF 00-19.  EITF 00-19 states that if the conversion
option requires net cash settlement in the event of circumstances that are not
solely within the Companys control that they should be classified as a
liability measured at fair value on the balance sheet.  Effective January 1, 2007, the Company
adopted the provisions of EITF Issue No. 06-7, Issuers Accounting for a
Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
the Conversion Option No Longer Meets the Bifurcation Criteria in Financial
Accounting Standards Board (FASB) Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities (EITF 06-7). Under EITF 06-7,
at the time of issuance, an embedded conversion option in a convertible debt
instrument may be required to be bifurcated from the debt instrument and
accounted for separately by the issuer as a derivative under SFAS 133,
based on the application of EITF 00-19. Subsequent to the issuance of the
convertible debt, facts may change and cause the embedded conversion option to
no longer meet the conditions for separate accounting as a derivative
instrument, such as when the bifurcated instrument meets the conditions of
Issue 00-19 to be classified in stockholders equity. Under EITF 06-7, when an
embedded conversion option previously accounted for as a derivative under
SFAS 133 no longer meets the bifurcation criteria under that standard, an
issuer shall disclose a description of the principal changes causing the
embedded conversion option to no longer require bifurcation under SFAS 133
and the amount of the liability for the conversion option reclassified to
stockholders equity. EITF 06-7 should be applied to all previously bifurcated
conversion options in convertible debt instruments that no longer meet the
bifurcation criteria in SFAS 133 in interim or annual periods beginning
after December 15, 2006, regardless of whether the debt instrument was
entered into prior or subsequent to the effective date of EITF 06-7. The
adoption of EITF 06-7, had the effect that on May 18, 2007, on account of
the Companys amendment of its convertible debenture, $4,335 of the derivative
liability was reclassified to stockholders equity (see Note 2 of the
accompanying consolidated financial statements for the twelve months ended December 31,
2007). The discount on the convertible debentures of $5,240 continues to be
amortized until October 2009.  Upon the issuance
date there was an insufficient number of authorized shares of Common Stock in
order to permit exercise of all of the warrants issued on August 11, 2006.
 In accordance with EITF 00-19, when
there are insufficient authorized shares, the obligation for the exercise of
investor warrants should be classified as liability measured at fair value on
the balance sheet. Accordingly, at August 11, 2006, in connection with the
$6,000 tranche, the convertible feature of the convertible debenture and the
warrants were recorded as derivative liabilities  F-15


of $4,446 and $1,269,
respectively.  On October 11, 2006
the Company received stockholder approval to increase the authorized shares
from 80,000,000 to 120,000,000.  Upon
re-valuation at October 11, 2006, the value of the warrants at October 11,
2006, was reclassified to equity at fair value in accordance with the
provisions of EITF 00-19.  Through May 18,
2007 the Company accounted for the conversion options using the fair value
method at the end of each quarter, with the resultant gain or loss recognition
recorded against earnings. The conversion option was valued at May 18,
2007, the effective date of the amendment to the convertible debenture to
remove the cash settlement option, using the Black-Scholes valuation model,
applying the actual common stock price on May 18, 2007 ($0.53), applicable
volatility rate (97 %), and the period close risk-free interest rates (4.82%)
for the instruments remaining contractual lives of 2.24 for the First Tranche
and 2.41 years for the Second Tranche.  At the initial
recording of the First Tranche, the sum of the fair values of the conversion
feature and the warrants, $5,714 in the aggregate, exceeded the net proceeds of
$5,615.  The difference of $99 was
charged to the provision for fair value adjustment, upon issuance during the
third quarter of 2006.  Accordingly, the
Company recorded a discount equal to the face value of the convertible
debenture, which will be amortized using the effective interest rate method
over the three year term.  The common
stock issued as fees in the transaction was recorded at a net value of $0, as
there was no residual value remaining.  At
October 13, 2006, in connection with the $5,000 Second Tranche, the
convertible feature of the convertible debenture was recorded as a derivative
liability of $3,449 and the warrants were recorded as additional paid in
capital of $230.  For
the Second Tranche issuance on October 13, 2006, the Company recorded a
discount of $3,979, which is being amortized using the effective interest
method over the three year term.  During
the years ended December 31, 2007 and 2006, $3,649 and $1,350 respectively
in face value of the convertible debentures was converted, resulting in the
issuance of 12,086,946 and 1,146,279 shares of common stock respectively.  As a result of the amortization and
conversion, $4,126 of the discount on the convertible debenture has been
charged to discount amortization and approximately $1,048 and $1,020,
respectively of the conversion option on the convertible debt was reclassified
upon conversion to additional paid in capital during the years ended December 31,
2007 and 2006 respectively.  At
December 31, 2007, the balances of the convertible debentures and the
offsetting related discount were $6,001 and $4,499, respectively.  For
the year ended December 31, 2007, the Company recorded total discount
amortization of $4,126and fair value adjustments of the conversion feature
derivative liability and the warrants derivative liability resulted in a gain
of $1,661, related to this private placement.  Liquidated
Damages  The Company accounts for potential registration
rights liquidated damage obligations in accordance with FSP EITF 00-19-2 Accounting
for Registration Payment Arrangements (FSP EITF 00-19-2). The Company
adopted this pronouncement during the quarter ended March 31, 2007. The
adoption of FSP EITF 00-19-2 did not have a material impact on the Companys
consolidated financial position, results of operations or cash flows.  Revenue
Recognition.  Revenue is
recognized when persuasive evidence of an arrangement exists, the price is
fixed or determinable, the collectibility 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
collectibility of customer accounts requires significant judgment. The Company
continually evaluates its equipment customer and service customers accounts
for collectibility at the date of sale and on an ongoing basis.  For
the year ended December 31, 2005, and through mid February 2006, the
Company had only one customer for the purchase of its product and the agreement
with this customer included several elements relevant to revenue recognition
including: (a) the customer had no general right to return the
product;  (b) the customer earned  F-16


warrants upon the purchase of
significant video telephony units and the value of these warrants would result
in a reduction of recognized revenue (the value of these warrants has been
routinely monitored by the Company and is currently deemed to be insignificant,
however, should the value of these warrants become material an offset would be
made against revenues); (c) penalties were payable to the customer if
certain excessive field failure rates are exceeded;  (d) the Company
and the customer shared in the benefit achieved by product cost reductions; (e) penalties
were payable to the customer if the Company failed to deliver shipments on a
timely basis; (f) the Company extended to the customer a limited product
warranty for a term not to exceed three years (the Company maintains a warranty
reserve based upon the percentage of product sales consistent with industry
comparable failure rates and the warranty period provided by the
agreement).  Beginning in mid February 2006,
as a result of the termination of the General Instrument marketing and
distribution agreement, the Company began selling its products to multiple
customers and now evaluates its revenue recognition policy on a customer by
customer basis.  Revenues are also
offset by a reserve for any price refunds and consumer rebates consistent with
the EITF Issue 01-9, Accounting for Consideration Given by a Vendor to a
Customer.  During the year
ended December 31, 2007, the Company shipped approximately 400 units, with
a sales value of $128 to customers with a right of return.  These customers may exercise their right of
return only if they do not sell the units to their respective customers.  Revenue and cost for these units were
deferred in accordance with SFAS 48 Revenue Recognition when a Right of Return
Exists.  As
part of ending the Companys agreement with General Instrument, and in
anticipation of WorldGate inventory requirements as a result of taking full
responsibility for product distribution, WorldGate negotiated the right to buy
back about two-thirds of the units sold to General Instrument, valued at
approximately $2,765 (based upon the original sales price to General
Instrument), for approximately $1,064. This is less than half of what it would
cost the Company to purchase the same inventory from its manufacturing
sources.  As a result the Company
recorded a reserve for returns and reduced revenue in the amount of
approximately $2,310, during the fourth quarter of 2005. In addition, the
Company has recorded no revenue for units shipped to General Instrument in the
first quarter 2006 and for the year ended December 31, 2006 has recorded a
gain on termination of this agreement of approximately $1,843 as a result of
the lower purchase price of the inventory repurchased from General Instrument
($1,393, net of the cost of rework for rebranding the product and the
adjustment of the inventory to its current replacement value) and reversal of
the product refund program reserve ($212) as well as an adjustment of the
warranty reserve for products repurchased ($233), both of which resulted from
termination of the Companys agreement with General Instrument.  In the third quarter of
2007, the Company began to ship its video phone product to its VRS
customer.  As part of its June 2007
agreement with this customer, the Company began to recognize product revenue at
the time of shipment of its video phone. In addition, the Company also began to
receive service fee revenues based on a percentage of the fees earned by Aequus
and for which the customer has received service.. The Company recognizes this
service fee revenue upon confirmation from the VRS customer of the fees they
have earned.  The Company also receives
service fee revenues from end consumers which is recognized after the service
has been performed.  In addition, the
Company had provided non-recurring engineering (NRE) services to Aequus valued
at $1,354 for the year ended December 31, 2007. These services are subject
to agreed arbitration between the parties. As such the Company did not
recognize revenues related to these NRE services during the year ended December 31,
2007 but rather will treat similar to a gain contingency.  Cost of Revenues  Cost of equipment product revenues reflects primarily
the purchase of video phones from the Companys supplier Mototech.  The components and raw materials used in the
Companys Ojo video phone product are generally available from a multitude of
vendors and are sourced based, among other factors, on reliability, price and
availability.  Engineering and Development Costs  Engineering and
development costs are expensed as incurred. Engineering and development were
$6,238 and $5,315 for the years ended December 31, 2006 and 2007,
respectively.  Advertising Costs  Advertising costs,
included in sales and marketing expense, are expensed in the period incurred.
Advertising costs were $1,036 and $297 for the years ended December 31,
2006 and 2007, respectively.  F-17


Income
Taxes  Provision for income taxes is determined based on the
asset and liability method. The asset and liability method provides that
deferred tax balances are recorded based on the difference between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes. Deferred tax liabilities or assets at the end of each
period are determined using the tax rate enacted under the current tax law. The
measurement of net deferred tax assets is reduced by the amount of any tax
benefits that, based on available evidence, are not expected to be realized,
and a corresponding valuation allowance is established.  The Company has recorded a full valuation
allowance against its net deferred tax assets at December 31, 2006 and 2007
due to the uncertainty regarding whether the deferred tax asset will be
realized.  In June 2006, the FASB issued Interpretation No. 48
Accounting for Uncertainty in Income TaxesA Interpretation of FASB Statement No. 109.(FIN
48). FIN 48 establishes for all entities a minimum threshold for financial
statement recognition of the benefit of tax positions, and requires certain
expanded disclosures. FIN 48  is
effective for fiscal years beginning after December 15, 2006, and is to be
applied to all open tax years as of the date of effectiveness. The adoption of
FIN 48 did not have a material effect on the Companys consolidated financial
position or results of operations or cash flows (See Note 7). As part of this
assessment the Company completed preliminary analyses under Section 382 of
the Internal Revenue Code.  Generally
section 382 limits the utilization of an entitys net operating loss
carryforward upon a change in control. Based on this analysis it was determined
that it was more likely than not that a change of control pursuant to Section 382
has not occurred. Future issuances of common stock may affect this analysis
which might cause limitation in the Companys ability to utilize net operating
loss carryforwards.  Stock-Based Compensation  Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of SFAS No. 123 (Revised 2004), Share-Based Payment, (SFAS No. 123(R))
using the modified-prospective-transition method which requires us to recognize
compensation expense on a prospective basis. 
SFAS No. 123(R) requires that all stock based compensation be
recognized as an expense in the financial statements and that such cost be
measured at the fair value of the award. 
Under this method, in addition to reflecting compensation for new
share-based awards, expense is also recognized to reflect the remaining service
period of awards that had been included in pro-forma disclosure in prior
periods.  SFAS No. 123(R) also
requires that excess tax benefits related to stock option exercises be
reflected as financing cash inflows instead of operating inflows.  As a result, the Companys net loss before
taxes for the year ended December 31, 2006 and 2007 included approximately
$837 ($0.02 per share and  $1,075 ($0.02
per share), of stock based compensation. The stock based compensation expense
is included in general and administrative expense in the consolidated
statements of operations.  Consistent
with the requirements of SFAS 123(R), the Company has selected a with-and-without
approach regarding the accounting for the tax effects of share-based
compensation awards.  This approach is
consistent with intraperiod allocation guidance in SFAS No. 109, Accounting
for Income Taxes, and EITF Topic D-32, Intraperiod Tax Allocation of the Tax Effect
of Pretax Income From Continuing Operations.  Net
Loss Per Share (Basic and Diluted)  Basic and diluted net loss per common share is computed by dividing the
net loss attributable to common stockholders for the period by the weighted
average number of shares of common stock outstanding during the period.  The calculation of diluted net loss per
common share excludes potential common shares if the effect is
antidilutive.  Potential common shares
comprise shares of common stock issuable upon the exercise of stock options and
warrants and the conversion of preferred stock and convertible debt.  The potential common shares that were
excluded from loss per share for the years ended December 31, 2006 and
2007 totaled 20,549,235, and 67,804,376, respectively.  In the period from December 31, 2007
through April 16, 2008 the Company issued 840,571 additional shares
increasing its total outstanding shares to 57,788,747.  Fair Value of Financial Instruments  The Companys financial instruments consist primarily of
cash and cash equivalents, embedded and free standing derivatives, 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 fair value because of their short term maturities.  The carrying value of the Convertible
Debentures Payable on the balance sheet as of December 31, 2006 and 2007
approximates fair value as terms approximate those currently available for
similar instruments.  Embedded derivatives
reported on the balance sheet as of December 31, 2006 are presented as a
liability measured  F-18


at fair value using the Black-Scholes pricing model (refer to Note 9, Redeemable
Preferred Stock and Note 2, Accounting for Secured Convertible Debentures).  There were no embedded derivatives reported
on the balance sheet as of December 31, 2007.  Free standing warrant derivative liabilities
on the balance sheet at December 31, 2006 and 2007 are measured at fair
value using the Black Scholes model.  Concentration of Credit Risk  Financial instruments that potentially subject the
Company to a concentration of credit risk principally consist of cash and cash
equivalents and accounts receivable. The Company has its cash and cash
equivalents placed with high quality, creditworthy financial institutions. As
part of its cash management process, the Company performs periodic evaluation
of the relative credit standing of these institutions.  In 2006 and 2007,
accounts receivable primarily consisted of receivables from the sales of the
Companys video phones to retailers, distributors, service providers and from
its web site.  As a result of the credit
worthiness and payment history related to these sales, no allowance for
potential credit losses has been recorded as of December 31, 2007.  Sales to major customers,
in excess of 10% of total revenues and accounts receivables, were as follows
for each of the years ended December 31:  Sales
  
  Accounts ReceivableCustomer
  
  2006
  
  2007
  
  2006
  
  2007A
  
  0
  
  63
  %
  0
  
  82
  %B
  
  0
  (1)
  0
  
  76
  %(1)
  0C
  
  4
  %
  2
  %
  3
  %
  13
  %D
  
  25
  %
  0
  
  0
  
  0E
  
  14
  %
  0
  
  0
  
  5
  %  
 (1) Shipments totaling $778 were deferred at December 31,
2006 pursuant to the guidance of SFAS 48. Substantially all of the units were
returned to the Company during the year ended December 31, 2007 (Note 3).  As
of December 31, 2007, Mototech is the sole volume manufacturer of Ojo
video phones to the Company.  A formal relationship had been established
with Mototech in 2003.  Mototech 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 Ojo video
phone product are generally available from a multitude of vendors and are
sourced based, among other factors, on reliability, price and availability.  At December 31, 2007
and 2006, the Company has long-lived assets, with a net book value total of
$626, located in the United States, and $171 located in Taiwan, R.O.C.  At December 31, 2006, the Company has
long-lived assets, with a net book value total of $951, located in the United
States, and $315 located in Taiwan, R.O.C.  Recent Accounting Pronouncements  In September 2006,
the FASB issued SFAS No. 157 Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
Adoption is required for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Early adoption of SFAS 157
is encouraged. The Company is currently evaluating the expected effect of SFAS
No.157 on its consolidated financial statements and is currently not yet in a
position to determine such effects.  In September 2006,
FASB ratified EITF No. 06-1, Accounting for Consideration Given by a
Service Provider to Manufacturers or Resellers of Equipment Necessary for an
End-Customer to Receive Service from the Service Provider(EITF 06-1). This
guidance requires the application of EITF 01-9, Accounting for Consideration
Given by a Vendor to a Customer (EITF 01-9), when consideration is given to
a reseller or manufacturer for benefit to the service providers end customer.
EITF 01-9 requires the consideration given be recorded as a liability at the
time of the sale of the equipment and, also, provides guidance for the
classification of the expense. EITF 06-1 is effective for the first annual
reporting period beginning after June 15, 2007. The Company has not yet
assessed the impact of EITF 06-1 on the Companys consolidated financial
statements.  F-19


In December 2006,
the FASB issued FASB Staff Position (FSP) EITF 00-19-2 Accounting for
Registration Payment Arrangements (FSP EITF 00-19-2) which specifies that
the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies.  Adoption of FSP EITF
00-19-02 was required for fiscal years beginning after December 15, 2006.
The adoption of FSP EITF 00-19-02 did not have a material impact on the Companys
consolidated financial position, results of operations or cash flows.  In February 2007,
the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
(SFAS No. 159), which permits entities to choose to measure many
financial instruments and certain other items at fair value.  The fair value option established by this
Statement permits all entities to choose to measure eligible items at fair
value at specified election dates. A business entity shall report unrealized
gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. 
Adoption is required for fiscal years beginning after November 15,
2007.  Early adoption is permitted as of the beginning of a fiscal year
that begins on or before November 15, 2007, provided the entity also
elects to apply the provisions of SFAS No.157. The Company is currently
evaluating the expected effect of SFAS No.159 on its consolidated financial
statements and is not yet in a position to determine such effects.  In December 2007,
the FASB issued SFAS No. 141R, Business Combinations, which replaces
SFAS No. 141, Business Combinations. SFAS No. 141R establishes principles
and requirements for determining how an enterprise recognizes and measures the
fair value of certain assets and liabilities acquired in a business
combination, including noncontrolling interests, contingent considerations, and
certain acquired contingencies. SFAS No. 141R also requires
acquisition-related transaction expenses and restructuring costs to be expensed
as incurred rather than capitalized as a component of the business combination.
SFAS No. 141R will be applicable prospectively to business combinations
for which the acquisition date is on or after January 1, 2009. SFAS No. 141R
would have an impact on accounting for any businesses acquired after the
effective date of this pronouncement.  In December 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial StatementsAn Amendment of ARB No. 51. SFAS No. 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary (previously referred to as minority interests).  SFAS 160 also requires that a retained
noncontrolling interest upon the deconsolidation of a subsidiary be initially
measured at its fair value. Upon the adoption of SFAS No.160, the Company would
be required to report any noncontrolling interests as a separate component of
consolidated stockholders equity. The Company would also be required to
present any net income allocable to noncontrolling interest and net income
attributable to the stockholders of the Company separately in its consolidated
statements of operations. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after January 1,
2009. SFAS No. 160 requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other requirements
of SFAS No. 160 shall be applied prospectively. SFAS No. 160 would
have an impact on the presentation and disclosure of the noncontrolling
interests of any non-wholly owned business acquired in the future.  In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (SAB 110). SAB 110 amends and
replaces Question 6 of Section D.2 of Topic 14, Share-Based Paymentof the Staff Accounting Bulletin series.
Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding
the use of the simplified method in developing an estimate of the expected
term of plain vanilla share options and allows usage of the simplified
method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically
sufficient experience to provide a reasonable estimate to continue use of the simplified
method for estimating the expected term of plain vanilla share option grants
after December 31, 2007. The Company currently uses the simplified
method to estimate the expected term for share option grants as it does not
have enough historical experience to provide a reasonable estimate. The Company
will continue to use the simplified method until it has enough historical
experience to provide a reasonable estimate of expected term in accordance with
SAB 110. SAB 110 will be effective for the Company
on January 1, 2008.  In March 2008,
the FASB issued SFAS 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133, which amends
and expands the disclosure requirements of SFAS 133 to require qualitative
disclosure about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. This statement will be effective for the Company
beginning on January 1, 2009. The adoption of this statement will change
the disclosures related to derivative instruments held by the Company.  F-20


3. 
Inventory  The Companys
inventory as carried in its financial statements is all finished goods
inventory.  The Company orders, purchases
and receives finished, completed, boxed and ready for sale video phone products
directly from its supplier.  The Company
makes no subsequent hardware changes to the products.  The Company does not maintain work in process
inventory, component raw materials or supplies, except for very minimal
quantities for repair work.  The Company
does not include tooling, deferred start-up or general and administrative costs
in its inventory costs.  The Company also
does not maintain specific inventory for any specific long-term contracts or
programs.  The Company tracks and removes
inventory only under the first-in, first-out method and prices it based upon
the Companys actual cost unless adjustments are required for certain costs,
obsolescence or for market valuations.  During
the years ended December 31, 2006 and 2007, the Company reduced inventory
by $585 and $293, respectively, for such adjustments.  Through
December 31, 2007 the Company arranged to have a total of 3,650 of the
reported units previously delivered to a service provider, with a value of
$763, returned to its inventory, which had no impact on the Companys results
of operations as these units were fully reserved for at the point of sale.  4. 
Property and Equipment  Property and equipment consist of the following at December 31,
2006 and 2007:  2006
  
  2007Computer equipment and system packages
  
  $
  1,247
  
  $
  1,363Furniture and fixtures
  
  964
  
  966Hardware, software and tooling
  
  1,328
  
  1,347Leasehold improvements
  
  955
  
  9514,494
  
  4,627Accumulated depreciation and amortization
  
  (3,228
  )
  (3,830
  )Property and equipment, net
  
  $
  1,266
  
  $
  797  Depreciation and amortization on property and
equipment in the amount of $720 and $602 was recorded for each of the years
ended December 31, 2006 and 2007, respectively.  5.  Accrued Expenses  The Companys accrued expenses consisted of the following as of December 31,
2006 and 2007:  2006
  
  2007Inventory purchases
  
  $
  0
  
  $
  802Interest on Convertible Debt
  
  194
  
  658Marketing and Advertising expenses
  
  656
  
  16Other
  
  390
  
  540Total
  
  $
  1,240
  
  $
  2,016  6.  Warranty Reserve  The Company provides a warranty covering defects
arising from the sales of its video phone product. This warranty is limited to
a specific time period. As of December 31, 2007 and 2006, the Company has
a reserve of $49 and $85, respectively that is based on expected and historical
loss rate as a percentage of product sales. 
Warranty costs are charged to cost of revenues when they are probable
and reasonably estimable. While the Company believes its estimate at December 31,
2007 is reasonable and adequate, it is subject to change based on its future
sales and experience, which may require an increase or decrease in its reserve.  During the years ended December 31, 2007 and
2006, the Company reduced its warranty reserve by $36 and $18,
respectively.  The adjustment in 2007
reflects warranty claims of $49, increases of $49 for additional warranty costs
from increased product sales and $91 of expired warranties based on the term of
warranty issued.  The adjustment in 2006
reflects a $224 increase to the gain recorded from the termination on February 17,
2006 of the Companys agreement with General Instrument, as a result of the
elimination of the warranty exposure for products previously sold and then
repurchased from General Instrument under this termination, warranty claims of
$52 in 2006 and increases of $25 for additional warranty costs from increased
product sales in 2006.  F-21


7. 
Income Taxes  The significant components of the net deferred tax
asset at December 31, 2006 and 2007 are as follows:  2006
  
  2007Federal tax loss carryforward
  
  $
  76,098
  
  $
  78,374State tax loss carryforward
  
  5,036
  
  5,635Property and equipment
  
  559
  
  1,255Research and experimentation credit
  
  3,624
  
  3,961Officers compensation, accrued expenses
  and other
  
  834
  
  1,084Inventory
  
  608
  
  58286,759
  
  90,891Valuation allowance
  
  (86,759
  )
  (90,891
  )$
  0
  
  $
  0  The following table
summarizes the significant differences between the U.S. Federal statutory tax
rate and the Companys effective tax rate for financial statement purposes for
the years ended December 31, 2007 an 2006:  2006
  
  2007U.S. Federal statutory rate
  
  (34
  )%
  (34
  )%Permanent items
  
  3
  
  15Increase in valuation allowance
  
  31
  
  19Effective rate
  
  0
  %
  0
  %  A valuation allowance was established against the
Companys net deferred tax asset due to the Companys lack of earnings history
and, accordingly, the uncertainty as to the realization of the asset. A portion
of the gross deferred asset and related valuation allowance is attributable to
stock option expense. To the extent that such assets are realized in the
future, the benefit is applied to equity.  At December 31, 2007, the Company had a net
operating loss carryforward of approximately $230,512 for federal tax purposes,
expiring between 2012 and 2027, if not utilized. The net operating loss
carryforward for state tax purposes is approximately $182,993, which will
expire through 2027. These carryforwards may be applied as a reduction to
future taxable income of the Company, if any. The state net operating loss
carryforwards are limited by state tax law to a maximum utilization of $2,000
per year per entity for losses generated in 2006 and prior and $3,000 per year
per entity for losses generated in 2007 and beyond. Due to the annual
limitation on state net operating loss utilization the related deferred tax
asset is reflected at the annual limits to date of expiration of $56,410. The
Company also has federal research and experimentation credit carryforwards of
approximately $3,961.  All state research
and experimentation credits totaling $23 were refunded during 2006 and no
carryovers remain. The federal research and experimentation credit
carryforwards expire between 2012 and 2027. The Companys ability to utilize
its net operating loss carryforwards and credit carryforwards may be subject to
annual limitations as a result of prior or future changes in ownership and tax
law as defined under Section 382 of the Internal Revenue Code of 1986.
Such limitations are based on the market value of the Company at the time of
ownership change multiplied by the long-term exempt rate supplied by the
Internal Revenue Service.  The Company has adopted the provisions of  FIN 48 on January 1, 2007.  FIN 48 provides guidance on recognition,
classification, interest and penalties, accounting in interim period,
disclosure and transition.  The Company has identified its federal tax return and
its state tax return in Pennsylvania as major tax jurisdictions, as
defined.  Based on the Companys
evaluation, it has been concluded that there are no significant uncertain tax
positions requiring recognition in the Companys financial statements.  The Companys evaluation was performed for
tax years ended 2004 through 2007, the only periods subject to
examination.  The Company believes that
it is more likely than not, that its income tax positions and deductions would
be sustained on audit and does not anticipate any adjustments that would result
in a material change to its financial position. 
In addition, the company did not record a cumulative effect adjustment
related to the adoption of FIN 48.  The Companys policy for recording interest and
penalties associated with audits is to record such items as a component of
income before income taxes.  Penalties
are recorded in other expense and interest paid or received is recorded in
interest expense or interest income, respectively, in the statement of
operations.  There were no amounts
accrued for penalties or interest as of or during year ended December 31,
2007.  The Company does not expect its
unrecognized tax benefit position to change during the next twelve months.  Management is currently unaware of any issues
under review that could result in significant payments, accruals or material
deviations from its position.  F-22


8.Secured Convertible Debentures  On
August 11, 2006 and October 13, 2006 the Company issued to an
institutional investor convertible debentures in the aggregate principal amount
of $11,000 (for more details, refer to Note 2). 
These convertible debentures have a maturity of three years from the
date of issuance, an interest rate of 6% per annum, and are convertible at the
option of the investors into WorldGate common stock at a conversion price equal
to the lesser of $1.75 per share or 90% of the average of the five lowest daily
volume weighted average closing prices (VWAP) of the common stock during the
fifteen trading days immediately preceding the conversion date (subject to
adjustment in the event of stock dividends and splits and certain distributions
to stockholders, fundamental transactions, and future dilutive equity
transactions).  Interest is payable at
maturity, and may be paid in cash or shares of the Companys common stock.  The Company recorded interest and accrued
interest expense of $194, and $464 for the years ended December 31, 2006
and 2007, respectively.  The convertible
debentures provide that the Company has the right to redeem all or any portion
of the principal amount of the debentures in cash at any time upon not less
than four business days notice if the closing price of its stock is less than
$1.75 per share. Such early redemption will, however, require the Company to
pay a 10% prepayment premium. In addition, without any prepayment premium, the
Company has the right to force the holder to convert a maximum of $500,000 of
the aggregate principal amount of the debentures in any thirty day period if
for five consecutive trading days the VWAP of its common stock is above $1.925
per share but less then $3.50 per share and providing the daily trading volume
exceeds 200,000 shares for these five days, and certain other conditions are
met. If the VWAP of the Companys common stock is greater than $3.50 per share
for 30 consecutive trading days, the daily trading volume exceeds 250,000
shares for five days prior, and if certain other conditions are met, the
Company can also force the holder to convert all or any portion of the
outstanding principal and interest into shares of its common stock without any
prepayment premium.  On
February 5, 2008 February 13, 2008, February 15, 2008, and April 8,
2008 the Company received notices from YA Global, holder of the Companys
convertible debentures, claiming that the Company was in default of the terms
of the debentures for stating its intent to wind down its business, failure to maintain
current financial statements in the registration statement relating to the sale
of the Companys common stock issuable upon conversion of one of those
debentures, to comply with a covenant to their satisfaction that provided for
the disclosure of information they considered material,  and entering into the agreement with Aequus
Technologies, and as a result YA Global was exercising its right to accelerate
payment of the full principal amount of the debentures. While the registration
statement was not effective as of December 31, 2007, the underlying
alleged default with respect to the registration statement was in any event
cured by the amendments to Rule 144 that became effective on February 15,
2008, obviating the need to maintain that registration statement. The Company
has notified YA Global that it disputes these claims and whether they
constitute a continuing event of default under the debentures. The Company has
also notified YA Global that their right to accelerate payment is also
disputed. The Company is working with YA Global in an effort to settle their
disputes regarding the claimed defaults and acceleration.  Although the Company disputes YA Globals
claims of default, and does not believe YA Global has any basis to accelerate
payments on the debenture, the Company has reclassified the YA convertible
debenture to a current liability on the balance sheet, solely in light of the
existence of the alleged claims.  During
the year ended December 31, 2007, $3,650 in face value of the convertible
debentures was converted, resulting in the issuance of 12,086,945 shares of
common stock.  As a result of
amortization and the conversions, $4,126 of the discount on the convertible
debenture has been charged to discount amortization.  At
December 31, 2007, the balances of the convertible debentures and the
offsetting related discount were $6,001 and $4,499, respectively.  8.  Stockholders Equity  Common Stock  On October 11,
2006 the Company had received stockholder approval to increase the authorized
shares from 80,000,000 to 120,000,000.  On December 13, 2007 the
Company received stockholder approval to increase the authorized common shares
from 120,000,000 to 200,000,000.  The Company issued
375,737 shares of its common stock (valued at market price on date of grant)
and 100,000 options (valued using Black Scholes model) to a consulting firm
associated with the marketing of the Companys video phone product. This
issuance resulted in non-cash based consulting fees of $300 and is included in
sales and marketing expense in the accompanying consolidated statements of
operations.  F-23


Preferred Stock  The Company has the authority to issue from time to
time up to an aggregate of 13,500,000 shares of preferred stock in one or more
classes or series and to determine the designation and the number of shares of
any class or series as well as the voting rights, preferences, limitations and
special rights, if any, of the shares of any class or series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of the Company. At December 31, 2006 and 2007 there were
166 and 0 shares, respectively, of redeemable preferred stock outstanding.  Redeemable
Preferred Stock  In June 2004,
WorldGate completed a private placement of preferred stock. The preferred stock
has a dividend rate of 5% per annum, payable quarterly, either by cash or
through the issuance of common stock at the Companys option. The preferred
stock has a staged maturity over three years with scheduled payments of one
third due after 18 months, one half of the remainder due after 24 months and
the balance due after 36 months, and may be redeemed at maturity in cash or, at
the Companys option, subject to certain conditions that may not be solely
under the control of the Company, through the issuance of the number of shares
of common stock determined by dividing the liquidation preference of the
preferred shares by the then average market price over the ten consecutive
trading days prior to the date of conversion.  If the effectiveness of the
registration statement lapses, the Company ceases to be listed on certain
specified exchanges and trading in the Companys stock is suspended or a change
in control occurs with respect to the Company, the Company may be required to
settle redemption of the preferred stock with cash instead of its common
shares.  Furthermore, since the market price of the Companys common stock
cannot be predicted, the actual number of shares of the Companys common stock
that will be required if a redemption is made through the issuance of common
stock also cannot be predicted. The private placement includes numerous
provisions intended to protect these institutional investors including a cash
payment penalty of 1.0% per month for unredeemed preferred shares once
registration of the shares lapse and until the registration again becomes
effective (see Note 2).  On June 23,
2007, the holder converted the remaining 166 shares of preferred stock into
326,471 shares of common stock.  As a
result of this conversion, the conversion option liability was reclassified to
equity.  Of the 7,550 preferred shares issued
under this private placement, all shares have been redeemed as of December 31,
2007.  Warrants  In August 2000, the Company issued warrants to
the TVGateway partners as part of the TVGateway Joint Venture. These warrants
may be exercised to purchase in the aggregate up to 1,500,000 shares of common
stock at an exercise price of $24.78 and up to 500,000 additional shares of
common stock at an exercise price of $12.39. The warrants were subject to
vesting at varying rates based on the deployment of the Companys discontinued
Internet TV service on each operators digital cable systems. On September 30,
2003, 1,000,000 warrants were cancelled. These warrants expired on July 24,
2007.  In November 2000, the Company entered into a
deployment agreement with AT&T Broadband to deploy the Companys
interactive services to AT&T digital customers in Cedar Falls and Waterloo,
Iowa and Tacoma, Washington. As part of this agreement, the Company issued
warrants to AT&T to purchase up to 1,000,000 shares of the Companys common
stock at a per share exercise price of $16.02. The warrants are subject to
vesting at varying rates based on the deployment of the Companys Internet TV
service on AT&Ts digital cable systems. These warrants expired on November 12,
2007.  In connection with the December 2003 and January 2004
private placements, the Company issued 1,020,000 warrants and 10,000 additional
investment rights to purchase shares of common stock. For the December 2003
transactions the warrants had an exercise price of $1.00 per share and the
additional investment rights were priced at $0.80 per share. For the January 2004
transaction the warrants had an exercise price of $1.875 per share and the
addition investment rights were priced at $1.50 per share. In addition, if the
selling security holders exercise their additional investment rights, the
Company will be obligated to issue additional warrants to purchase its common
stock at an exercise price of $1.00 per share and $1.875 per share,
respectively, for the December 2003 and the January 2004
transactions.  In connection with the Development and Distribution Agreement
with General Instrument, the Company issued warrants in April and September 2004
to General Instrument to purchase 600,000 shares of its common stock, 300,000
at an exercise price of $1.4375 per share with the execution of the agreement
in April 2004, and 300,000 at an exercise price of $1.75 upon the delivery
to General Instrument of acceptable prototypes for the product.  These warrants expire on April 27, 2009
and September 21, 2009, respectively and were fully vested on their date
of grant.  F-24


In connection with
the June 2004 private placement  the Company issued five-year
warrants to purchase up to 803,190 shares of its common stock at an exercise
price of $2.69 per share and five-year warrants to purchase up to 803,190
shares of its common stock at an exercise price of $3.14 per share. The
investors also received an additional investment right, for a limited period of
time, to purchase 1,606,383 additional shares of common stock shares at $3.14 a
share. This exercise price of the warrants is subject to adjustment if, at any
time after the date the warrants were issued, the Company issues or sells, or
is deemed to have issued or sold, any shares of the Companys common stock for
per share consideration less than the exercise price of the warrants on the
date of such issuance or sale.  Accordingly, the number of common shares
that will be issued upon the exercise of the warrants cannot be
predicted.  As of December 31, 2006, 125,000 warrants exercisable at
$2.69 had been exercised and 51,915 warrants exercisable at $3.14 had been
exercised.  All of the additional investment rights had been exercised as
of December 31, 2006.Based on anti-dilution provisions
contained within this private placement the $2.69 warrants were modified to an
exercise price of $2.35 as of December 31, 2006 and the number of
outstanding warrants were increased by 98,164 related to the issuance of
convertible debentures and warrants in August 2006 and October 2006
and as a result of the conversion price related to these issuances.  Based on anti-dilution provisions contained
within this private placement the $3.14 warrants were also modified to an
exercise price of $2.70 as of December 31, 2006 and the number of
outstanding warrants were increased by 120,307 related to the issuance of
convertible debentures and warrants in August 2006 and October 2006
and as a result of the conversion price related to these issuances.  Based on anti-dilution provisions contained
within this private placement the $2.69 warrants were modified to an exercise
price of $0.69 as of December 31, 2007 and the number of outstanding
warrants were increased by 1,978,070 related to the issuance of convertible
debentures and warrants in August 2006 and October 2006 and as a
result of the conversion price related to these issuances.  Based on anti-dilution provisions contained
within this private placement the $3.14 warrants were also modified to an
exercise price of $0.76 as of December 31, 2007 and the number of
outstanding warrants were increased by 2,332,045 related to the issuance of
convertible debentures and warrants in August 2006 and October 2006
and as a result of the conversion price related to these issuances.  Based on anti-dilution provisions contained
within this private placement the $2.69 warrants were further modified to an
exercise price of $0.23 as of March 31, 2008 and the number of outstanding
warrants were increased by an additional 5,202,945 to a total of 7,181,914
related to the issuance of convertible debentures and warrants in August 2006
and October 2006 and as a result of the conversion price related to these
issuances.  Based on anti-dilution
provisions contained within this private placement the $3.14 warrants were also
further modified to an exercise price of $0.25 as of March 31, 2008 and
the number of outstanding warrants were increased by an additional 6,242,552 to
a total of 8,574,597 related to the issuance of convertible debentures and
warrants in August 2006 and October 2006 and as a result of the
conversion price related to these issuances.  In December 2004, WorldGate completed a private
placement of 208,333 shares of its common stock to K.Y. Chou, President and
General Manager of Mototech at a sales price of $2.40 per shares, which
resulted in additional gross proceeds to the Company of $500.  In
connection with this placement the Company granted warrants to Mr. Chou to
purchase up to 62,500 shares of common stock at an exercise price of $2.88 per
share. These warrants expire on December 15, 2009 and were fully vested on
their date of grant.  In August 2005, the
Company completed a private placement for $17,500 of its common stock and
warrants with several institutional investors. The Company issued 4,666,664
shares of its common stock at $3.75 per share to the participating investors.
The Company also issued five-year warrants to purchase a total of 1,671,947
shares of its common stock: 1,633,333 shares to the investors at an exercise
price of $5.00 per share, and 38,614 shares to the placement agent at an
exercise price of $4.53 per share. The investors also received an
additional investment right, for a period of 60 days from the time the shares
become registered, to purchase 1,554,000 additional shares of common stock at
$4.12 per share. The accounting for these warrants and investment rights is
established by analogy to APB No. 14 Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants, which addresses detachable stock
purchase warrants issued in conjunction with convertible debt and prescribes
that such warrants be accounted for as additional paid in capital measured at
fair value. The private placement includes numerous provisions intended to
protect these institutional investors including a cash payment penalty of 1.5%
per month for the period above 120 days from the effective date of the
agreement that the shares in the transaction fail to be registered. The
Registration Statement covering the shares under this private placement was not
declared effective until June 1, 2006. 
Until such time as the shares were registered the Company was subject to
the penalty provision under this private placement. For the years ended December 31,
2006 and 2007 the Company recorded and expensed related penalties of $1,114 and
$0, respectively. The related unpaid penalties accrued as of December 31,
2006 and December 31, 2007 was $157. 
On July 25, 2006, the Company amended the terms of the additional
investment right that was granted to an investor as part of the August 2005
private placement, with respect to a portion of shares of common stock
purchasable thereunder and agreed to apply $158 of accrued penalties towards
the exercise price of such amended additional investment right, for the
purchase of 129,950 shares of common stock. The penalties had accrued with
respect to the Companys inability to register the shares acquired by such
investor in the private placement within 120 days of the transaction.  In consideration for this amendment  F-25


and application of the exercise proceeds the investor
agreed to forego any cash payment of the penalties other than as available
through the proceeds of the exercise of the amended investment right and to
grant to the Company a release of all claims relating to the late registration
of the private placement shares, other than the aforesaid penalties.  The
amended additional investment right provides that the investor thereof may
purchase the 129,950 shares of common stock for a period of 760 days beginning June 1,
2006 for an exercise price of $1.515 per share.  The terms of the
additional investment rights with respect to the remaining 1,424,050 shares of
common stock purchasable thereunder remain unchanged.  On July 26, 2006 this investor exercised
the additional investment right for 129,950 shares. On July 31, 2006
the amended additional investment right with respect to the remaining 1,424,050
shares of common stock expired.  On December 12,
2006 the Company amended the terms of the warrants that were granted to an
investor as part of the August 2005 private placement, with respect to a
portion of shares of common stock purchasable thereunder and agreed to apply
$315 of accrued penalties towards the exercise price of such amended warrants,
for the purchase of 279,255 shares of common stock. In addition, the exercise
price of 47,412 of the warrants was changed to $1.41 per share.  The penalties had accrued with respect to the
Companys inability to register the shares acquired by such investor in the
private placement within 120 days of the transaction.  In consideration for this amendment and
application of the exercise proceeds the investor agreed to forego any cash
payment of the penalties other than as available through the proceeds of the
exercise of the amended warrant and to grant to the Company a release of all
claims relating to the late registration of the private placement shares, other
than the aforesaid penalties.  The amended warrants provide that the
investor thereof may purchase the 326,667 shares of common stock for a period
of 1,330 days beginning December 12, 2006 for an exercise price of $1.41
per share.  The terms of the warrants with respect to the remaining shares
of common stock purchasable thereunder remain unchanged.  On December 19, 2006 this investor
exercised the warrants for the purchase of 279,255 shares.  On August 11,
2006 the Company completed a private placement with an institutional investor
of a convertible debenture in the aggregate principal amount of up to
$11,000.  As part of this private
placement the Company issued five-year warrants to purchase a total of up to
2,595,000 shares of WorldGate common stock, with 1,145,000 of the warrants
having an exercise price of $1.85 per share, 1,100,000 of the shares having an
exercise price of $2.35 per share and 350,000 warrants having an exercise price
of $2.60 per share (with 190,909 of these warrants issued at the initial
closing and 159,091 warrants issued at the closing of the second tranche of
funding on October 13, 2006).  A summary of the Company warrant activity for the year ended December 31,
2007, is as follows:  Warrants
  
  Weighted Average
  Exercise Price
  
  Weighted
  Average
  Remaining
  Contract
  LifeOutstanding, January 1, 2007
  
  7,277,378
  
  $
  4.74Granted
  
  8,304,582
  
  0.65Exercised
  
  0
  
  0Cancelled / Forfeited
  
  (2,347,936
  )
  (8.42
  )Outstanding, December 31, 2007
  
  13,234,024
  
  $
  2.43
  
  2.66Exercisable, December 31, 2007
  
  13,234,024  Stock Option Plan  In December 1996, the Company adopted the 1996
Stock Option Plan (1996 Plan). This plan provides for the granting of stock
options to officers, directors, employees and consultants. Grants under this
plan may consist of options intended to qualify as incentive stock options (ISOs),
or nonqualified stock options that are not intended to so qualify (NQSOs).
The option price of any ISO will not be less than the fair market value on the
date the option is granted (110% of fair value in certain instances). The
option price of NQSOs may be greater than, equal to, or less than the fair
market value on the date the option is granted. The 1996 Plan originally
authorized a maximum of 933,333 shares of common stock.  In May 1999 and May 2000, the Board
increased the total number of shares of common stock available under the 1996
Plan to 1,600,000 and 3,200,000 shares, respectively. In October 2000, the
Companys stockholders approved these increases. In February 2001, the
Board approved an automatic annual increase of shares reserved under the 1996
Plan in an amount equal to the lesser of 4% of the then outstanding shares of
the Companys common stock or 1,000,000 shares. In October 2001, the
Companys stockholders approved this increase.  F-26


In October 2004, the Companys stockholders
approved the 2003 Equity Incentive Plan (2003 Plan). This plan is intended to
replace the 1996 Plan for new grants. No additional shares were reserved for
the new plan but rather all available shares under the 1996 Plan were made
available for the new plan. As with the 1996 Plan, the 2003 Plan includes the
same automatic annual increase in the number of shares reserved for use with
the plan equal to the lesser of 4% of the then outstanding shares of the
Companys common stock or 1,000,000 shares. In addition to ISOs and NQSOs, the
new plan also provides for performance based awards and restricted stock.  Both the 1996 Plan
and its successor, the 2003 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 ISOs, in certain instances, may not exceed five years. The
options granted under both Plans vest ratably over a four-year period from the
date of grant.  As of December 31,
2006 there were 2,091,682 shares available to grant under the Plans and
4,913,689 options outstanding.  As of December 31,
2007 there were 1,197,029 shares available to grant under the Plan and
6,808,342 options and restricted shares outstanding.  Options granted during
the year ended December 31, 2007 vest over four years and expire in ten
years from the date of granted under the Plan. The weighted-average fair values
of the options granted were $1.15, and $0.33 per option during the years ended December 31,
2006 and 2007, 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 2006 and
2007, respectively: expected volatility of 91.7%, and 85%; average risk-free
interest rates of 4.62% and 4.33%; dividend yield of 0%; and expected lives of
6.2 and 6.2 years.  A summary of the Companys stock plan is presented
below:  Stock Options
  
  Weighted-
  Average
  Exercise Price
  
  Aggregate
  Intrinsic
  ValueOutstanding, January 1, 2006
  
  4,481,015
  
  $
  1.94Granted
  
  529,523
  
  $
  1.53Exercised
  
  (56,857
  )
  $
  0.93Cancelled/forfeited
  
  (39,992
  )
  $
  3.08Outstanding, December 31, 2006
  
  4,913,689
  
  $
  1.90
  
  $
  1,540,132Granted
  
  1,581,500
  
  $
  0. 33Exercised
  
  0
  
  $
  0Cancelled/forfeited
  
  (587,847
  )
  $
  1.35Outstanding, December 31, 2007
  
  5,907,342
  
  $
  1.53
  
  $
  0Exercisable, December 31, 2007
  
  3,964,511
  
  $
  1.81
  
  $
  0  As of December 31, 2007,
there was $1,067 of total unrecognized compensation arrangements granted under
the Plan.The cost is
expected to be recognized through 2011.  The following table
summarizes information about stock options outstanding at December 31,
2007:  Stock Options Outstanding
  
  Stock Options ExercisableRange of Exercise Prices
  
  Shares
  
  Weighted-
  Average
  Remaining
  Contractual
  Life (Years)
  
  Weighted-
  Average
  Exercise
  Price
  
  Shares
  
  Weighted-
  Average
  Exercise
  Price$0.00 - $0.39
  
  1,474,613
  
  8.86
  
  $
  0.31
  
  290,613
  
  $
  0.37$0.40 - $0.59
  
  1,116,000
  
  6.02
  
  0.52
  
  1,036,000
  
  0.52$0.60 - $0.89
  
  299,492
  
  6.94
  
  0.60
  
  299,492
  
  0.60$0.90 - $1.34
  
  729,250
  
  5.97
  
  1.06
  
  589,250
  
  1.06$1.35 - $2.01
  
  700,293
  
  6.46
  
  1.61
  
  439,935
  
  1. 68$2.02 - $3.02
  
  1,033,332
  
  5.05
  
  2.56
  
  880,934
  
  2.57$3.03 - $4.53
  
  376,412
  
  6.38
  
  4.23
  
  271,287
  
  4.29$4.54 - $6.80
  
  102,848
  
  4.92
  
  5.91
  
  81,898
  
  6.07$6.81 - $10.20
  
  40,000
  
  3.13
  
  8.25
  
  40,000
  
  8.25$15.31 - $22.95
  
  31,046
  
  2.10
  
  20.44
  
  31,046
  
  20.44$22.96 - $34.43
  
  4,056
  
  2.51
  
  28.60
  
  4,056
  
  28.605,907,342
  
  6.61
  
  $
  1.53
  
  3,964,511
  
  $
  1.81  F-27


Cash received from
option exercises for fiscal years 2006,and 2007 was $12 and $0, respectively. The
Company did not realize an actual tax benefit for the tax deductions from
exercises during these years.  The total fair
value of the shares vested during the years ended December 31, 2006 and
2007 was $837 and $808, respectively. The intrinsic value of the options
exercised during the years ended December 31, 2006 and 2007 was $27 and
$0, respectively.  Restricted
Stock Grants  Performance based
shares were granted on October 3 and December 20 of 2007 to certain
senior executives that vest upon the achievement of certain criteria as
follows: 10% of the shares vest upon achieving each of a 10%, 20%, 30% 40% and
50% increase for the Company in total gross revenue in a quarter over its third
quarter 2007 total gross revenue shown on its statement of operations as
reported in the SEC filings and 25% of the shares vest upon the Company
achieving each of (1) a quarterly operating cash break even (defined as
zero or positive net cash provided by operations consistent with or as
reported on the Consolidated Statement of Cash Flows in the financial
statements filed with SEC) and (2) a 10% net income as a percent of
revenue. The Performance Grants had a fair value of $206 on their dates of
grant of October 3 and December 20, 2007. As of December 31,
2007, it was determined that is was more likely than not that the performance
grants would be not be earned and therefore there was no compensation expense
recorded for these grants.  The following
table is the summary of the Companys non-vested restricted shares as of December 31,
2007 and changes during the year then ended:  SharesNonvested as of January 1, 2007
  
  0Granted
  
  1,151,000Vested
  
  0Forfeited
  
  (250,000
  )Nonvested as of December 31, 2007
  
  901,000  Employee Stock Purchase Plan  In October 2001, the Companys stockholders
approved the WorldGate 2001 Employee Stock Purchase Plan that provides eligible
participants with the opportunity to periodically acquire shares of its common
stock through payroll deductions. Eligible participants may contribute up to
fifteen percent of their compensation towards the purchase of the Companys
common stock. At the end of each calendar quarter, the contributions of the
participants are used to purchase shares of the Companys common stock at the
lower of eighty-five percent of the market price of its common stock: (i) at
the beginning of each calendar quarter or (ii) at the end of each calendar
quarter. A maximum of 750,000 shares of the Companys common stock (plus an
annual increase of 375,000 shares) may be purchased in the aggregate by
participants in the Stock Purchase Plan.  During 2006 and 2007, the Company sold 18,040 and
42,262 shares of common stock under the Stock Purchase Plan for proceeds of $27
and $24, respectively  10.  Commitments and
Contingencies  Leases  The Companys current five year lease was signed on September 1,
2005 and covers 42,500 square feet at an annual rate of $11.40 per square foot
with a 3% increase annually, cancelable by either party with eight months
notice, with a termination by tenant also including six months termination fee.
Total rent expense for the years ended December 31, 2006 and 2007 amounted
to approximately $642 and $657, respectively. In March 2008 the parties
agreed in principle to a new lease (and the cancellation of the current lease
with no termination cost) for a smaller space within the current facility
consisting of approximately 17,000 square feet at an annual fee of $7 per
square foot. This new lease is expected to be cancelable by either party upon
90 days notice with no termination costs.  In November 2003, the Company entered into a 60
month lease for office equipment. As of December 31, 2007, there remains a
total of $5 to be paid over the remaining period of this lease. In December 2007,
the  F-28


Company entered into a 60 month lease for office equipment. As of December 31,
2007 there remains a total of $56 to be paid over the remaining period of this
lease.  Disclosure of Contractual
Obligations  The future minimum
contractual rental commitments under non-cancelable leases (including the lease
expected to be cancelled in April 2008) for each of the fiscal years
ending December 31 are as follows:  2008
  
  $
  5352009
  
  5462010
  
  3752011
  
  112012
  
  11Total
  
  $
  1,478  Legal
Proceedings  Although from time to
time the Company is involved in litigation as a routine matter in conducting its
business, we are not currently involved in any litigation which it believes is
material to its operations or balance sheet. During the first fiscal quarter
2008 the Company was involved in a dispute with Aequus, its largest customer. With
the exception of certain NRE services, in the amount of approximately $1.3,
million which remains the subject of agreed arbitration between the parties,
this dispute was settled as part of the March 31, 2008 agreement with this
customer (Note 2). When the Company is involved in disputes or other legal
proceedings it complies with the requirements of currently prevailing
accounting standards and provide for accruals where a liability is probable and
a reasonable estimate can be made as to the probable amount of such liability.  11.  Significant Agreements and
Transactions  The Company has a current multi-year agreement
with Mototech , an investor, to provide the Company with engineering and
development support. As a result of this agreement, the Company has expensed
approximately $64 and $415, respectively for the years ended December 31,
2007 and 2006. Accounts payable to this investor amounted to $809 and $$1,377
at December 31, 2007 and December 31, 2006, respectively. This
agreement provides for contracted services, including hardware and software
development, and the creation and development of tools to facilitate the
Companys engineering efforts. This agreement does not provide for ongoing
royalties, purchase provisions, or for any requirement to provide additional funding
to the Company. Net revenues from operations recognized from Mototech were
approximately $2 and $406 for the years ended December 31, 2007 and 2006,
respectively. This investor accounted for approximately 0% and 14% of the
revenues for the years ended December 31, 2007 and 2006, respectively. Accounts
receivable from this investor were $8 and $1, respectively, as of December 31,
2007 and December 31, 2006.  In July, 2007, the
Company sold its Shadow trademark to T-Mobile USA, Inc. and received
$500. In addition, the Company obtained a license to continue its use of the
mark until July 7, 2009. Shadow is the non-registered trademark currently
used with respect to the Companys Ojo PVP 900. The Company has retained all
ownership in Ojo, which is its primary registered mark.  On September 24,
2007, the Company completed a private placement with Antonio Tomasello, a
private investor who is the father of David Tomasello, a director of the
Company, of its common stock in the principal amount of $1,000.  As part
of the private placement, the Company issued to the Investor 2,564,102 shares
of common stock and warrants to purchase a total of 2,564,102 shares of common
stock, with an exercise price of $0.485 per share.  Mr. Tomasello is
currently the largest non-affiliated investor in WorldGate, and the father of
one of the Companys directors.  On May 9, 2006 the
Company entered into a multiyear agreement with Aequus, for Aequus to purchase
Ojo video phones through its wholly owned subsidiary Snap Telecommunications
Inc., (Snap!VRS) , a provider of Video Relay Services (VRS) and Video Remote
Interpreting (VRI) services for the deaf and hard of hearing.  On June 20, 2007 the Company announced
that it had expanded its relationship with Aequus and Snap!VRS modifying their
earlier agreement to provide for the parties to work collaboratively to
identify the most desired Ojo features and capabilities that will provide the
best video phone experience for the VRS user community and that would enable
Ojo to be the preferred VRS video phone. As part of the modified agreement the
Company agreed to contract to provide development and engineering resources to
accomplish these features and capabilities and in addition, as a  F-29


result of Snaps
utilization of the Ojo network, Snap also placed a purchase order for 10,000
Ojos to begin to fill the current Snap order backlog. In the later part of the
third quarter of 2007 product shipments were commenced to Snap!VRS Video Relay
Services customers.  On March 31,
2008, the Company entered into a new agreement with Aequus Technologies Corp.
and Snap Telecommunications, Inc. (collectively Aequus). This new
agreement, inter alia, provides for the (i) resolution of a dispute with
Aequus regarding amounts the Company claimed were owed to the Company by Aequus
and the termination by the Company of service to Aequus, (ii) payment to
the Company by Aequus of approximately $5 million in scheduled payments over
the next ten months, (iii) agreement to arbitrate approximately $1.4
million additional dollars claimed by the Company to be owed by Aequus and (iv) purchase
of an additional $1.5 million of video phones by Aequus (the Aequus
Transaction). As a result of this new agreement Aequus is planning to build a
new data center, with support and training provided by the Company, and upon
completion, directly operating a video phone service for its customers.  12. 
Employee Benefit Plan  The Company maintains a
new Retirement Savings Plan that is funded by the participants salary
reduction contributions. All employees of the Company are eligible to
participate in the plan upon joining the Company. The plan is intended to
permit any eligible employee who wishes to participate to contribute up to 12%
of the employees compensation on a before-tax basis under Section 401(k) of
the Internal Revenue Code. The plan provides for discretionary Company matching
contributions and discretionary Company profit-sharing contributions.
Contributions are invested, in such proportions as the employee may elect in a
variety of mutual investment funds. During the years ended December 31,
2007 and 2006, the Company made no matching or discretionary profit-sharing
contributions to the plan.  13Supplemental
disclosure of cash flow information  Year Ended December 312006
  
  2007Cash paid for interest
  
  $
  0
  
  $
  2Non-cash investing and
  financing activities:Conversion of derivative
  liability
  
  1,020
  
  0Accretion on preferred
  stock
  
  28
  
  26Conversion of preferred
  stock to common stock
  
  334
  
  166Conversion of convertible
  debenture to common stock
  
  1,350
  
  3,650Dividends payable on
  preferred stock
  
  1
  
  0Deemed dividend on
  conversion of preferred stock
  
  68
  
  4Common stock issued for
  accrued dividends
  
  14
  
  6Reclassification of
  conversion liability
  
  0
  
  5,384  14.   Geographical
Data  Financial Information
Relating to Foreign and Domestic Operations and Export Sales for the years
ended December 31, 2006 and 2007  2006
  
  2007Net revenues from
  continuing operations by geographic area:United States
  
  $
  1,326
  
  $
  3,128Foreign (*)
  
  1,450
  
  317Total
  
  $
  2,776
  
  $
  3,445Net Loss (all from United
  States operations)
  
  $
  (17,608
  )
  $
  (14,739
  )Identifiable assets within
  the United States
  
  $
  14,251
  
  $
  3,243Identifiable foreign assets (hardware and tooling for manufacturing)
  in Taiwan, R.O.C.
  
  $
  315
  
  $
  171  
 * Net
revenues for the years ended December 31, 2006 and 2007, respectively,
include net revenues primarily derived from sales to customers located as
follows:  F-30


2006
  
  2007Turkey
  
  0
  
  268Taiwan, R.O.C.
  
  405
  
  3Italy
  
  0
  
  7Israel
  
  251
  
  0New Zealand
  
  59
  
  0Russia
  
  718
  
  0South Africa
  
  0
  
  4Venezuela
  
  0
  
  29Others
  
  17
  
  6Total
  
  1,450
  
  317  F-31


Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.  None  Item 9A. Controls and Procedures  (a)Disclosure Controls and Procedures.  The Company
maintains disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and
15d-15(e))  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 December 31, 2007. 
The Companys Chief Executive Officer and Chief Financial Officer
determined that the Company has a material weakness as a result of several
significant deficiencies including lack of segregations of duties, lack of
appropriate IT security and program change controls,  insufficient documentation of period-end
reviews, the improper recording of revenues, not recording inventory at the
lower of cost or market, and the incorrect determination of grant date for
stock based awards. The temporary shift in the Companys focus and resources
toward keeping the Company solvent contributed to the material weakness.   As a result of the material weakness
identified the Chief Executive Officer and Chief Financial Officer concluded
that as of December 31, 2007, its disclosure controls and procedures were
not designed properly and were not 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.  While the Company
continues the engagement of outside experts to provide counsel and guidance in
areas where it cannot economically maintain the required expertise internally,
the reductions in staff have adversely impacted the Company on exercising the
necessary internal control over financial reporting for the quarter ended December 31,
2007.  In 2007 the Company initiated the
process of implementing a financial system that it believes would improve the
internal control over financial reporting and eliminate any identified
deficiencies. Because of the financial condition the Company faced in 2007, and
pending the obtaining of adequate financing to support the implementation of
the necessary controls and procedures, the full implementation of this system
is now delayed.  (b)  Managements
Annual Report on Internal Control Over Financial Reporting.  The Company is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) or 15d  15(f) under
the Securities Exchange Act of 1934. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.  Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.  Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2007. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework.  Based on
managements assessment, management concluded that internal controls over
financial reporting were not effective, as of December 31, 2007, due to
significant deficiencies including lack of segregations of duties, lack of
appropriate IT security and program change controls, insufficient documentation
of period-end reviews, the improper recording of revenues, not recording
inventory at the lower of cost or market, and incorrect determination of the
grant date for stock based awards, which aggregated to a material
weakness.  This annual report does not
include an attestation report of the Companys independent registered public
accounting firm, regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys independent  24


registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only managements report in this annual
report.  Item 9B.  Other Information.  None  PART III  Item 10.
Directors, Executive Officers and Corporate Governance.  Our
business is managed by the Companys executive officers under the direction of
our Board of Directors, in accordance with the Delaware Business Corporation
Law and our Bylaws.  Members of the Board
are kept informed of our business through discussions with the Companys
executive officers, by reviewing materials provided to them and by
participating in regular and special meetings of the Board and its
committees.  In addition, to promote open
discussion among our non-employee Directors, those Directors meet in regularly
scheduled executive sessions without the participation of management or
employee Directors.  In
accordance with our Bylaws, our Board of Directors has specified that the
number of Directors will be set at seven. 
Six of our seven Directors are non-employee Directors, and the Board of
Directors has determined that each of these six Directors has no relationship
which, in the opinion of the Board of Directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a
Director, and that each meets the objective requirements for independence
under the NASDAQ Marketplace Rules. 
Therefore, the Board of Directors has determined that each of these six
Directors is an independent Director under the standards currently set forth
in the NASDAQ Marketplace Rules.  The
Director who is not independent is Mr. Krisbergh, the Companys chairman
and president.  As of December 31,
2007 our executive officers and directors are as follows:  Name
  
  Age
  
  PositionHal M. Krisbergh
  
  60
  
  Chairman of the Board
  of Directors and Chief Executive OfficerJoel Boyarski
  
  61
  
  Vice President and
  Chief Financial OfficerRandall J. Gort
  
  58
  
  Vice President, Chief
  Legal Officer and SecretaryJames E. McLoughlin
  
  55
  
  Vice President, Account
  Development and MarketingSteven C. Davidson(2)
  
  59
  
  DirectorClarence L.
  Irving, Jr.(1)(3)
  
  52
  
  DirectorMartin Jaffe(2)
  
  61
  
  DirectorJeff Morris(1)
  
  55
  
  DirectorLemuel Tarshis(2)(3)
  
  66
  
  DirectorDavid Tomasello
  
  35
  
  Director  
 (1)Member of Compensation Committee (2)Member of Audit Committee (3)Member of the Corporate Governance and
Nominating Committee  All Executive Officers
serve at the pleasure of the Board.  Each
director holds office until the election and qualification of the directors
successor at the next annual meeting of stockholders or until the directors
earlier death, removal or resignation.  Hal M. Krisbergh
has served as our Chairman and Chief Executive Officer since our inception in March 1995.
From September 1981 to September 1994, Mr. Krisbergh was an
executive officer of General Instrument (now a part of Motorola, Inc.). Mr. Krisbergh
served as President of General Instruments Communications Division and, for
the past 25 years, has been a well-known figure in the cable industry. He is a
recognized leader in the development of addressable cable boxes, impulse pay-per-view,
opto-electronics and digital audio technologies. In 1991, Mr. Krisbergh
received cable televisions prestigious Vanguard award. Prior to joining
General Instrument, Mr. Krisbergh was employed by W. R. Grace &
Co., Deloitte & Touche and Raytheon Company.  25


Joel I. Boyarski
joined our company in October 1999, and was named Vice President and Chief
Financial Officer in September 2002. Prior to becoming Vice President and
Chief Financial Officer, Mr. Boyarski served as General Manager of
TVGateway, LLC from December 2001 until September 2002 and as Vice
President of Business Development for TVGateway, LLC from June 2000 until December 2001.
From October 1999 to June 2000, he served as a consultant for our
Company. Prior to joining us, Mr. Boyarski was a business and financial
consultant from June 1998 to October 1999, and for 23 years prior to June 1998,
he held a variety of management positions at Joseph E. Seagram and Sons, Inc.,
including Vice President of Finance and Business Planning for several of
Seagrams Domestic and International divisions including North America, Asia
Pacific and Global Duty Free.  Randall J. Gort
joined our company in August 1997 as Vice President, Legal and Corporate
Affairs, General Counsel and Secretary. In January 2003, Mr. Gort
became the Companys Chief Legal Officer. From July 1995 to August 1997,
Mr. Gort was General Counsel, Secretary, and Director of Legal and
Corporate Affairs for Integrated Circuit Systems, Inc. Mr. Gort was
in private practice from August 1994 through June 1995. Prior to that
time, from May 1987 through July 1994, he was an Associate General
Counsel for Commodore International Ltd. Mr. Gort was with Schlumberger
Ltd. from October 1982 through early 1987, originally as Senior Attorney
and then as General Counsel, FACTRON Division. From April 1979 through October 1982,
Mr. Gort was Counsel for various divisions of the 3M Company, including
Medical and Surgical Products Divisions, Orthopedic Products Division,
Electro-Mechanical Resources Division and 3Ms four tape divisions.  James E.
McLoughlin joined our company in February 2001 and in January 2002
was named Vice President, Marketing, Business and Account Development. Prior to
this position, Mr. McLoughlin served as Vice President, Sales and
Marketing. From February 1981 through February 2001, Mr. McLoughlin
was Vice President, Affiliate Operations for Home Box Office, where he was
responsible for sales and marketing of premium television services to
affiliated cable television companies.  Steven C. Davidson
has been a member of our board of directors since April 2002. From 1979
until his retirement in April 2002, Mr. Davidson held various
executive positions with HBO, Inc., most recently serving as Senior Vice
President and General Manager of Affiliate Operations. In February 2004, Mr. Davidson
returned to HBO, Inc. as Executive Vice President of Affiliate Sales. Mr. Davidson
is also a director of Nation Fatherhood Initiative, a non-profit organization.  Clarence L. Irving, Jr.
has been a member of our board of directors since July 2000. He has been
President and Chief Executive Officer of Irving Information Group, a consulting
services firm, since October 1999 and has served as a director of Covad Communications
Group, Inc. since April 1999. Covad owns and operates the largest
national broadband network, and is a leading supplier of facilities-based
provider of data, voice, and wireless telecommunications solutions for small
and medium-sized businesses. Covad is also a key supplier of high-bandwidth
access for telecommunications services providers like EarthLink, AOL, and
AT&T.  On August 15, 2002, Covad
Communications Group, Inc. filed a voluntary petition for relief under
Chapter 11 of the Federal bankruptcy code in the United States Bankruptcy Court
for the District of Delaware. Mr. Irving served as Assistant Secretary of
Commerce to the United States Department of Commerce from June 1993 to October 1999.  Martin Jaffe has
been a member of our board of directors since April 2002. Since January 2002,
Mr. Jaffe has been the Chief Operating Officer, Managing Director and
Co-Founder of Silvercrest Asset Management Group LLC, an independent,
employee-owned, registered investment advisor which provides asset management
and family office services to families and select institutional investors. From
November 2000 until September 2001, Mr. Jaffe was Chief
Financial Officer of Credit Suisse Asset Management Group LLC, and from 1981
until November 2000, Mr. Jaffe was Chief Operating Officer of
Donaldson, Lufkin & Jenrette Asset Management Group.Messrs Jaffe and Tarshis are brothers-in-law.  Jeff Morris has
been a member of our board of directors since April 2001. Mr. Morris
is currently Senior Vice President of Long Term Strategy & Technology
Development at Showtime Networks Inc., an originator and distributor of
entertainment content through its premium television networks SHOWTIME®, THE
MOVIE CHANNEL and FLIX®, as well as the multiplex channels SHOWTIME® TOO,
SHOWTIME® SHOWCASE, SHOWTIME EXTREME®, SHOWTIME BEYOND®, SHOWTIME NEXT®,
SHOWTIME WOMEN®, SHOWTIME FAMILYZONE® and TMC xtra.  He has been in his current position since August 2005.
From June 2001 to July 2005, Mr. Morris was the principle of
Digital Media Consulting, a new media consulting company. From July 1999
to April 2001 Mr. Morris was President and Chief Executive Officer of
Yack, Inc., an Internet events and program guide. Mr. Morris is a
veteran of the cable television industry, including a previous tenure from 1984
through 1999 at Showtime Networks, Inc., where his last position was
Senior Vice President of New Media and Technology Development.  26


Lemuel A. Tarshis
has been a member of our board of directors since April 2001. Since August 1991,
Dr. Tarshis has been a director for the Howe School Alliance for
Technology Management at the Stevens Institute of Technology.  Dr. Tarshis also currently is a director
for both Aequus Technologies Corp. and Life-Pack Technologies, Inc.  In addition, he has worked as a management
consultant for Lucent Technologies Inc., Bell Atlantic, GTECH Corporation,
AT&T Corporation, Aequus Technologies and Life-Pack Technologies.  Messrs Jaffe and Tarshis are brothers-in-law.  David Tomasello
has been a member of our board of directors since May 23, 2007.  He is a graduate of Boston University with a
degree in finance. He has been a member of the board of directors and the audit
committee of Corimon S.A.C.A. since 2005. Corimon, a diversified manufacturer
and distributor of packaging materials, chemicals and paint, is one of the top
five conglomerates in Venezuela. Since 2003, Tomasello is also a member of the
board of directors of Fininvest S.A., a Venezuelan commercial and residential
real estate developer and Complejo Metalurgico de Sociedad Anonima (COMMTESA),
a Venezuelan construction company.  Mr. Tomasello
is the managing partner of Attiva Capital Management, an independent investment
firm.  Mr. Tomasellos father, Antonio
Tomasello, is currently the beneficial owner of approximately 14% of WorldGates
Common Stock.  Mr. Tomasello holds a
power of attorney to vote such shares.  Code of Conduct  The Company has
adopted a Code of Conduct that applies to all of our directors and employees,
including, without limitation, our principal executive officer, our principal
financial and accounting officer, and all of our employees performing financial
or accounting functions.  The Company has posted our Code of Conduct on
our website, www.wgate.com, under the About Us section. The Company intends
to satisfy the disclosure requirements under Item 10 of Form 8-K regarding
an amendment to, or waiver from, any provisions of our Code of Conduct by
posting such information on our website at the location specified above.You can request a copy of our Code of Conduct, at no
cost, by contacting Investor Relations, c/o WorldGate Communications, 3190
Tremont Ave., Trevose, PA  19053.  Corporate
Governance At WorldGate  Our
Board of Directors has a long-standing commitment to sound and effective
corporate governance practices.  The
foundation for our corporate governance is the Boards policy that a majority
of the members of the Board should be independent.  The Company has reviewed internally and with
our Board of Directors the provisions of the Sarbanes-Oxley Act of 2002, the
related rules of the SEC and current NASDAQ Marketplace Rules regarding
corporate governance policies and procedures. 
Our corporate governance documents comply with all requirements.  During
Fiscal Year 2007, our Board of Directors held seventeen meetings.  Each member of the Board except Mr. Morris
attended at least 75% of the total number of meetings of the Board and all
committees on which he sits.  The Board
also acts by unanimous written consent from time to time.  Board
Committees  The standing committees of our Board of Directors
consist of the Audit Committee, Compensation and Stock Option Committee and
Corporate Governance Nominating Committee. The
Board has adopted a written charter for each of these committees that is
available on the Companys web site at http://www.wgate.com/about/board.html. These committees are described below. Our
Board of Directors may also establish various other committees to assist it in
its responsibilities.  Audit
Committee.The Audit Committee is responsible for
providing general oversight with respect to the accounting principles employed
in our financial reporting.  It operates
in accordance with a written charter adopted by our Board of Directors. The
Audit Committee monitors our financial reporting process and internal control
system, reviews and appraises the audit efforts of our independent accountants
and provides an avenue of communication among the independent accountants,
financial and senior management and the Board of Directors. The Audit Committee
meets at least each quarter and at least once annually with our management and
independent public accountants to review the scope of auditing procedures, our
policies relating to internal auditing and accounting procedures and controls,
and to discuss results of the annual audit of our financial statements. The
Audit Committee is currently composed of Dr. Tarshis, Mr. Davidson
and Mr. Jaffe, each of whom is independent as such term is defined under
Rule 4200(a)(15) of the NASDAQ listing standards. The Audit Committee also
complies with the financial sophistication requirement under the NASDAQ listing
standards. In addition, the Board has determined that Mr. Jaffe is an
audit committee financial expert as defined by the Instruction to Item
407(d)(5)(i) of Regulation S-K. 
Four separate meetings of this committee were held in 2007 independent
of the general meetings for the full board.  27


Compensation
and Stock Option Committee.The
Compensation and Stock Option Committee is currently composed of two directors,
Messrs. Irving and Morris, each of whom is independent as such term is
defined under applicable NASDAQ rules. 
Further details concerning the duties of this committee, can be found in
Item 11 of this annual report.  Corporate
Governance and Nominating Committee.The Corporate
Governance and Nominating Committee is currently composed of two directors, Messrs. Irving
and Tarshis, each of whom are independent as such term is defined under
applicable NASDAQ rules. The primary function of this committee is to establish
Board membership criteria; assist the Board by identifying individuals
qualified to become Board members; recommend to the Board matters of corporate
governance; facilitate the annual review of the performance of the Board and
its committees; and periodically review CEO and management succession plans.
The committee also reviews and evaluates stockholder nominees for director. In
evaluating nominees for director the committee considers a number of qualities
and skills that it believes are necessary for directors to possess, including,
but not limited to, (i) roles and contributions valuable to the Company
and the general business community; (ii) personal qualities of leadership,
character, judgment, and whether the candidate possesses and maintains
throughout service on the Board a reputation in the community at large of
integrity, trust, respect, competence and adherence to the highest ethical
standards; (iii) relevant knowledge and diversity of background and
experience in such things as business, operations, technology, finance, and
accounting, sales, marketing, international business, government and the like;
and (iv) whether the candidate is free of conflicts and has the time
required for preparation, participation and attendance at meetings. A directors
qualifications in light of these criteria are considered at least each time the
director is re-nominated for Board membership.Stockholder recommendations should be submitted to the
Companys Corporate Secretary in writing no later than the date determined in
accordance with the deadlines by which a stockholder must give notice of a
matter that he or she wishes to bring before the Companys Annual Meeting of
Shareholders as described in the Stockholders Proposals for the 2007 Annual
Meeting section of the Companys 2007 Proxy Statement. Any recommendation must
include: (i) the name and address of the stockholder making the
recommendation; (ii) pertinent biographical information about the
recommended candidate; and (iii) a description of all arrangements or
understandings between the stockholder and the recommended candidate.
Recommendations that are received by the Secretary by the deadline will be
forwarded to the Chairman of the Governance and Nominating Committee for review
and consideration. No separate meetings
of this committee were held in 2007 independent of the general meetings for the
full board.  Section 16(a) Beneficial
Ownership Reporting Compliance.  Section 16(a) of
the Securities Exchange Act of 1934 requires our directors and executive
officers and persons who beneficially own more than 10% of our common stock
(collectively, the reporting persons) to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and to furnish
us with copies of these reports. Based solely on our review of those documents
received by us, and written representations, if any, received from reporting
persons with respect to the filing of reports on Forms 3, 4 and 5, the
Company believes that all filings required to be made by the reporting persons
for fiscal year 2007 were made on a timely basis.  Item 11. Executive Compensation.  Compensation
Discussion and Analysis  Compensation and Stock Option Committee Membership and
Organization  The Compensation and Stock Option Committee is
currently composed of two directors, Messrs. Irving and Morris, each of
whom is independent as such term is defined under applicable NASDAQ rules.
The Compensation and Stock Option Committee has general supervisory power over,
and the power to grant options under, the Companys 2003 Equity Incentive Plan.
In addition, the Compensation and Stock Option Committee recommends to the
Board the compensation of the Companys Chief Executive Officer, reviews and
takes action on the recommendations of the Chief Executive Officer as to the
compensation of the Companys other executive officers, approves the grants of any
bonuses to officers, and reviews the Companys compensation strategy for other
compensation matters generally. The Board has adopted a written charter for the
Compensation and Stock Option Committee that is available on the Companys web
site at http://www.wgate.com/about/board.html/. No separate meetings of this
committee were held in 2007 independent of the general meetings of the full
board.No member of the Committee is an officer or
employee of the Company.  Compensation Philosophy and Objectives.  The
Compensation and Stock Option Committees philosophy and objectives in setting
compensation policies is to align pay with performance, while at the same time
providing fair, reasonable and competitive compensation  28


that will allow us to
retain and attract superior executive talent. The Committee strongly believes
that executive compensation should align executives interests with those of
stockholders by rewarding achievement of specific annual, long-term, and
strategic goals by the Company, with the ultimate objective of improving
stockholder value. To that end, the Compensation and Stock Option Committee
believes executive compensation packages provided by the Company to its
executive officers should include a mix of both cash and equity-based
compensation that reward performance as measured against established goals.  Setting Executive Compensation.  Based
on the foregoing philosophy and objectives, the Committee has structured the
Companys annual and long-term incentive-based executive compensation to
motivate executives to achieve the business goals set by the Company and reward
the executives for achieving such goals. The base salaries, targeted bonus
amounts and equity incentive awards established for or granted to the Companys
executive officers are based, in part, on the Committees understanding of the
Companys current financial position, compensation amounts and forms paid to
persons in comparable roles performing at comparable levels at other companies
in the same or related industries, the Companys need to attract and retain key
personnel for whom the Company must compete against larger, more established
companies, and other market factors. Such amounts reflect the subjective
discretion of the members of the Committee based on these factors as well as
the Committees evaluation of the Companys current and anticipated future
performance, the experience of each executive officer and the contribution of
the officer to such performance, and the contribution of the individual
executive officers to the Company in areas not necessarily reflected by the
Companys performance.  Components of Executive Compensation for Fiscal Year
2007.  For
the fiscal year ended December 31, 2007, the principal components of
compensation for our executive officers were;  Base Salaries.Salary levels are typically reviewed annually
as part of our performance review process as well as upon a promotion or other
change in job responsibility. During 2007 none of the senior officers received
any base salary increase and further elected to waive and/or take reduced
salary for a portion of the fiscal year in light of the Companys financial
condition.  Annual Bonuses.Annual bonuses
are normally intended to provide an incentive for improved performance in the
short term. Typically the Committee establishes target bonus levels at the
beginning of each year based on the factors noted above, and awards a
percentage of such target levels based on individual, department and Company
performance. No bonuses were paid during 2007.  Long-Term Incentive Compensation.The Companys long-term incentive compensation plan,
administered through the Companys equity incentive plan, promotes ownership of
the Companys Common Stock, which, in turn, provides a common interest between
the stockholders of the Company and the executive officers of the Company. The
Committee has the authority to administer the long term incentive plans and to
exercise all the powers and authorities either specifically granted to it, or
necessary or advisable in the administration of the plans, including, without
limitation, the authority to grant awards; to determine the persons to whom and
the time or times at which awards shall be granted; to determine the type and
number of awards to be granted, the number of shares of common stock to which
an award may relate and the terms, conditions, restrictions and performance
goals relating to any award; to determine whether, to what extent, and under
what circumstances an award may be settled, canceled, forfeited, exchanged, or
surrendered; to make adjustments in the performance goals in recognition of
unusual or non-recurring events affecting us or our financial statements of
WorldGate (to the extent not inconsistent with Section 162(m) of the
Code, if applicable), or in response to changes in applicable laws,
regulations, or accounting principles; to construe and interpret the plans and
any award; to prescribe, amend and rescind rules and regulations relating
to the plans; to determine the terms and provisions of agreements evidencing
awards; and to make all other determinations deemed necessary or advisable for
the administration of the plans.  Typically
awards granted under the plan have an exercise price equal to the fair market
value of the shares on the date of grant, an exercise period of ten years and
generally vest over four years, subject to acceleration in the event of some
changes of control of WorldGate. In keeping with a philosophy of providing a
total compensation package that favors at-risk components of pay, long-term
incentives comprise a significant component of an executive officers total
compensation package. These incentives are designed to motivate and reward
executive officers for maximizing stockholder value and encourage the long-term
employment of key employees. The size of grants is based primarily on the
responsibilities of the applicable employee in addition to the factors
discussed above. Only the Committee may approve grants to our executive officers.
However, the Committee has delegated to a committee of executive officers the
authority to grant stock options to employees below the level of executive
officer in an amount not to exceed 5,000 shares to any one individual in any
twelve month period.  29


Timing of Grants. Stock options are generally granted by the
Committee at their regularly scheduled, predetermined meetings. On limited
occasion, grants may occur during an interim meeting of the Committee or upon
unanimous written consent of the Committee or pursuant to the delegated
authority granted to the committee of executive officers, which occurs
primarily for the purpose of approving a compensation package for newly hired
or promoted executives. Information with respect to the long term incentive
compensation is set forth below in the table titled Grants of Plan-Based
Awards.  Compensation of the Chief Executive Officer.During fiscal year 2007, Mr. Krisberghs base salary was not
increased.  In addition Mr. Krisbergh
elected to waive and/or take reduced salary for a portion of the 2007 fiscal
year in light of the Companys financial condition.  Limitations on Deductibility of Compensation.Under the 1993 Omnibus Budget Reconciliation Act, a portion of annual
compensation payable after 1993 to any of the Companys five highest paid
executive officers would not be deductible by the Company for federal income
tax purposes to the extent such officers overall compensation exceeds
$1,000,000. Qualifying performance-based incentive compensation, however, would
be both deductible and excluded for purposes of calculating the $1,000,000
base. Although the Committee does not presently intend to award compensation in
excess of the $1,000,000 cap, it will continue to address this issue when
formulating compensation arrangements for the Companys executive officers.  Accounting for Stock-Based Compensation.Beginning on January 1, 2006, the Company began
accounting for stock-based payments including its stock options and RSAs in
accordance with the requirements of FASB Statement 123(R).  Summary
Compensation Table  The
following table sets forth information concerning compensation paid with
respect to our chief executive officer and three of the other most highly
compensated officers who were serving as such as of December 31, 2007,
each of whose aggregate compensation for fiscal 2007 exceeded $100,000, for
services rendered in all capacities for us and our subsidiaries.  2007
SUMMARY COMPENSATION TABLE  Name and Principal
  Position
  
  Fiscal
  Year
  
  Salary ($)
  
  Bonus ($)
  
  Share
  Awards
  ($)
  
  Option 
  Awards ($)
  
  All Other
  Compensation 
  ($)
  
  Total ($)Hal M. Krisbergh
  Chairman and Chief
  Executive Officer
  
  2007
  2006
  
  304,391
  387,246
  
   
  
  
   
  
  
   
  1,485
  
  
  
  
  304,391
  388,731Richard Westerfer
  Vice President, Chief
  Operations Officer (1)
  
  2007
  2006
  
  188,480
  244,213
  
   
  
  
  812 
  
  
  917 
  825
  
  
  
  
  190,209
  245,038Randall J. Gort
  Vice President, Chief
  Legal Officer
  
  2007
  2006
  
  180,510
  227,298
  
   
  
  
  2,062 
  
  
  917 
  743
  
  
  
  
  183,489
  228,041Joel Boyarski
  Vice President, Chief
  Financial Officer
  
  2007
  2006
  
  176,550
  222,263
  
   
  
  
  1,875 
  
  
  804 
  660
  
  
  
  
  179,229
  222,923  
 (1) Mr. Westerfers
employment terminated December 2007 and all of his stock awards and option
awards for 2007 were terminated  30


The
following table summarizes the grants of plan based awards given to the named
executives for fiscal year 2007:  GRANTS OF
PLAN-BASED AWARDS FISCAL
YEAR 2007  Name
  
  Grant Date
  
  All Other Stock Awards:
  Number of Shares of Stock or
  Units (#)
  
  Exercise or Base Price
  of Option Awards
  ($/Sh)
  
  Grant Date Fair Value
  of Stock Options
  ($)Hal M. Krisbergh
  
  
  
  0
  
  0
  
  0Richard Westerfer
  
  10/3/07
  
  163,000
  (1)
  0.30
  
  36,60510/3/07
  
  250,000
  (2)
  0.30
  
  32,500Randall J. Gort
  
  10/3/07
  
  163,000
  (1)
  0.30
  
  36,60510/3/07
  
  275,000
  (2)
  0.30
  
  35,750Joel Boyarski
  
  10/3/07
  
  143,000
  (1)
  0.30
  
  32,17510/3/07
  
  250,000
  (2)
  0.30
  
  32,500  
 (1) These
  options vest in four equal annual installments beginning on the first
  anniversary of the date of grant.
  (2) Performance
  based shares vest as follows: 10% of the shares vest upon achieving each of a
  10%, 20%, 30% 40% and 50% increase in Company total gross revenue in a
  quarter over its third quarter 2007 total gross revenue shown on its
  statement of operations as reported in its SEC filings and 25% of the shares
  vest upon the Company achieving each of (1) a quarterly operating cash
  break even (defined as zero or positive net cash provided by operations
  consistent with or as reported on the Consolidated Statement of Cash Flows
  in the financial statements filed with SEC) and (2) a 10% net income as
  a percent of revenue.  The following table
summarizes all outstanding equity awards for the named executives at December 31,
2007:  OUTSTANDING
EQUITY AWARDS AT 2007 FISCAL YEAR-END  Name
  
  Number of
  Securities
  Underlying
  Unexercised
  Options/Shrs
  (#)
  Exercisable
  
  Number of
  Securities
  Underlying
  Unexercised
  Options/Shrs(#)
  Unexercisable
  
  Option
  Exercise
  Price ($)
  
  Option
  Expiration
  DateHal M. Krisbergh
  
  20,000
  
  
  
  21.57
  
  5/5/2010160,000
  
  
  
  2.50
  
  5/19/201180,000
  
  
  
  1.59
  
  5/21/201225,000
  
  25,000(1)
  
  3.95
  
  3/9/201522,500
  
  22,500(2)
  
  2.20
  
  4/25/2016Richard Westerfer (3)
  
  145,000
  
  
  
  2.78
  
  4/26/20114,000
  
  
  
  2.60
  
  5/24/20111,600
  
  
  
  2.61
  
  5/24/20112,400
  
  
  
  2.65
  
  5/24/20118,000
  
  
  
  2.80
  
  5/31/201149,000
  
  
  
  2.40
  
  5/1/201237,000
  
  
  
  0.38
  
  2/28/2013163,000
  
  
  
  0.52
  
  10/1/2013150,000
  
  
  
  1.06
  
  1/3/201412,500
  
  
  
  4.43
  
  12/24/201412,500
  
  
  
  2.63
  
  11/10/20156,250
  
  
  
  1.40
  
  10/14/2016  31


Randall J. Gort
  
  127,333
  
  
  
  2.78
  
  4/26/201124,000
  
  
  
  2.40
  
  5/1/201237,000
  
  
  
  0.38
  
  2/28/2013163,000
  
  
  
  0.52
  
  10/1/2013150,000
  
  50,000(4)
  
  1.06
  
  1/3/201416,875
  
  5,625(5)
  
  4.43
  
  12/24/201411,250
  
  11,250(6)
  
  2.63
  
  11/10/20155,625
  
  16,875(7)
  
  1.40
  
  11/14/2016
  
  163,000(8)
  
  0.30
  
  10/4/2017
  
  275,000(9)
  
  0.30
  
  10/4/2017Joel Boyarski
  
  5,738
  
  
  
  6.34
  
  12/9/201045,000
  
  
  
  1.93
  
  2/1/201220,000
  
  
  
  1.55
  
  2/28/201210,000
  
  
  
  2.45
  
  4/26/201257,000
  
  
  
  0.38
  
  2/28/2013143,000
  
  
  
  0.52
  
  10/1/2013131,250
  
  4,3750(4)
  
  1.06
  
  1/3/201415,000
  
  5,000(5)
  
  4.43
  
  12/24/201410,000
  
  10,000(6)
  
  2.63
  
  11/10/20155,000
  
  1,5000(7)
  
  1.40
  
  11/14/2016
  
  143,000(8)
  
  0.30
  
  10/4/2017
  
  250,000(9)
  
  0.30
  
  10/4/2017  
 (1)These options vest in three annual installments
beginning on March 8, 2007. (2)These options vest in three annual installments
beginning on November 30, 2007. (3)Mr. Westerfers employment terminated in December 2007
and all of his non-vested options were forfeited. (4)These options vest on January 2, 2008. (5)These options vest on December 23, 2008. (6)These options vest in two annual installments
beginning on November 9, 2008. (7)These options vest in three annual installments
beginning on November 13, 2008. (8)These options vest in four annual installments
beginning on October 3, 2008 (9)These restricted shares vest upon the Company
achieving certain identified financial targets  During 2007 no
options were exercised by the named executive officers.  The Company has no information
to provide with respect to Pension Benefits (Reg. S-K 402(g)(1)), Nonqualified
Deferred Compensation (Reg. S-K 402(n)(2)), and potential payments upon
termination or change-in-control (Reg. S-K 402(g)(2)).  COMPENSATION OF DIRECTORS FISCAL YEAR 2007  Name
  
  Fees Earned or
  Paid in Cash
  
  Option
  Awards
  
  All Other
  Compensation
  
  Total($)
  
  ($)
  
  ($)
  
  ($)Steven C.
  Davidson
  
  13,250
  
  186
  
  
  
  13,436Clarence L.
  Irving, Jr.
  
  13,250
  
  186
  
  
  
  13,436Martin Jaffe
  
  14,000
  
  186
  
  
  
  14,186Jeff Morris
  
  11,750
  
  186
  
  
  
  11,936Lemuel
  Tarshis
  
  14,500
  
  186
  
  
  
  14,686David
  Tomasello
  
  1,750
  
  625
  
  
  
  2,375  Pursuant to our
2003 Equity Incentive Plan, non-employee directors, currently Messrs. Davidson,
Jaffe, Irving, Morris, Tarshis and Tomasello, will receive an annual stock
grant of 10,000 shares, vesting in equal amounts over four years, issued at the
fair market value on the date of grant, a stipend of $1,000 for each board or
committee meeting the director attends in person, and $250 for each meeting attended
telephonically. Furthermore, the Company paid an annual stipend of $5,000 for
2005 and will pay $10,000 for each year thereafter, as well as an  32


initial stock grant of
30,000 shares upon becoming a non-employee director.  The Company will
continue to reimburse non-employee directors for reasonable travel expenses for
attending board or committee meetings.  On October 5, 2001,
our shareholders approved the WorldGate 2001 Employee Stock Purchase Plan (the Stock
Purchase Plan). The Stock Purchase Plan provides our eligible employees with
the opportunity to periodically acquire shares of our common stock through
payroll deductions. In general, the Stock Purchase Plan provides that:  ·
  
  each employee who has
  completed six months of continuous employment with us is eligible to
  participate in the Stock Purchase Plan so long as the employee customarily
  works at least 20 hours per week and 5 months per year;·
  
  participants in the
  Stock Purchase Plan are permitted to contribute up to fifteen percent of
  their compensation towards the purchase of our common stock;·
  
  at the end of each
  calendar quarter, the contributions of the participants are used to purchase
  shares of our common stock at the lower of eighty-five percent of the market
  price of our common stock: (i) at the beginning of each calendar quarter
  or (ii) at the end of each calendar quarter;·
  
  shares of our common
  stock that are purchased under the Stock Purchase Plan are not transferable
  by the participant until at least nine months has elapsed from the
  acquisition of the shares;·
  
  a maximum of 750,000
  shares of our common stock (plus an annual increase of 375,000 shares) may be
  purchased in the aggregate by participants in the Stock Purchase Plan; and·
  
  our Board of Directors
  has the power and authority to administer the Stock Purchase Plan and may,
  subject to certain limitations suspend, revise, terminate or amend the Stock
  Purchase Plan.  Item 12.  Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters  The following table sets
forth information as of December 31, 2007 regarding securities authorized
for issuance under the Companys equity compensation plans:  Equity Compensation Plan Information  Plan Category
  
  Number of securities to
  be issued upon exercise
  of outstanding options,
  warrants and rights
  (a)
  
  Weighted-average
  exercise price of
  outstanding
  options, warrants
  and rights
  (b)
  
  Number of securities
  remaining available
  for future issuance
  under equity
  compensation plans
  (excluding securities
  reflected in column (a)
  (c)Equity compensation plans approved by
  security holders (1)
  
  6,808,342
  
  $
  1.37
  
  1,197,029
  (1)Equity compensation plans not approved by
  security holders (2)
  
  
  
  
  
  Total
  
  6,808,342
  
  1.37
  
  1,197,029
  (1)  
 (1) 2003
Equity Incentive Plan. (2) The
Company does not maintain any equity compensation plans that have not been
approved by its stockholders.  The
Equity Plan has an automatic annual increase in the number of shares reserved
for issuance in an amount equal to the lesser of 4% of the then outstanding
shares of our Common Stock or 1,000,000 shares.  In
2003 the Company adopted an equity incentive plan (the Equity Plan) which was
approved by stockholders in November, 2004. 
The principal features of our Equity Plan are summarized below, but the
summary is qualified in its entirety by reference to our Equity Plan, which was
filed as exhibit 10.6 to the Companys Proxy Statement to shareholders filed September 3,
2004  33


This plan provides for
the grant of equity awards to such officers, other employees, consultants and
directors of WorldGate and our affiliates as the Compensation and Stock Option
Committee may determine from time to time. Although various types of awards are
available under the Equity Plan, including non-qualified and incentive stock
options, restricted stock and performance based awards, currently only stock
options and performance based restricted stock have been granted.  Such options vest in equal installments over
a four-year period, and expire ten years following the date of its grant,
subject to acceleration in the event of some changes of control of WorldGate,
and earlier termination upon cessation of employment. Performance based
restricted stock vests upon certain defined criteria as determined by the
Companys Board of Directors.  To administer our Equity
Plan, the Compensation and Stock Option Committee must consist of at least two
members of our board of directors, each of whom is a non-employee director
for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, or
the Exchange Act and, with respect to awards that are intended to constitute
performance-based compensation under Section 162(m) of the Internal
Revenue Code of 1986, an outside director for the purposes of Section 162(m).
The Compensation and Stock Committee, among other things, interprets our Equity
Plan, selects award recipients, determines the type of awards to be granted to
such recipients and determines the number of shares subject to each award and
the terms and conditions thereof. The Compensation Committee may also determine
if or when the exercise price of an option may be paid in the form of shares of
our common stock and the extent to which shares or other amounts payable with
respect to an award can be deferred by the participant. Our board of directors
may amend or modify our Equity Plan at any time. In addition, our board of
directors is also authorized to adopt, alter and repeal any rules relating
to the administration of our Equity Plan and to rescind the authority of the
Compensation Committee and thereafter directly administer our Equity Plan.
However, subject to certain exceptions, no amendment or modification will
impair the rights and obligations of a participant with respect to an award
unless the participant consents to that amendment or modification.  Our Equity Plan will continue in effect until
terminated by us in accordance with its terms, although incentive stock options
may not be granted more than 10 years after the adoption of our Equity Plan.  The following
table sets forth information as of April 1, 2008 regarding beneficial
ownership of our common stock by the following persons:  ·each person who is
known to us to own beneficially more than 5% of the outstanding shares of
common stock, ·each director, ·each executive
officer named in the executive compensation table above, and ·all directors and
executive officers as a group.  Unless otherwise
indicated below, to our knowledge, all persons listed below have sole voting
and investment power with respect to their shares of common stock, except to
the extent authority is shared by spouses under applicable law. Beneficial
ownership is determined in accordance with the rules of the SEC, based on
factors including voting and investment power with respect to shares, subject
to applicable community property laws. Shares of common stock subject to
options or warrants exercisable within 60 days of April 1, 2008 are
deemed outstanding for the purpose of computing the percentage ownership of the
person holding such options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other person. Unless otherwise
indicated, the mailing address of the beneficial owners is 3190 Tremont Avenue,
Suite 100, Trevose, Pennsylvania 19053.  Name of Beneficial Owner
  
  Number of Shares of
  Common Stock
  Beneficially Owned
  
  Percent of
  OwnershipHal M. Krisbergh(1)
  
  5,937,556
  
  10.43
  %Randall J. Gort(2)
  
  1,035,025
  
  1.82
  %Richard Westerfer (3)
  
  241
  
  *Joel Boyarski(4)
  
  745,109
  
  1.31
  %James McLoughlin(5)
  
  674,900
  
  1.19
  %Steven C. Davidson(6)
  
  59,000
  
  *Martin Jaffe(7)
  
  109,000
  
  *Clarence L. Irving, Jr.(8)
  
  67,000
  
  *Jeff Morris(9)
  
  59,500
  
  *Lemuel Tarshis(10)
  
  72,700
  
  *David Tomasello (11)
  
  9,057,501
  
  15.91
  %Antonio Tomasello (12)
  
  8,689,587
  
  15.26
  %All current directors and executive officers as a group (10 persons)
  
  17,817,532
  
  29.83
  %  34


*
  Less than 1% of the
  outstanding Common Stock.   (1)
  
  Includes options to
  purchase 320,000 shares of common stock. Also includes 3,654,246 shares of
  common stock held directly, 1,434,429 shares of common stock held within
  grantor retained trusts in which either Mr. Krisbergh or his spouse are
  trustees, 299,938 shares of common stock held by Mr. Krisberghs spouse
  and 300,000 shares of common stock held by the Krisbergh Family Foundation,
  with Mr. Krisbergh acting as the custodian for these shares.(2)
  
  Includes options to
  purchase 585,083 shares of common stock.  Also includes 106,063 shares
  of common stock held directly and 68,879 shares of common stock held by
  Mr. Gort as custodian for his minor children.(3)
  
  Includes 241 shares of
  common stock held by Mr. Westerfers minor son.(4)
  
  Includes options to
  purchase 485,739 shares of common stock. Also includes 9,371 shares of common
  stock held directly.(5)
  
  Includes options to
  purchase 429,900 shares of common stock.(6)
  
  Includes options to
  purchase 49,000 shares of common stock. Also includes 10,000 shares of common
  stock held directly.(7)
  
  Includes options to
  purchase 49,000 shares of common stock. Also includes 15,000 shares of common
  stock held directly.(8)
  
  Includes options to
  purchase 67,000 shares of common stock.(9)
  
  Includes options to
  purchase 59,500 shares of common stock.(10)
  
  Includes options to
  purchase 55,500 shares of common stock.  Also includes 5,200 shares of
  common stock held directly and 12,000 shares of common stock held by
  Mr. Tarshis spouse.(11)
  
  Includes options to
  purchase 7,500 shares, 235,914 of common stock held directly, 124,500 shares
  of common stock held beneficially as a result of Mr. Tomasellos
  position with Cometasa, and 8,689,587 shares of common stock held
  beneficially as a result of a power of attorney over accounts of his father
  Antonio Tomasello (which shares are also reported in this table as being
  directly owned by David Tomasello).(12)
  
  Includes 6,125,485
  shares and 2,564,102 warrants to buy shares, each of which is held directly.  Item 13.
Certain Relationships and Related Transactions, and Director Independence  Certain
Relationships and Related Transactions  None.  Director Independence  In accordance with our Bylaws,
our Board of Directors has specified that, as of the date of our 2006 Annual
Meeting, the number of Directors will be set at seven.  Six of our seven Directors are non-employee
Directors, and the Board of Directors has determined that each of these six
Directors has no relationship which, in the opinion of the Board of Directors,
would interfere with the exercise of independent judgment in carrying out the
responsibilities of a Director, and that each meets the objective requirements
for independence under the NASDAQ Marketplace Rules.  Therefore, the Board of Directors has
determined that each of these six Directors is an independent Director under
the standards currently set forth in the NASDAQ Marketplace Rules.  The Director who is not independent is Mr. Krisbergh,
the Companys chairman and president.  As of December 31,
2007our directors are as follows:  Name
  
  Age
  
  PositionHal M. Krisbergh
  
  59
  
  Chairman of the Board of Directors and Chief Executive
  OfficerSteven C. Davidson(2)
  
  58
  
  DirectorClarence L. Irving, Jr.(1)(3)
  
  51
  
  DirectorMartin Jaffe(2)
  
  60
  
  DirectorJeff Morris(1)
  
  54
  
  DirectorLemuel Tarshis(2)(3)
  
  66
  
  DirectorDavid Tomasello
  
  35
  
  Director  35


(1)
  
  Member of Compensation Committee(2)
  
  Member of Audit Committee(3)
  
  Member of the Corporate
  Governance and Nominating Committee  Item 14. Principal Accountant Fees and Services  The aggregate fees
for professional services rendered to us by Marcum & Kliegman LLP, our
independent registered public accounting firm for the fiscal years ended December 31,
2006 and 2007, are as follows (in whole dollars):  Fiscal Years Ended
  December 312006
  
  2007Audit fees
  
  $
  202,600
  
  $
  243,000Audit related fees
  
  33,000
  
  32,000Tax fees
  
  25,000
  
  24,000All other fees
  
  0
  
  0Total
  
  $
  260,600
  
  $
  299,000  Audit Fees  The audit fees reported above were billed to us by
Marcum & Kliegman LLP for professional services rendered in connection
with their audit of our consolidated financial statements and their limited
reviews of our unaudited condensed consolidated financial statement information
and our unaudited condensed consolidated interim financial statements included
in our quarterly reports, and for services normally provided by  Marcum & Kliegman  LLP in connection with other statutory and
regulatory filings or engagements, including audit consultations, issuance of
consents for registration statements and SEC comment letters.  Audit Related Fees  The audit related
fees reported above were billed to us by Marcum & Kliegman LLP   for assurance and related services that were
reasonably related to the performance of their audit or review of our financial
statements, but which are not reported as Audit Fees. These services include
accounting consultations in connection with the impact of prospective
accounting pronouncements and stock based compensation matters.  Tax Fees  During the fiscal
years reported above, Marcum & Kliegman LLP rendered professional
services to us relating to tax compliance, tax advice, or tax planning.  All Other Fees  During the fiscal
years reported above, Marcum & Kliegman LLP rendered no professional
services to us other than for those relating to audit, audit related and tax
matters.  36


Audit
Committee Pre-approval Policies and Procedures  Our audit
committee has adopted a policy requiring the pre-approval of all audit and
permissible non-audit services provided by our independent public auditors.
Under the policy, the audit committee is to specifically pre-approve before the
end of each fiscal year any recurring audit and audit related services to be
provided during the following fiscal year. The audit committee also may
generally pre-approve, up to a specified maximum amount, any nonrecurring audit
and audit related services for the following fiscal year. All pre-approved
matters must be detailed as to the particular service or category of services
to be provided, whether recurring or non-recurring, and reported to the audit
committee at its next scheduled meeting. Permissible non-audit services are to
be pre-approved on a case-by-case basis. The audit committee may delegate its
pre-approval authority to any of its members, provided that such member reports
all pre-approval decisions to the audit committee at its next scheduled
meeting. Our independent public auditors and members of management are required
to report periodically to the audit committee the extent of all services
provided in accordance with the pre-approval policy, including the amount of
fees attributable to such services.  In accordance with
Section 10A(i)(2) of the Securities Exchange Act of 1934, as amended
by Section 202 of the Sarbanes-Oxley Act of 2002, the Company is required
to disclose the approval by the audit committee of the Board of Directors of
non-audit services to be performed by 
Marcum and Kliegman LLP, the Companys independent auditors. Non-audit
services are services other than those provided in connection with an audit or
review of the financial statements. During the period covered by this filing,
the audit committee approved all audit related fees, tax fees and all other
fees.  PART IV  Item 15. Exhibits and Financial Statement Schedules.  (a)Documents filed as part of this report.  1.Financial Statements  The following
financial statements have been included as part of this report:  Report of
  Marcum & Kliegman LLP, Independent Registered Public Accounting FirmConsolidated Balance
  SheetsConsolidated
  Statements of OperationsConsolidated
  Statements of Stockholders Equity (Deficiency)Consolidated
  Statements of Cash FlowsNotes to
  Consolidated Financial Statements  3. 
Exhibits  Exhibit
  
  Description3.1
  
  Amended and Restated Certificate of Incorporation (11)3.2
  
  Amended and Restated Bylaws (2)3.3
  
  Certificate of Amendment to Certificate of Incorporation,
  dated October 18, 2004 (11)3.4
  
  Certificate of Designations, Preferences and Rights of
  the Series A Convertible Preferred Stock of the Company dated
  June 24, 2004 (11)4.1
  
  Form of Warrant issued by the Company to the
  Purchasers (as defined in the Amended and Restated Securities Agreement dated
  as of December 4, 2003) (4)4.2
  
  Form of Additional Investment Right issued by the Company
  to the Purchasers (as defined in the Amended and Restated Securities
  Agreement dated as of December 4, 2003) (4)4.3
  
  Form of Warrant issued by the Company to the
  Purchasers (as defined in the Securities Purchase Agreement dated as of
  January 20, 2004) (7)4.4
  
  Form of Additional Investment Right dated issued by
  the Company to the Purchasers (as defined in the Securities Purchase
  Agreement dated as of January 20, 2004) (7)4.5
  
  Form of Series A Warrant issued by the Company
  to the Investors (as defined in the Securities Purchase Agreement dated as of
  June 24, 2004) (8)4.6
  
  Form of Series B Warrant issued by the Company
  to the Investors (as defined in the Securities Purchase Agreement dated as of
  June 24, 2004 between the Company and the Investors) (8)4.7
  
  Form of Series C Warrant issued by the Company
  to the Investors (as defined in the Securities Purchase Agreement dated as of
  June 24, 2004 between the Company and the Investors) (8)  37


4.8
  
  Form of Warrant issued by the Company to Mr. K.
  Y. Chou (13)4.9
  
  Form of Warrant dated August 3, 2005 issued by
  the Company to the Investors (as defined in the Securities Purchase Agreement
  dated August 3, 2005 among the Company and the Investors) (14)4.10
  
  Form of Warrant dated August 3, 2005 issued by
  the Company to the Investors (as defined in the Securities Purchase Agreement
  dated August 3, 2005 among the Company and the Investors) (14)4.11
  
  Investor Registration Rights Agreement, dated
  August 11, 2006, by and among the Company and Cornell Capital Partners,
  LP (16)4.12
  
  Form of Amended and Restated Secured Convertible
  Debenture issued by the Company to Cornell Capital Partners, LP, dated as of
  May 18, 2007 (17)10.1
  
  Lease Agreement dated October 7, 1998 between
  WorldGate and Balanced Capital LLC, as amended by First Amendment to Lease
  Agreement dated December 7, 1998 between WorldGate and Balanced Capital
  LLC, as further amended by Second Amendment to Lease Agreement dated December 17,
  1998 between WorldGate and Balanced Capital LLC (1)10.2
  
  Amendment dated November 18, 2004 to Lease Agreement
  dated October 7, 1998 between WorldGate and Balanced Capital LLC (12)10.3
  
  Manufacturing Agreement between WorldGate and Mototech
  Inc. dated September 9, 2003 (6)10.4
  
  Development and
  Distribution Agreement dated as of April 28, 2004 between the Company,
  WorldGate Services, Inc. and General Instrument Corporation d/b/a the
  Broadband Communication Sector of Motorola, Inc. (9) (Portions of
  this agreement are subject to a confidential treatment request.)10.5
  
  1996 Stock Option Plan
  (3)10.6
  
  2003 Equity Incentive
  Plan(10)10.7
  
  Amended and Restated
  Securities Purchase Agreement dated as of December 4, 2003, by and
  between the Company and the Purchasers (as defined therein) (5)10.8
  
  Securities Purchase
  Agreement dated as of January 20, 2004 by and between the Company and
  the Purchasers (as defined therein) (7)10.9
  
  Securities Purchase
  Agreement dated as of June 24, 2004 by and between the Company and the
  Investors (as defined therein) (8)10.10
  
  Securities Purchase
  Agreement, dated as of August 11, 2006, by and among the Company and
  Cornell
  Capital Partners, LP
  (16)10.11
  
  Securities Purchase
  Agreement dated August 3, 2005 among the Company and the Investors (as
  defined therein) (14)10.12
  
  Securities Purchase
  Agreement dated August 3, 2005 among the Company and the Investors (as
  defined therein) (14)10.13
  
  License, Maintenance
  and Update Service Agreement between WorldGate and Aequus dated March 31,
  2008 *10.14
  
  Revised and Restated
  Amendment and Master Contract between WorldGate and Aequus dated March 31,
  2008 *10.15
  
  Master Agreement
  between WorldGate and Aequus dated March 31, 2008 *10.16
  
  Subscription Agreement
  dated September 24, 2007 between the Company and Antonio Tomasello *10.17
  
  Voting Agreement
  among  the Company, Antonio Tomasello
  and David Tomasello (17)21
  
  Subsidiaries*23.1
  
  Consent of Marcum &
  Kliegman  LLP*24
  
  Power of Attorney
  (included in signature page)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*  
  *
  
  Filed herewith(1)
  
  Incorporated by
  reference to the exhibits to our Registration Statement on Form S-1/A as
  filed on April 7, 1999 (Registration No. 333-71997).(2)
  
  Incorporated by
  reference to the exhibits to our Form 10-Q Report for the quarter ended
  March 31, 1999.(3)
  
  Incorporated by
  reference to the exhibits to our Form 10-K/A Report for the fiscal year
  ended December 31, 2000, as filed on August 17, 2001.(4)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  December 2, 2003.(5)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  December 4, 2003.(6)
  
  Incorporated by
  reference to the exhibits to our Registration Statement on Form SB-2 as
  filed on December 24, 2003 (Registration No. 333-111571).  38


(7)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  January 21, 2004.(8)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  June 25, 2004.(9)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  July 13, 2004.(10)
  
  Incorporated by
  reference to the exhibits to the Companys Proxy Statement to shareholders
  filed September 3, 2004.(11)
  
  Incorporated by
  reference to the exhibits to our Form 10-Q Report for the quarter ended
  September 30, 2004, as filed on November 17, 2004.(12)
  
  Incorporated by
  reference to the exhibits to our Form 10-K Report for the fiscal year
  ended December 31, 2004, as filed on March 31, 2005.(13)
  
  Incorporated by
  reference to the exhibits to our Registration Statement on Form SB-2 as
  filed on May 24, 2005.(14)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  August 8, 2005.(15)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  November 23, 2005.(16)
  
  Incorporated by
  reference to the exhibits to our Form 10-Q Report for the quarter ended
  June 30, 2006, as filed on August 14, 2006.(17)
  
  Incorporated by reference to the
  exhibits to our Current Report on Form 8-K filed May 24, 2007.  39


SIGNATURES  Pursuant to the
requirements of Section 13 or 15(d) 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.Date: April 16,
  2008
  By:
  /s/ HAL M. KRISBERGHHal M. KrisberghChief Executive Officer  Power of
Attorney  Each
person whose signature appears below hereby constitutes and appoints Hal M.
Krisbergh and Randall J. Gort the true and lawful attorneys-in-fact and agents
of the undersigned, with full power of substitution and resubstitution, for and
in the name, place and stead of the undersigned, in any and all capacities, to sign
any and all amendments to this report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, and hereby grants to such attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.  Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.  Name
  
  Capacity
  
  Date/s/ HAL M. KRISBERGH
  
  Chairman of the Board
  and Chief Executive OfficerHal M. Krisbergh
  
  (Principal Executive
  Officer)
  
  April 16, 2008/s/ JOEL BOYARSKIJoel Boyarski
  
  Senior Vice President
  and Chief Financial Officer(Principal Financial
  and Accounting Officer)
  
  April 16, 2008/s/ STEVEN C. DAVIDSONSteven C. Davidson
  
  Director
  
  April 16, 2008/s/ MARTIN JAFFEMartin Jaffe
  
  Director
  
  April 16, 2008/s/ CLARENCE L. IRVING, JR.Clarence L. Irving, Jr.
  
  Director
  
  April 16, 2008/s/ JEFF MORRISJeff Morris
  
  Director
  
  April 16, 2008/s/ LEMUEL TARSHISLemuel Tarshis
  
  Director
  
  April 16, 2008/s/ DAVID TOMASSELO
  
  DirectorDavid Tomasselo
  
  
  
  April 16, 2008  40


Exhibit Index  Exhibit
  
  Description3.1
  
  Amended and Restated Certificate
  of Incorporation (11)3.2
  
  Amended and Restated Bylaws (2)3.3
  
  Certificate of Amendment to
  Certificate of Incorporation, dated October 18, 2004 (11)3.4
  
  Certificate of Designations,
  Preferences and Rights of the Series A Convertible Preferred Stock of
  the Company dated June 24, 2004 (11)4.1
  
  Form of Warrant issued by
  the Company to the Purchasers (as defined in the Amended and Restated
  Securities Agreement dated as of December 4, 2003) (4)4.2
  
  Form of Additional
  Investment Right issued by the Company to the Purchasers (as defined in the
  Amended and Restated Securities Agreement dated as of December 4, 2003)
  (4)4.3
  
  Form of Warrant issued by
  the Company to the Purchasers (as defined in the Securities Purchase
  Agreement dated as of January 20, 2004) (7)4.4
  
  Form of Additional
  Investment Right dated issued by the Company to the Purchasers (as defined in
  the Securities Purchase Agreement dated as of January 20, 2004) (7)4.5
  
  Form of Series A
  Warrant issued by the Company to the Investors (as defined in the Securities
  Purchase Agreement dated as of June 24, 2004) (8)4.6
  
  Form of Series B
  Warrant issued by the Company to the Investors (as defined in the Securities
  Purchase Agreement dated as of June 24, 2004 between the Company and the
  Investors) (8)4.7
  
  Form of Series C
  Warrant issued by the Company to the Investors (as defined in the Securities
  Purchase Agreement dated as of June 24, 2004 between the Company and the
  Investors) (8)4.8
  
  Form of Warrant issued by
  the Company to Mr. K. Y. Chou (13)4.9
  
  Form of Warrant dated
  August 3, 2005 issued by the Company to the Investors (as defined in the
  Securities Purchase Agreement dated August 3, 2005 among the Company and
  the Investors) (14)4.10
  
  Form of Warrant dated
  August 3, 2005 issued by the Company to the Investors (as defined in the
  Securities Purchase Agreement dated August 3, 2005 among the Company and
  the Investors) (14)4.11
  
  Investor Registration Rights
  Agreement, dated August 11, 2006, by and among the Company and Cornell
  Capital Partners, LP (16)4.12
  
  Form of Amended and Restated
  Secured Convertible Debenture issued by the Company to Cornell Capital
  Partners, LP, dated as of May 18, 2007 (17)10.1
  
  Lease Agreement dated
  October 7, 1998 between WorldGate and Balanced Capital LLC, as amended
  by First Amendment to Lease Agreement dated December 7, 1998 between
  WorldGate and Balanced Capital LLC, as further amended by Second Amendment to
  Lease Agreement dated December 17, 1998 between WorldGate and Balanced
  Capital LLC (1)10.2
  
  Amendment dated November 18,
  2004 to Lease Agreement dated October 7, 1998 between WorldGate and
  Balanced Capital LLC (12)10.3
  
  Manufacturing Agreement between
  WorldGate and Mototech Inc. dated September 9, 2003 (6)10.4
  
  Development and
  Distribution Agreement dated as of April 28, 2004 between the Company,
  WorldGate Services, Inc. and General Instrument Corporation d/b/a the
  Broadband Communication Sector of Motorola, Inc. (9) (Portions of
  this agreement are subject to a confidential treatment request.)10.5
  
  1996 Stock Option Plan
  (3)10.6
  
  2003 Equity Incentive
  Plan(10)10.7
  
  Amended and Restated
  Securities Purchase Agreement dated as of December 4, 2003, by and
  between the Company and the Purchasers (as defined therein) (5)10.8
  
  Securities Purchase
  Agreement dated as of January 20, 2004 by and between the Company and
  the Purchasers (as defined therein) (7)10.9
  
  Securities Purchase
  Agreement dated as of June 24, 2004 by and between the Company and the
  Investors (as defined therein) (8)10.10
  
  Securities Purchase
  Agreement, dated as of August 11, 2006, by and among the Company and
  CornellCapital
  Partners, LP (16)10.11
  
  Securities Purchase
  Agreement dated August 3, 2005 among the Company and the Investors (as
  defined therein) (14)10.12
  
  Securities Purchase
  Agreement dated August 3, 2005 among the Company and the Investors (as
  defined therein) (14)10.13
  
  License, Maintenance
  and Update Service Agreement between WorldGate and Aequus dated
  March 31, 2008 *10.14
  
  Revised and Restated
  Amendment and Master Contract between WorldGate and Aequus dated March 31,
  2008 *  41


10.15
  
  Master Agreement
  between WorldGate and Aequus dated March 31, 2008 *10.16
  
  Subscription Agreement
  dated September 24, 2007 between the Company and Antonio Tomasello *10.17
  
  Voting Agreement among
  the Company, Antonio Tomasello and David Tomasello (17)21
  
  Subsidiaries*23.1
  
  Consent of
  Marcum & Kliegman LLP*24
  
  Power of Attorney
  (included in signature page)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*  
 *
  
  Filed herewith(1)
  
  Incorporated by
  reference to the exhibits to our Registration Statement on Form S-1/A as
  filed on April 7, 1999 (Registration No. 333-71997).(2)
  
  Incorporated by
  reference to the exhibits to our Form 10-Q Report for the quarter ended
  March 31, 1999.(3)
  
  Incorporated by
  reference to the exhibits to our Form 10-K/A Report for the fiscal year
  ended December 31, 2000, as filed on August 17, 2001.(4)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  December 2, 2003.(5)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  December 4, 2003.(6)
  
  Incorporated by
  reference to the exhibits to our Registration Statement on Form SB-2 as
  filed on December 24, 2003 (Registration No. 333-111571).(7)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  January 21, 2004.(8)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  June 25, 2004.(9)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  July 13, 2004.(10)
  
  Incorporated by
  reference to the exhibits to the Companys Proxy Statement to shareholders
  filed September 3, 2004.(11)
  
  Incorporated by
  reference to the exhibits to our Form 10-Q Report for the quarter ended
  September 30, 2004, as filed on November 17, 2004.(12)
  
  Incorporated by
  reference to the exhibits to our Form 10-K Report for the fiscal year
  ended December 31, 2004, as filed on March 31, 2005.(13)
  
  Incorporated by
  reference to the exhibits to our Registration Statement on Form SB-2 as
  filed on May 24, 2005.(14)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  August 8, 2005.(15)
  
  Incorporated by
  reference to the exhibits to our Current Report on Form 8-K filed
  November 23, 2005.(16)
  
  Incorporated by
  reference to the exhibits to our Form 10-Q Report for the quarter ended
  June 30, 2006, as filed on August 14, 2006.(17)
  
  Incorporated by reference to the
  exhibits to our Current Report on Form 8-K filed May 24, 2007.  42