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, 2008Or ̈
            
            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. Yes  ̈   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.  Yes  ̈   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. Yes x   No   ̈





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. Yes x   
No   ̈




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


Large
accelerated filer  ̈      Accelerated
filer  ̈       Non-accelerated
filer   ̈       Smaller Reporting
Company    x




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




The
aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $11 million as of June 30, 2008, based on the
closing sale price of $0.19 per share of common stock, as reported on theOTC Bulletin
Board.




The
number of shares of the registrant’s common stock outstanding as of March 16,
2009 was 118,906,345




DOCUMENTS
INCORPORATED BY REFERENCE


None









WORLDGATE
COMMUNICATIONS, INC.




ANNUAL
REPORT ON FORM 10-K


For
the Fiscal Year Ended December 31, 2008




TABLE
OF CONTENTS




PART
      IItem
      1. Business
                    
                    1Item
      1A. Risk Factors.
                    
                    5Item
      2. Properties.
                    
                    12Item
      3. Legal Proceedings.
                    
                    12Item
      4. Submission of Matters to a Vote of Security Holders.
                    
                    12PART
      IIItem
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities.
                    
                    12Item
      6. Not required
                    
                    14Item
      7. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.
                    
                    14Item
      7A.  Not Required
                    
                    23Item
      8.  Financial Statements
                    
                    F -
      1Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure.
                    
                    25Item
      9A (T). Controls and Procedures
                    
                    25Item
      9B.  Other Information.
                    
                    26PART
      IIIItem
      10. Directors, Executive Officers and Corporate
Governance.
                    
                    26Item
      11. Executive Compensation.
                    
                    29Item
      12.  Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                    
                    34Item
      13. Certain Relationships and Related Transactions and Director
      Independence
                    
                    36Item
      14. Principal Accountant Fees and Services
                    
                    36Item
      15. Exhibits, Financial Statement Schedules.
                    
                    38







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 “Item 1A.  Risk Factors” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations– Forward-Looking and Cautionary Statements” 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 quoted on the OTC Bulletin Board (“OTCBB”) 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 May 9,
2006 we 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.  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. Our Ojo video phone provides this video
equipment link for the hard-of-hearing 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, and
the CA can relay such communications to a voice telephone user or the VRI user
that does not understand ASL.  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.


.


On
June 20, 2007 we announced that we had expanded our relationship with Aequus and
Snap!VRS by modifying our 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 we agreed to provide development and engineering resources to
Snap!VRS.  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’
customers.





On
February 4, 2008, we issued a current report on Form 8−K indicating that we were
in a dispute with Aequus over the payment of significant monies that we believed
Aequus owed to us.  The refusal by Aequus to pay such monies had
contributed to a shortfall in our available operating cash needed to continue
operations, and accordingly, on January 30, 2008, we shut down our operations.
The Form 8−K further indicated that this was a first step to winding down our
business, which would occur if we were not able to secure payment of the monies
believed to be owed to us by Aequus, and/or new financing.


1


On March
31, 2008 we entered into a new agreement with Aequus and Snap!VRS (the “March
Aequus Agreement”).  The March Aequus Agreement, inter alia, provided
for the resolution of the dispute with Aequus including, (i) payment by Aequus
to us of $5 million in scheduled payments over the next ten months, (ii)
agreement to arbitrate approximately $1.4 million that we claimed was owed to us
by Aequus, for non-recurring engineering, or NRE, costs (the “NRE Arbitration”),
and (iii) purchase of an additional $1.5 million of video phones by
Aequus.  As a result of the March Aequus Agreement, Aequus built a new
data center, and began directly operating a video phone service for its
customers.  In October 2008, Aequus failed to pay to us approximately
$1 million we were owed for the purchase of video phones, and as a result we
terminated our reseller agreement with Aequus.  We are reviewing our
possible remedies to recover the $1 million including selling Aequus inventory
we hold in our possession.  We have also opened discussions with other
VRS/VRI service providers.





On
January 27, 2009, we resolved the outstanding NRE Arbitration with Aequus, and
in full satisfaction of the outstanding arbitration claim Aequus agreed to
terminate any obligation on our part to provide certain prepaid engineering
services pursuant to the March Aequus Agreement (Aequus had prepaid
approximately $900,000 for these engineering services of which $725,000 was
allocated to the settlement).





On
December 12, 2008, we entered into a securities purchase agreement with WGI
Investor LLC ("WGI"), pursuant to which we agreed to issue and sell to WGI a
total of 202.5 million shares (the “WGI Shares”) of our common stock (“Common
Stock”), as well as a warrant to purchase up to 140.0 million shares of Common
Stock in certain circumstances (the “Anti-Dilution Warrant”), in exchange for
(i) total cash consideration of $1.45 million, (ii) the cancellation of
debentures held by WGI under which approximately $5.1 million in principal and
accrued interest was outstanding at December 31, 2008, and (iii) the
cancellation of certain of our outstanding warrants held by WGI (the "Private
Placement").  The Anti-Dilution Warrant will entitle WGI to purchase
up to 140.0 million shares of Common Stock to the extent that any of our capital
stock is issued following the closing of the Private Placement upon the exercise
or conversion of (i) any warrants, options and other purchase rights that are
outstanding as of the closing of the Private Placement (“Existing Contingent
Equity”), (ii) up to 19.7 million shares underlying future options, warrants or
other purchase rights issued by us after the closing (“Future Contingent
Equity”), or (iii) the ACN Warrant. The Anti-Dilution Warrant is designed
to ensure that WGI may maintain 63% of the issued and outstanding shares of
our capital stock in the event that any of our capital stock is issued in
respect to these options, warrants, restricted stock and other
convertible securities. The term of the Anti-Dilution Warrant is ten years
from the date of issuance, and the shares subject to the Anti-Dilution
Warrant will be decreased proportionally upon the expiration of Existing
Contingent Equity, Future Contingent Equity and the ACN Warrant.  In
December 2008, WGI acquired from YA Global Investments, L.P. ("YA Global") the
secured convertible debentures we had previously issued to YA Global as well as
the outstanding warrants to purchase Common Stock then held by YA
Global.





WGI is a
private investment fund whose ownership includes owners of ACN, Inc. ("ACN").
ACN is a large direct seller of telecommunications services and a leading
distributor of video phones.  In December 2008, we agreed to enter
into a commercial relationship through which we will design and sell videophones
to ACN (the "Commercial Relationship").  As part of the Commercial
Relationship, ACN will commit to purchase 300,000 videophones over a two-year
period and will provide us with $1.2 million to fund software development costs
associated with the Commercial Relationship. In connection with the Commercial
Relationship, we will grant ACN a warrant to purchase up to approximately 38.2
million shares of common stock at an exercise price of $0.0425 per share (the
“ACN Warrant”).  The ACN Warrant will vest incrementally based on
ACN’s purchases of videophones under the Commercial Relationship.





In
connection with the closing of the Private Placement, we will enter into a
Registration Rights and Governance Agreement with WGI and ACN (the “Rights
Agreement”) granting them certain rights with respect to the securities they
will receive in the Private Placement and in connection with the Commercial
Relationship.  Under the terms of the Rights Agreement, we have agreed
to file a registration statement on Form S-3 covering the resale of any shares
held by WGI and ACN and to maintain its effectiveness for a minimum period of
time.  In addition, WGI and ACN will have the right to require us to
file additional registration statements covering the resale of such securities
to the extent they are not covered by an effective registration statement and
will be entitled to "piggy-back" registration rights on all future registrations
by us (with certain limitations) and on any demand registrations of any other
investors, subject to customary underwriters' cutbacks to reduce the number of
shares to be registered in view of market conditions.





Pursuant
to the terms of the Rights Agreement, we will grant WGI and ACN preemptive
rights to purchase a pro rata portion of any Common Stock or other securities
convertible into Common Stock issued by us, except for shares issued under
board-approved employee benefit plans, conversions of Existing Contingent Equity
or upon exercise of the Anti-Dilution Warrant or the ACN Warrant.  WGI
will also have the right to nominate a total of four of the seven members of our
board of directors, which nomination right will be reduced by one director for
each reduction in its beneficial ownership of our Common Stock (including any
warrants or other purchase rights) below thresholds of 50%, 43%, 29% and 14% of
our voting stock. To the extent that such nomination right decreases, the
corresponding number of WGI nominees will offer to tender their resignation for
acceptance by our board of directors.





Pursuant
to the terms of the securities purchase agreement with WGI, we submitted for
approval by our stockholders (i) the Private Placement and (ii) an amendment to
our Amended and Restated Certificate of Incorporation to increase our authorized
Common Stock to 700,000,000 shares, which approvals were obtained on March 20,
2009.  The closing of the Private Placement is subject to certain
additional conditions, including the execution of the agreements relating to the
Commercial Relationship by us and ACN, the continued accuracy of our
representations and warranties in all material respects, and the absence of any
material adverse change in our assets, liabilities, business or operations prior
to the closing date.  The closing of the Private Placement and the
execution of the agreements relating to the Commercial Relationship is scheduled
to be completed in early April 2009.  However, no assurance can be
made that such closing will occur.


2





In
addition to the VRS and VRI markets, we believe that high speed data (“HSD”) and
telecommunication users provide a large, and 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 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 and telecommunications service
providers as well as to consumers through traditional consumer electronics
distribution channels. We believe that HSD and telecommunications service
providers 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 eventually
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 the commercial success and consumer acceptance of video phones and
have 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 and telecommunications service
providers, 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.




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 and telecommunications service providers, as
well as through traditional electronics distribution channels. Video phone
service, using the Ojo video phone, is expected to be offered by HSD and
telecommunications service providers as a means of attracting new HSD and
telecommunications subscribers as well as maintaining existing subscribers. We
believe that HSD and telecommunications service 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 and telecommunications service
models, 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 and
telecommunications service providers.  There is also a parallel market
for sales of Ojo video phones directly to consumers through the standard
consumer and telecommunications electronic channels. Sales of Ojo video phones
through these retail channels still require a video phone service and we are
currently offering such a video phone service, with an associated monthly
service fee, for units sold in this manner.





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.


3


Under the
agreement, Mototech is required to manufacture products in response to purchase
orders we issue.  Although we have  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.  Both we and Mototech have the right 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 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 and
telecommunications service 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 personally 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.More recently, Cisco Systems, Inc. has 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 our distinctive design (a design patent issued in December 2006 and
extends 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 extends for a 14 year term thereafter) and have 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





Third
parties have asserted, and may in the future assert, that the technologies we
use infringe their intellectual property rights. We may be subject to
intellectual property claims and legal proceedings in the ordinary course of our
business. If we are forced to defend against any third-party infringement
claims, we could face expensive and time-consuming litigation and be required to
pay monetary damages, which could include treble damages and attorneys’ fees for
any infringement that is found to be willful, and either be enjoined or required
to pay ongoing royalties with respect to any business methods or technologies
that are found to be infringing. Further, as a result of infringement claims
either against us or against those who license technology to us, we may be
required, or deem it advisable, to develop non-infringing technology, which
could be costly and time-consuming, or enter into costly royalty or licensing
agreements.





Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Any litigation, regardless of outcome or merit,
could result in substantial costs and diversion of management and technical
resources, which could materially harm our business.




Government
Regulation




Our Ojo
video phone is required to comply with various laws and government regulations,
including Parts 15 and 68 of the Federal Communications 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 our
operations. 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 $5,315,000 and $2,316,000 for the years ended December 31,
2007 and 2008 respectively, virtually all of which was spent on the development
of the video phone product and services.




Employees




As of
December 31, 2008, on a consolidated basis, we had 27 full-time employees
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.


5





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 ability to continue as a going
concern.





We have
experienced recurring losses from operations and at December 31, 2008 had an
accumulated deficit of $270,857,000, a stockholder’s deficiency of $8,190,000
and a working capital deficit of $8,490,000 that raised substantial doubt about
our 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. At
least in the short term, we do not expect to generate sufficient cash from
operations and will likely need to secure additional financing and to increase
product sales.  No assurances can be given that we will be able to
obtain the necessary cash for us 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 require significant
resources and may affect our reported financial results or the way we conduct
business.





We are
subject to regulation by the Securities and Exchange Commission (“SEC”), which
imposes extensive corporate governance measures and comprehensive reporting and
disclosure requirements. The scope and complexity of these rules, regulations
and other applicable requirements demand significant time, expertise and
resources and has increased thecost of our
corporate governance, reporting and disclosure practices.  The demands
of this regulatory regime impact the way we conduct our business and may
negatively affect our operations.





Furthermore,
generally accepted accounting principles in the United States (“GAAP”),
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.





We
identified a material weakness in our internal controls over financial
reporting.  Failure to remediate the material weakness could
negatively impact our business.





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. When conducting its annual
assessment of the design and effectiveness of our internal control systems,our management
determined that a material weakness existed in our internal controls over
financial reporting as of December 31, 2008.  It is management’s
assessment that we lack sufficient internal expertise with GAAP related to the
accounting and reporting of complex financial transactions.  Our
limited resources, as well as our focus and efforts on our solvency rather than
financial reporting, contributed to this material weakness.





The
staff additions we would need to make to maintain internal GAAP expertise to
assist with the accounting and reporting of complex financial transactions in
accordance with compliance guidelines are costly and will negatively impact
future financial results.  In addition, there is no assurance that the
necessary resources required to remedy our material weakness will be available,
and even if they are available there is no assurance that we will be able to
conclude that our reporting 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.





Wehave historically beenreliant primarily on one
customer





We have
been heavily dependent on one customer, Aequus Technologies, for the majority of
our revenue. Recently we have had disputes with Aequus related to its failure to
pay amounts owed to us.  In October 2008, Aequus failed to pay to us
approximately $1 million we were owed for the purchase of video phones, and as a
result we terminated our reseller agreement with Aequus.  As a result
our operating results have been adversely affected, and our ability to pay all
or any obligated payments have been jeopardized, and while we are seeking other
significant customers for video phones our efforts in this regard may not be
successful.




In
connection with our anticipated completion of the Private Placement, we expect
to enter into a commercial relationship with ACN pursuant to which we will
design and sell video phones to ACN and will provide software development work
to ACN.  As a result, in the future, we may be focused and heavily
dependent on this customer.  If our efforts with this customer do not
lead to significant sales our ability to continue to operate our business may
also be placed in jeopardy.


6





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;


•
            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.




7


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. We also plan 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 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 U.S. 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. In the developing video phone business, we 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 and
telecommunications service 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.


8





We
may not be able to compete successfully in the highly competitive and rapidly
evolving HSD and telecommunications market.




The
market for products that utilize HSD and telecommunications is still developing
and there can be no assurance that our product will ever achieve market
acceptance. Businesses, cable operators and other HSD and telecommunications
service providers as well as the users of such HSD and telecommunications
services 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 rely on patent,
trade secret, trademark and copyright law to protect our video phone
intellectual property. Although we have been awarded patents for our distinctive
designs and technology and have 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 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 us.




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.


9




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 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.





On
multiple occasions we have issued shares of our common and preferred stock,
convertible debentures, as well as 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 anti-dilution adjustments of outstanding
shares and warrants and issuance of additional shares or warrants of our
stock.





In
connection with the Private Placement described in “Item 1. Business – Overview”
above, we expect to issue approximately 202.5 million shares of our common stock
to WGI, representing 63% of our outstanding common stock immediately following
the closing of the Private Placement.  In addition, we will issue to
WGI the Anti-Dilution Warrant which is designed to ensure that WGI may maintain
63% of the issued and outstanding shares of our capital stock in the event that
we issue any capital stock in respect of Existing Contingent Equity, New
Contingent Equity and the ACN Warrant.  Accordingly, upon the closing
of the Private Placement, our current stockholders will be reduced to 37% of the
outstanding shares of common stock and may be further reduced in the future to
the extent the Anti-Dilution Warrant or the ACN Warrant are
exercised.





Upon
the closing of the Private Placement, WGI will control a significant amount of
our outstanding common stock thus allowing it to exert significant influence on
our management and affairs.





Upon the
closing of the Private Placement, WGI will own approximately 63% of our
outstanding common stock and will hold a warrant to acquire additional shares of
common stock to maintain that level of ownership.  In addition, we
will issue ACN a warrant to acquire up to 38.2 million shares of our common
stock. Under the terms of the Rights Agreement to be executed upon the closing
of the Private Placement, WGI and ACN will be entitled to maintain their
respective ownership percentage in our company. Accordingly, WGI and ACN will
have significant influence over matters submitted to our stockholders, including
any potential change of control transactions. Our controlling stockholders will
be able to determine the outcome of matters put to a stockholder vote, including
the ability to elect our directors, determine our corporate and management
policies, including compensation of our executives, and determine, without the
consent of our other stockholders, the outcome of any corporate action submitted
to our stockholders for approval, including potential mergers, acquisitions,
asset sales and other significant corporate transactions. This concentration of
ownership may discourage, delay or prevent a change in control of our company,
which could deprive our stockholders of an opportunity to receive a premium for
their common stock as part of a sale of our company or result in strategic
decisions that could negatively impact the value and liquidity of our
outstanding stock. WGI also has sufficient voting power to amend our
organizational documents. Furthermore, conflicts of interest could arise in the
future between us and WGI or ACN concerning, among other things, potential
competitive business activities or business opportunities. Neither WGI nor ACN
is restricted from competitive activities or investments. We cannot provide
assurance that the interests of WGI or ACN will coincide with the interests of
other holders of our common stock.




Our
ability to utilize our historical net operating losses has been substantially
limited and will be subject to additional limitations if the Private Placement
is completed.


During our 2008 fiscal year, we
experienced an “ownership change” as defined in Section 382 of the Internal
Revenue Code, which resulted in a loss of a substantial amount of
the  net operating loss carryforwards (“NOL”) we had accrued,
resulting in a remaining NOL of approximately $7 million as of December 31,
2008.  Our ability to use our remaining NOLs could be additionally
reduced if we experience any further “ownership change,” as defined under
Section 382. The calculation of an “ownership change” under the Internal Revenue
Code is based on the cumulative ownership changes in our common stock by
stockholders that own, or are deemed to own, 50% or more of our common stock
over a rolling three-year period. Our issuance of the common stock to WGI in the
Private Placement will result in additional limitations on the amount of the NOL
we would be able to use to offset income that we generate in future years as a
result of current tax law as defined under Section 382.
  We
will be required under applicable accounting guidelines to report significant
reductions in the revenue we recognize from sales of our products under the
Commercial Relationship with ACN.
 
 Current
accounting principles require that beginning with fiscal year 2009 revenue which
is generated as result of the Commercial Relationship with ACN be reduced, as
reported, to reflect the excess fair value of the equity issued as part of the
Private Placement with WGI and the fair value of the warrants earned by ACN
pursuant to the Commercial Relationship to the extent that such equity and
warrants are determined to be consideration given by a vendor to a customer for
which an otherwise identifiable benefit has not been received.  The Company
has not yet completed its analysis of the applicability or extent of any such
reduction, however the reduction of revenues the Company expects to report under
the Commercial Relationship is expected to be
significant.


10





If
the Private Placement with WGI does not close as expected we may not have
sufficient working capital to fund our continuing video phone
business.





If, for
any reason, the Private Placement with WGI does not close as scheduled in early
April, and we are unable to secure any additional financing, we will have to
curtail or suspend our business activities, we may not be able to continue to
operate our business 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.





Our
common stock is quoted on the OTC Bulletin Board (“OTCBB”) which increases the
volatility of our stock and makes it harder to sell our stock.





Our common stock is quoted on the
OTCBB.  The OTCBB 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 OTCBB 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 $0.01 in
November 2008. The trading price for our common stock during the period from
January 2, 2008 to December 31, 2008 ranged from $0.01 to $0.40.  The
price has changed dramatically over short periods with changes of over
100%  in a single day. An investment in our stock is subject to such
volatility and, consequently, is subject to significant risk.




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 do 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.




11




Our failure to comply with certain
covenants contained in agreements relating to  private placements of
our securities may have
an adverse impact on our available cash.


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, we are 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 our obligation
to make cash payments to the investors.  The investors may also be
entitled to receive more shares than originally allocated in the event we
subsequently issue 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 our stock is suspended, or a change in our control
occurs.





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 17,000 square feet at an annual rent of
approximately $7.06 per square foot, with a 4% increase annually. The lease will
be cancelable by either party with ninety (90) days prior notice, notice, with
no termination cost.




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.  We entered into an agreement with Aequus, effective
March 31, 2008 that provided for the resolution of a dispute with Aequus
regarding amounts we claimed were owed to us by Aequus including, (i) payment to
us by Aequus of $5 million in scheduled payments over the next ten months, (ii)
agreement to arbitrate approximately $1.4 million that we claimed were owed to
us by Aequus for NRE costs, and (iii) purchase of an additional $1.5 million of
video phones by Aequus.  In October 2008, however, Aequus failed to
pay us approximately $1 million that we were owed for the purchase of video
phones, and as a result we terminated our reseller agreement with
Aequus.  We are reviewing our possible remedies to recover the $1
million, including selling Aequus inventory we hold in our
possession.





On
January 27, 2009, we resolved the outstanding NRE Arbitration with Aequus, and
in full satisfaction of the outstanding arbitration claim Aequus agreed to
terminate any obligation on our part to provide certain prepaid engineering
services pursuant to the March Aequus Agreement (Aequus had prepaid
approximately $900,000 for these engineering services of which $725,000 was
allocated to the settlement).




Item 4. Submission of Matters to a
Vote of Security Holders.





No
matters were submitted to a vote of stockholders during the fourth quarter of
2008.





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 quoted 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 2007 and 2008.




High
                  
                  
                  LowYear
      Ended December 31, 2007First
      Quarter
                  
                  $
                  1.44
                  
                  
                  $
                  0.64Second
      Quarter
                  
                  
                  0.92
                  
                  
                  
                  0.45Third
      Quarter
                  
                  
                  0.56
                  
                  
                  
                  0.33Fourth
      Quarter
                  
                  
                  0.50
                  
                  
                  
                  0.11




Year
      Ended December 31, 2008First
      Quarter
                  
                  $
                  0.20
                  
                  
                  $
                  0.02Second
      Quarter
                  
                  
                  0.26
                  
                  
                  
                  0.07Third
      Quarter
                  
                  
                  0.18
                  
                  
                  
                  0.02Fourth
      Quarter
                  
                  
                  0.40
                  
                  
                  
                  0.01





12




As of
March 16, 2009, we had 361 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, 2008 regarding securities authorized for issuance
under our 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)
                      
                      
                      6,913,364
                      
                      
                      $
                      0.28
                      
                      
                      
                      2,939,482
                      (1)Equity
      compensation plans not approved by security holders (2)
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      
                      6,913,364
                      
                      
                      
                      0.28
                      
                      
                      
                      2,939,482
                      (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) We do
not maintain any equity compensation plans that have not been approved by our
stockholders.





In 2003
we 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 our Proxy
Statement to stockholders filed September 3, 2004.





The
Equity 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 we awarded 1,151,000 shares of
restricted stock subject to vesting under certain performance criteria of which
250,000 have since been forfeited. Performance based shares expire in ten years
and vest upon our meeting the following vesting criteria:  10% of the
shares vest upon achieving each of a 10%, 20%, 30% 40% and 50% increase in our
total gross revenue in a quarter over our third quarter 2007 total gross revenue
shown on our statement of operations as reported in our SEC filings and 25% of
the shares vest upon our achievement of (1) a quarterly operating cash break
even (defined as zero or positive “net cash provided byoperations”
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.


13




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





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  and telecommunications
service providers (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, and
(9) other risks identified in our filings with the Securities and Exchange
Commission, including the risks identified in “Item 1A. Risk Factors” in this
Report.  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.





In the
spring of 2006, we entered into a multiyear agreement with Aequus Technologies
Corp. (“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.  In the spring of 2007, we
announced an expansion of our relationship with Aequus and Snap!VRSagreeing to
work collaborativelyto
develop the preferred Video Relay Services (“VRS”) phone for the VRS
community.  See “Item 1.  Business – Overview” for more
detail on the development of our relationship with Aequus and
Snap!VRS.  From 2006, we were reliant on the Aequus relationship as
our primary customer relationship.




On
February 4, 2008, we issued a current report on Form 8−K indicating that we were
in a dispute with Aequus over the payment of significant monies that we believed
Aequus owed to us.  The refusal by Aequus to pay such monies had
contributed to a shortfall in our available operating cash needed to continue
operations, and accordingly, on January 30, 2008, we shut down our operations.
The Form 8−K further indicated that this was a first step to winding down our
business, which would occur if we were not able to secure payment of the monies
believed to be owed to us by Aequus, and/or new financing.


14





On March
31, 2008, we entered into a new agreement with Aequus and Snap!VRS (the “March
Aequus Agreement”).  The March Aequus Agreement provided for the
resolution of a dispute with Aequus regarding amounts we claimed were owed to us
by Aequus including, (i) payment to us by Aequus of $5,000 in scheduled payments
over the next ten months, (ii) agreement to arbitrate approximately
$1,354  that we claimed was owed to us by Aequus for NRE,
costs  and (iii) purchase of an additional $1,475 of video phones by
Aequus.  As a result of this new agreement Aequus built a new data
center, directly operating a video phone service for its customers.





In
October 2008, Aequus failed to pay $953 owed to us for the purchase of video
phones, and as a result we terminated our reseller agreement with
Aequus.  We are reviewing our possible remedies to recover the $953,
including selling Aequus inventory that we have in our possession.  We
have also opened discussions with other VRS/VRI service providers.





On
January 27, 2009, we resolved the outstanding NRE Arbitration with Aequus, and
in full satisfaction of the outstanding arbitration claim Aequus agreed to
terminate any obligation on our part to provide certain prepaid engineering
services pursuant to the March Aequus Agreement (Aequus had prepaid
approximately $900 for these engineering services of which $725 was allocated to
the settlement).





On
December 12, 2008, we entered into a securities purchase agreement with WGI
Investor LLC ("WGI"), pursuant to which we agreed to issue and sell to WGI a
total of 202.5 million shares (the “WGI Shares”) of our common stock (“Common
Stock”), as well as a warrant to purchase up to 140.0 million shares of Common
Stock in certain circumstances (the “Anti-Dilution Warrant”), in exchange for
(i) total cash consideration of $1,450, (ii) the cancellation of debentures held
by WGI under which approximately $5,100 in principal and accrued interest was
outstanding at December 31, 2008, and (iii) the cancellation of certain of
outstanding warrants held by WGI (the "Private Placement").  In
December 2008, WGI acquired from YA Global Investments, L.P. ("YA Global") the
secured convertible debentureswe had
previously issued to YA Global as well as the outstanding warrants to purchase
Common Stock then held by YA Global.





WGI is a private investment fund whose
ownership includes owners of ACN, Inc. ("ACN"). ACN is a large direct seller of
telecommunications services and a leading distributor of video phones. In
December 2008, we agreed to enter into a commercial relationship pursuant to
which we will design and sell videophones to ACN (the "Commercial
Relationship").  As part of the Commercial Relationship, ACN will
commit to purchase 300,000 videophones over a two-year period and will provide
us with $1,200 to fund software development costs associated with the Commercial
Relationship. In connection with the Commercial Relationship, we will grant ACN
a warrant to purchase up to approximately 38.2 million shares of Common Stock at
an exercise price of $0.0425 per share (the “ACN Warrant”).  The ACN
Warrant will vest incrementally based on ACN’s purchases of videophones under
the Commercial Relationship.  Pursuant to the terms of the securities
purchase agreement with WGI, we submitted for approval by our stockholders (i)
the Private Placement and (ii) an amendment to our Amended and Restated
Certificate of Incorporation to increase our authorized Common Stock to
700,000,000 shares, which approvals were obtained on March 20,
2009.  We expect the closing of the Private Placement and the
execution of the agreements relating to the Commercial Relationship is scheduled
to be completed in early April 2009.  However, no assurance can be
made that such closing will occur.





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,
2008.  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. We evaluate
our equipment customer and service customers’ accounts for collectibility at the
date of sale and on an ongoing basis.


15




Revenues
are also offset by a reserve for any price refunds and consumer rebates
consistent with EITF Issue 01-9, “Accounting for Consideration Given by a Vendor
to a Customer.”





During the year ended December 31, 2008
and 2007 we shipped approximately 9 and 400 units, respectively, with a sales
value of approximately $2 and $128, respectively, to customers subject to a
right of return should the units not be sold through to their
customers.  Revenue and cost of goods sold of $0 and $16,
respectively, were deferred as of December 31, 2008 and 2007 in accordance with
SFAS 48 “Revenue Recognition when a Right of Return Exists.”





From June 2007 through October 2008 we
shipped our video phone product to Aequus.  We recognized product
revenue at the time of shipment.  In addition, we also received
service fee revenues based on a percentage of the fees earned by Aequus for
which  their customer has received service. We recognize this service
fee revenue upon confirmation from Aequus of the fees it has
earned.  We also receive service fee revenues from end customers which
are recognized after the services have been performed.




During
the year ended December 31, 2008, Aequus purchased $2,628 of Ojo units ($1,475
as agreed under the March Aequus Agreement discussed in “Results of Operations –
General” and an additional $1,153 in purchases).  We held the Ojo
units purchased by Aequus pending shipment to Aequus’ ultimate
customers.  We deferred revenue on these units in accordance with the
SEC Staff Accounting Bulletin Topic 13 A (3) (a), “Bill and Hold Arrangements”
until shipment to the ultimate Aequus customer.  Of the total $2,628
of units purchased by Aequus (8,156 units) during the year ended December 31,
2008, $1,740 of units was shipped (5,404 units) to Aequus customers and
recognized as revenue, and $888 of units purchased was recorded as deferred
revenue. As of December 31, 2008, we continued to hold 2,752 Ojo units purchased
by Aequus.




Pursuant
to the March Aequus Agreement, Aequus agreed to pay us $5,000 over ten months,
with such amount related to multiple deliverables each having standalone value
with objective and reliable evidence of fair value, including: (i) a specified
amount of NRE ( with a fair value of $900), (ii) support and transition training
to Aequus to operate its own data center (“Training” with an estimated fair
value of $358), (iii) continued use of the WorldGate video phone service center
during the transition (with an estimated fair value of $230), and (iv) the
elimination of  previously agreed service fees (“contract termination fee”,
with a residual fair value of $3,512).  These deliverables are all
separate units of accounting in accordance with EITF No. 00-21, “Revenue
Arrangements with Multiple Deliverables.  We recognize revenue for the
NRE and Training when the service is provided.  For the year ended
December 31, 2008, revenue of $133 was recognized for NRE, and $358 was
recognized for Training.  Our obligation regarding the NRE is to
provide $900 of such NRE which may extend beyond a period of twelve
months.  For the year ended December 31, 2008, we recorded $3,165 of
contract termination fees as other income.  As of December 31, 2008 we
had received $4,600 of the $5,000 agreed payments.  Of the $4,600 of
payments, $804 of such payments is reflected as deferred revenue and income as
of December 31, 2008.  In January 2009 we received the final remaining
$400 of the $5,000 agreed payments. On January 27, 2009, we resolved the
outstanding NRE Arbitration with Aequus, and in full satisfaction of the
outstanding arbitration claim Aequus agreed to terminate any obligation on our
part to provide certain prepaid engineering services pursuant to the March
Aequus Agreement (Aequus had prepaid approximately $900 for these engineering
services of which $725 was allocated to the settlement).




We
account for stock warrants issued to third parties, including customers, in
accordance with the provisions of the Emerging Issues Task Force 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services,” and EITF 01-9,
“Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products)” (“EITF 01-9”). In connection with the
Commercial Relationship expected to be entered into with ACN in April 2009, we
will grant ACN a warrant to purchase up to approximately 38.2 million shares of
our common stock at an exercise price of $0.0425 per share.  This
warrant will vest incrementally based on ACN’s purchases of videophones under
the Commercial Relationship.  Under the provisions of EITF 96-18, we
record a charge for the fair value of the portion of the warrant earned from the
point in time when vesting of the warrant becomes probable. Final determination
of fair value of the warrant occurs upon actual vesting. EITF 01-9 requires that
the fair value of the warrant be recorded as a reduction of revenue to the
extent of cumulative revenue recorded from that customer. Accordingly, the
application of these accounting guidelines will require our reported revenue
from the Commercial Relationship to be reduced to reflect the fair value of the
warrant granted to ACN pursuant to the Commercial Relationship and the excess
fair value of the equity issued in the Private
Placement.


Accounts
Receivable





We record
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, we 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, 2008 and 2007,
we did not have an allowance for doubtful accounts or any off-balance sheet
credit exposure related to our customers.  At December 31, 2008 and
2007, approximately 96% and 82%, respectively, of accounts receivable was
concentrated with one customer.  Trade accounts receivable at December
31, 2008 and 2007 were $1,019 and $166 respectively.  For the year
ended December 31, 2008 and 2007 we recorded bad debt expense of $0 and $19,
respectively.





Inventory.




Our
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 our Ojo product, we have
historically subsidized, and may in the future continue to subsidize, certain of
our product sales to customers that result in sales of inventory below
cost.  In accordance with Accounting Research Bulletin (“ARB”) No. 43,
we reflect such inventory at the lower of cost or market and
reduced  our inventory balance by $0 and $293, respectively, for
the year ended  December 31, 2008 and 2007 to reflect such
valuation.  Any significant unanticipated changes in the factors noted
above could have an impact on the value of our inventory and our reported
operating results.    At December 31, 2008 and December 31,
2007 our inventory balance was $1,176 and $1,057,
respectively.  Included in the inventory balance reported as of
December 31, 2008 are costs of units purchased by Aequus in a “Bill and Hold”
arrangement of $745 that we continued to hold as of that date.
  16


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 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 $6,357 as of
December 31, 2008, 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.




We
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.  Our ability
to utilize our 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 our market value at the time of
ownership change multiplied by the long-term tax-exempt rate supplied by the
Internal Revenue Service.





Upon
completing an analysis as required by Section 382, it was determined that during
July 2008, the Company experienced a change of ownership as defined. As a result
of this change, the Company’s net operating loss carryforward will be limited as
previously described. Due to the limitations imposed by this Code Section, the
Company will be unable to utilize significant amounts of its net operating loss
and the remaining amounts will be subject to an annual limitation of $326. The
federal net operating loss projected to be lost is $230,280 resulting in $7,160
remaining to be carried forward subject to annual limitations. The state net
operating loss projected to be lost is $182,760 resulting in $7,160 remaining to
be carried forward subject to annual limitations. The state net operating losses
are also limited by state law to maximum utilization limits. The federal
research and experimental credit will also be subject to an annual
limitation.  Due to the limitation, all but $144 of the credit is
lost.  The federal credits remaining will expire in
2028.  All state research and experimentation credit carryovers have
been refunded and no state credit remains.





Future
issuances of common stock may further affect this analysis which might cause
additional limitation on our ability to utilize net operating loss
carryforwards.  We have determined that upon closing of the Private
Placement pursuant to which WGI will acquire 63% of our shares,
our  ability to utilize our remaining net operating loss carryforwards
and credit carryforwards will again be subject to additional annual limitations
as a result of current tax law as defined under Section 382.





Stock-Based
Compensation.




Effective
January 1, 2006, we 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 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, our net loss before taxes for the
year ended December 31, 2008 and 2007 included approximately $632 ($0.01
per share) and $1,075 ($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.


17





Accounting for Preferred Shares and
Related Warrants.





We
account 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 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 were no
preferred shares outstanding as of December 31, 2008. 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.




We
account 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 our control that they should be
classified as a liability embedded measured at fair value on the balance
sheet.




On May
18, 2007, we and the investor in 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 we may issue restricted shares if there is no
effective registration statement at the time of conversion. The terms of the
convertible debentures were amended to permit us to reclassify the derivative
conversion option liability embedded in the convertible debentures from debt to
equity.




We
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, we received stockholder 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.




Results
of Operations





2008
versus 2007





Revenues





Revenues.Net revenues for the year ended December 31, 2008 and 2007 were $2,969
and $3,445, respectively.  This decrease of $476, or 14%, primarily
reflects the reduced sales of Ojo units to our VRS customer including the impact
due to the shutdown of our operations from January 30, 2008 through March 11,
2008 as a result of our cash shortfall related in part to a dispute with this
customer over the payment of significant monies which we believed was owed to us
and the customer's refusal to pay such monies.    Product
sales decreased by $645, and service revenues decreased by $147 for the year
ended December 31, 2008 compared to 2007.  As an offset, other
revenues increased by $316, primarily the result of $491 in non-recurring
engineering services, support and transition training and service center usage
provided to our VRS customer under the March Aequus Agreement.  During
the year ended December 31, 2008 and 2007 we shipped approximately 9 and 400
units respectively to customers subject to a right of return.  Revenue
and cost of sales of $0 and $16 was deferred as of December 31, 2008 and 2007 in
accordance with SFAS 48 “Revenue Recognition when a Right of Return
Exists.”




Gross
profit of $1,070 and $399, respectively, was reported for the twelve month
periods ended December 31, 2008 and 2007.  This improvement in gross
profit was primarily the result of the increase in revenue from NRE, Training
and service center usage revenues related to the March Aequus Agreement as well
as increased selling prices and lower unit costs of the product shipped during
the year ended December 31, 2008 compared to the same period in
2007.


18




Costs
and Expenses





Cost of Revenues. The cost of
revenues, consisting of product and delivery costs relating to the delivery of
video phones, and direct costs related to non-recurring engineering services
revenues, was $1,899 and $3,046, respectively, for the year ended December 31,
2008 and 2007.  This decrease of $1,147, or 38%, primarily reflects
the reduction in product shipments which also reduced the respective cost of
revenues by $655.  In addition, year ended December 31, 2008 and 2007,
inventory adjustments for lower of cost or market valuations were $0 and $293,
respectively, and freight, warranty, royalty and other costs were $10 and $249,
respectively.





Engineering and
Development.  Engineering and development expenses primarily
consist of compensation, and the cost of design, programming, testing,
documentation and support of our video phone product.  Engineering and
development costs were $2,316 for the year ended December 31, 2008, compared
with $5,315 for year ended December 31, 2007.  This decrease of
$2,999, or 56%, primarily reflects our reduction in engineering staff, and
related costs, in 2008 versus 2007.





Sales and
Marketing.  Sales and marketing expenses consist primarily of
compensation (which includes staff compensation and 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 our video phone
product.  Sales and marketing costs were $501 for the year ended
December 31, 2008, compared with $2,479 for the year ended December 31,
2007.  This decrease of $1,978, or 80%, for the year ended December
31, 2008, when compared to the same period in 2007, was primarily a result of
our efforts to reduce expenditures reflected in a decrease in consumer marketing
promotional expenditures of $1,104, associated with our distribution and
marketing support of our video phone product, marketing staff and related costs
reductions of $591, and reduced customer service support costs of
$311.





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 $3,526
for the year ended December 31, 2008, compared with $5,260 for the year ended
December 31, 2007.  This decrease of $1,734, or 33%, is primarily a
result of our efforts to reduce expenditures which resulted in reduced staffing
of $481, reduced rent of $407, reduced non-cash based compensation expense of
$178 and reduced professional and consulting fees of $412.





Other
Income and Expense





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 $51 for the year ended December 31, 2008 decreased by $127 versus the
year ended December 31, 2007.  This decrease is related to reduced
interest income earned on cash and cash equivalents.  During the year
ended December 31, 2008 and 2007, we earned interest on average cash balances of
approximately $559 and $3,670, respectively.  Interest expense for the
year ended December 31, 2008 was $328 compared to $466 for 2007.  This
decrease of $138, or 30%, primarily reflects lower accrued interest on reduced
balances for convertible debentures issued on August 11, 2006 and October 13,
2006 (see Note 2 of the accompanying consolidated financial statements for
the year ended December 31, 2008).  During the year ended December 31,
2008 and 2007, we accrued interest expense on average convertible debenture
balances of approximately $5,277 and $7,712, respectively.





Income from Service
Fee Contract Termination.  During the year ended December 31,
2008, we realized $3,165 of other income from the elimination of previously
agreed service fees with Aequus.  See “Critical Accounting Policies –
Revenue Recognition” for a discussion of the March Aequus
Agreement.





Gain on trademark
assignment.In July 2007, we sold our “Shadow” trademark to
T-Mobile USA, Inc. and received $500.  In addition, we obtained a
license to continue the use of the mark until July 7, 2009.  We have
retained all ownership in Ojo, which is our primary registered
mark.





Non Cash Change in Fair Value of
Derivative Warrants and Conversion Options.  For the year ended
December 31, 2008 the non-cash change in fair value of derivative warrants
and conversion options was a loss of $4,124.  For the year ended
December 31, 2007, the non cash change in fair value of derivative warrants
and conversion options was a gain of $2,432.  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.  In December 2008, WGI acquired from YA Global the secured
convertible debentureswe had
previously issued to YA Global as well as the outstanding warrants then held by
YA Global. Upon the closing of the Private Placement, scheduled for early April
2009, WGI will cancel the secured convertible debentures and warrants held by
WGI.


19





Amortization of Debt
Discount.  For the year ended December 31, 2008 and 2007, the
amortization of the debt discount was $2,212 and $4,126 respectively, relating
to the August 11, 2006 and October 13, 2006 private placements of secured
convertible debentures.  This decrease of $1,914, or 46%, reflects a
decrease of $1,921 in the amount of debt converted in 2008 compared to $2,299
converted in 2007.The
unamortized discount recognized upon debt conversion for the year 2008 was $876,
compared to $3,212 for the year 2007.  The amortization of the
discount not related to debt conversions was $1,336 and $914, respectively, for
the years 2008 and 2007. 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 year ended
December 31, 2008).





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, 2008, our primary source of liquidity consisted of cash and
cash equivalents that are highly liquid, and have original maturities of less
than three months.




At
December 31, 2008, we had cash and cash equivalents of $429 as compared to
cash and cash equivalents of $1,081 at December 31, 2007.  Net
cash used in operating activities was $655 for the year ended December 31,
2008, as compared to $10,378 used for the same period in 2007. This reduced cash
usage results from an increase in cash generated from operations of $9,723, or
94%, for the year ended December 31, 2008, when compared to the same period in
2007. This increase primarily reflects the funds received from Aequus in
connection with the March Aequus Agreement, and our reduction in staff and
overall cost of operations during the year ended December 31, 2008, including
the shut down of operations during the period from January 30, 2008 through
March 11, 2008.





For the
year ended December 31, 2008, cash provided by investing activities was $2. For
the year ended December 31, 2007, net cash provided by investing activities was
$368 primarily a result of the receipt of $500 for the assignment of certain
trademarks offset by $132 of investments in equipment for product development
and manufacture as well as general administrative and project management
purposes.





Cash
provided by financing activities during the year ended December 31, 2008 and
2007 was $1 and $1,024, respectively.  During the year ended December
31, 2007, we received a $1,000 investment from a related party.





Operations and
Liquidity.





As shown
in the accompanying consolidated financial statements, we have incurred
recurring net losses and have an accumulated deficit of $270,857, stockholder’s
deficiency of $8,190 and a working capital deficit of $8,490 as of December 31,
2008.  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 cash.  At least in the short
term we do not expect to generate sufficient cash from operations and will
likely need to secure additional cash financing and to increase product
sales.  No assurances can be given that we will be able to obtain the
necessary cash for us to continue as a going concern.  These factors
raise substantial doubt about our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might be
necessary should we 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, and the
repayment of the 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
converted into shares of our common stock at the holder’s option.  As
of December 31, 2008 the convertible debentures have an outstanding principle
balance of $4,080 (before discount) and accrued interest of $978.  In
December 2008, WGI acquired from YA Global the secured convertible debentures we
previously issued to YA Global as well as the outstanding warrants to purchase
our common stock then held by YA Global.  On March 20, 2009, ourstockholders approved the Private
Placement, and upon closing of the Private Placement, scheduled for early April
2009, WGI willcancel these debentures
under which approximately $5,100 in principal and accrued interest was
outstanding at December 31, 2008, and will also cancel certain outstanding
warrants to purchase an aggregate of 2,595,000 shares of our common
stock.




To date,
we have funded operations primarily through multiple private sales of equity
securities, through the issuance of convertible debentures, through certain
transactions and through an initial public offering of common stock in April
1999.  The financing secured on August 11, and October 13, 2006 (see
Note 2 of the accompanying consolidated financial statements for the year ended
December 31, 2008) has added long term debt to the balance sheet and we have
pledged substantially all of our assets as collateral.  We continue to
evaluate possibilities to obtain additional financing through public or private
equity or debt offerings, asset securitizations, or from other
sources.  There can be no assurance given, however, that our efforts
will be successful or that any additional financing will be available and can be
consummated on terms acceptable to us if at all. If we are unable to obtain
sufficient funds we may be required to further reduce the size of the
organization or suspend operations which could have a material adverse impact on
its business prospects.


20




Our
ability to generate cash is dependent upon the sale of our Ojo product and on
obtaining cash through capital markets.  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 success of our sales
efforts could also have an adverse impact on our ability to raise additional
financing.




During
2004 we entered into an exclusive distribution relationship with General
Instrument and beginning in April 2005, we generated revenue from the sale of
our Ojo product through  General Instrument. That relationship ended
in February 2006, after which we began to directly distribute and sell our
products.  Although we were able to increase the number of
distribution relationships with service providers and retailers carrying our
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 we began to focus on sales to the VRS market and to sell Ojo units through
our relationship with Aequus and Snap!VRS (please refer to “Item 1. Business –
Overview” for a discussion of our product sales to Aequus) and were primarily
reliant on our relationship with Aequus for product sales.  However,
due to a cash shortfall precipitated by Aequus’ failure to make payments, we
shut down operations from January 30, 2008 through March 11, 2008, and despite
efforts to continue a vendor/customer relationship with Aequus, due to its
failure in October 2008 to pay approximately $953 owed to us for its purchase of
video phones, we have terminated our reseller agreement with Aequus. We have
most of the units sold to Aequus in our possession and will attempt to sell the
units elsewhere to recover the$953. We
continue to believe that the VRS and VRI markets provide an attractive
opportunity for the sale of video phones and we have opened discussions with
other VRS/VRI service providers.  However, there can be no assurance
that we will be able to generate significant revenue from the sale of our video
phone product, including to the VRS market.




On March
20, 2009, our stockholders approved the Private Placement more fully discussed
in “Item 1. Business – Overview,” and upon closing of the transaction, scheduled
for early April 2009, we will issue and sell to WGI the WGI Shares and grant WGI
the Anti-Dilution Warrant in exchange for cash consideration of $1,450 and the
cancellation of certain of our outstanding debentures and
warrants.  In addition, in early April 2009, we expect to enter into
the Commercial Relationship with ACN, pursuant to which it will agree to
purchase 300,000 video phones over a two-year period and to provide us with up
to $1,200 to fund software development costs.





Based
on management’s internal forecasts and assumptions, including, among others, the
expected closing of the Private Placement and, upon such closing, the receipt of
the payments under our agreements with WGI and ACN and assumptions
regarding our short term cash requirements, we currently believe that we will
have sufficient cash on hand to meet our obligations into the third quarter of
2009. Based on additional assumptions regarding short term projected revenue
growth related to product sales and services to ACN, we might have sufficient
cash on hand to meet our obligations into 2010.  However, there can be
no assurance given that these assumptions are correct or that the revenue
projections associated with product sales and services to ACN will materialize
to a level that will provide us with sufficient capital to operate our
business.





On
October 4, 2007, our common stock was delisted from the NASDAQ Capital Market
and on October 10, 2007, it commenced being quoted on the OTC Bulletin Board
which made it subject to the SEC penny stock rules, and could adversely affect
the market liquidity of our common stock and our ability to raise additional
capital.





We
continue to evaluate possibilities to obtain additional financing through public
or private equity or debt offerings, asset securitizations, or from other
sources.  There can be no assurance given, however, that our efforts
will be successful or that any additional financing will be available and can be
consummated on terms acceptable to us, if at all. If we are unable to obtain
sufficient funds we may be required to further reduce the size of the
organization or suspend operations which could have a material adverse impact on
our business prospects.





Related
Parties





We have a
current multi-year agreement with Mototech, an investor, to provide us with
engineering and development support. As a result of this agreement, we expensed
approximately $3, and $64, respectively for the years ended December 31, 2008
and 2007.  Accounts payable to this investor amounted to $1,110 and
$809 at December 31, 2008 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 our
engineering efforts. This agreement does not provide for ongoing royalties,
purchase provisions, or for any requirement to provide additional funding. Net
revenues from operations recognized from Mototech were approximately $1 and $2
for the years ended December 31, 2008 and 2007,
respectively.  Accounts receivable from this investor were $8 as of
December 31, 2008 and December 31, 2007.


21




Recent
Accounting Pronouncements




In December 2007, the Financial
Accounting Standards Board ("FASB") issued Statement of Accounting Standard
("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, we would be
required to report any noncontrolling interests as a separate component of
consolidated stockholders' equity. We 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 our 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.




Effective
January 1, 2008, we adopted SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159") which permits
entities to choose to measure many financial instruments and certain other items
at fair value. We did not elect the fair value reporting option for any assets
and liabilities not previously recorded at fair value.




Effective
January 1, 2008, we adopted the provisions of SFAS 157, "Fair Value
Measurements" for financial assets and liabilities, as well as any other assets
and liabilities that are carried at fair value on a recurring basis in financial
statements. SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or
permit fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute.  The adoption of SFAS 157 did not have a material
impact on our consolidated financial statements. We applied the provisions of
FSP FAS 157-2, "Effective Date of FASB Statement 157," which defers the
provisions of SFAS 157 for nonfinancial assets and liabilities to the first
fiscal period beginning after November 15, 2008. The deferred nonfinancial
assets and liabilities include items such as property and equipment and
goodwill. We are required to adopt SFAS 157 for nonfinancial assets and
liabilities in the first quarter of fiscal 2009 and it is not expected to have a
material impact on our consolidated financial statements.




Effective
January 1, 2008, we adopted 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.
The adoption of EITF 06-1 did not have a material effect on our
consolidated financial statements.




Effective
January 1, 2008, we adopted Staff Accounting Bulletin No. 110
("SAB 110"). SAB 110 amends and replaces Question 6 of
Section D.2 of Topic 14, Share-Based Payment, of 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.
The adoption of SAB 110 did not have a material impact upon our
consolidated financial statements.




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 us beginning on
January 1, 2009. The adoption of this statement will change the disclosures
related to derivative instruments we hold.


22




In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies a consistent
framework, or hierarchy, for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with GAAP for
nongovernmental entities. SFAS 162 is effective 60 days following the
SEC's approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles."




In June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
application is not permitted. We are assessing the potential impact of this EITF
07-5 on the financial condition and results of operations.





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-2Consolidated Balance Sheets as of
      December 31, 2007 and 2008
                                  
                                  F-3Consolidated Statements of Operations for the
      years ended December 31, 2007,  and
    2008
                                  
                                  F-4Consolidated Statements of Stockholders’ Equity
      (Deficiency) for the years ended December 31, 2007  and
      2008
                                  
                                  F-5Consolidated Statements of Cash Flows for the
      years ended December 31, 2007 and 2008
                                  
                                  F-6Notes to Consolidated Financial
      Statements
                                  
                                  F-7


F - 1





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 2008, 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 consolidated financial position of WorldGate
Communications, Inc. and its subsidiaries as of December 31, 2007 and 2008
and the results of their operations and their 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 $271 million, stockholders’
deficiency of $8.2 million and a working capital deficit of $8.5 million at
December 31, 2008. 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 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 LLPMarcum
      & Kliegman LLPMelville, New YorkMarch
      25, 2009


F - 2





WORLDGATE COMMUNICATIONS,
INC.


CONSOLIDATED
BALANCE SHEETS


(DOLLARS
IN THOUSANDS, EXCEPT SHARE AMOUNTS)





As
      of
                            December 31,2007
                          
                          
                          2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          1,081
                          
                          
                          $
                          429Trade
      accounts receivable less allowance for doubtful accounts of $0 at
      December 31, 2007 and  2008
                          
                          
                          166
                          
                          
                          
                          1,019Other
      receivables
                          
                          
                          6
                          
                          
                          
                          1Inventory
                          
                          
                          1,057
                          
                          
                          
                          1,176Prepaid
      and other current assets
                          
                          
                          186
                          
                          
                          
                          160Total
      current assets
                          
                          
                          2,496
                          
                          
                          
                          2,785Property
      and equipment, net
                          
                          
                          797
                          
                          
                          
                          234Deposits
      and other assets
                          
                          
                          121
                          
                          
                          
                          66Total
      assets
                          
                          $
                          3,414
                          
                          
                          $
                          3,085LIABILITIES
      AND STOCKHOLDERS’  DEFICIENCYCurrent
      liabilities:Accounts
      payable
                          
                          $
                          747
                          
                          
                          $
                          1,750Accrued
      expenses
                          
                          
                          2,016
                          
                          
                          
                          1,420Accrued
      compensation and benefits
                          
                          
                          74
                          
                          
                          
                          173Detachable
      Warrants
                          
                          
                          236
                          
                          
                          
                          4,360Warranty
      reserve
                          
                          
                          49
                          
                          
                          
                          17Deferred
      revenues and income
                          
                          
                          252
                          
                          
                          
                          1,762Convertible
      debenture payable (net of unamortized discount of $4,499 at December 31,
      2007 and $2,287 at December 31, 2008)
                          
                          
                          1,502
                          
                          
                          
                          1,793Total
      current liabilities
                          
                          
                          4,876
                          
                          
                          
                          11,275Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      Stock, $.01 par value, 13,492,450 shares authorized, and 0 shares issued
      December 31, 2007 and 2008
                          
                          
                          0
                          
                          
                          
                          0Common
      Stock, $.01 par value; 200,000,000 shares authorized; 56,939,925 shares
      issued and outstanding at December 31, 2007 and 118,906,345 shares
      issued and outstanding at December 31, 2008
                          
                          
                          569
                          
                          
                          
                          1,189Additional
      paid-in capital
                          
                          
                          259,544
                          
                          
                          
                          261,478Accumulated
      deficit
                          
                          
                          (261,575
                          )
                          
                          
                          (270,857
                          )Total
      stockholders’ deficiency
                          
                          
                          (1,462
                          )
                          
                          
                          (8,190
                          )Total
      liabilities and stockholders’ deficiency
                          
                          $
                          3,414
                          
                          
                          $
                          3,085





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


F - 3





WORLDGATE
COMMUNICATIONS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(DOLLARS
IN THOUSANDS,  EXCEPT PER SHARE AMOUNTS)




Year Ended
                        December 31,
                        2007
                      
                      
                      Year Ended
                        December 31,
                        2008Net
      revenuesProduct
      revenues
                      
                      $
                      2,565
                      
                      
                      $
                      1,920Service
      revenues
                      
                      
                      705
                      
                      
                      
                      558Other
      revenues
                      
                      
                      175
                      
                      
                      
                      491Total
      net revenues
                      
                      
                      3,445
                      
                      
                      
                      2,969Cost
      of revenues
                      
                      
                      3,046
                      
                      
                      
                      1,899Gross
      profit
                      
                      
                      399
                      
                      
                      
                      1,070Engineering
      and development (excluding depreciation and amortization amounts of $382,
      and $149, respectively)
                      
                      
                      5,315
                      
                      
                      
                      2,316Sales
      and marketing (excluding depreciation and amortization amounts of $59 and
      $46, respectively)
                      
                      
                      2,479
                      
                      
                      
                      501General
      and administrative (excluding depreciation and amortization amounts of
      $161 and $71, respectively)
                      
                      
                      5,260
                      
                      
                      
                      3,526Depreciation
      and amortization
                      
                      
                      602
                      
                      
                      
                      266Total
      expenses from operations
                      
                      
                      13,656
                      
                      
                      
                      6,609Loss
      from operations
                      
                      
                      (13,257
                      )
                      
                      
                      (5,539
                      )Other
      income (expense)Interest
      and other income
                      
                      
                      178
                      
                      
                      
                      51Gain
      on trademark assignment
                      
                      
                      500
                      
                      
                      
                      0Change
      in fair value of derivative warrants and conversion
options
                      
                      
                      2,432
                      
                      
                      
                      (4,124
                      )Income
      from service fee contract termination
                      
                      
                      0
                      
                      
                      
                      3,165Amortization
      of debt discount
                      
                      
                      (4,126
                      )
                      
                      
                      (2,212
                      )Loss
      on equipment disposal
                      
                      
                      0
                      
                      
                      
                      (295
                      )Interest
      and other expense
                      
                      
                      (466
                      )
                      
                      
                      (328
                      )Total
      other (expense)
                      
                      
                      (1,482
                      )
                      
                      
                      (3,743
                      )Net
      loss
                      
                      
                      (14,739
                      )
                      
                      
                      (9,282
                      )Accretion
      on preferred stock, dividends and deemed dividends
                      
                      
                      (30
                      )
                      
                      
                      0Net
      loss attributable  to common stockholders
                      
                      $
                      (14,769
                      )
                      
                      $
                      (9,282
                      )Net
      loss per common share (Basic and Diluted)
                      
                      $
                      (0.32
                      )
                      
                      $
                      (0.13
                      )Weighted
      average common shares outstanding (Basic and Diluted)
                      
                      
                      45,934,717
                      
                      
                      
                      71,175,379





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


F - 4


WORLDGATE COMMUNICATIONS,
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, 2007
                        
                        
                        41,535
                        
                        
                        $
                        415
                        
                        
                        $
                        248,393
                        
                        
                        $
                        (246,806
                        )
                        
                        $
                        2,002Issuance
      of Common Stock pursuant to employee stock purchase plan
                        
                        
                        42
                        
                        
                        
                        
                        
                        
                        
                        24
                        
                        
                        
                        
                        
                        
                        
                        24Issuance
      of Common Stock upon related party investment
                        
                        
                        2,564
                        
                        
                        
                        26
                        
                        
                        
                        974
                        
                        
                        
                        
                        
                        
                        
                        1,000Issuance
      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
                        )Issuance
      of Common Stock pursuant to employee stock purchase plan
                        
                        
                        8
                        
                        
                        
                        
                        
                        
                        
                        1
                        
                        
                        
                        
                        
                        
                        
                        1Issuance
      of Common Stock upon conversion of convertible debenture
                        
                        
                        61,958
                        
                        
                        
                        620
                        
                        
                        
                        1,301
                        
                        
                        
                        
                        
                        
                        
                        1,921Non-cash
      stock based compensation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        632
                        
                        
                        
                        
                        
                        
                        
                        632Net
      Loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (9,282
                        )
                        
                        
                        (9,282
                        )Balance
      at December 31, 2008
                        
                        
                        118,906
                        
                        
                        $
                        1,189
                        
                        
                        $
                        261,478
                        
                        
                        $
                        (270,857
                        )
                        
                        $
                        (8,190
                        )





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


F - 5


WORLDGATE
COMMUNICATIONS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(DOLLARS
IN THOUSANDS)




Year
                      Ended
                      December
      31,
                      2007
                    
                    
                    Year
                      Ended
                      December
      31,
                      2008Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (14,739
                    )
                    
                    $
                    (9,282
                    )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
                    
                    
                    602
                    
                    
                    
                    266Amortization
      of debt discount
                    
                    
                    4,126
                    
                    
                    
                    2,212Change
      in fair value of derivative warrants and conversion
options
                    
                    
                    (2,432
                    )
                    
                    
                    4,124Loss
      on equipment disposal
                    
                    
                    0
                    
                    
                    
                    295Write
      down of inventory
                    
                    
                    293
                    
                    
                    
                    0Stock
      based compensation
                    
                    
                    1,075
                    
                    
                    
                    632Gain
      on trademark assignment
                    
                    
                    (500
                    )
                    
                    
                    0Bad
      debt expense
                    
                    
                    19
                    
                    
                    
                    0Changes
      in operating assets and liabilities:Trade
      accounts receivable
                    
                    
                    53
                    
                    
                    
                    (853
                    )Other
      receivables
                    
                    
                    11
                    
                    
                    
                    5Inventory
                    
                    
                    1,017
                    
                    
                    
                    (119
                    )Prepaid
      and other current assets
                    
                    
                    304
                    
                    
                    
                    26Deposits
      and other assets
                    
                    
                    0
                    
                    
                    
                    55Accounts
      payable
                    
                    
                    (908
                    )
                    
                    
                    1,003Accrued
      expenses and other current liabilities
                    
                    
                    726
                    
                    
                    
                    (596
                    )Accrued
      compensation and benefits
                    
                    
                    26
                    
                    
                    
                    99Warranty
      reserve
                    
                    
                    (36
                    )
                    
                    
                    (32
                    )Deferred
      revenue and income
                    
                    
                    (15
                    )
                    
                    
                    1,510Net
      cash used in operating activities
                    
                    
                    (10,378
                    )
                    
                    
                    (655
                    )Cash
      flows from investing activities:Capital
      expenditures
                    
                    
                    (132
                    )
                    
                    
                    (2
                    )Cash
      from trademark assignment
                    
                    
                    500
                    
                    
                    
                    0Proceeds
      from the sale of property and equipment
                    
                    
                    0
                    
                    
                    
                    4Net
      cash provided by investing activities
                    
                    
                    368
                    
                    
                    
                    2Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                    
                    
                    1,024
                    
                    
                    
                    1Net
      cash provided by financing activities
                    
                    
                    1,024
                    
                    
                    
                    1Net  decrease
      in cash and cash equivalents
                    
                    
                    (8,986
                    )
                    
                    
                    (652
                    )Cash
      and cash equivalents, beginning of year
                    
                    
                    10,067
                    
                    
                    
                    1,081Cash
      and cash equivalents, end of year
                    
                    $
                    1,081
                    
                    
                    $
                    429





See Note
13 for supplemental cash flow information disclosures





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


F - 6


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 (“HSD”) and
telecommunications service providers 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 distributed through and in partnerships with HSD and telecommunications
service providers, as well as through traditional electronics distribution
channels. Video phone service, using the Ojo video phone, is expected to be
offered by HSD and telecommunications service providers as a means of attracting
new subscribers as well as maintaining existing subscribers. The Company
believes that HSD and telecommunications service 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 and telecommunications models,
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 and telecommunications
service providers. 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
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, 2008 the Company had cash and cash equivalents of
$429.  The cash used in operations for the year ended December 31,
2008 was $655.  The funds the Company received as a result of private
placements of its securities have permitted it to fund the development of the
Company’s business.





The
Company had $11,275 of liabilities and substantially all of its assets are
pledged as collateral as of December 31, 2008. These liabilities include
$4,359 of fair value of detachable warrants related to the Company’s private
placement of preferred stock in June 2004 and $4,080 (including debt discount of
$2,287) 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, capital
expenditures from operations, and operating expenses and the repayment ofthe August and October 2006 secured convertible debenture transactions
which mature in 2009 (See Note 8).





The
Company has incurred recurring net losses and has an accumulated deficit of
$270,857, stockholders’ deficiency of $8,190 and a working capital deficit of
$8,490 as of December 31, 2008.  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
future.  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.


F - 7





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, 2008 the investors converted $6,920 of the convertible debt into
75,191,392 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 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 an expansion of its relationship with Aequus
and Snap!VRS and in the later part of the third quarter of 2007 product
shipments were commenced to Snap!VRS’ customers.





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 (the
“March Aequus Agreement”). The March Aequus Agreement inter alia, provided for
the resolution of a dispute with Aequus regarding amounts the Company claimed
were owed to the Company by Aequus including, (i) payment to the Company by
Aequus of approximately $5,000 in scheduled payments over ten months commencing
March 31, 2008, (ii) agreement to arbitrate approximately $1,354 claimed by the
Company to be owed by Aequus for non-recurring engineering (“NRE”) costs (the
“NRE Arbitration”)  and (iii) purchase of an additional $1,475 of
video phones by Aequus.  As a result of the March Aequus Agreement
Aequus built a new data center, with support and training provided by the
Company, and began directly operating a video phone service for its customers.
  During the year ended December 31, 2008, Aequus purchased $2,628 of units
($1,475 as agreed under the March Aequus Agreement and an additional $1,153 in
purchases).  The Company held the units purchased by Aequus pending
shipment to Aequus’ ultimate customers.  The revenue for these units
was deferred per the SEC Staff Accounting Bulletin Topic 13 A (3) (a), Bill and
Hold Arrangements and is recognized as and when the units were shipped to the
Aequus customer.  Of the total $2,628 of units purchased by Aequus
(8.2 thousand units) during the year ended December 31, 2008, $1,740 of units
were shipped (5.4 thousand units) to Aequus customers and was recognized as
revenue, and $888 of units purchased was recorded as deferred revenue (2.8
thousand units were still being held by the Company as of December 31,
2008).





Pursuant
to the March Aequus Agreement, Aequus agreed to pay the Company $5,000 over ten
months, with such amount being related to multiple deliverables each having a
standalone value with objective and reliable evidence of fair value, and
including: (i) a specified amount of NRE (with a fair value of $900), (ii)
support and transition training to Aequus to operate its own data center
(“Training,” with an estimated fair value of $358), (iii) continued use of the
WorldGate video phone service center during the transition (with an estimated
fair value of $230), and (iv) the elimination of  previously agreed service
fees (“contract termination fee”, with a residual fair value of $3,512). These
deliverables are all separate units of accounting in accordance with EITF No.
00-21, “Revenue Arrangements with Multiple Deliverables.” The Company recognizes
revenue for the NRE and Training as the service is provided.  For the
year ended December 31, 2008, revenue of $133 was recognized for NRE, and $358
was recognized for Training.  The Company’s obligation regarding the
NRE is to provide $900 of such NRE which may extend beyond a period of twelve
months.  For the year ended December 31, 2008, the Company recorded
$3,165 of contract termination fees as other income.  As of December
31, 2008 the Company had received $4,600 of the $5,000 agreed
payments.  Of the $4,600 of payments, the December 31, 2008 balance
sheet reflects $804 of such payments as deferred revenue and
income.  In January 2009 the Company received the final remaining $400
of the $5,000 agreed payments.


F - 8





In
October 2008 Aequus failed to pay to WorldGate $953 owed to WorldGate for the
purchase of video phones, and as a result the Company terminated its reseller
agreement with Aequus.  The Company has most of the units sold to
Aequus in its possession and will attempt to sell the units elsewhere to recover
the $953.There can be no assurance
that WorldGate will be able to sell the units and recover the $953 owed by
Aequus.  The Company continues to believe that the VRS and VRI markets
provide an attractive opportunity for the sale video phones and has opened
discussions with other VRS/VRI service providers.





On
January 27, 2009, the Company resolved the outstanding NRE Arbitration with
Aequus, and in full satisfaction of the outstanding arbitration claim Aequus
agreed to terminate any obligation on the part of the Company to provide certain
prepaid engineering services pursuant to the March Aequus Agreement (Aequus had
prepaid approximately $900 for these engineering services of which $725 was
allocated to the settlement).





On
December 12, 2008, the Company entered a Securities Purchase Agreement with WGI
Investor LLC ("WGI"), pursuant to which the Company agreed to issue and sell to
WGI a total of 202.5 million shares, which should represent 63% of the Company’s
stock, after issuance, as well as a warrant to purchase up to 140.0 million
shares of Common Stock in certain circumstances, in exchange for (i) total cash
consideration of $1,450, (ii) the cancellation of debentures held by WGI under
which approximately $5,100 in principal and accrued interest was outstanding at
December 31, 2008, and (iii) the cancellation of certain of the Company's
outstanding warrants held by WGI (the "Private Placement").





WGI is a
private investment fund whose ownership includes owners of ACN, Inc. ("ACN").
ACN is a direct seller of telecommunications services and a distributor of video
phones. Further, in December 2008, the Company agreed to enter into a commercial
relationship providing for the Company to design and sell videophones to ACN
(the "Commercial Relationship"). As part of the Commercial Relationship, ACN
will commit to purchase 300 thousand videophones over a two-year period and will
provide the Company with $1,200 to fund software development costs associated
with the Commercial Relationship. In connection with the Commercial
Relationship, the Company will grant ACN a warrant to purchase up to
approximately 38.2 million shares of Common Stock (the “ACN Warrant”). Pursuant
to the terms of the securities purchase agreement with WGI, the Company
submitted for approval by its stockholders (i) the Private Placement and (ii) an
amendment to the Company’s Amended and Restated Certificate of Incorporation to
increase its authorized Common Stock to 700,000,000 shares, which approvals were
obtained on March 20, 2009.  Although the stockholders have approved
the transaction, no assurance can be made that such closing will occur, that ACN
will make the agreed to payments, that ACN will purchase the 300 thousand units,
or that the units will be purchased in the committed timeframe.





In
December 2008, WGI acquired from YA Global Investments, L.P. ("YA Global") the
secured convertible debentures previously issued by the Company to YA Global and
the outstanding warrants to purchase the Common Stock of the Company then held
by YA Global.  On March 20, 2009, the Company’s stockholders approved
the Private Placement and upon closing of the Private Placement scheduled for
early April, WGI will cancel these debentures, under which approximately $5,100
in principal and accrued interest was outstanding at December 31, 2008, and also
cancel certain outstanding warrants it holds to purchase an aggregate of
2,595,000 shares of Common Stock.





The
Company’s ability to generate cash is dependent upon the sale of its Ojo product
and on obtaining cash through capital markets.  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.





Based on management’s internal
forecasts and assumptions, including, among others, the receipt of the payments
which are currently committed to the Company, such as the payments under the
Company’s agreements with WGI and ACN, upon the scheduled closing of the
Private Placement and pursuant to the Commercial Relationship, and assumptions
regarding its short term cash requirements, the Company currently believes that
it will have sufficient cash on hand to meet its obligations into the third
quarter of 2009. Based on additional assumptions regarding short term projected
revenue growth related to product sales and services to ACN, the Company might
have sufficient cash on hand to meet its obligations into 2010. However, there
can be no assurance given that these assumptions are correct or that the revenue
projections associated with product sales and services to ACN will materialize
to a level that will provide the Company with sufficient capital to operate its
business.


F - 9





On
October 4, 2007, the Company was delisted from the NASDAQ Capital Market and on
October 10, 2007 commenced being quoted on the 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, asset securitizations, or
from other sources.  There can be no assurance given, however, that
the Company’s efforts will be successful or that any additional financing will
be available and can be consummated on terms acceptable to the Company, if at
all. If the Company is unable to obtain sufficient funds the Company may be
required to further reduce the size of the organization or suspend operations
which could have a material adverse impact on its business
prospects




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




In
addition to the risks and uncertainties regarding the Company’s relationship
with Aequus and Snap!VRS and WGI and ACN as discussed above under “Liquidity and
Going Concern Considerations,” 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.





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, 2008, the Company did not have an allowance for doubtful accounts
or any off-balance sheet credit exposure related to its customers.  At
December 31, 2008 and 2007, approximately 96% and 82%, respectively, of accounts
receivable were concentrated with one customer.  Bad debt expense
recorded for the years ended December 31, 2008 and 2007 was $0 and $19,
respectively.


F - 10





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.  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.





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.




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, 2008
of $1,420 primarily consisted of $978 of interest on convertible debentures as
described below in “Accounting for Preferred Shares and Derivative Shares,” and
$157 of contingent penalties (See Note 15).  Accrued expenses at
December 31, 2007 of $2,016 primarily consisted of $658 of interest on
convertible debentures, $157 of contingent penalties and $802 of inventory
purchases.





Accounting
for Preferred Shares and Derivative Shares




In
June 2004, WorldGate completed a private placement of preferred stock.
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.


F - 11




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, 2008 and 2007 was
$0.




The terms
of the preferred stock included certain conversion options that represented
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 included certain provisions
that could have resulted in a variable number of shares to be issued upon
conversion, adjustment to the strike price at which conversion shares would 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, 2008 and
2007, the closing common stock price was $0.38 and $0.19, respectively,
applicable volatility rates were 451% and 108%, respectively, and the period
close risk-free interest rates were approximately 0.27% and 3.20%, respectively,
the instrument’s contractual lives were 0.5 and 1.5 years, respectively,
(continuously compounded), and represent the key assumptions used in the
valuation calculation.  The result was a $4,124 non cash charge for
the year ended December 31, 2008, and a $772 non cash gain for the year ended
December 31, 2007.





After the
mark to market adjustments, the balances of the warrants derivative liability
were $4,359 and $236, respectively, at December 31, 2008 and 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 approximately $978 of accrued interest as of December 31,
2008.  For the year ended December 31,2007  the investors
converted $3,650 of the convertible debt into 12,086,946 shares of the Company’s
common stock. For the year ended December 31, 2008 the investors converted
$1,921 into 61,958,168 shares of the Company’s common stock.  Through
December 31, 2008 the investors converted $6,920 of the convertible debt into
75,191,392 shares of the Company’s common stock.


F - 12





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. This
amendment of the terms of the convertible debentures permits 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 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 who resigned on January
2, 2009.  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.


F - 13




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.  In December 2008 the Company increased this share
limitation of the aggregate number of shares to be issued to 75,368,811 shares
of common stock.




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.





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.





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 OTCBB, 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.  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
restricted shares if there is no effective registration statement at the time of
conversion.  This amendment of the terms of the convertible debenture
permits the Company to reclassify $5,384 of the embedded derivative conversion
option liability to stockholders' equity.  The discount on the
convertible debentures of $5,240 is based on amortization until
October 2009.


F - 14




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, 2008 and 2007, $1,921 and $3,650 respectively in
face value of the convertible debentures was converted, resulting in the
issuance of 61,958,168 and 12,086,946 shares of common stock
respectively.  As a result of the amortization and conversion, $2,212
and $4,126, respectively, of the discount on the convertible debenture has been
charged to discount amortization and approximately $0 and $1,048, respectively
of the conversion option on the convertible debt was reclassified upon
conversion to additional paid in capital during the years ended December 31,
2008 and 2007.





At
December 31, 2008, the balances of the convertible debentures and the offsetting
related discount were $4,080 and $2,287, respectively.





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.


F - 15





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 years ended December 31,
2008 and 2007, the Company shipped approximately 9 and 400 units, respectively,
with a sales value of $2 and $128, respectively, 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.”





From June 2007 through October 2008 the
Company shipped its video phone product to its VRS customer,
Aequus.  As part of its June 2007 agreement with this customer, the
Company recognized product revenue at the time of shipment of its video phone.
In addition, the Company also received service fee revenues based on a
percentage of the fees earned by Aequus and for which its customer had received
service. The Company recognizes this service fee revenue upon confirmation from
Aequus of the fees it has earned.   The Company also receives
service fee revenues from end consumers which are recognized after the services
have been performed.




On March
31, 2008, the Company entered into the March Aequus Agreement.  During
the year ended December 31, 2008, Aequus purchased $2,628 of units ($1,475 as
agreed under the March Aequus Agreement and an additional $1,153 in
purchases).  The Company held the units purchased by Aequus pending
shipment to Aequus’ ultimate customers.  The revenue for these units
was deferred per the SEC Staff Accounting Bulletin Topic 13 A (3) (a), “Bill and
Hold Arrangements,” and was recognized as and when the units were shipped to the
Aequus consumer.  Of the total $2,628 of units purchased by Aequus
(8.2 thousand units) during the year ended December 31, 2008, $1,740 of units
were shipped (5.4 thousand units) to Aequus customers and was recognized as
revenue, and $888 of units purchased was recorded as deferred sales (2.8
thousand units were still being held by the Company as of December 31,
2008).




Pursuant
to the March Aequus Agreement, Aequus agreed to pay the Company $5,000 over ten
months, with such amount being related to multiple items each having a
stand-alone value with objective and reliable evidence of fair value, and
including: (i) a specified amount of NRE, (with a fair value of $900), (ii)
support and transition training to Aequus to operate its own data center
(“Training,” with an estimated fair value of $358), (iii) continued use of the
WorldGate video phone service center during the transition (with an estimated
fair value of $230), and (iv) the elimination of  previously agreed service
fees (“contract termination fee”, with a residual fair value of
$3,512).  These deliverables are all separate units of accounting in
accordance with EITF No. 00-21, “Revenue Arrangements with Multiple
Deliverables.”  The Company recognizes revenue for the NRE and
Training as the service is provided.  For the year ended December 31,
2008, revenue of $133 was recognized for NRE, and $358 was recognized for
Training.  The Company’s obligation regarding the NRE is to provide
$900 of such NRE which may extend beyond a period of twelve
months.  For the year ended December 31, 2008, the Company recorded
$3,165 of contract termination fees as other income.  As of December
31, 2008 the Company had received $4,600 of the $5,000 agreed payments.  Of
the $4,600 of payments, the December 31, 2008 balance sheet reflects $804 of
such payments as deferred revenue and income.  In January 2009, the Company
received the final remaining $400 of the $5,000 agreed payments.




On
January 27, 2009, the Company resolved the outstanding NRE Arbitration with
Aequus, and in full satisfaction of the outstanding arbitration claim Aequus
agreed to terminate any obligation on the part of the Company to provide certain
prepaid engineering services pursuant to the March Aequus Agreement (Aequus had
prepaid approximately $900,000 for these engineering services of which $725,000
was allocated to the settlement which will be recorded as revenue during the
first quarter of 2009).





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
$2,316 and $5,315 for the years ended December 31, 2008 and 2007,
respectively.


F - 16





Advertising
Costs





Advertising
costs, included in sales and marketing expense, are expensed in the period
incurred. Advertising costs were $79 and $297 for the years ended
December 31, 2008 and 2007, respectively.





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, 2008 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 –
an  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). The Company completed analyses under Section 382 of the
Internal Revenue Code.  Generally section 382 limits the utilization
of an entity’s net operating loss carry forward upon a change in
control.  Upon completion of this analysis, it was determined that
during July 2008, the Company experienced a change of ownership, as defined
under Section 382, as more fully described in Note 7. Future issuances of common
stock may affect this analysis which might cause limitation in the Company’s
ability to utilize net operating loss carry forwards.





Upon the
closing of the Private Placement, scheduled for early April 2009, and WGI
acquiring 63% of the post transaction shares of the Company, the Company has
determined that the ability to utilize its remaining net operating loss
carryforwards and credit carryforwards would again be subject to further annual
limitations as a result of current tax law as defined under
Section 382.





Stock-Based
Compensation




The
Company accounts for stock-based compensation utilizing  the fair
value recognition provisions of SFAS No. 123 (Revised 2004), "Share-Based
Payment,” (SFAS No. 123(R).  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, 2008 and 2007 included approximately $632
($0.01 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, unvested restricted
stock grants 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, 2008 and 2007 totaled 27,237,092, and
67,804,376, respectively.


F - 17





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, 2008 and
2007 approximates fair value as terms approximate those currently available for
similar instruments.    Free standing warrant derivative
liabilities on the balance sheet at December 31, 2008 and 2007 are measured at
fair value using the Black Scholes model.





SFAS No.
157, “Fair Value Measurements” (“SFAS 157”), defines fair value, establishes a
framework for


measuring
fair value in accordance with generally accepted accounting principles, and
expands disclosures about the price that would be received to sell an asset, or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.  SFAS 157 applies to all assets and
liabilities that are measured and reported on a fair value basis.





SFAS 157
establishes a three-tier fair value hierarchy which prioritizes the inputs used
in measuring fair


value as
follows:





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


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


Level
3 – Unobservable inputs in which there is little or no market data, which
require the reporting entity


to develop its own assumptions.




The
following are the Company’s major categories of liabilities measured at fair
value on a recurring basis


at
December 31, 2008, categorized by the SFAS 157 fair value
hierarchy:





Fair Value Measurements at
December 31, 2008 Using Significant Unobservable Inputs:





Description
                  
                  (Level 3)Liabilities:Derivatives
                  
                  $
                  4,360





The following is a reconciliation of
the beginning and ending balances for the Company’s liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3)
during the year ended


December
31, 2008:





Fair Value Measurements
Using Significant Unobservable Inputs (Level 3):





Description
                  
                  DerivativesLiabilities:Balance,
      January 1, 2008
                  
                  $
                  236Total
      change in fair value included in operations
                  
                  
                  4,124Balance,
      December 31, 2008
                  
                  $
                  4,360





The change in fair value recorded for
Level 3 liabilities for the periods above are reported in other income (expense)
on the consolidated statement of operations.





SFAS
157 was effective for fiscal years beginning after November 15, 2007.  FASB
Staff Position (“FSP”)


FAS
157-2, “Effective Date of FASB Statement No. 157”, delays the effective date of
SFAS 157 for non-financial assets and non-financial liabilities that are
recognized or disclosed in the financial statements on a nonrecurring basis
until fiscal years beginning after November 15, 2008.  The Company does not
have any assets or liabilities measured at fair value on a recurring basis at
December 31, 2008; accordingly, the partial adoption of SFAS 157 did not have
any impact on the Company’s financial statements.  The Company will apply
the provisions of SFAS 157 to non-financial assets and liabilities beginning
January 1, 2009 as required by FSP FAS 157-2.





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.  As part of its cash
management process, the Company performs periodic evaluation of the relative
credit standing of these institutions.At times, the Company’s
cash and cash equivalents may be uninsured or in deposit accounts that exceed
the Federal Deposit Insurance Corporation (“FDIC”) insurance limit.  At
December 31, 2008, all of the Company’s cash is held at two financial
institutions.


F - 18




In 2008
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 creditworthiness and payment
history related to these sales, no allowance for potential credit losses has
been recorded as of December 31, 2008 and 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
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2008A
                  
                  
                  63
                  %
                  
                  
                  82
                  %
                  
                  
                  82
                  %
                  
                  
                  96
                  %B
                  
                  
                  2
                  %
                  
                  
                  0
                  %
                  
                  
                  13
                  %
                  
                  
                  0
                  %





As of
December 31, 2008, 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, 2008 the Company has long-lived assets, with a net book value
total of $152, located in the United States, and $82 located in Taiwan,
R.O.C.  At December 31, 2007, 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.




Recent
Accounting Pronouncements




In December 2007, the FASB issued Statement of Accounting Standard ("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 non-controlling 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, "Non-controlling Interests in
Consolidated Financial Statements—An Amendment of ARB
No. 51."  SFAS No. 160 establishes accounting and reporting
standards for the non-controlling interest in a subsidiary (previously referred
to as minority interests).  SFAS 160 also requires that a
retained non-controlling 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 non-controlling interests as a separate
component of consolidated stockholders' equity. The Company would also be
required to present any net income allocable to non-controlling 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 non-controlling interests of any non-wholly
owned business acquired in the future.




Effective
January 1, 2008, the Company adopted SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities." ("SFAS 159") which
permits entities to choose to measure many financial instruments and certain
other items at fair value. The Company did not elect the fair value reporting
option for any assets and liabilities not previously recorded at fair
value.




Effective
January 1, 2008, the Company adopted 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. The adoption of EITF 06-1 did not have a
material effect on the  consolidated financial statements of the
Company.


F - 19




Effective
January 1, 2008, the Company adopted Staff Accounting Bulletin No. 110
("SAB 110"). SAB 110 amends and replaces Question 6 of
Section D.2 of Topic 14, Share-Based Payment, of 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. The adoption of SAB 110 did not have a
material impact upon the Company's consolidated financial
statements.




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.




In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies a consistent framework,
or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with Generally Accepted
Accounting Principles ("GAAP") for nongovernmental entities. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, "The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles."




In June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an
Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5
provides that an entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions. EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early application is not permitted. The
Company is assessing the potential impact of this EITF 07-5 on its financial
condition and results of operations.





3.   Inventory




In
accordance with Accounting Research Bulletin (“ARB”) No. 43, the Company
reflects such inventory at the lower of cost or market and
reduced  its inventory by $0 and $293, respectively, for the years
ended December 31, 2008 and 2007 to reflect such valuation.  Included
in the inventory balance reported on the balance sheet as of December 31, 2008
is $745 for units purchased in a “Bill and Hold” arrangement by
Aequus.




Through
December 31, 2007 the Company arranged to have a total of 3.7 thousand 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, 2007 and
2008:





2007
                
                
                2008Computer
      equipment and system packages
                
                $
                1,363
                
                
                $
                778Furniture
      and fixtures
                
                
                966
                
                
                
                495Hardware,
      software and tooling
                
                
                1,347
                
                
                
                1,188Leasehold
      improvements
                
                
                951
                
                
                
                454,627
                
                
                
                2,506Accumulated
      depreciation and amortization
                
                
                (3,830
                )
                
                
                (2,272
                )Property
      and equipment, net
                
                $
                797
                
                
                $
                234


F - 20





Depreciation
and amortization on property and equipment in the amount of $266 and $602 was
recorded for each of the years ended December 31, 2008 and 2007,
respectively.





During
the year ended December 31, 2008, certain equipment, furniture and fixtures were
sold and disposed of during the Company’s move to a smaller
facility.  The net loss realized during the year ended December 31,
2008 was $295.  There was no loss or gain realized during the year
ended December 31, 2007.





5.   Accrued
Expenses





The
Company’s accrued expenses consisted of the following as of December 31, 2007
and 2008:




2007
                        
                        
                        2008Inventory
      purchases
                        
                        $
                        802
                        
                        
                        $
                        0Interest
      on Convertible Debt
                        
                        
                        658
                        
                        
                        
                        978Marketing
      and Advertising expenses
                        
                        
                        16
                        
                        
                        
                        0Contingent
      penalties
                        
                        
                        157
                        
                        
                        
                        157Other
                        
                        
                        383
                        
                        
                        
                        285Total
                        
                        $
                        2,016
                        
                        
                        $
                        1,420




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, 2008 and 2007, the Company has a reserve of $17 and $49,
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, 2008 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, 2008 and 2007, the Company reduced its warranty
reserve by $32 and $36, respectively.  The adjustment in 2008 and 2007
reflects warranty claims of $5 and $49, respectively, increases of $32 and $49,
respectively, for additional warranty costs from increased product sales and $5
and $91, respectively, of expired warranties based on the term of warranty
issued.





7.  
Income Taxes





The
significant components of the net deferred tax asset at December 31, 2007
and 2008 are as follows:





2007
                  
                  
                  2008Federal
      tax loss carryforward
                  
                  $
                  78,374
                  
                  
                  $
                  2,434State
      tax loss carryforward
                  
                  
                  5,635
                  
                  
                  
                  715Property
      and equipment
                  
                  
                  1,255
                  
                  
                  
                  677Research
      and experimentation credit
                  
                  
                  3,961
                  
                  
                  
                  144Officers’
      compensation, accrued expenses and other
                  
                  
                  1,084
                  
                  
                  
                  1,938Inventory
                  
                  
                  582
                  
                  
                  
                  44990,891
                  
                  
                  
                  6,357Valuation
      allowance
                  
                  
                  (90,891
                  )
                  
                  
                  (6,357
                  )$
                  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 2008:




2007
                      
                      
                      2008U.S.
      Federal statutory rate
                      
                      
                      (34
                      )
      %
                      
                      
                      (34
                      )
                      %Permanent  items
                      
                      
                      15
                      
                      
                      
                      23Increase
      in valuation allowance
                      
                      
                      19
                      
                      
                      
                      11Effective
      rate
                      
                      
                      0
                      %
                      
                      
                      0
                      
                      %


F - 21





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, 2008, the Company had net operating loss carryforwards (“NOL’s) of
approximately $237,630 for federal tax purposes, expiring between 2012 and 2028.
The NOL’s for state purposes is approximately $190,110, which will expire
through 2028. The Company also has federal research and experimental credit
carryforwards of approximately $4,331.





During
July 2008, the Company experienced a change of ownership as defined within the
Internal Revenue Code Section 382. As a result of this change, which is defined
as a more than 50% change in ownership over a three year period, the Company’s
net operating loss carryforward will be limited. Such limitations are based on
the market value of the Company at the time of the ownership change (July 2008)
multiplied by the long-term exempt rate supplied by the Internal Revenue
Service, which was 4.71% at the date of change.  Due to the
limitations imposed by this Code Section, the Company will be unable to utilize
significant amounts of its NOL’s and the remaining amounts will be subject to an
annual limitation of $326.





The
federal net operating loss carryforward lost and remaining amounts available for
carryforward at December 31, 2008 are:





Total
      2008 NOL’s
                  
                  $
                  237,630Total
      NOL’s lost due to Sec 382 limitations
                  
                  
                  230,470NOL’s
      remaining subject to annual limitation
                  
                  $
                  7,160





The state
net operating loss carryforward lost and remaining amounts available for
carryforward at December 31, 2008 are:





Total
      2008 NOL’s
                  
                  $
                  190,110Total
      NOL’s lost due to Sec 382 limitations
                  
                  
                  182,950NOL’s
      remaining subject to annual limitation
                  
                  $
                  7,160





These
carryforwards may be applied as a reduction to future taxable income of the
Company, if any, subject to annual limitations to the pre-change losses. The
state net operating losses are also limited by state law to a maximum
utilization of $2,000 per year per entity for losses generated in 2006 and prior
and $3,000 per entity for losses generated 2007 and beyond.





The
federal research and experimental credit will also be subject to an annual
limitation. Due to the limitation, all but $144 of the credit is
lost.  The federal credits remaining will expire in 2028. All state
research and experimentation credit carryovers have been refunded and no state
credit remains.





Upon the
closing of the Private Placement, scheduled for early April 2009, and WGI
acquiring 63% of the post transaction shares of the Company, the Company has
determined that the ability to utilize its remaining net operating loss
carryforwards and credit carryforwards would again be subject to further annual
limitations as a result of current tax law as defined under
Section 382.





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 within FIN
48.  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 2005 through 2008, 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.


F - 22





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,
2008.  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.





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
$320, and $464 for the years ended December 31, 2008 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.





In
December 2008, WGI acquired from YA Global the secured convertible debentures
previously issued by the Company to YA Global and the outstanding warrants to
purchase the Common Stock of the Company then held by YA Global. On March 20,
2009, the Company’s stockholders approved the Private Placement, and upon
closing of the Private Placement, scheduled for early April, 2009, WGI will
cancel these debentures held by WGI under which approximately $5.1 million in
principal and accrued interest was outstanding at December 31, 2008, and will
also cancel certain outstanding warrants to purchase an aggregate
of 2,595,000 shares of Common Stock held by WGI.  As part of the
agreement with WGI, the Company increased the share limitation of the aggregate
number of shares to be issued upon conversion under the convertible debentures,
exercise of the warrants, payment for commitment shares, and payment of
liquidated damages pursuant to the registration rights agreement to 75,368,811
shares of common stock.




During
the year ended December 31, 2008, $1,921 in face value of the convertible
debentures was converted, resulting in the issuance of 61,958,169 shares of
common stock.  As a result of amortization and the conversions, $2,212
of the discount on the convertible debenture has been charged to discount
amortization.





At
December 31, 2008, the balances of the convertible debentures and the offsetting
related discount were $4,080 and $2,287, respectively.





9.  
Stockholders’ Equity





Common
Stock




On
December 13, 2007 the Company received stockholder approval to increase the
authorized common shares from 120,000,000 to 200,000,000.  On March
20, 2009, the Company received stockholder approval to increase the authorized
common shares from 200,000,000 to 700,000,000.




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.  At December 31, 2008 and
2007 there was no preferred stock outstanding.


F - 23





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 June 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.These warrants expired on
December 3, 2008 and January 20, 2009, respectively.





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
will 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 $0.31 as of December 31, 2008 and
the number of outstanding warrants were increased by 5,227,287 to a total of
5,905,477 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 $.33 as of December 31, 2008 and the number of outstanding warrants
were increased by 6,164,765 to a total of 6,916,040 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.





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).





On
September 24, 2007, the Company completed a private placement with Antonio
Tomasello, a private investor who is the father of David Tomasello, a former
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.





A summary
of the Company warrant activity for the year ended December 31, 2008, is as
follows:





Warrants
                  
                  Weighted Average
                    Exercise Price
                  
                  Weighted
                    Average
                    Remaining
                    Contract
                    LifeOutstanding,
      January 1, 2008
                  13,234,024
                  
                  $
                  1.46Granted
                  12,821,517
                  
                  0.32Exercised
                  0
                  
                  0Cancelled
      / Forfeited
                  (5,909,230)
                  
                  (0.74)
                  )Outstanding,
      December 31, 2008
                  20,146,311
                  
                  0.96
                  
                  1.26Exercisable,
      December 31, 2008
                  20,146,311





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.


F - 25




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.





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, 2008 there were 2,939,482
shares available to grant under the Plans and 6,913,364 options and restricted
shares 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, 2008 vest over four years and expire in ten years from the date of
grant under the Plan. The weighted-average fair values of the options granted
were $0.08, and $0.33 per option during the years ended December 31, 2008
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 2008 and 2007,
respectively: expected volatility of 119.2%, and 85%; average risk-free interest
rates of 3.01% and 4.33%; dividend yield of 0%; and expected lives of 4.1 and
6.2 years.





On July
29, 2008, the Company’s Board of Directors approved a re-pricing of 3,756,132
stock options, which represented all outstanding stock options that had been
issued to employees of the Company prior to January 1, 2008.  The new
exercise price was established as the closing price of the Company’s stock on
that date, which was $0.108.   All other terms of the stock
options will remain the same.  In accordance with the provisions of
SFAS 123(R), this re-pricing resulted in the Company recording additional
compensation expense of $133 on July 29, 2008.




A summary
of the Company’s stock plan is presented below:


Stock Options
                    
                    
                    Weighted-Average
                      Exercise Price
                    
                    
                    Aggregate Intrinsic
                      ValueOutstanding,
      January 1, 2008
                    
                    
                    5,907,342
                    
                    
                    $
                    1.53
                    
                    
                    $
                    0Granted
                    
                    
                    5,356,107
                    
                    
                    $
                    0.
      11Exercised
                    
                    
                    0
                    
                    
                    $
                    0Cancelled/forfeited
                    
                    
                    (5,183,085
                    )
                    
                    $
                    1.545Outstanding,
      December 31, 2008
                    
                    
                    6,080,364
                    
                    
                    $
                    0.27
                    
                    
                    $
                    1,435,875Exercisable,
      December 31, 2008
                    
                    
                    3,545,432
                    
                    
                    $
                    0.36
                    
                    
                    $
                    791,974




As of
December 31, 2008, there was $494 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, 2008:


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
                      
                      5,363,632
                      
                      6.77
                      
                      $
                      0.11
                      
                      2,926,200
                      
                      $
                      0.11$0.40
      - $0.59
                      
                      86,500
                      
                      8.17
                      
                      0.49
                      
                      26,500
                      
                      0.48$0.60
      - $0.89
                      
                      289,492
                      
                      5.97
                      
                      0.60
                      
                      289,492
                      
                      0.60$0.90
      - $1.34
                      
                      6,500
                      
                      3.57
                      
                      1.20
                      
                      6,500
                      
                      1.20$1.35
      - $2.01
                      
                      83,665
                      
                      5.19
                      
                      1.72
                      
                      58,665
                      
                      1.
      78$2.02
      - $3.02
                      
                      193,000
                      
                      4.23
                      
                      2.39
                      
                      193,000
                      
                      2.39$3.03
      - $4.53
                      
                      54,000
                      
                      6.20
                      
                      3.60
                      
                      41,500
                      
                      3.59$4.54
      - $6.80
                      
                      2,025
                      
                      1.94
                      
                      6.34
                      
                      2,025
                      
                      6.34$6.81
      - $10.20
                      
                      0
                      
                      0
                      
                      0
                      
                      0
                      
                      0$10.20
      - $15.30
                      
                      0
                      
                      0
                      
                      0
                      
                      0
                      
                      0$15.31
      - $22.95
                      
                      1,550
                      
                      0.21
                      
                      16.50
                      
                      1,550
                      
                      16.50$22.96
      - $34.43
                      
                      0
                      
                      0
                      
                      0
                      
                      0
                      
                      06,080,364
                      
                      6.64
                      
                      $
                      0.27
                      
                      3,545,432
                      
                      $
                      0.36


F - 26





The total fair value of the shares
vested during the years ended December 31, 2008 and 2007 was $553 and $826,
respectively.  There were no options exercised during the years ended
December 31, 2008 and 2007.





Restricted Stock Grants





Performance based shares were granted
on October 3 and December 20 of 2007 to certain senior
executives.  The 1,151,000 shares awarded are subject to vesting under
certain performance criteria of which 250,000 shares have since been forfeited.
The Performance based shares expire in ten years and vest upon the Company
meeting the vesting criteria:  10% of the shares vest upon achieving
each of a 10%, 20%, 30% 40% and 50% increase in the Company’s total gross
revenue in a quarter over its third quarter 2007 total gross revenue shown on
the Company’s statement of operations as reported in its SEC filings and 25% of
the shares vest upon the Company’s achievement 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 $198 on their
dates of grant of October 3 and December 20, 2007.  As of December 31,
2008, 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, 2008 and changes during the year then ended:





SharesNonvested
      as of January 1, 2008
                  
                  
                  901,000Granted
                  
                  
                  0Vested
                  
                  
                  0Forfeited
                  
                  
                  (68,000
                  )Nonvested
      as of December 31, 2008
                  
                  
                  833,000





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
2008 and 2007, the Company sold 8,251 and 42,262 shares of common stock under
the Stock Purchase Plan for proceeds of $1 and $24,
respectively


F - 27





10. 
Commitments and Contingencies




Leases




On
September 1, 2005 the Company executed a lease for 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.    In March 2008 the
parties agreed in principle to a new lease (with the expectation of the
cancellation of the prior lease with no termination cost) for a smaller space
within the current facility consisting of approximately 17,000 square feet at an
annual rent of $7 per square foot. The parties have agreed that the new lease
will be able to be cancelled by either party upon 90 days notice with no
termination costs.  Total rent expense for the years ended December
31, 2008 and 2007 amounted to approximately $250 and $657,
respectively.





In
December 2008, the Company entered into a new 60 month lease for office
equipment.  As of December 31, 2008 there remains a total of $45 to be
paid over the remaining period of this lease.





Disclosure
of Contractual Obligations





The future minimum contractual rental
commitments under non-cancelable leases for each of the fiscal years ending
December 31 are as follows:





2009
                        
                        $
                        5462010
                        
                        
                        3752011
                        
                        
                        112012
                        
                        
                        11Total
                        
                        $
                        943





Legal
Proceedings





Although
from time to time we may be involved in litigation as a routine matter in
conducting the Company’s business, we are not currently involved in any
litigation which we believe is material to the Company’s operations or balance
sheet. During the first fiscal quarter 2008 the Company was involved in a
dispute with Aequus Technologies.  With the exception of certain
non-recurring engineering, in the amount of approximately $1,354, which was the
subject of the NRE Arbitration between the parties, this dispute was settled as
part of the March Aequus Agreement (see Note 2).  On January 27, 2009,
the Company resolved the outstanding NRE Arbitration with Aequus, and in full
satisfaction of the outstanding arbitration claim Aequus agreed to terminate any
obligation on the part of the Company to provide certain prepaid engineering
services pursuant to the March Aequus Agreement (Aequus had prepaid
approximately $900 for these engineering services of which $725 was allocated to
the settlement).





When
the Company is involved in disputes or other legal proceedings it complies with
the requirements of currently prevailing accounting standards and provides 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 $3 and $64, respectively
for the years ended December 31, 2008 and 2007.  Accounts payable to
this investor amounted to $1,110 and $809 at December 31, 2008 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 $1 and $2 for the years
ended December 31, 2008 and 2007, respectively.  Accounts
receivable from this investor were $8, as of December 31, 2008 and December 31,
2007.





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.  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 former
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.


F - 28




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, 2008 and 2007, the Company made no matching or discretionary
profit-sharing contributions to the plan.





13.  Supplemental
disclosure of cash flow information




Year Ended December 312007
                            
                            
                            2008Cash
      paid for interest
                            
                            $
                            0
                            
                            
                            $
                            9Non-cash
      investing and financing activities:Accretion
      on preferred stock
                            
                            
                            26
                            
                            
                            
                            0Conversion
      of preferred stock to common stock
                            
                            
                            166
                            
                            
                            
                            0Conversion
      of convertible debenture to common stock
                            
                            
                            3,650
                            
                            
                            
                            1,921Deemed
      dividend on conversion of preferred stock
                            
                            
                            4
                            
                            
                            
                            0Common
      stock issued for accrued dividends
                            
                            
                            6
                            
                            
                            
                            0Reclassification
      of conversion liability
                            
                            
                            5,384
                            
                            
                            
                            0





14.  Subsequent
Events.





On
February 4, 2009, WGI advanced $550 to the Company as part of the Private
Placement which is scheduled  to be closed in early April 2009 (see
Note 2).  The Company issued a promissory note, with an interest rate
of 6% per annum, in the amount of the advance, which promissory note will be
cancelled in the event the Private Placement is consummated and due on May 1,
2009 if it is not consummated.





On March 20, 2009, the
Company’s stockholders approvedan amendment to the Company’s certificate
of incorporation to increase the total number of authorized shares of common
stock to 700,000,000.





On March
23, 2009, WGI advanced $200 to the Company as part of the Private Placement
which is scheduled  to be closed in early April 2009 (see Note
2).  The Company issued a promissory note, with an interest rate of 6%
per annum, in the amount of the advance, which promissory note will be cancelled
in the event the Private Placement is consummated and due on May 1, 2009 if
it is not consummated.


F - 29


Item
9.   Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.





None.





Item
9A (T). 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, 2008.  The
Company’s Chief Executive Officer and Chief Financial Officer determined that
the Company had a material weakness related to the lack of internal GAAP
expertise to assist with the accounting and reporting of complex financial
transactions.  The limited Company resources as well as the Company’s
focus and efforts toward keeping the Company solvent contributed to the material
weakness.  As a result, the Chief Executive Officer and Chief
Financial Officer concluded that as of December 31, 2008, 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.





The staff
additions to the Company required to maintain internal GAAP expertise to assist
with the accounting and reporting of complex financial transactions 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 material weakness will be available, and
even if they are available there is no assurance that we will be able to
conclude that our reporting 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.




(b)  
Management's Annual Report on Internal Control Over Financial
Reporting.




Management
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, 2008. 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, 2008, due to a
material weakness related to the lack of internal GAAP expertise to assist with
the accounting and reporting of complex financial transactions. This annual
report does not include an attestation report of the Company’s independent
registered public accounting firm, regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s
independent 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.


25




(c)  
Changes in internal control over financial reporting.





No change
was made in the fourth quarter of 2008 to the Company’s internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting





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 General 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.




As of
March 20, 2009 our executive officers and directors were as
follows:




Name
                      
                      Age
                      
                      PositionHal
      M. Krisbergh
                      
                      61
                      
                      Chairman
      of the Board of Directors and Chief Executive OfficerJoel
      Boyarski
                      
                      62
                      
                      Vice
      President and Chief Financial OfficerRandall
      J. Gort
                      
                      59
                      
                      Vice
      President, Chief Legal Officer and SecretaryJames
      E. McLoughlin
                      
                      56
                      
                      Vice
      President, Account Development and MarketingSteven
      C. Davidson(2)
                      
                      60
                      
                      DirectorClarence
      L. Irving, Jr.(1)(3)
                      
                      53
                      
                      DirectorMartin
      Jaffe(2)
                      
                      62
                      
                      DirectorJeff
      Morris(1)
                      
                      56
                      
                      DirectorLemuel Tarshis(2)(3)
                      
                      67
                      
                      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.  Effective as of the closing of the Private Placement,
and pursuant to its terms, all of our directors, other than Harold M. Krisbergh,
the Company's current Chairman and CEO, will resign from the board and four WGI
nominees will be appointed to the board of directors. Each of the WGI nominees
is a principal of WGI. Under the terms of the Rights Agreement to be entered
into in connection with the Private Placement, WGI will have the right to
nominate a total of four of the seven members of our board of directors, which
nomination right will be reduced by one director for each reduction in its
beneficial ownership of our Common Stock (including any warrants or other
purchase rights) below thresholds of 50%, 43%, 29% and 14% of our voting stock.
To the extent that such nomination right decreases, the corresponding number of
WGI nominees will offer to tender their resignation for acceptance by our board
of directors..  The board of directors will select two independent
directors to fill the remaining vacancies on the board of
directors.  Information regarding each of the four WGI nominees that
will be appointed to our board of directors as of the closing of the Private
Placement is provided below under the heading “Information Regarding New
Directors.”





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.


26




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 CHANNELTM and FLIX®, as well as the multiplex channels SHOWTIME® TOOTM,
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.


27




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.





Information
Regarding New Directors





In
accordance with the terms of the Private Placement, the following new directors
will be appointed to the board of directors of the Company:





Robert Stevanovski, age 45, is one of
the co-founders of ACN. Mr. Stevanovski has served as Chairman of ACN since its
founding in 1993. Mr. Stevanovski is the brother of David
Stevanovski.





Gregory Provenzano, age 49, is one of
the co-founders of ACN. Mr. Provenzano has served as President of ACN since its
founding in 1993.





Anthony Cassara, age 54, currently
serves as President of Cassara Management Group, Inc., a privately held business
counseling practice focused on the telecommunications industry. Prior to
founding Cassara Management Group, Mr. Cassara was President of the Carrier
Services division at Frontier Corporation and later at Global
Crossing.





David Stevanovski, age 42, has served
in a number of positions at ACN since joining ACN in 1996, and currently serves
as Chief Operating Officer of ACN North America. Mr. Stevanovski is the brother
of Robert Stevanovski.





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 5.05 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.




Board
and Committee Meetings




During Fiscal Year 2008, our Board of
Directors held seventeen meetings.  Each member of the Board except
Messrs. Davidson, Irving and Tomasello 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 Directorsconsist 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 that would apply to listed companies under the NASDAQ
listing standards. In addition, the Board has determined that Mr. Jaffe is
an audit committee financial expert as defined by applicable SEC
regulations.  Four separate meetings of this committee were held in
2008 independent of the general meetings for the full board.


28




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. Executive Compensation”.




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 Rule 4200(a)(15) of the
NASDAQ listing standards. 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 Stockholders as described in the
Stockholder's Proposals for the 2009 Annual Meeting section of the Company’s
2009 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 2008 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
2008 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 2008 independent of the general meetings of the full
board.  No member of the Committee is an officer or employee of the
Company.


29


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 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 2008
  For the
fiscal year ended December 31, 2008, 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 2008 none of the senior officers received
any base salary increase.
  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
2008.
  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 (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.
  30
 
 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.
  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 2008, Mr. Krisbergh's base
salary was not increased.
  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 two of the other most highly compensated
officers who were serving as such as of December 31, 2008, each of whose
aggregate compensation for fiscal 2008 exceeded $100,000, for services rendered
in all capacities for us and our subsidiaries.  Refer to Note 9 of the
accompanying consolidated financial statements included in Item 8 of this Annual
Report on Form 10-K, Stock Option Plan section, for a description of estimates
used in calculating the compensation below.
  SUMMARY
COMPENSATION TABLE
 
 Name and Principal
                                                                  Position
                                                                
                                                                Fiscal
                                                                  Year
                                                                
                                                                Salary ($)
                                                                  (2)
                                                                
                                                                
                                                                Bonus ($)
                                                                
                                                                
                                                                Share
                                                                  Awards
                                                                  ($)(1)
                                                                
                                                                
                                                                Option
                                                                  Awards
                                                                  ($)(1)
                                                                
                                                                
                                                                All Other
                                                                  Compensation
                                                                  ($)
                                                                
                                                                
                                                                Total ($)Hal
      M. Krisbergh
                                                                
                                                                2008
                                                                
                                                                
                                                                307,171
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                42,293
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                349,464Chairman and Chief
      Executive
      Officer
                                                                
                                                                2007
                                                                
                                                                
                                                                304,391
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                37,028
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                341,419Randall
      J. Gort
                                                                
                                                                2008
                                                                
                                                                
                                                                224,847
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                74,275
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                299,122Vice President,
      Chief Legal
      Officer
                                                                
                                                                2007
                                                                
                                                                
                                                                180,510
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                89,145
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                269,655Joel
      Boyarski
                                                                
                                                                2008
                                                                
                                                                
                                                                215,451
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                65,905
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                281,356Vice President,
      Chief Financial
      Officer
                                                                
                                                                2007
                                                                
                                                                
                                                                176,550
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                79,456
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                256,006
 
 (1)
              Represents
      the compensation expense accrued by us in the applicable fiscal year for
      financial statement reporting purposes in accordance with SFAS 123(R) in
      connection with the applicable restricted stock or restricted unit award
      or option award.  For a detailed discussion of the assumptions
      made in the valuation of stock awards, please see Note 9 to our financial
      statements included in this Report.
 (2)
              Although
      base salaries for 2007 and 2008 were the same, the lower amount in 2007
      reflects the decision of the named individuals to forego a portion of
      their salaries during this
period.
  31
 
 The
following table summarizes the grants of plan based awards given to the named
executives for fiscal year 2008:
 GRANTS
OF PLAN-BASED AWARDS
 FISCAL
YEAR 2008
 
 Name
                              
                              Grant Date
                              
                              All Other Stock Awards: Number
                                of Shares of Stock or Units (#)(1)
                              
                              
                              Exercise or Base Price of
                                Option Awards ($/Sh)
                              
                              
                              Grant
                                Date Fair
                                Value of
                                Stock
                                Options
                                ($)Hal
      M. Krisbergh
                              
                              
                              
                              
                              0
                              
                              
                              
                              0
                              
                              
                              
                              0Randall
      J. Gort
                              
                              
                              
                              
                              0
                              
                              
                              
                              0
                              
                              
                              
                              0Joel
      Boyarski
                              
                              
                              
                              
                              0
                              
                              
                              
                              0
                              
                              
                              
                              0
 
 (1)Although
no additional stock options were granted to the above named individuals during
fiscal year 2008, the Company did re-price all of the listed individuals’
outstanding options as of July 29, 2008.  The new exercise price was
$0.108 and the vesting schedule remained as set forth in the original
grant.  The “Outstanding Equity Awards at 2008 Fiscal Year-End” table
below lists the options that were re-priced during 2008.
 
 The
following table summarizes all outstanding equity awards for the named
executives at December 31, 2008:
 OUTSTANDING
EQUITY AWARDS AT 2008 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
                                                                                                              Date20,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            5/5/2010160,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            5/19/2011Hal
      M.
                                                                                                            
                                                                                                            
                                                                                                            80,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            5/21/2012Krisbergh
                                                                                                            
                                                                                                            
                                                                                                            37,500
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            12,500
                                                                                                            (1)
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            3/9/201533,750
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            11,250
                                                                                                            (2)
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            4/25/2016127,333
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            4/26/201124,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            5/1/201237,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            2/28/2013163,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            10/1/2013Randall
      J.
                                                                                                            
                                                                                                            
                                                                                                            204,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            1/3/2014Gort
                                                                                                            
                                                                                                            
                                                                                                            22,500
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            12/24/201416,875
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            5,625
                                                                                                            (3)
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            11/10/201511,250
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            11,250
                                                                                                            (4)
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            11/14/201640,750
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            122,250
                                                                                                            (5)
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            10/4/20175,738
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            12/9/201045,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            2/1/201220,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            2/28/201210,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            4/26/2012Joel
                                                                                                            
                                                                                                            
                                                                                                            57,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            2/28/2013Boyarski
                                                                                                            
                                                                                                            
                                                                                                            143,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            10/1/2013175,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            1/3/201420,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            12/24/201415,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            5,000
                                                                                                            (3)
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            11/10/201510,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            10,000
                                                                                                            (4)
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            11/14/201635,750
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            107,250
                                                                                                            (5)
                                                                                                            
                                                                                                            
                                                                                                            0.108
                                                                                                            
                                                                                                            10/4/2017
  32
 
 (1)
              These
      options vested on March 8, 2009.
 (2)
              These
      options vest on November 30, 2009.
 (3)
              These
      options vest on November 9, 2009.
 (4)
              These
      options vest in two annual installments beginning on November 13,
      2009.
 (5)
              These
      options vest in three annual installments beginning on October 3,
      2009
  The
following provides additional information regarding outstanding stock awards
with respect to the above-named individuals:
 Unvested Shares
                    
                    
                    Market ValueRandall
      J. Gort
                    
                    
                    275,000
                    (6)
                    
                    $
                    82,500Joel
      Boyarski
                    
                    
                    250,000
                    (6)
                    
                    $
                    75,000
 These
awards vest under certain performance criteria as follows: 10% of the shares
vest upon achieving each of a 10%, 20%, 30% 40% and 50% increase in our 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 our achievement 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.
  During
2008 no options were exercised by the named executive officers.
 
 COMPENSATION OF
DIRECTORS
 FISCAL
YEAR 2008
 Name
                                      
                                      Fees Earned or
                                        Paid in Cash
                                        ($)
                                      
                                      
                                      Option
                                        Awards
                                        ($)
                                      
                                      
                                      All Other
                                        Compensation
                                        ($)
                                      
                                      
                                      Total
                                        ($)Steven
      C. Davidson (2)
                                      
                                      
                                      13,750
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      13,750Clarence
      L. Irving, Jr. (2)
                                      
                                      
                                      13,750
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      13,750Martin
      Jaffe (2)
                                      
                                      
                                      15,250
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      15,250Jeff
      Morris (2)
                                      
                                      
                                      13,750
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      13,750Lemuel
      Tarshis (2)
                                      
                                      
                                      15,750
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      15,750David
      Tomasello(1)
                                      
                                      
                                      14,750
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      14,750
 
 (1)
              Mr.
      Tomasello resigned as a director effective January 2,
  2009
 (2)
              As
      of December 31, 2008, the directors had the following outstanding option
      awards: Mr. Davidson 61,500, Mr. Jaffe 61,500, Mr. Irving 79,500, Mr.
      Morris 72,000, Dr. Tarshis 68,000 and Mr. Tomasello
  7,500.
 
 Pursuant
to our 2003 Equity Incentive Plan, non-employee directors are entitled to
receive an annual option 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 pays an
annual stipend of $10,000, as well as an 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.  The Company did not pay directors fees
in 2008, but accrued $93,500 of such fees at December 31, 2008.  The
Company also did not issue any option grants for the year ended December 31,
2008.
  33
  Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
  Equity
Compensation Plan Information
  The following table sets forth
information as of December 31, 2008 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)
                                          
                                          
                                          6,913,364
                                          
                                          
                                          $
                                          0.28
                                          
                                          
                                          
                                          2,939,482
                                          (1)Equity
      compensation plans not approved by security holders (2)
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Total
                                          
                                          
                                          6,913,364
                                          
                                          
                                          
                                          0.28
                                          
                                          
                                          
                                          2,939,482
                                          (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 2003
Equity Incentive 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 stockholders filed September 3, 2004
 
 The
Equity 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 (see Note 9 of the consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K).
 
 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.
  34
 
 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.
 
 Security
Ownership of Certain Beneficial Owners and Management
 
 The
following table sets forth information as of March 20, 2009 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 our common
stock,
 •
              each
      of our current directors,
 •
              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 March 20, 2009 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
                          OwnershipDavid
      Tomasello(1)
                      
                      
                      9,490,501
                      
                      
                      
                      7.8
                      %Antonio
      Tomasello(2)
                      
                      
                      8,689,587
                      
                      
                      
                      7.2
                      %Hal
      M. Krisbergh(3)
                      
                      
                      5,729,046
                      
                      
                      
                      4.8
                      %Randall
      J. Gort(4)
                      
                      
                      1,092,650
                      
                      
                      
                      *Joel
      Boyarski(5)
                      
                      
                      795,859
                      
                      
                      
                      *James
      McLoughlin(6)
                      
                      
                      725,650
                      
                      
                      
                      *Martin
      Jaffe(7)
                      
                      
                      121,500
                      
                      
                      
                      *Lemuel
      Tarshis(8)
                      
                      
                      85,200
                      
                      
                      
                      *Clarence
      L. Irving, Jr.(9)
                      
                      
                      79,500
                      
                      
                      
                      *Jeff
      Morris(10)
                      
                      
                      72,000
                      
                      
                      
                      *Steven
      C. Davidson(11)
                      
                      
                      71,500
                      
                      
                      
                      *All
      current directors and executive officers as a group (9
      persons)(12)
                      
                      
                      8,772,905
                      
                      
                      
                      7.2
                      %
  Less than 1% of the
outstanding Common Stock.
 (1) Includes options to purchase 7,500
shares. Also includes 668,914 shares 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 the accounts of his father Antonio
Tomasello (which shares are also reported in this table as being directly owned
by Antonio Tomasello). Mr. Tomasello resigned as a director as of
January 9, 2009. The information provided for the shares over which
Mr. Tomasello has a power of attorney is based on a Schedule 13D/A
filed by Antonio Tomasello on October 11, 2007.
 (2) Includes 6,125,485 shares and 2,564,102
warrants to buy shares, each of which is held directly. The information provided
for Mr. Tomasello is based on a Schedule 13D/A filed by
Mr. Tomasello on October 11, 2007.
 (3) Includes options to purchase 343,750
shares of common stock. Also includes 4,785,358 shares of common stock which are
held directly, 300,000 shares of common stock held by the Krisbergh Family
Foundation, and 299,938 shares of common stock held by Mr. Krisbergh's
spouse.
 (4) Includes options to purchase 642,708
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 and 275,000 shares of restricted stock directly held by
Mr. Gort which vest upon the Company achieving certain financial
performance.
 (5) Includes options to purchase 536,488
shares of common stock. Also includes 9,371 shares of common stock held directly
and 250,000 shares of restricted stock directly held by Mr. Boyarski which
vest upon the Company achieving certain financial performance.
  35
  (6) Includes options to purchase 475,650
shares of common stock. Also includes 250,000 shares of restricted stock
directly held by Mr. McLoughlin which vest upon the Company achieving
certain financial performance.
 (7) Includes options to purchase 61,500
shares of common stock. Also includes 60,000 shares of common stock held
directly.
 (8) Includes options to purchase 68,000
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.
 (9) Includes options to purchase 79,500
shares of common stock.
 (10) Includes options to purchase 72,000
shares of common stock
 (11) Includes options to purchase 61,500
shares of common stock. Also includes 10,000 shares of common stock held
directly.
 (12)Includes options to
purchase an aggregate of 2,341,096 shares of common stock and an aggregate of
775,000 shares of performance-based restricted stock held by the current
directors and executive officers.
 
 Upon the closing of the Private
Placement, WGI will own approximately 63% of our outstanding Common Stock. Each
of Messrs. R. Stevanovski, Provenzano, Cassara and D. Stevanovski, who will be
appointed to serve on our Board of Directors, is a principal of WGI and ACN and
may be deemed to beneficially own the shares of Common Stock held by WGI or
issuable upon exercise of the Anti-Dilution Warrant and the ACN
Warrant.  However, each of such individuals disclaims beneficial
ownership of such securities, and the foregoing shall not be deemed an admission
that such reporting person is the beneficial owner of the securities for any
purpose, except to the extent of his pecuniary interest therein.
 
 Item
13. Certain Relationships and Related Transactions, and Director
Independence
  Certain
Relationships and Related Transactions
 
 On
September 24, 2007, the Company completed a private placement with Antonio
Tomasello, a private investor who is the father of David Tomasello, a former
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.
 
 In
connection with the closing of the Private Placement, Robert Stevanovski,
Anthony Cassara, Gregory Provenzano and David Stevanovski will be appointed to
serve on the Company’s Board of Directors pursuant to the terms of the purchase
agreement.  Each of these individuals is a principal of WGI, and
Robert Stevanovski serves as manager of Praescient, LLC, the sole manager of
WGI.  In addition, each of these individuals is a principal of ACN,
and each of them (other than Anthony Cassara) serves as an officer of
ACN.  As a result of their relationship with WGI and ACN, each of
these individuals may be deemed to have a direct or indirect interest in the
transactions contemplated by the Private Placement and the Commercial Agreement
described in “Item 1A. Business” above.
 
 Director
Independence
 
 In accordance with our Bylaws, our
Board of Directors has specified that the number of Directors will be set at
seven.  We currently have six directors and one vacancy on our Board
of Directors.  Five of our six current Directors are non-employee
Directors. These Directors are Steven C. Davidson, Clarence L. Irving, Jr.,
Martin Jaffe, Jeff Morris, and Lemuel Tarshis.  Our common stock is
quoted on the OTC Bulletin Board ("OTCBB"), which does not require that a
majority of our board of directors be independent, and is not listed on a
national exchange.  Nevertheless, the Board of Directors has
determined that each of these five 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 five Directors is an “independent” Director under the
standards currently set forth in the NASDAQ Marketplace Rules.
 
 Our common stock is currently quoted on
the OTC Bulletin Board and is not listed on the NASDAQ Stock Market or any other
national securities exchange.  While we are not currently subject to
the listing requirements of NASDAQ, we strive to maintain corporate governance
consistent with the rules applicable to NASDAQ-listed companies.
 
 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, 2007 and 2008, are as follows (in whole
dollars):
  36
 
 Fiscal Years Ended
                                December 312007
                              
                              
                              2008Audit
      fees
                              
                              $
                              243,000
                              
                              
                              $
                              220,000Audit
      related fees
                              
                              
                              32,000
                              
                              
                              
                              13,000Tax
      fees
                              
                              
                              24,000
                              
                              
                              
                              23,000All
      other fees
                              
                              
                              0
                              
                              
                              
                              0Total
                              
                              $
                              299,000
                              
                              
                              $
                              256,000
 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.
  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 &
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.
  37
  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)3.5
              
              Certificate
      of Amendment to Certificate of Incorporation, dated February 10 ,
      2009*3.6
              
              Certificate
      of Amendment to Certificate of Incorporation, dated March 23,
      2009*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)
  38
 
 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)10.13
              
              License,
      Maintenance and Update Service Agreement between WorldGate and Aequus
      dated March 31, 2008 (17)10.14
              
              Revised
      and Restated Amendment and Master Contract between WorldGate and Aequus
      dated March 31, 2008 (18)10.15
              
              Master
      Agreement between WorldGate and Aequus dated March 31, 2008
      (18)10.16
              
              Subscription
      Agreement dated September 24, 2007 between the Company and Antonio
      Tomasello (18)10.17
              
              Voting
      Agreement among  the Company, Antonio Tomasello and David
      Tomasello (17)10.18
              
              Securities
      Purchase Agreement, dated December 12, 2008, by and between WorldGate
      Communications, Inc. and WGI Investor
  LLC  (19)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
      stockholders 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.(18)
                Incorporated
      by reference to the exhibits to our Form 10-K Report for the fiscal
      year ended December 31, 2007, as filed on April 17,
    2008.(19)
                Incorporated
      by reference to Annex A of our Proxy Statement, as filed on February 13,
      2009.
  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:
      March 26, 2009
                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)
              
              March
      26, 2009/s/ JOEL BOYARSKI
              
              Senior
      Vice President and Chief Financial OfficerJoel
      Boyarski
              
              (Principal
      Financial and Accounting Officer)
              
              March
      26, 2009/s/ STEVEN C. DAVIDSONSteven
      C. Davidson
              
              Director
              
              March
      26, 2009/s/ MARTIN JAFFEMartin
      Jaffe
              
              Director
              
              March
      26, 2009/s/ CLARENCE L. IRVING, JR.Clarence
      L. Irving, Jr.
              
              Director
              
              March
      26, 2009
  /s/
      JEFF MORRISJeff
      Morris
              
              Director
              
              March
      26, 2009/s/
      LEMUEL TARSHISLemuel
      Tarshis
              
              Director
              
              March
      26, 2009
  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)3.5
              
              Certificate
      of Amendment to Certificate of Incorporation, dated February 10
      ,2009*3.6
              
              Certificate
      of Amendment to Certificate of Incorporation, dated March 23,
      2009*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 Cornell
                Capital
      Partners, LP (16)10.11
              
              Securities
      Purchase Agreement dated August 3, 2005 among the Company and the
      Investors (as defined therein) (14)10.13
              
              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
    *
  41
 
 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)10.18
              
              Securities
      Purchase Agreement, dated December 12, 2003, by and between WorldGate
      Communications, Inc. and WGI Investor
  LLC  (19)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
      stockholders 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.(18)
              Incorporated
      by reference to the exhibits to our Form 10-K Report for the fiscal
      year ended December 31, 2007, as filed on April 17,
    2008.(19)
              Incorporated
      by reference to Annex A of our Proxy Statement, as filed on February 13,
      2009
  42