WorldGate

Prospectus Summary

This summary highlights key aspects of the information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our securities. You should read this entire prospectus and the documents incorporated by reference into this prospectus carefully, especially the financial statements and related notes and the risks of investing in our securities discussed under the heading “Risk Factors” in the annual and quarterly reports incorporated by reference into this prospectus.

References to “we,” “us,” “our company” and “WorldGate” refer to WorldGate Communications, Inc. together with its subsidiaries.

We have developed a video phone ergonomically and functionally designed specifically for in-home and business, personal video communication. During the development of our video phone, we identified several issues that have interfered with commercial success and consumer acceptance of video phones and sought to address each of these issues within the Ojo video phone. The Ojo video phone was designed for use on the existing high speed data, or HSD, infrastructure. The Ojo phone will, however, also connect to the analog phone line for interoperability with the voice only communications offered by the existing public switch telephone networks, or PSTN. Ojo, therefore, can be used for video calls, for ordinary voice only calls as well as for voice over Internet protocol, or 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 images is similar to what we perceive with traditional television), interoperation with the PSTN, ease of deployment by HSD operators, ease of use by residential and business end users, 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.

We were incorporated in Delaware in 1996 to succeed to the business of our predecessor, WorldGate Communications, L.L.C., which commenced operations in March 1995, and, as of September 5, 2006, we remain incorporated in Delaware. In April 1999, we completed our initial public offering of 5,750,000 shares of our common stock. Since January 9, 2003 our common stock has been listed on the NASDAQ Small Cap Market. Previously our common stock was traded on the NASDAQ National Market. Our common stock is traded under the symbol “WGAT”. Our executive offices are located at 3190 Tremont Avenue, Suite 100, Trevose, Pennsylvania 19053 and the telephone number of our executive offices is (215) 354-5100.

On April 28, 2004, we entered into a multi-year agreement with General Instrument Corporation d/b/a the Connected Home Solutions Business of Motorola, Inc. (“General Instrument”) for the worldwide development and distribution of the Ojo personal video phone. This agreement provided for General Instrument to be the exclusive distributor of our broadband video phone products and for us to be the exclusive supplier of General Instrument’s broadband video phone products. On February 17, 2006, we mutually agreed with General Instrument to end this agreement. The ending of this agreement immediately terminated exclusivity for both parties. In addition to our current role for development and manufacture of Ojo, we now have direct responsibility and control for the advertising, marketing, and distribution of our products. Under our agreement with General Instrument, we had been active in marketing and promoting our products, and working with General Instrument to distribute Ojo. We are continuing the rollout of Ojo using many of the same distributors, retailers and service providers, and have expanded distribution to service providers and retailers around the world. The two companies are working together to ensure a smooth transition for customer accounts. As part of ending our agreement with General Instrument, and in anticipation of our inventory requirements as a result of taking full responsibility for product distribution, we negotiated the right to buy back about two-thirds of the units sold to General Instrument, valued at approximately $2,765,000 (based upon the original sales price to General Instrument), for approximately $1,064,000, of which $480,000 was paid in cash and the remaining $584,000 represented forgiveness of a receivable from General Instrument. This is less than half of what it would cost us to purchase the same inventory from our manufacturing sources. As a result, we recorded a reserve for returns and reduced revenue in the amount of approximately $2,310,000 during the fourth quarter of 2005. In addition, we recorded no revenue for units shipped to General Instrument in the first quarter 2006 and recorded a gain on termination of this agreement of approximately $1,792,000 during the first quarter of 2006 as a result of the lower purchase price of this inventory ($1,342,000, net of the cost of rework for rebranding the product and the adjustment of the inventory to its current replacement value) and reversal of the product refund program reserve ($212,000), as well as an adjustment of the warranty reserve for products repurchased ($233,000), both of which resulted from the termination of our agreement with General Instrument.

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Prior to the development of our video phone, our primary business involved the development and distribution of interactive television products and services for use in conjunction with cable television broadband networks (our “ITV Business”). During the third quarter of 2003 we completed the sale of significant assets related to this business and began the transition to our current video telephony product line. Our ITV Business has historically accounted for substantially all of our revenue. Since we have discontinued the ITV Business and only recently transitioned to become a developer, manufacturer and seller of video phone products, we cannot reliably predict our future revenues, and no assurances can be provided as to the amount of ongoing revenues, if any, or to the periods in which any such revenues may be received.

During the operation of our current video phone business, we have not been able to reach profitability and have generated significant losses. As a result, a report issued by our independent registered public accounting firm for the year ended December 31, 2005 includes an explanatory paragraph stating that our company has suffered recurring losses from operations and has a net accumulated deficiency of $229,000,000 that raises substantial doubt about our company’s ability to continue as a going concern. Our net losses available to common stockholders for the fiscal years ended December 31, 2003, 2004 and 2005 and the six months ended June 30, 2006 were approximately $8,705,000, $20,376,000, $10,773,000 and $7,834,000, respectively. No assurances can be given that either our history of losses or our auditors’ substantial doubt about our company’s ability to continue as a going concern will be remedied by the continued rollout of our new video phone product line or that our business will continue to operate as a going concern.

During 2004 we raised approximately $17,020,000 in gross proceeds ($16,260,000 net of deal costs) through various private placements of our company’s securities and through the exercise of non-executive employees’ and prior employees’ stock options. During 2005, we raised approximately $19,830,000 in gross proceeds ($18,935,000 net of deal costs) from private placements of our company’s securities, the exercise of outstanding warrants issued pursuant to the private placements discussed above and by the exercise of non-executive employees’ and prior employees’ stock options.

On August 11, 2006 we completed a private placement with an institutional investor of a secured convertible debenture in the principal amount of $6,000,000. This debenture has a maturity of three years, an interest rate of 6% per annum, and is convertible at the option of the investor into shares of our 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 prices of our 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 we may elect to pay the interest amount in cash or shares of our common stock. We received $6,000,000 upon the closing of the private placement, $5,640,000 net of transaction costs.

On the date we obtain stockholder approval of the transactions contemplated by the private placement, the terms of the private placement provide that we will sell, and the investor will purchase, a second secured convertible debenture in the principal amount of $3,000,000. Provided that we have obtained stockholder approval of the transaction, on the third business day after the date this registration statement is declared effective, we have agreed to sell, and the investor has agreed to purchase, a third secured convertible debenture in the principal amount of $2,000,000.

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As part of the August 11, 2006 private placement, we issued to the investor 177,419 shares of our common stock and five-year warrants to purchase a total of 1,415,454 shares of our common stock: 624,545 shares at an exercise price of $1.85 per share, 600,000 shares at an exercise price of $2.35 per share, and 190,909 shares at an exercise price of $2.60 per share. On the date we obtain stockholder approval of the transactions contemplated by the private placement, the terms of the private placement provide that we will issue to the investor five-year warrants to purchase an additional total of 1,179,546 shares of our common stock: 520,455 shares at an exercise price of $1.85 per share, 500,000 shares at an exercise price of $2.35 per share, and 159,091 shares at an exercise price of $2.60 per share.

Depending upon stockholder approval of the transaction, the conversion price of the debentures, the price of our common stock at the time of any interest or other payments due to investors as a result of the August 11, 2006 private placement, and whether or not any or all of such payments are made in cash, this offering could result in the issuance of shares of our common stock that exceeds 20% of our outstanding common stock as of the date of the private placement. The aggregate number of shares to be issued under the private placement, including the shares issuable upon conversion of the debentures and exercise of the warrants, the shares issued at the closing, and any shares issued as payment of liquidated damages or interest in connection with the private placement has, however, been limited to 61,111,111 shares of common stock irrespective of our share price.

This registration statement covers the resale of up to 7,975,752 shares of our common stock, or approximately 19.9% of our outstanding shares, issued or issuable to the institutional investor who participated in our August 11, 2006 private placement, including 7,798,333 shares of the common stock issuable upon conversion of the secured convertible debentures and the 177,419 shares of common stock issued at the closing of the private placement.

Effect of the Secured Convertible Debenture

The secured convertible debentures and warrants may have an adverse impact on the market value of our common stock.

The sale of stock issuable upon conversion of the secured convertible debentures and upon exercise of the warrants issued or issuable in connection with our August 11, 2006 private placement, or even the possibility of their sale, may adversely affect the trading market for our common stock and adversely affect the prevailing market price of our common stock.

The existence of rights under such debentures and warrants to acquire our common stock at 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 secured convertible debentures and warrants may adversely affect our financial flexibility.

The secured convertible debenture imposes a significant debt burden on us that could have adverse consequences on our business. The amount of the debentures could adversely affect us in a number of ways, including the following:

· we may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes;

· debt-service requirements could reduce the amount of cash we have available for other purposes;

· we may be restricted in our ability to make strategic acquisitions and to exploit business opportunities; and · we may be required to make cash payments under the terms of the debenture which would reduce the amount of cash we have available for other purposes.

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Our ability to make payments of principal and interest on our debt, whether in cash or shares of our common stock, depends upon our future performance, general economic conditions and financial, business and other factors affecting our operations, many of which are beyond our control. If we are not able to make these payments with shares of our common stock or generate sufficient cash flow from operations in the future to service our debt we may be required, among other things:

· to seek additional financing in the debt or equity markets;

· to refinance or restructure all or a portion of our debt; or · to sell assets.

These measures might not be sufficient to enable us to service our debt. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms.

The secured convertible debentures and warrants may adversely affect our operational flexibility.

The terms of the August 11, 2006 private placement impose restrictions on us that may affect our ability to successfully operate our business. The transaction documents contain a number of covenants that may restrict our ability to operate, including, among other things, covenants that restrict our ability:

· to incur additional indebtedness;

· to pay dividends on our capital stock (except for our preferred stock);

· to redeem or repurchase our common stock;

· to issue shares of common stock, or securities convertible into common stock;

· to use our assets as security in other transactions;

· to create liens on our assets; and · to enter into certain transactions with affiliates.

Further, the debenture limits our ability to enter into change of control transactions by providing that any such transaction could constitute an event of default with respect to the debenture. An event of default could result in acceleration of our indebtedness and permit the investor to foreclose on our assets. If we issue the additional debentures in the amounts of $3,000,000 and $2,000,000 as contemplated by the transaction documents, the related risks that we face would intensify.

FORWARD-LOOKING STATEMENTS