Total

Balance as of December 31, 2007 $ 2,526,110
iSYS acquisition 6,049,771

Balance as of December 31, 2008 $ 8,575,881
iSYS acquisition-related costs (13,627 )

Balance as of September 30, 2009 $ 8,562,254

In ~~2008, $6,049,771~~the three month period ended March 31, 2010, $629,089 in goodwill was acquired as a result of the acquisition of ~~iSYS, LLC.~~the assets of the government business of Vuance, Inc. by the Company’s wholly-owned subsidiary, Advanced Response Concepts. Management believes that as of ~~September 30, 2009~~March 31, 2010, the carrying value of our goodwill was not impaired. ~~For~~Goodwill and the ~~three month period ended September 30, 2009 there were no goodwill adjustments made.~~description of the Vuance/Advanced Response Concepts asset purchase is more fully described in Note 8.

Purchased and Internally Developed Intangible Assets

The following table summarizes purchased and internally developed intangible assets subject to amortization:

	As of March 31, 2010
	Gross Carrying Amount		Accumulated Amortization			Weighted Average Amortization Period (in years)
Purchased Intangible Assets

ORC Intangible (Includes customer relationships and PKI business opportunity purchase accounting preliminary valuations)	$	1,145,523	$	(1,122,113	)		5

iSYS (includes customer relationships, internal use software and trade name)	$	1,230,000	$	(579,751	)		5

Protexx (Identity Security Software)	$	506,463	$	(281,369	)		3
Advanced Response Concepts (includes preliminary values for customer relationships and first responder security software)	$	381,420	$	(15,893	)		4
	$	3,263,406	$	(1,999,126	)		4
Internally Developed Intangible Assets

ORC PKI-I Intangible (Related to internally generated software)	$	334,672	$	(315,271	)		6

ORC PKI-II Intangible (Related to internally generated software)	$	649,991	$	(573,593	)		6

ORC PKI-III Intangible (Related to internally generated software)	$	211,680	$	(135,240	)		3

ORC PKI-IV Intangible (Related to internally generated software)	$	42,182	$	(26,947	)		3

ORC PKI-V Intangible (Related to internally generated software)	$	126,029	$	(3,501	)		3
		1,364,554	$	(1,054,552	)		5

Total	$	4,627,960	$	(3,053,678	)		5

Aggregate Amortization Expense:
For the three months ended 3/31/10	$	203,041

Estimated Amortization Expense:
For the year ending 12/31/10	$	722,502
For the year ending 12/31/11	$	467,823
For the year ending 12/31/12	$	325,032
For the year ending 12/31/13	$	254,020
For the year ending 12/31/14	$	7,946

Total	$	1,777,323

As of September 30, 2009
Gross Carrying Amount
Accumulated
Amortization

Weighted
Average
Amortization
Period (in years)

Purchased Intangible Assets
ORC Intangible (Includes customer relationships and PKI business opportunity purchase accounting preliminary valuations) $ 1,145,523 $ (1,086,966 ) 5

iSYS (includes customer relationships, internal use software and trade name) $ 1,230,000 $ (450,917 ) 5

Protexx (Identity Security Software) $ 506,463 $ (196,958 ) 3
$ 2,881,986 $ (1,734,841 ) 4
Internally Developed Intangible Assets
ORC PKI-I Intangible (Related to internally generated software) $ 334,672 $ (286,169 ) 6

ORC PKI-II Intangible (Related to internally generated software) $ 649,991 $ (511,020 ) 6

ORC PKI-III Intangible (Related to internally generated software) $ 211,680 $ (99,960 ) 3

ORC PKI-IV Intangible (Related to internally generated software) $ 42,182 $ (19,920 ) 3

ORC PKI-V Intangible (Related to internally generated software) $ 107,838 — 3
1,346,363 $ (917,069 ) 5

Total $ 4,228,349 $ (2,651,910 ) 5

Aggregate Amortization Expense:

For the three months ended 9/30/09 $ 228,884
For the nine months ended 9/30/09 $ 686,654

Estimated Amortization Expense:

For the year ended 12/31/09 $ 894,368
For the year ended 12/31/10 $ 652,134
For the year ended 12/31/11 $ 350,300
For the year ended 12/31/12 $ 214,626
For the year ended 12/31/13 $ 151,665

Total $ 2,263,093

The total weighted average life of all of the intangibles is approximately 3 years.

There were no amounts of research and development assets acquired nor any written-off during the three month period ended ~~September 30, 2009 nor any written-off in the period.~~

March 31, 2010 ..

5.	Income Taxes

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (formerly known as SFAS No. 109, “Accounting for Income Taxes”). ~~Under ASC 740, deferred~~Deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. ~~ASC 740~~Income tax accounting guidance requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized. ~~The Company has further adopted the provisions of ASC 740-10-15 (formerly known as Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”).~~ The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company’s assessments of its tax positions ~~in accordance with ASC 740~~ did not result in changes that had a material impact on results of operations, financial condition or liquidity. As of March 31, 2010 and December 31, ~~2008 and at September 30,~~ 2009 the Company had no unrecognized tax benefits. While the Company does not have any interest and penalties in the periods presented, the Company’s policy is to recognize such expenses as tax expense.

The Company files U.S. federal income tax returns with the Internal Revenue Service (“IRS”) as well as income tax returns in various states. The Company may be subject to examination by the IRS for tax years ~~2001~~2002 through ~~2008.~~2009. Additionally, the Company may be subject to examinations by various state taxing jurisdictions for tax years ~~2001~~2002 through ~~2008.~~2009. The Company is currently not under examination by the IRS or any state tax jurisdiction.

As of ~~September 30, 2009,~~March 31, 2010, the Company had net operating loss (NOL) carry forwards of approximately ~~$21,000,000~~$15 million to offset future taxable income. There are also up to approximately in $8 million in state tax NOL carry forwards. These carry forwards expire between 2010 and ~~2028.~~2029. In assessing the ability to realize of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical losses that may limit utilization of NOL carry forwards in future periods, management is unable to predict whether these net deferred tax assets will be utilized prior to expiration. Under the provision of the Tax Reform Act of 1986, when there has been a change in an entity’s ownership of 50 percent or greater, utilization of net operating loss carry forwards may be limited. As a result of WidePoint’s equity transactions, the Company’s net operating losses will be subject to such limitations and may not be available to offset future income for tax purposes. ~~To date~~In the fourth quarter of 2009, the Company ~~has not~~ completed aits “Section 382” ~~analysis.~~analysis and preliminarily determined that some of the Company’s net operating losses may be limited as a result of expirations that may occur prior to the utilization of those net operating losses under the limitations from certain changes of control that occurred in past years. Utilization of the NOL carryforwards will be subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986 and similar state provisions due to ownership change limitations that have occurred. These ownership changes will limit the amount of NOL carryforwards that can be utilized to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. An analysis was performed which indicated that multiple ownership changes have occurred in previous years which created annual limitations on our ability to utilize NOL and tax credit carryovers. Such limitations will result in approximately $4,907,000 of tax benefits related to federal NOL carryforwards that will expire unused. Accordingly, the related NOL carryforwards have been removed from deferred tax assets accompanied by a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, related to our operations in the U.S. will not impact our effective tax rate.

No tax benefit has been realized associated with the exercise of stock options infor the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010 and 2009, ~~and 2008,~~ respectively, because of the existence of net operating loss carryforwards. There will be no credit to additional paid in capital for such until the associated benefit is realized through a reduction of income taxes payable.

The Company has determined that its net deferred tax asset did not satisfy the recognition criteria ~~set forth in ASC 740~~ and, accordingly, established a valuation allowance for 100 percent of the net deferred tax asset.

The Company incurred a deferred income tax expense of approximately ~~$118,000~~$39,000 for the ~~nine~~three months ended ~~September 30, 2009.~~March 31, 2010 and 2009, respectively. This deferred income tax expense is attributable to the differences in our treatment of the amortization of goodwill for tax purposes versus book purposes as it relates to our acquisition of iSYS in January 2008. Because the goodwill is not amortized for book purposes but is for tax purposes, the related deferred tax liability cannot be reversed until some indeterminate future period when the goodwill either becomes impaired and/or is disposed of. The deferred tax liability can be offset by deferred Income tax assets that may be recognized In the future and the deferred tax expense is a non-cash expense. ~~ASC 740~~Income tax accounting guidance requires the expected timing of future reversals of deferred tax liabilities to be taken into account when evaluating the realizability of deferred tax assets. Therefore, the reversal of deferred tax liabilities related to the goodwill is not to be considered a source of future taxable income when assessing the realization of deferred tax assets. Because the Company has a valuation allowance for the full amount of the deferred income tax asset, the deferred income liability associated with the tax deductible goodwill has been recorded and not offset against existing deferred income tax assets.

~~6. Stockholders’ Equity~~

6.	Stockholders’ Equity

The Company is authorized to issue 110,000,000 shares of common stock, $.001 par value per share. As of ~~September 30, 2009,~~March 31, 2010, there were ~~60,684,823~~61,375,333 shares of common stock outstanding. During the quarter ended ~~September 30, 2009, 2,379,309~~March 31, 2010, no shares of common stock were ~~issued as the result of the exercise of management warrants.~~issued.

~~As of September 30, 2009 there were 60,684,823 shares of common stock outstanding.~~

~~Common Stock~~

On July 8, 2009, each of Steve L. Komar, James T. McCubbin and Mark F. Mirabile exercised, in the form of a cashless exercise, his respective warrant to purchase 1,333,333 shares of common stock of the Company, which warrant was previously issued to such individual pursuant to a Warrant Purchase Agreement, dated July 14, 2004, by and between the Company and each such individual. As a result of his respective cashless exercise of such warrant, each of Steve L. Komar, James T. McCubbin and Mark F. Mirabile, as applicable, was issued 793,103 shares of common stock of the Company, with 540,230 shares of common stock of the Company being withheld by the Company from each such warrant as payment of the respective exercise price of each such warrant. The shares issued pursuant to the exercise of these warrants have not been registered under the Securities Act of 1933, as amended (the “Securities Act”). Such shares are exempt from the registration requirements under the Securities Act pursuant to the “private offering” exemption under Section 4(2) of the Securities Act.

On May 11, 2009, the Company’s Compensation Committee of the Board of Directors voted to cancel 950,000 options held by management and other employees (the “Cancelled Options”) and issue replacement options to such individuals (the “Replacement Options”). The optionees all concurred with such action by the Compensation Committee. The Cancelled Options had varying exercise prices ranging from $0.85 to $2.80 with a weighted average exercise price of $1.06 per share. The exercise price of the Replacement Options was set at $0.54 per share. Other than the exercise price per share, there are no differences in the terms between the Cancelled Options and the Replacement Options. The incremental additional fair value of the Replacement Options was calculated to be approximately $64,000, which was determined by calculating the fair value of the Cancelled Options as they existed on May 11, 2009 immediately prior to cancellation as compared to the fair value on the same date of the exercise price of the Replacement Options. This amount of additional fair value of the Replacement Options will be recognized over the vesting period of the Replacement Options. Since some of the Replacement Options were fully vested at May 11, 2009, there was an expense of approximately $45,000 recognized in the three months ended June 30, 2009 as a result of the cancellation of the Cancelled Options and the issuance of the Replacement Options.

The Company granted Mr. Oxley 250,000 options in connection with the commencement of his employment with the Company in May of 2008, with such options being granted on July 25, 2008 at a price per common share of $0.81 and with an intrinsic value of $202,500.

On January 8, 2008, pursuant to the terms of a Membership Interest Purchase Agreement (the “Membership Agreement”) between the Company, iSYS, LLC and Jin Kang, dated January 4, 2008, the Company issued 1,500,000 shares of Company common stock on January 8, 2008 at a stock price of $1.20 per common share (based on the closing market price of the Company’s common shares the issuance date) for a value of $1,800,000. The Company also issued an additional 3,000,000 shares of Company common stock on January 8, 2008, which shares were delivered into escrow to be held subject to the satisfaction of certain earnout provisions under the Membership Agreement. Under the Membership Agreement the initial $1.4 million in earnings before interest, taxes, depreciation and amortization (“EBITDA”) from iSYS is excluded from the earnout for the initial 3 years, with 66% of the value in excess of such initial $1.4 million being paid to the former owner of iSYS, with 50% of the amount being paid in cash and 50% being valued and released in escrow shares. In the fourth year the value in excess of 50% is used instead of 66%, with the total earnout capped at $6 million, with $3 million payable in cash and $3 million payable in the release of earnout shares. Performance of the earnout is measured annually and awarded within 30 days following the end of the Company’s fiscal year and filing of the Company’s Form 10-K for that year. As of December 31, 2008 performance measures were attained allowing for the release of 184,817 common shares valued at $1.00 per common share from the common shares placed into escrow at the time of the acquisition of iSYS by the Company.

On April 29, 2008, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Deutsche Bank AG, London Branch (“Deutsche Bank”), and related agreements, as part of a private equity financing to raise additional funds for working capital. Under the Purchase Agreement, Deutsche Bank agreed to purchase 2,500,000 shares of WidePoint common stock for a total purchase price of $2,550,000, or $1.02 per share. Pursuant to the Purchase Agreement, the Company issued 2,500,000 shares of its common stock to Deutsche Bank on May 2, 2008. The offer and sale of the shares were not registered under the Securities Act of 1933, as amended, in reliance on the “private offering” exemption provided under Section 4(2) thereof.

On May 16, 2008, the Company entered into two Common Stock Purchase Agreements (collectively, the “Endurance Purchase Agreements”) with Endurance Partners, L.P. and Endurance Partners (Q.P), L.P., and related agreements, as part of a private equity financing to raise additional funds for working capital. Under the Endurance Purchase Agreements, Endurance Partners, L.P. agreed to purchase 428,954 shares of WidePoint common stock for a total purchase price of $437,533, or $1.02 per share, and Endurance Partners (Q.P.), L.P. agreed to purchase 1,071,046 shares of WidePoint common stock for a total purchase price of $1,092,467, or $1.02 per share. Pursuant to the Endurance Purchase Agreements, on May 19, 2008, the Company issued 428,954 shares of its common stock to Endurance Partners, L.P. and 1,071,046 shares of its common stock to Endurance Partners (Q.P.), L.P. The offer and sale of the shares were not registered under the Securities Act of 1933, as amended, in reliance on the “private offering” exemption provided under Section 4(2) thereof.

As a result of the equity transactions to raise additional capital that we entered into during the second quarter of 2008, the Company issued a combined cumulative total of 4,000,000 common shares of the Company which provided gross proceeds of approximately $4.1 million and net proceeds after various legal and other expenses of $3.9 million.

On July 31, 2008, pursuant to the terms of the Asset Purchase Agreement between the Company, Protexx Acquisition Corporation, a Delaware corporation, Protexx Incorporated, a Delaware corporation (“Protexx”), and Peter Letizia, Charles B. Manuel, Jr. and William Tabor, the Company issued 2,500,000 shares of its common stock in the name of Protexx and delivered such shares to the parties’ escrow agent to be held in escrow pending the possible release of such shares as part of the potential earnout to which Protexx may be entitled under the Purchase Agreement for calendar year 2008. The 2008 earnout was not attained. For calendar year 2009, Protexx shall have the opportunity to earn an additional Two Million Two Hundred Fifty Thousand Dollars ($2,250,000) worth of privately issued shares of WidePoint common stock as part of the earnout for that calendar year. The maximum number of shares of WidePoint common stock that Protexx shall have the opportunity to earn for calendar year 2009 shall be equal to the number of shares of WidePoint common stock that results from Two Million Two Hundred Fifty Thousand Dollars ($2,250,000) divided by the greater of (x) One Dollar and Twenty-Five Cents ($1.25) or (y) the average closing sale price of the WidePoint common stock for the twenty (20) trading days immediately preceding December 31, 2009.

~~Stock Warrants~~

On November 1, 2005, the Company issued a warrant to purchase 54,878 shares of common stock at a price of $0.80 per share to Hawk Associates as part of a consulting agreement in which Hawk Associates agreed to act as the Company’s investor relations representative. The warrant has a term of 5 years. We are accounting for this award in accordance with ASC 505-50, “Equity-Based Payments to Non-Employees” (formerly known as EITF 96-18).

On October 27, 2004 and November 22, 2004, the Company issued two warrants to purchase 30,612 shares and 5,556 shares of common stock at a price of $0.49 and $0.45 per share, respectively, to Liberty Capitol as part of a consulting agreement in which Liberty Capitol assisted the Company in arranging its senior debt financing with RBC-Centura Bank. The warrants have a term of 5 years. The Company used a fair-value option pricing model to value these stock warrants at approximately $14,291. This value has been reflected as part of stock warrants in the stockholders’ equity section of the consolidated balance sheet.

7.	Segment reporting

Segments are defined by ~~ASC 280, “Segment Reporting” (formerly known as SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”),~~authoritative guidance as components of a company in which separate financial information is available and is evaluated by the chief operating decision maker, or a decision making group, in deciding how to allocate resources and in assessing performance.

Management evaluates segment performance primarily based on revenue and segment operating income.

~~Until December 31, 2005 the~~The Company ~~was comprised of a single segment,~~operates as three segments, which ~~was comprised of our~~include Wireless Mobility Management, Cybersecurity Solutions, and IT consulting ~~services segment within our Commercial and Federal Government Marketplaces. As of January 1, 2006, the Company added a second segment, which consists of PKI credentialing and managed~~ services. ~~As of January 4, 2008, the Company added a third segment upon the acquisition of iSYS, LLC for mobile telecom expense management.~~

Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative costs that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include costs for corporate office support, all office facility costs, costs relating to accounting and finance, human resources, legal, marketing, information technology and company-wide business development functions, as well as costs related to overall corporate management.

The following table ~~presents information about reported segments along with~~sets forth selected segment and consolidated operating results and other operating data for the ~~items necessary~~periods indicated. Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative costs that are incurred directly by the segment. Unallocated corporate costs include costs related to ~~reconcile the segment information~~administrative functions that are performed in a centralized manner that are not attributable to a particular segment. Management does not analyze assets for decision making purposes as it relates to the ~~totals reported~~segments below. Accordingly, information is not available for long-lived assets or total assets.

Three Month Period Ending March 31, 2010

	Wireless		Cyber		Consulting		Corp			Consol
Revenue	$	6,919,812	$	1,425,507	$	2,817,737	$	-		$	11,163,056
Operating income including amortization and depreciation expense		679,244		285,366		107,414		(772,741	)		299,283
Interest Income (expense), net								(20,763	)		(20,763	)
Pretax income											278,520
Income tax expense								(39,322	)		(39,222	)
Net income											239,298

Three Month Period Ending March 31, 2009

	Wireless		Cyber		Consulting		Corp			Consol
Revenue	$	6,356,460	$	1,407,852	$	2,371,070	$	-		$	10,135,382
Operating income (loss) Including amortization and depreciation expense		602,354		225,429		16,677		(610,102	)		234,358
Interest Income (expense), net								(66,211	)		(66,211	)
Pretax income											168,147
Income tax expense								(39,222	)		(39,222	)
Net income											128,925

8.	Advanced Response Concepts Corporation Asset Purchase.

On January 29, 2010, the Company, together with its wholly-owned subsidiary, Advanced Response Concepts Corporation, a Delaware corporation (“Advanced Response Concepts”), entered into an Asset Purchase Agreement with Vuance, Inc. a Delaware corporation (“Vuance”) and Vuance’s sole shareholder, Vuance, Ltd., a public company organized in the ~~accompanying consolidated financial statements:~~State of Israel under the Israeli Companies Law (the “Vuance Agreement”), pursuant to which Advanced Response Concepts acquired certain assets and assumed certain liabilities of Vuance as further specified in the Vuance Agreement. Advanced Response Concepts acquired all assets of the collective business of Vuance relating to its Government Services Division, including but not limited to the operation by Vuance of identity assurance and priority resource management solutions, as well as crime scene management and information protection, and other activities related or incidental thereto and the development, maintenance, enhancement and provision of software, services, products and operations for identity management and information protection, offered primarily to state and local government agency markets.

Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008

Mobile Telecom Managed Services:
Revenues $ 6,761,176 $ 5,284,138 $ 20,232,001 $ 14,579,042
Operating income after depreciation expense 963,141 296,628 2,173,809 685,448

Consulting services:
Revenues $ 3,059,677 $ 2,432,951 $ 7,372,426 $ 7,768,633
Operating income after depreciation expense 60,448 85,358 228,610 385,591

PKI Credentialing and Managed Services:
Revenues $ 1,557,940 $ 1,161,342 $ 4,302,030 $ 2,945,394
Operating income (loss) (includes amortization expense of $66,993, $63,477, $200,980, and $166,913, respectively) 245,853 (38,549 ) 730,945 (306,319 )

Total Company
Revenues $ 11,378,793 $ 8,878,431 $ 31,906,457 $ 25,293,069
Operating income (loss) before depreciation expense 629,700 (1) (251,091 ) (2) 1,267,095 (3) (1,100,192 ) (4)
Depreciation expense (46,887 ) (41,171 ) (130,999 ) (117,204 )
Interest income (expense), net (28,130 ) (42,306 ) (123,391 ) (156,373 )
Other expense (49 ) - (49 ) -
Income tax expense (39,223 ) - (117,668 ) -

Net income (loss) $ 515,411 $ (334,568 ) $ 894,988 $ (1,375,467 )

2017

The Company has engaged a valuation consultant to assist in finalizing the determination of the purchase price and fair value of assets and liabilities acquired and this process has not been completed as of the end of the quarter. As such, amounts disclosed are provisional and subject to change based on the final determination of the purchase price and fair value of assets and liabilities acquired. The purchase price was based upon management’s estimates and assumptions using the latest available information. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in this business combination:

	Advanced Response Concepts Jan. 29, 2010
Consideration:

Cash	$	370,000
Cash to be paid (post-closing adjustments)		13,700
Contingent consideration arrangement		300,000

Fair value of total consideration transferred	$	683,700

Approximate acquisition related costs (including general & administrative expenses in WidePoint’s income statement for the period ending March 31, 2010)	$	70,000

Recognized amounts of identifiable assets acquired & liabilities assumed:

Current Assets	$	42,000
Property, plant, and equipment, net		43,675
Identifiable intangible assets		381,420

Current liabilities assumed		(412,483	)

Total identifiable net assets & liabilities assumed		54,612

Goodwill		629,088

Total	$	683,700

~~(1) Includes $55,269~~The operations of Advanced Response Concepts have been included in ~~amortization expense~~the Company’s results of operations beginning on January 29, 2010, the acquisition date.

The earnout provision of the Vuance Agreement provides for additional consideration of up to $1,500,000 during the earnout period of the calendar years 2010 - 2012, subject to Advanced Response Concepts receiving minimum qualified revenues of at least $4,000,000 per year. In the event Advanced Response Concepts receives at least $4,000,000 in ~~cost~~qualified revenues in an earnout year Vuance will have the right to receive an earnout payment equal to twenty percent (20%) of ~~sales associated~~the amount by which such qualified revenues for that earnout year exceed $4,000,000; provided, however, that the first $270,000 of any such earnout payment will be retained by the Company for its sole account as reimbursement for certain accounts payable and deferred revenue liabilities assumed by Advanced Response Concepts in connection with the purchase of ORC and $64,417 in amortization expense in cost of sales associated with the purchase of iSYS and $42,205 in amortization expense in cost of sales associated with internally developed intangibles, which are not allocated among the segments and includes $524,738 in unallocated corporate costs in general and administrative expense of which $20,093 is comprised of stock options expense.Vuance Agreement.

(2) Includes $55,269 in amortization expense in cost of sales associated with the purchase of ORC and $100,000 in amortization expense in cost of sales associated with the purchase of iSYS and $28,137 in amortization expense in cost of sales associated with internally developed intangibles, which are not allocated among the segments and includes $411,121 in unallocated corporate costs in general and administrative expense of which $51,253 is comprised of stock options expense.

(3) Includes $165,808 in amortization expense in cost of sales associated with the purchase of ORC and $193,250 in amortization expense in cost of sales associated with the purchase of iSYS and $126,616 in amortization expense in cost of sales associated with internally developed intangibles, which are not allocated among the segments and includes $1,511,594 in unallocated corporate costs in general and administrative expense of which $126,680 is comprised of stock options expense.

(4) Includes $165,808 in amortization expense in cost of sales associated with the purchase of ORC and $300,000 in amortization expense in cost of sales associated with the purchase of iSYS and $28,137 in amortization expense in cost of sales associated with internally developed intangibles, which are not allocated among the segments and includes $1,370,967 in unallocated corporate costs in general and administrative expense of which $527,333 is comprised of stock options expense.

2118

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the notes thereto which appear elsewhere in this quarterly report and the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2008.~~2009.

The information set forth below includes forward-looking statements. Certain factors that could cause results to differ materially from those projected in the forward-looking statements are set forth below. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

WidePoint Corporation is a technology-based provider of ~~product~~products and services to both the government sector and commercial markets. WidePoint was incorporated in Delaware on May 30, 1997. We have grown through the merger with and acquisition of highly specialized regional IT consulting companies.

Our expertise lies ~~within~~in three business ~~segments. The~~segments operated through six wholly-owned operational entities. Our three business segments include: Wireless Mobility Management (formerly referred to as our “Wireless Telecommunications Expense Management Services” segment), Cybersecurity Solutions (formerly referred to as our “Identity Management” segment), and Consulting Services and Products. These segments offer unique solutions and proprietary intellectual property (“IP”) in mobile and wireless full life cycle management solutions; cybersecurity solutions with specific subject matter expertise, U.S. government certifications and authorizations, and IP in identity management and information assurance services utilizing certificate-based security solutions; ~~wireless telecommunication expense management systems;~~ and other associated IT consulting services and products inthrough which we provide specific subject matter expertise in IT Architecture and Planning, Software Implementation Services, IT Outsourcing, and Forensic Informatics.

~~WidePoint has~~ For additional information related to our three ~~material~~business segments and operational entities, ~~Operational Research Consultants, Inc. (ORC); iSYS, LLC (iSYS), which we acquired~~see our Overview Section of Management’s discussion and analysis of financial condition and results of operations and our consolidated financial statements in ~~January 2008; and WidePoint IL, Inc., operated together with Protexx Acquisition Corp., doing business as Protexx, which we acquired in July 2008:~~

ORC specializes in IT integration and secure authentication processes and software, and providing services to the U.S. Government. ORC has been at the forefront of implementing Public Key Infrastructure (PKI) technologies. PKI technology uses a class of algorithms in which a user can receive two electronic keys, consisting of a public key and a private key, to encrypt any information and/or communication being transmitted to or from the user within a computer network and between different computer networks. PKI technology is rapidly becoming the technology of choice to enable security services within and between different computer systems utilized by various agencies and departments of the U.S. Government.

iSYS specializes in mobile telecommunications expense management services, forensic informatics, and information assurance services, predominantly to various agencies and departments of the U.S. Government.

~~Protexx, which was a development stage company when we acquired it, specializes in identity assurance, and mobile and wireless data protection products and services.~~this Form 10-Q.

See Note 7 to the Condensed Consolidated Financial Statements included in this report for a description of the operating results for each segment.

We intend to continue to market and sell our technical capabilities into the governmental and commercial marketplace. Further, we are continuing to actively search out new synergistic acquisitions that we believe may further enhance our present base of business and service offerings, which has already been augmented by our acquisitions of ORC and iSYS, our asset ~~purchase~~purchases of Protexx and Advanced Response Concepts, and our internal growth initiatives.

With the addition of the customer base and the increase in revenues attributable to our iSYS acquisition, WidePoint’s opportunity to leverage and expand further into the federal ~~governmental~~government marketplace has improved substantially. iSYS’s past client successes, top security clearances for their personnel, and additional breadth of management talent have expanded the Company’s reach into markets that previously were not fully accessible to WidePoint. ~~The~~Further supplemented by the addition of the Protexx and Advanced Response Concepts asset acquisitions, the Company intends to continue to leverage the synergies between its newly-acquired operating ~~subsidiary,~~subsidiaries, and cross sell its technical capabilities into each separate marketplace serviced by our respective ~~subsidiaries.~~

business segments.

Our revenues and operating results may vary significantly from quarter-to-quarter, due to revenues earned on contracts, the number of billable days in a quarter, the timing of the pass-through of other direct costs, the commencement and completion of contracts during any particular quarter, the schedule of the government agencies for awarding contracts, the term of each contract that we have been awarded and general economic conditions. Because a significant portion of our expenses, such as personnel and facilities costs, are fixed in the short term, successful contract performance and variation in the volume of activity as well as in the number of contracts commenced or completed during any quarter may cause significant variations in operating results from quarter to quarter.

As a result of our acquisitions, which predominantly operate in the U.S. federal ~~governmental~~government marketplace, we rely upon a larger portion of our revenues from the federal government directly or as a subcontractor. The federal government’s fiscal year ends September 30. If a budget for the next fiscal year has not been approved by that date, our clients may have to suspend engagements that we are working on until a budget has been approved. Such suspensions may cause us to realize lower revenues in the fourth calendar quarter (first quarter of the government’s fiscal year). Further, a change in senior government officials, or realignment of responsibilities, may negatively affect the rate at which the federal government purchases the services that we offer.

As a result of the factors above, period-to-period comparisons of our revenues and operating results may not be meaningful. These comparisons are not indicators of future performance and no assurances can be given that quarterly results will not fluctuate, causing a possible material adverse effect on our operating results and financial condition.

In addition, most of WidePoint’s current costs consist primarily of the salaries and benefits paid to WidePoint’s technical, marketing and administrative personnel as well as vendor-related costs in connection with our Mobile Telecom Managed Services segment. As a result of our plan to expand WidePoint’s operations through a combination of internal growth initiatives and merger and acquisition opportunities, WidePoint expects such costs to increase. WidePoint’s profitability also depends upon both the volume of services performed and the Company’s ability to manage costs. As a significant portion of the Company’s cost is labor related, WidePoint must effectively manage these costs to achieve and grow its profitability. The Company must also manage our telephony airtime plans and other vendor related offerings under our Mobile Telecom Managed Services provided to our customers as they also represent a significant portion of our costs. To date, the Company has attempted to maximize its operating margins through efficiencies achieved by the use of its proprietary methodologies, and by offsetting increases in consultant salaries with increases in consultant fees received from its clients. The uncertainties relating to the ability to achieve and maintain profitability, obtain additional funding to partially fund the Company’s growth strategy and provide the necessary investment to continue to upgrade its management reporting systems to meet the continuing demands of the present regulatory changes affect the comparability of the information reflected in the financial information presented above.

Our staff consists of business process and computer specialists who help our government and civilian customers augment and expand their resident technologic skills and competencies, drive technical innovation, and help develop and maintain a competitive edge in today’s rapidly changing technological environment in business. Our organization emphasizes an intense commitment to our people, our customers, and the quality of our solutions offerings. As a services organization, our customers are our primary focus.

Results of Operations

Three Months Ended ~~September 30, 2009~~March 31, 2010 as Compared to Three Months Ended ~~September 30, 2008~~March 31, 2009

Revenues, net. Revenues for the three month period ended ~~September 30, 2009~~March 31, 2010, were approximately ~~$11,379,000~~$11.2 million as compared to approximately ~~$8,878,000~~$10.1 million for the three month period ended ~~September 30, 2008.~~March 31, 2009. The increase in revenues was primarily attributable to increases in all three of our segments as a result of the performance of recent contract awards and expansions made predominately by our federal agency customers.

Our Mobile Telecom Managed Services (“MTEM”) segment experienced revenue growth of approximately ~~28%~~9% from approximately ~~$5,284,000~~$6.4 million for the quarter ended ~~September 30, 2008,~~March 31, 2009 to approximately ~~$6,761,000~~$6.9 million for the quarter ended ~~September 30, 2009.~~March 31, 2010. The positive revenue performance primarily resulted from the execution of new contract awards and renewals and expansion work from our current customer base. We anticipate that this segment should continue to demonstrate positive revenue growth in the future as federal agencies continue to adopt the Company’s services under the recent contract award associated with the federal strategic sourcing initiative, or FSSI, by the General Services Administration. In addition, we expect future revenue growth of this segment to be further bolstered by the drive of federal agencies and departments to expand the efficiencies and savings that services such as our Mobile Telecom Managed Services have to date proven to generate for these groups. Also, we are presently pursuing several significant service contract award opportunities at a number of federal agencies and are also initiating a new strategy to expand into state and local municipalities and commercial enterprises through a sales channel strategy utilizing intermediaries to potentially expand our reach beyond the federal sector and help to support the long-term growth of this segment.

Our PKI credentialing and managed services segment experienced relatively flat revenue growth with revenues of approximately ~~34%. Revenues increased approximately $397,000 from $1,161,000~~$1.4 million for the three month ~~period~~periods ended ~~September 30, 2008, to $1,558,000 for the three month period ended September 30, 2009. This positive revenue performance primarily resulted from new contract awards~~March 31, 2010 and ~~renewals and expansion work from our current customer base.~~2009, respectively. We anticipate that this segment should continue to demonstrate ~~positive~~ revenue growth in the future as various federal agency mandates continue to be implemented in order to strengthen their requirements for greater levels of identity management and better protect the federal information technology infrastructure thereof. We have entered into a number of affiliations with partners who support the end user base, which facilitate access to these various federal agencies and the technology infrastructure in order to take advantage of these identity management improvement mandates. We believe these new partnerships should widen our sales reach, which we anticipate should support the continued long-term growth of this segment.

Our consulting services segment experienced revenue growth of approximately ~~26%~~19%. Revenues increased from ~~$2,433,000~~approximately $2.3 million for the three month period ended ~~September 30, 2008~~March 31, 2009 to ~~$3,060,000~~$2.9 million for the three month period ended ~~September 30, 2009.~~March 31, 2010. This positive revenue performance primarily resulted from new contract awards and renewals and expansion work from our current customer base occurring in this quarter. Timing delays that occurred in the second quarter of 2009 pushed sales of certain products and services into the third quarter. While this segment experiences fluctuations from quarter to quarter, we are hopeful that the current growth represents a bottoming trend in revenues as the economy slowly recovers.

Cost of sales. Cost of sales for the three month period ended ~~September 30, 2009,~~March 31, 2010, was approximately ~~$8,704,000~~$8.6 million (or ~~76%~~77% of revenues), as compared to cost of sales of approximately ~~$7,382,000~~$8.1 million (or ~~83%~~80% of revenues), for the three month period ended ~~September 30, 2008.~~March 31, 2009. This absolute increase in cost of sales was primarily attributable to an increase in revenues. The decrease in our cost of sales as a percentage of revenues was primarily attributable to margin improvements in all three of our segments. Our MTEM and PKI segments realized greater margins from the benefit of economies of scale with our direct costs centers realizing greater efficiencies. Our consulting services segment realized greater margins as a result of a larger mix of higher margin consulting services, versus a lesser amount of lower margin software reselling that was realized during the quarter. We anticipate improvements in our costs of sales on a percentage basis as our MTEM and PKI segments add economies of scale, which may be partially offset at times by the fluctuation in our consulting services segment revenue mix.

Gross profit. Gross profit for the three month period ended ~~September 30, 2009,~~March 31, 2010 was approximately ~~$2,675,000~~$2.6 million (or ~~24%~~23% of revenues), as compared to gross profit of approximately ~~$1,497,000~~$2.0 million (or ~~17%~~20% of revenues), for the three month period ended ~~September 30, 2008.~~March 31, 2009. The percentage of gross profit was higher in the ~~third~~first quarter of ~~2009~~2010 as compared to the ~~third~~first quarter of ~~2008~~2009 as a result of higher margins associated with improved economies of scale in our MTEM and PKI segments and a greater mix of higher margin direct consulting services as compared to lower margin software reselling in our consulting services segment. We anticipate gross profit as a percentage of revenues should increase ~~in the near term~~ as cost of sales as a percentage of revenues decreases due to a greater mix of higher margin services. We believe as revenues expand in the future there will be periods of variability in margin growth associated with changes in our product mix.

Sales and marketing. Sales and marketing expense for the three month period ended ~~September 30, 2009,~~March 31, 2010, was approximately ~~$333,000,~~$343,000, (or 3% of revenues) as compared to ~~approximately $263,000~~approximately$229,000 (or 3%2% of revenues), for the three month period ended ~~September 30, 2008.~~March 31, 2009. The absolute dollar amount of sales and marketing expanded slightly as we increased our sales and marketing capabilities through the addition of several new hires, tools, and services infrastructure improvements. We believe that with our niche capabilities and the present latent demand for our services the investment within our sales and marketing will support our ability to continue to expand our revenues.

General and administrative. General and administrative expenses for the three month period ended ~~September 30, 2009,~~March 31, 2010, were approximately ~~$1,712,000~~$1.8 million (or ~~15%~~16% of revenues), as compared to approximately ~~$1,485,000~~$1.5 million (or ~~17%~~15% of revenues) recorded by the Company for the three month period ended ~~September 30, 2008.~~March 31, 2009. This increase in general and administrative expenses over those for the three months ended ~~September 30, 2008,~~March 31, 2009, was primarily attributable to ~~slight~~ increases in general and administrative costs ~~incurred~~as we added a new subsidiary Advanced Response Concepts that added to ~~support~~ our ~~increasing revenue base.~~general and administrative expense base, along with a one time increase in legal expenses associated with the purchase of the assets of the government business of Vuance, Inc., which we are operating as Advanced Response Concepts. We anticipate that our general and administrative costs in absolute dollars may rise slightly in the future as our support costs rise to facilitate our expectations of a greater revenue base as we continue our efforts to comply with pending additional financial compliance requirements. We believe that our general and administrative costs on a percentage of revenue basis will level out or decrease ~~to the extent our revenue growth expands at a greater pace than our general and administrative costs rise.~~in future financial reporting periods.

Depreciation. Depreciation expense for the three month period ended ~~September 30, 2009,~~March 31, 2010, was approximately ~~$47,000~~$50,000 (or less than 1% of revenues), as compared to approximately ~~$41,000~~$43,000 of such expenses (or less than 1% of revenues) recorded by the Company for the three month period ended ~~September 30, 2008.~~March 31, 2009. This increase in depreciation expense over those for the three month period ended ~~September 30, 2008,~~March 31, 2009, was primarily attributable to ~~greater amounts~~recent acquisitions of additional depreciable assets. We do not anticipate any material changes within depreciation expense in the short-term. However, as our revenue base increases within our MTEM and PKI segments, there may be a need from time to time to increase the purchase of equipment in support of new revenue streams that may then raise our depreciation expenses.

Interest income. Interest income for the three month period ended ~~September 30, 2009,~~March 31, 2010, was approximately ~~$4,000~~$7,000 (or less than 1% of revenues), as compared to approximately ~~$34,000~~$14,000 (or less than 1% of revenues), for the three month period ended ~~September 30, 2008.~~March 31, 2009. This decrease in interest income for the three month period ended ~~September 30, 2009,~~March 31, 2010, was primarily attributable to lesser amounts of invested cash and cash equivalents, and combined with lower short-term interest rates that were available to the Company on investments in interest bearing accounts. We do not anticipate any material changes in trends in our interest income for the near-term as a result of continuing low short-term interest rates presently payable by financial institutions in connection with the present monetary policy of the U.S. federal government.

Interest expense. Interest expense for the three month period ended ~~September 30, 2009,~~March 31, 2010, was approximately ~~$32,000~~$27,000 (or less than 1% of revenues), as compared to approximately ~~$76,000~~$80,000 (or less than 1% of revenues), for the three month period ended ~~September 30, 2008.~~March 31, 2009. This decrease in interest expense for the three month period ended ~~September 30, 2009~~March 31, 2010, was primarily attributable to lesser expenses associated with the debt instruments held by the Company. We anticipate our interest expense will continue to decrease as the Company continues to pay down the principal on its term note held by Cardinal Bank.

Income taxes. Income taxes for the three month ~~period~~periods ended ~~September 30,~~March 31, 2010 and March 31, 2009 each were approximately ~~$39,000 as compared to no income taxes for the three month period ended September 30, 2008.~~$39,000. The Company incurred a deferred income tax expense of approximately $39,000 for ~~the~~each three month period, ~~ended September 30, 2009,~~ as a result of the recognition of a deferred tax liability attributable to the differences in our treatment of the amortization of goodwill for tax purposes versus book purposes as it relates to our acquisition of iSYS in January 2008. As goodwill is amortized for tax purposes but not book purposes and is considered a permanent asset rather than a temporary asset, the related deferred tax liability cannot be reversed until some indeterminate future period when the goodwill either becomes impaired and/or is disposed of.

Net ~~income (loss).~~income. As a result of the above, the net income for the three month period ended ~~September 30, 2009,~~March 31, 2010, was approximately ~~$515,000~~$239,000 as compared to the net ~~loss~~income of approximately ~~$335,000~~$129,000 for the three months ended ~~September 30, 2008.~~

~~Nine Months Ended September 30, 2009 as Compared to Nine Months Ended September 30, 2008~~

~~Revenues, net~~. Revenues for the nine month period ended September 30, 2009 were approximately $31,906,000 as compared to approximately $25,293,000 for the nine month period ended September 30, 2008. This increase in revenues was primarily attributable to increases in our MTEM and PKI credentialing and managed services segments, partially offset by a decline in our consulting services segment.

~~Our~~ ~~MTEM segment~~ ~~experienced revenue growth of approximately 39%, from approximately $14,579,000 for the nine months ended September 30, 2008 to approximately $20,232,000 for the nine months ended September 30,~~March 31, 2009. This positive revenue performance primarily resulted from new contract awards and renewals and expansion work from our current customer base. We anticipate that this segment should continue to demonstrate positive revenue growth in the future as federal agencies continue to adopt the Company’s services under the recent contract award associated with the federal strategic sourcing initiative, or FSSI, by the General Services Administration. In addition, we expect future revenue growth of this segment to be further bolstered by the drive by federal agencies and departments to expand the efficiencies and savings that services such as our Mobile Telecom Managed Services have to date proven to generate for these groups. Also, we are presently pursuing several significant service contract opportunities to potentially provide our services, and we are also initiating a new strategy to expand into state and local municipalities and commercial enterprises through a sales channel strategy utilizing intermediaries. We believe that these efforts should further expand our reach beyond the federal sector and help to support the long-term growth of this segment.

Our PKI credentialing and managed services segment experienced revenue growth of approximately 46%. Revenues increased approximately $1,357,000 from $2,945,000 for the nine month period ended September 30, 2008 to $4,302,000 for the nine month period ended September 30, 2009 as a result of various mandates to roll out credential programs to various agencies and contractors. This positive revenue performance primarily resulted from new contract awards and renewals and expansion work from our current customer base. We anticipate that this segment should continue to demonstrate positive revenue growth in the future as various federal agency mandates continue to be implemented to strengthen their requirements for greater levels of identity management and better protect the federal information technology infrastructure thereof. We have entered into a number of affiliations with partners who support the end user base, which facilitate access to these various federal agencies and the technology infrastructure in order to take advantage of these identity management improvement mandates. We believe these new partnerships should widen our sales reach, which we anticipate will support the continued long-term growth of this segment.

Our consulting services segment experienced decreasing revenue of approximately 5%. Revenues decreased approximately $397,000, from $7,769,000 for the nine month period ended September 30, 2008, as compared to $7,372,000 for the nine month period ended September 30, 2009. This revenue decrease primarily resulted from lesser revenues being recognized during the nine month period as a result of timing differences that have delayed the recognition of some expected second-quarter revenues into the second half of 2009.

~~Cost of sales~~. Cost of sales for the nine month period ended September 30, 2009, was approximately $24,987,000 (or 78% of revenues), as compared to cost of sales of approximately $21,075,000 (or 83% of revenues), for the nine month period ended September 30, 2008. This absolute increase in cost of sales was primarily attributable to an increase in revenues. The decrease in our cost of sales as a percentage of revenues was primarily attributable to margin improvements in all of our segments. Our MTEM and PKI segments realized greater margins from the benefit of economies of scale with our direct costs centers realizing greater efficiencies. Our consulting services segment realized greater margins as a result of a larger mix of higher margin consulting services, versus a lesser amount of lower margin software reselling that was realized during the nine month period. We anticipate improvements in our costs of sales on a percentage basis as our MTEM and PKI segments add economies of scale, which may be partially offset at times by the fluctuation in our consulting services segment revenue mix.

~~Gross profit~~. Gross profit for the nine month period ended September 30, 2009, was approximately $6,920,000 (or 22% of revenues), as compared to a gross profit of approximately $4,218,000 (or 17% of revenues), for the nine month period ended September 30, 2008. The percentage of gross profit was higher in the first nine months of 2009 as compared to the first nine months of 2008 as a result of higher margins associated with improved economies of scale in our MTEM and PKI segments and a greater mix of higher margin direct consulting services as compared to lower margin software reselling in our consulting services segment. We anticipate gross profit as a percentage of revenues should increase in the near term as cost of sales as a percentage of revenues decreases due to a greater mix of higher margin services. We believe as revenues expand in the future there will be periods of variability in margin growth associated with changes in our product mix.

~~Sales and marketing.~~ Sales and marketing expense for the nine month period ended September 30, 2009, was approximately $828,000 (or 3% of revenues), as compared to approximately $676,000 (or 3% of revenues), for the nine month period ended September 30, 2008. This increase was materially attributable to the expansion of our sales and marketing outreach efforts.

~~General and administrative.~~ ~~General and administrative expenses for the nine month period ended September 30, 2009, were approximately $4,825,000 (or 15% of revenues~~.as compared to approximately $4,643,000 (or 18% of revenues), recorded by the Company for the nine month period ended September 30, 2008. This increase in general and administrative expenses over those for the nine months ended September 30, 2008, was primarily attributable to slight increases in general and administrative costs incurred to support our increasing revenue base. We anticipate that our general and administrative costs in absolute dollars may rise slightly in the future as our support costs rise to facilitate our expectations of a greater revenue base as we continue our efforts to comply with pending additional financial compliance requirements. We believe that our general and administrative costs on a percentage basis will level out or decrease to the extent our revenue growth expands at a greater pace than our general and administrative costs rise.

~~Depreciation expense.~~ Depreciation expense for the nine month period ended September 30, 2009, was approximately $131,000 (or less than 1% of revenues), as compared to approximately $117,000 (or less than 1% of revenues), recorded by the Company for the nine month period ended September 30, 2008. This increase in depreciation expenses for the nine month period ended September 30, 2009, was primarily attributable to the greater amounts of depreciable assets.

~~Interest income.~~ Interest income for the nine month period ended September 30, 2009, was approximately $22,000 (or less than 1% of revenues), as compared to approximately $106,000 (or less than 1% of revenues), for the nine month period ended September 30, 2008. This decrease in interest income for the nine month period ended September 30, 2009, was primarily attributable to lesser amounts of cash and cash equivalents available to the Company over this time period.

~~Interest expense.~~ Interest expense for the nine month period ended September 30, 2009, was approximately $146,000 (or less than 1% of revenues), as compared to approximately $262,000 (or less than 1% of revenues), for the nine month period ended September 30, 2008. This decrease in interest expense for the nine month period ended September 30, 2009 was primarily attributable to the reduction in the outstanding balance of debt instruments held by the Company.

~~Income taxes.~~ Income taxes for the nine month period ended September 30, 2009 were approximately $118,000 as compared to no income taxes for the nine month period ended September 30, 2008. The Company incurred a deferred income tax expense of approximately $118,000 for the nine month period ended September 30, 2009 as a result of the recognition of a deferred tax liability attributable to the differences in our treatment of the amortization of goodwill for tax purposes versus book purposes as it relates to our acquisition of iSYS in January 2008. As goodwill is amortized for tax purposes but not for book purposes and is considered a permanent asset rather than a temporary asset, the related deferred tax liability cannot be reversed until some indeterminate future period when the goodwill either becomes impaired and/or is disposed of.

~~Net income (loss).~~ As a result of the above, the net income for the nine month period ended September 30, 2009, was approximately $895,000, as compared to the net loss of approximately $1,375,000 for the nine months ended September 30, 2008.

Liquidity and Capital Resources

The Company has, since inception, financed its operations and capital expenditures through the sale of preferred and common stock, seller notes, convertible notes, convertible exchangeable debentures, senior secured loans and the proceeds from the exercise of the warrants related to a convertible exchangeable debenture. During ~~2008~~2009 and through the period ended ~~September 30, 2009,~~March 31, 2010, operations were ~~materially~~primarily financed with working capital, ~~borrowings against the Company’s credit facilities with Cardinal Bank~~senior debt, and through the private sale of securities. During the first quarter of 2009 the Company modified its senior lending facility with Cardinal Bank, which senior lending facility now allows for the Company to borrow up to $5 million at a rate of prime plus 50 basis points. The new senior lending facility replaced the prior senior lending facility with Cardinal Bank. This senior lending facility matures on June 1, 2010. This senior lending facility, as modified, provides the Company with continuing liquidity to fund the operations of the business supporting additional contract awardsstock option and opportunities to expand the Company’s strategic goals and objectives. Further, on November 5, 2007, the Company entered into a series of agreements with Protexx, Inc., a company from which WidePoint acquired substantially all of that company’s assets and intellectual property in July of 2008. These agreements allowed for Protexx, Inc. to borrow up to $250,000 from WidePoint on an installment basis between November 5, 2007 and July 31, 2008. The short-term borrowing facility was converted and eliminated by WidePoint at the time of the asset purchase of Protexx, Inc.

warrant exercises.

Net cash ~~provided by~~used in operating activities for the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, was approximately ~~$1.7~~$2.3 million, as compared to cash provided by operating activities of ~~$4.7~~$2.2 million for the ~~nine~~three months ended ~~September 30, 2008.~~March 31, 2009. This decrease in cash generated and increase in cash used in from operating activities for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 was primarily a result of a decrease in ~~unbilled accounts receivable, a reduction in stock compensation expense, decreases in~~ accounts payable and accrued expenses ~~offset by improvements to net income from~~as a ~~net loss.~~result of an acceleration of vendor payments during the first quarter of 2010. Net cash used in investing activities for the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, was approximately ~~$0.2 million,~~$395,000, as compared to ~~$5.0 million~~$19,000 in cash used in investing activities for the ~~nine~~three months ended ~~September 30, 2008.~~March 31, 2009. The ~~decrease~~increase in net cash used in investing activities was primarily attributable to nothe asset acquisition ~~activity during~~of the ~~period as compared to~~government business assets of Vuance, Inc. by the ~~prior period in which we had purchased iSYS.~~Company. Net cash used in financing activities amounted to approximately ~~$2.6 million~~$203,000 in the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, as compared to net cash ~~provided by~~used in financing activities of approximately ~~$5.5~~$2.2 million in the ~~nine~~three months ended ~~September 30, 2008.~~March 31, 2009. This ~~increase~~decrease in net cash used in financing activities primarily related to the reduction of acquisition indebtedness during the first quarter ended March 31, 2010 as compared to the first quarter of March 31, 2009 in which we paid down the remaining amounts of the Sellers Note issued to Jin Kang, a related party of the Company and the former owner and current officer of iSYS, LLC, in connection with our ~~Cardinal Bank loans~~. acquisition of iSYS, LLC. As a result of the Company’s capital raising in 2008 and profitability in 2009, the Company has had excess liquidity to absorb the pay-down of short-term and long-term debt, while still maintaining sufficient levels of capital resources to fund operations.

As of ~~September 30, 2009,~~March 31, 2010, the Company had a net working capital of approximately ~~$4.2~~$3.7 million. The Company’s primary source of liquidity consists of approximately $3.3 million in cash and cash equivalents and approximately ~~$7.9~~$8.5 million of accounts receivable and unbilled accounts receivable. Current liabilities include approximately ~~$5.8~~$7.2 million in accounts payable and accrued expenses. The reduction in ~~Current~~current liabilities for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 was predominately associated with the ~~payment~~reduction of ~~seller’s notes.~~accounts payable and accrued liabilities as a result of the acceleration of vendor invoices during the first quarter of 2010.

The Company’s business environment is characterized by rapid technological change, periods of high growth and contraction and is influenced by material events such as mergers and acquisitions, with each of the foregoing able to substantially change the Company’s outlook.

The Company has embarked upon several new initiatives to expand revenue growth which has included both acquisitions and organic growth. The Company requires substantial working capital to fund the future growth of its business, particularly to finance accounts receivable, sales and marketing efforts, and capital expenditures.

Currently there are no material commitments for capital expenditures and software development costs. Future capital requirements will depend on many factors, including the rate of revenue growth, if any, the timing and extent of spending for new product and service development, technological changes and market acceptance of the Company’s services.

Management believes that its current cash position is sufficient to meet capital expenditure and working capital requirements for the near term. However, the growth and technological change of the market make it difficult to predict future liquidity requirements with certainty. Over the longer term, the Company must successfully execute its plans to increase revenue and income streams that will generate significant positive cash flows if it is to sustain adequate liquidity without impairing growth or requiring the infusion of additional funds from external sources. Additionally, a major expansion, such as that which occurred with the acquisition of iSYS or any other potential new subsidiaries, might require external financing that could include additional debt or equity capital. The Company added to its working capital during the second quarter of 2008 by selling shares of its common stock in private transactions. The approximate $4.1 million in proceeds has bolstered the Company’s ability to finance working capital requirements. There can be no assurance that additional financing, if required, will be available on acceptable terms, if at all, for future acquisitions and/or growth initiatives.

Off-Balance Sheet Arrangements

The Company has no existing off-balance sheet arrangements as defined under SEC regulations.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the existence of the material weaknesses discussed below ~~under the heading~~in “Material ~~Weaknesses,~~Weakness in Internal Control Over Financial Reporting,” our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of the end of the period covered by this report.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Material ~~Weaknesses~~

~~In our Management’s Report on~~Weakness in Internal Control Over Financial Reporting ~~included~~

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 Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Management assessed the effectiveness of our ~~Form 10-K for the year ended~~internal control over financial reporting as of December 31, ~~2008,~~2009. 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 this assessment, management concluded that our internal control over financial reporting was not effective as of December 31, 2009 due to the existence of the following material ~~weaknesses as~~weaknesses:

Inadequate segregation of ~~December 31, 2008, discussed below. A material weakness is~~duties within a significant account or process. Management determined that it did not have appropriate segregation of duties within our internal controls that would ensure the consistent application of procedures in our financial reporting process by existing personnel. This control deficiency orcould result in a ~~combination~~misstatement to substantially all of ~~control deficiencies,~~our financial statement accounts and disclosures that ~~results~~would result in ~~more than a remote likelihood that~~ a material misstatement ofto the annual or interim financial statements ~~will~~that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.

~~Inadequate segregation of duties within a significant account or process.~~ Lack of sufficient subject matter expertise. Management determined that it lacks certain subject matter expertise accounting for and the disclosure of complex transactions. Our financial staff currently lacks sufficient training or experience in accounting for complex transactions and the required disclosure therein.We did not have appropriate segregation of duties within our internal controls that would ensure the consistent application of procedures in our financial reporting process by existing personnel. This control deficiency could result in a misstatement to substantially all of our financial statement accounts and disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.

~~Inadequate documentation of the components of internal control.~~ We did not maintain documented policies and evidence of compliance with our internal controls that would ensure the consistent application of procedures in our financial reporting process by existing personnel. This control deficiency could result in a misstatement to substantially all of our financial statement accounts and disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.

~~Income Tax Accounting.~~ We engage outside parties to assist us in accounting for income taxes. We have not implemented an effective review process for accounting for income taxes which could lead to errors occurring in the amounts and disclosures for income taxes. Accordingly, management has concluded that this control deficiency constitutes a material weakness.

Remediation Plan for Material Weaknesses

The material weaknesses described above in “Material Weaknesses in Internal Control Over Financial Reporting” comprise control deficiencies that we discovered ~~in the fourth quarter of fiscal year 2007 and~~ during the financial close process for the December 31, 2009 fiscal year 2008. Upon our acquisition of iSYS in January 2008, we further determined that the material weaknesses described above were also present in iSYS’s internal controls. We specifically noted weaknesses associated with the process of recognizing a certain segment of the iSYS revenue and associated direct costs.period.

~~Beginning and during the fourth quarter of fiscal 2007, we formulated~~Management has commenced a remediation plan ~~and initiated remedial action to address those material weaknesses at WidePoint. During~~during the first quarter of ~~2008, we expanded~~2010 that will be implemented during our fiscal year 2010, which includes (i) recruiting and adding specific financial subject matter experts as consultants or employees to the ~~scope~~financial staff and, (ii) augmenting and allowing for additional training and education for select members of our remediation plan to address the material weaknesses related to the internal controls and procedures of iSYS. We have continued our remediation actions through the third quarter of 2009 and expect to continue working on our remediation plan through December 31, 2009. The elements of the remediation plan are as follows:

~~Inadequate segregation of duties within a significant account or process.~~ ~~We commenced a thorough review of our accounting staff’s duties and where necessary we have begun segregating such duties with other personnel.~~

~~Inadequate documentation of the components of internal control~~. We commenced a thorough review of our documentation and where necessary we are putting into place policies and procedures to document such evidence to comply with our internal control requirements. We are specifically addressing policies to properly review and recognize a certain segment of the iSYS revenue and associated direct costs. We have also retained a financial consultant to assist us in further reviewing and improving our internal control processes.

~~Inadequate Income Tax Accounting review process.~~ ~~We commenced a search and review of outside experts to assist us in developing an effective review process for accounting for income taxes.~~

financial staff.

We believe that these measures, if effectively implemented and maintained, will remediate the material weaknesses discussed above.

Changes in Internal Control Over Financial Reporting

~~During~~We are currently undertaking the ~~first three quarters of fiscal year 2009, we undertook a number of~~ measures discussed above to remediate the material weaknesses discussed under “Material Weaknesses in Internal Control Over Financial Reporting” above. Those measures, described under ~~the heading~~ “Remediation Plan for Material Weaknesses,” ~~have been undertaken~~were commenced during the first ~~three quarters~~quarter of 2010, will continue to be implemented during our fiscal year ~~2009~~2010, and will ~~continue into the remainder of 2009. We anticipate these measures will have~~ materially ~~affected,~~affect, or are reasonably likely to materially affect, our internal control over financial ~~reporting when such "remediation Plan for Material Weaknesses" is completed.~~reporting.

Other than as described above, there have been no changes in our internal control over financial reporting during the ~~nine months~~three-month period ended ~~September 30, 2009~~March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

3024

PART II – OTHER INFORMATION

~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.~~

On July 8, 2009, each of Steve L. Komar, James T. McCubbin and Mark F. Mirabile exercised, in the form of a cashless exercise, his respective warrant to purchase 1,333,333 shares of common stock of the Company, which warrant was previously issued to such individual pursuant to a Warrant Purchase Agreement, dated July 14, 2004, by and between the Company and each such individual. As a result of his respective cashless exercise of such warrant, each of Steve L. Komar, James T. McCubbin and Mark F. Mirabile, as applicable, was issued 793, 103 shares of common stock of the Company, with 540,230 shares of common stock of the Company being withheld by the Company from each such warrant as payment of the respective exercise price of each such warrant. The shares issued pursuant to the exercise of these warrants have not been registered under the Securities Act of 1933, as amended (the “Securities Act”). Such shares are exempt from the registration requirements under the Securities Act pursuant to the “private offering” exemption under Section 4(2) of the Securities Act.

ITEM 6. EXHIBITS.

EXHIBIT
NO.		DESCRIPTION

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

3125

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		WIDEPOINT CORPORATION

Date: May 17, 2010	~~November 16, 2009~~		/s/ STEVE L. KOMAR
			Steve L. Komar
			President and Chief Executive Officer


	For the quarterly period ended March 31, 2010

	OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ____________ to ____________

Delaware	~~52-2040275~~		52-2040275
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

18W100 ~~22nd~~22nd St., Oakbrook Terrace, IL ~~60181~~		60181
(Address of principal executive offices)		(Zip Code)

			Page No.
Part I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements		2

	Condensed Consolidated Balance Sheets as of ~~September 30, 2009~~March 31, 2010 (unaudited) and December 31, ~~2008~~2009 (unaudited)		2

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and ~~nine months ended September 30,~~ 2009 ~~and 2008~~ (unaudited)		3

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and ~~nine months ended September 30,~~ 2009 ~~and 2008~~ (unaudited)		4

	Notes to Condensed Consolidated Financial Statements		5

Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	22	19

Item 4.	Controls and Procedures	29	23

Part II.	OTHER INFORMATION

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	31

Item 6.	Exhibits	31	25

SIGNATURES		32	26

CERTIFICATIONS

	September 30,			December 31,
	2009			2008			March 31,			December 31,
	(unaudited)						2010			2009
Assets							(unaudited)
Current assets:
Cash and cash equivalents	$	3,300,508		$	4,375,426		$	3,349,382		$	6,238,788
Accounts receivable, net of allowance of $52,650 and $0, respectively		6,590,753			5,282,192
Accounts receivable, net of allowance of $52,650 and $52,650, respectively								6,775,176			7,055,525
Unbilled accounts receivable		1,339,235			2,301,893			1,774,440			1,334,455
Prepaid expenses and other assets		367,238			267,666			376,184			359,563
Total current assets		11,597,734			12,227,177			12,275,182			14,988,331
Property and equipment, net		444,375			431,189			520,412			538,811
Goodwill		8,562,254			8,575,881			10,399,737			9,770,647
Intangibles, net		1,576,439			2,236,563
Other Intangibles, net								1,574,282			1,381,580
Other assets		103,609			110,808			64,890			75,718
Total assets	$	22,284,411		$	23,581,618		$	24,834,503		$	26,755,087

Liabilities and stockholders’ equity
Current liabilities:
Related party note payable	$	—		$	2,140,000
Short term note payable		29,176			97,158		$	55,117		$	102,074
Accounts payable		4,468,584			2,465,394			4,797,985			7,120,168
Accrued expenses		1,293,214			2,548,106			2,412,789			2,304,995
Deferred revenue		963,607			1,667,969			650,365			768,504
Short-term portion of long-term debt		512,077			486,707			529,799			520,855
Short-term portion of deferred rent								45,992			54,497
Short-term portion of capital lease obligation		118,899			107,141			95,155			112,576
Total current liabilities		7,385,557			9,512,475			8,587,202			10,983,669
Deferred income tax liability		274,559			156,891			353,004			313,782
Long-term debt, net of current portion		735,735			1,117,230			469,273			604,048
Fair value of earnout liability								300,000			—
Deferred rent, net of current portion		71,596			—			21,760			7,312
Capital lease obligation, net of current portion		91,772			95,248			56,142			67,632
Total liabilities	$	8,559,219		$	10,881,844		$	9,787,381		$	11,976,443

Stockholders’ equity:
Common stock, $0.001 par value; 110,000,000 shares authorized; 60,684,823 and 58,275,514 shares issued and outstanding, respectively		60,685			58,276
Common stock, $0.001 par value; 110,000,000 shares authorized; 61,375,333 shares issued and outstanding, respectively								61,375			61,375
Stock warrants		38,666			38,666			24,375			24,375
Additional paid-in capital		67,322,809			67,194,788			67,903,574			67,874,394
Accumulated deficit		(53,696,968	)		(54,591,956	)		(52,942,202	)		(53,181,500	)
Total stockholders’ equity		13,725,192			12,699,774			15,047,122			14,778,644
Total liabilities and stockholders’ equity	$	22,284,411		$	23,581,618		$	24,834,503		$	26,755,087

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
	(unaudited)
Revenues, net	$	11,378,793		$	8,878,431		$	31,906,457		$	25,293,069
Cost of sales (including amortization and depreciation of $245,876, $ 261,134, $731,767, and $ 701,739, respectively)		8,704,275			7,381,674			24,986,779			21,075,234

Gross profit		2,674,518			1,496,757			6,919,678			4,217,835

Sales and marketing		333,130			262,970			827,913			675,501
General and administrative (including share-based compensation expense of $20,093, $51,253, $126,680, and $527,333, respectively)		1,711,688			1,484,878			4,824,670			4,642,526
Depreciation expense		46,887			41,171			130,999			117,204

Income (loss) from operations		582,813			(292,262	)		1,136,096			(1,217,396	)

Interest income		3,548			33,713			22,287			105,773
Interest expense		(31,678	)		(76,019	)		(145,678	)		(262,146	)
Other expense		(49	)		-			(49	)		(1,698	)

Net income (loss) before income tax expense		554,634			(334,568	)		1,012,656			(1,375,467	)
Deferred income tax expense		39,223			-			117,668			-

Net income (loss)	$	515,411		$	(334,568	)	$	894,988		$	(1,375,467	)

Basic earnings (loss) per share	$	0.009		$	(0.006	)	$	0.015		$	(0.024	)
Basic weighted average shares outstanding		60,348,616			58,090,697			58,990,406			56,197,675
Diluted earnings (loss) per share	$	0.008		$	(0.006	)	$	0.015		$	(0.024	)
Diluted weighted average shares outstanding		62,063,726			58,090,697			61,440,208			56,197,675

	Three Months
	Ended March 31,
	2010			2009
	(unaudited)
Revenues, net	$	11,163,056		$	10,135,382
Cost of sales (including amortization and depreciation of $226,285 and $243,136, respectively)		8,639,221			8,092,280

Gross profit		2,523,835			2,043,102

Sales and marketing		343,007			229,466
General and administrative (including share-based compensation expense of $29,180 and $30,730, respectively)		1,831,811			1,536,271
Depreciation expense		49,734			43,007

Income from operations		299,283			234,358

Interest income		6,614			14,088
Interest expense (loss)		(27,377	)		(80,299	)


Net income before income tax expense		278,520			168,147
Deferred income tax expense		39,222			39,222

Net income	$	239,298		$	128,925

Basic net income per share	$	0.004		$	0.002
Basic weighted average shares outstanding		61,375,333			58,294,514
Diluted net income per share	$	0.004		$	0.002
Diluted weighted average shares outstanding		62,974,353			59,302,205

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2009			2008			2009			2008			2010			2009
	(unaudited)												(unaudited)
Cash flows from operating activities:

Net income (loss)	$	515,411		$	(334,568	)	$	894,988		$	(1,375,467	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income													$	239,298		$	128,925
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense		39,223			-			117,668			-			39,222			39,222
Depreciation expense		63,879			55,421			176,112			158,085			72,978			57,258
Amortization		228,884			246,884			686,654			660,859
Amortization of intangibles														203,041			228,885
Amortization of deferred financing costs		2,912			2,143			6,665			6,429			2,911			842
Share-based compensation expense		20,093			51,253			126,680			527,333			29,180			30,730
Loss (gain) on disposal of equipment		49			-			49			(2,378	)

Changes in assets and liabilities (net of business combinations):
Accounts receivable and unbilled accounts receivable		(477,688	)		1,198,275			(345,903	)		3,262,334			(159,636	)		208,064
Prepaid expenses and other current assets		(89,692	)		259,656			(99,572	)		74,553			25,379			53,033
Other assets		(2,948	)		6,885			12,534			(43,838	)		7,917			15,007
Accounts payable and accrued expenses		618,603			(946,744	)		817,045			(398,515	)		(2,633,815	)		1,593,103
Deferred revenue		(277,411	)		1,817,380			(704,362	)		1,791,265			(118,139	)		(167,730	)
Net cash (used in) provided by operating activities		641,315			2,356,585			1,688,558			4,660,660			(2,291,664	)		2,187,339

Cash flows from investing activities:
Purchase of asset/subsidiary, net of cash acquired		17,109			(5,878	)		13,627			(4,907,623	)
Purchase of asset/subsidiary, net of cash Acquired														(370,000	)		—
Purchase of property and equipment		(111,549	)		(9,948	)		(189,347	)		(73,534	)		(10,904	)		(7,726	)
Software development costs		(14,078	)		-			(26,530	)		-			(14,324	)		(11,682	)
Net cash used in investing activities		(108,518	)		(15,826	)		(202,250	)		(4,981,157	)		(395,228	)		(19,408	)

Cashflows from financing activities:
Borrowings on notes payable		-			-			400,737			3,800,000

Principal payments on notes payable		(156,290	)		(123,358	)		(2,867,593	)		(2,168,298	)		(173,603	)		(2,160,205	)
Principal payments under capital lease Obligation		(29,410	)		(29,842	)		(86,120	)		(87,823	)
Principal payments under capital lease obligation														(28,911	)		(30,158	)
Proceeds from exercise of stock options		-			-			3,750			14,400			—			3,750
Proceeds from issuance of stock		-			-			-			4,080,000
Costs related to issuance of stock		-			-			-			(140,298	)
Costs related to renewal fee for line of credit		-			-			(12,000	)		-			—			(12,000	)
Costs related to financing purchase of Subsidiary		-			-			-			(13,713	)
Net cash (used in) provided by financing activities		(185,700	)		(153,200	)		(2,561,226	)		5,484,268
Net cash used in financing activities														( 202,514	)		(2,198,613	)

Net increase (decrease) in cash and cash equivalents		347,097			2,187,559			(1,074,918	)		5,163,771
Net decrease in cash and cash equivalents														(2,889,406	)		(30,682	)

Cash and cash equivalents, beginning of period		2,953,411			4,808,203			4,375,426			1,831,991			6,238,788			4,375,426

Cash and cash equivalents, end of period	$	3,300,508		$	6,995,762		$	3,300,508		$	6,995,762		$	3,349,382		$	4,344,744

Non-cash investing activities:
Capital leases for acquisition of property and Equipment	$	94, 402		$	-		$	94, 402		$	-

Non-cash financing activities:
Promissory Note issued for iSYS acquisition	$	-		$	-		$	-		$	2,000,000
Liabilities incurred but not yet paid relating to stock issuance		-			-			-			41,949
Value of 1.5 million common shares issued as consideration in the acquisition of iSYS		-			-			-			1,800,000

Supplemental cash flow information:
Cash paid for interest	$	29,523		$	28,529		$	293,498		$	110,322		$	25,281		$	228,416

	For the Three Months Ended March 31,
Customer Name	2009 (%) Revenue			2008 (%) Revenue
Transportation Security Administration (“TSA”)		24	%		24	%
Department of Homeland Security (“DHS”)		20	%		21	%
Washington Headquarters Services (“WHS”)		17	%		18	%

Customer Name	As of March 31, 2010 (%) Receivables			As of December 31, 2009 (%) Receivables
Department of Homeland Security (“DHS”)		31	%		30	%
Transportation Security Administration (“TSA”)		17	%		26	%
Washington Headquarters Services (“WHS”)		12	%		20	%

	September 30, 2009			December 31, 2008			March 31, 2010			December 31, 2009
Automobiles, computers, equipment and software	$	1,031,527		$	867,013		$	1,238,732		$	1,194,831

Less– Accumulated depreciation and amortization		(587,152	)		(435,824	)		(718,320	)		(656,020	)
	$	444,375		$	431,189		$	520,412		$	538,811

	For the Three Months Ended
	March 31,		March 31,
	2010		2009
Basic Net Income Per Common Share:
Net income	$	239,298	$	128,925

Weighted average number of common shares		61,375,333		58, 294,514

Income per common share	$	0.004	$	0.002

Diluted net Income per Common Share:
Net income	$	239,298	$	128,925

Weighted average number of common shares		61,375,333		58,294,514

Incremental shares from assumed conversions of stock options		1,599,020		1,007,691
Adjusted weighted average number of common shares		62,974,353		59,302,205
Income per common share	$	0.004	$	0.002

	Three Months Ended					Nine Months Ended
	Sep. 30,		Sep. 30,			Sep. 30,		Sep. 30,
	2009		2008			2009		2008
Basic Earnings Per Common Share:
Net income (loss)	$	515,411	$	(334,568	)	$	894,988	$	(1,375,467	)

Weighted average number of common shares		60,348,616		58,090,697			58,990,406		56,197,675

Earnings (loss) per common share.	$	0.009	$	(0.006	)	$	0.015	$	(0.024	)

Diluted Earnings Per Common Share:
Net income (loss)	$	515,411	$	(334,568	)	$	894,988	$	(1,375,467	)

Weighted average number of common shares		60,348,616		58,090,697			58,990,406		56,197,675
Incremental shares from assumed conversions of stock options		1,715,110		0			2,449,802		0
Adjusted weighted average number of common shares		62,063,726		58,090,697			61,440,208		56,197,675

Earnings (loss) per common share	$	0.008	$	(0.006	)	$	0.015	$	(0.024	)

	Three Months ended September 30				Nine Months ended September 30				Three Months ended March 31,
	2009		2008		2009		2008		2010		2009

General and administrative expense	$	20,093	$	51,253	$	126,680	$	527,333	$	29,180	$	30,730
Share-based compensation before taxes		20,093		51,253		126,680		527,333		29,180		30,730
Total net share-based compensation expense	$	20,093	$	51,253	$	126,680	$	527,333	$	29,180	$	30,730
Net share-based compensation expenses per basic and diluted common share		nil		nil		nil	$	0.01	nil		nil

	Three Months Ending March 31, 2010
Expected dividend yield		0
Expected volatility		102%	%
Risk-free interest rate		1.40	%
Expected life – Employees options	3.0 years
Expected life – Board of directors options		n/a

	# of Shares		Weighted average grant date fair value per share
Non-vested at January 1, 2009		1,314,000	$	0.57

Granted		-		-
Vested		119,996	$	0.80
Forfeited		-		-
Non-vested at March 31, 2009		1,194,004	$	0.55

Granted		25,000	$	0.54
Vested		-		-
Forfeited		-		-
Non-vested at June 30, 2009		1,219,004	$	0.39

Granted		-		-
Vested		4,000	$	0.58
Forfeited		-		-
Non-vested at September 30, 2009		1,215,004	$	0.39

Non-vested at January 1, 2008		457,044	$	0.73

Granted		870,000	$	0.77
Vested		57,044	$	0.49
Forfeited		-		-
Non-vested at March 31, 2008		1,270,000	$	0.77

Granted		-		-
Vested		390,000	$	0.80
Forfeited		-		-
Non-vested at June 30, 2008		880,000	$	0.76

Granted		610,000	$	0.01
Vested		176,000		0.60
Forfeited		-		-
Non-vested at September 30, 2008		1,314,000	$	0.43

	# of Shares		Weighted average grant date fair value per share
Non-vested at January 1, 2010		1,215,004	$	0.39

Granted		75,000	$	0.41
Vested		120,001	$	0.05
Forfeited		-		-
Non-vested at March 31, 2010		1,170,003	$	0.43

Non-vested at January 1, 2009		1,314,000	$	0.57

Granted		-		-
Vested		119,996	$	0.80
Forfeited		-		-
Non-vested at March 31, 2009		1,194,004	$	0.55

	# of Shares		Weighted average grant date fair value per share
Total outstanding at January 1, 2010		4,517,411	$	0.54

Issued		75,000	$	0.65
Cancelled		1,000	$	1.35
Exercised		-		-
Total outstanding at March 31, 2010		4,591,411	$	0.54
Total exercisable at March 31, 2010		3,421,408	$	0.44

Total outstanding at January 1, 2009		8,523,411	$	0.45

Issued		-		-
Cancelled		1,000	$	1.35
Exercised		30,000		0.13
Total outstanding at March 31, 2009		8,492,411	$	0.45
Total exercisable at March 31, 2009		7,298,407	$	0.38

	Total

Balance as of December 31, 2008	$	8,575,881
iSYS additional earn-out purchase consideration		1,194,766
Balance as of December 31, 2009	$	9,770,647

Advanced Response Concepts asset purchase		629,090

Balance as of March 31, 2010	$	10,399,737

	Total

Balance as of December 31, 2007	$	2,526,110
iSYS acquisition		6,049,771

Balance as of December 31, 2008	$	8,575,881
iSYS acquisition-related costs		(13,627	)

Balance as of September 30, 2009	$	8,562,254

	As of September 30, 2009
	Gross Carrying Amount		Accumulated Amortization			Weighted Average Amortization Period (in years)
Purchased Intangible Assets
ORC Intangible (Includes customer relationships and PKI business opportunity purchase accounting preliminary valuations)	$	1,145,523	$	(1,086,966	)		5

iSYS (includes customer relationships, internal use software and trade name)	$	1,230,000	$	(450,917	)		5

Protexx (Identity Security Software)	$	506,463	$	(196,958	)		3
	$	2,881,986	$	(1,734,841	)		4
Internally Developed Intangible Assets
ORC PKI-I Intangible (Related to internally generated software)	$	334,672	$	(286,169	)		6

ORC PKI-II Intangible (Related to internally generated software)	$	649,991	$	(511,020	)		6

ORC PKI-III Intangible (Related to internally generated software)	$	211,680	$	(99,960	)		3

ORC PKI-IV Intangible (Related to internally generated software)	$	42,182	$	(19,920	)		3

ORC PKI-V Intangible (Related to internally generated software)	$	107,838		—			3
		1,346,363	$	(917,069	)		5

Total	$	4,228,349	$	(2,651,910	)		5

Aggregate Amortization Expense:
For the three months ended 9/30/09	$	228,884
For the nine months ended 9/30/09	$	686,654

Estimated Amortization Expense:
For the year ended 12/31/09	$	894,368
For the year ended 12/31/10	$	652,134
For the year ended 12/31/11	$	350,300
For the year ended 12/31/12	$	214,626
For the year ended 12/31/13	$	151,665

Total	$	2,263,093

May 17, 2010
	~~November 16, 2009~~	/s/ JAMES T. MCCUBBIN
		James T. McCubbin
		Vice President – Principal Financial
		and Accounting Officer