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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2002

or

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

For the transition period from
 to

Commission file number: 000-25755

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WorldGate Communications, Inc.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of incorporation or organization)

23-2866697(I.R.S. Employer Identification No.)3190 Tremont Avenue
Trevose, Pennsylvania(Address of principal executive offices)

19053(Zip Code)


(215) 354-5100(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value(Title of Class)

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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ý]        No [o]

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [o]        No [ý]

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes
[o]        No [ý]

The
aggregate market value of the common stock held by non-affiliates of the registrant was approximately $32.5 million as of June 30, 2002, based on the
closing sale price per share of common stock, as quoted on the NASDAQ Small Cap Market.

The
number of shares of the registrant's common stock outstanding as of March 17, 2003 was 23,578,694.

DOCUMENTS INCORPORATED BY REFERENCE

[None]

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WORLDGATE COMMUNICATIONS, INC.

ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2002

TABLE OF CONTENTS

|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  
|Item 1.  |  | Business                                                                              |  | 1   
|Item 2.  |  | Properties                                                                            |  | 10  
|Item 3.  |  | Legal Proceedings                                                                     |  | 10  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 10  
|PART II 
|Item 5.  |  | Market for Registrant's Common Stock and Related Stockholder Matters                  |  | 11  
|Item 6.  |  | Selected Financial Data                                                               |  | 13  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 31  
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | F-1 
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 32  
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 32  
|Item 11. |  | Executive Compensation                                                                |  | 34  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 39  
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 40  
|Item 14  |  | Controls and Procedures                                                               |  | 41  
|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 41  

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WORLDGATE COMMUNICATIONS, INC.

This report contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are based on management's current
expectations and are subject to a number of uncertainties and risks that could cause actual results to differ significantly from those anticipated in these forward-looking statements. Factors that may
cause such a difference include, but are not limited to, those set forth in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed
elsewhere in this report.

PART I

Item 1: Business

WorldGate Communications, Inc., or WorldGate or the Company, was incorporated in Delaware in 1996 to succeed to the business of our predecessor, WorldGate
Communications, L.L.C., which commenced operations in March 1995. In April 1999, we completed our initial public offering of 5,750,000 shares of our common stock. Since January 9,
2003 our common stock has been listed on the NASDAQ Small Cap Market. Previously our common stock was traded on the NASDAQ National Market. Our common stock is traded under the symbol "WGAT". Our
executive offices are located at 3190 Tremont Avenue, Suite 100, Trevose, Pennsylvania 19053.

Overview

We are a leader in providing interactive television entertainment applications, products and services to the cable television industry. Interactive television, or
ITV, is a sector of the cable television industry that focuses on deploying services and applications to allow television viewers to interact with
programs, advertisements and other content on their television sets. We offer our cable operator customers a wide array of ITV applications and related services and products, including the following:



1

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We
believe that we are uniquely positioned in that we can offer cable operators a wide variety of ITV solutions tailored to their needs. Our business strategy, as more fully described
below, is designed to take advantage of our unique position. ITV has several components. First, cable operators must create the infrastructure to deploy ITV applications. We design, assemble, install
and maintain the equipment and computer software, or systems, necessary to provide these ITV applications. Second, cable operators must have the flexibility to concurrently provide multiple ITV
applications, including
applications such as interactive program guides, or IPGs, Internet over television services, video on demand, or VOD, and enhanced television, or eTV, products. We provide a platform, called
middleware, which works in combination with the set-top boxes currently used by cable operators for television programming to provide these ITV applications. Our middleware is designed as
an "open standards" platform, which means it will work with a wide variety of applications, including many of the third party applications that are in existence today. Our middleware has already been
integrated with the leading IPG and VOD applications. Third, in addition to our systems and middleware products, we license a variety of our own ITV applications to our cable operator customers.
Finally, our cable operator customers must ensure that the various systems, middleware and applications that they are using are compatible and have the required interoperability such that they do not
adversely impact each other. We provide development, testing, certification, training and other support services to help our customers to deploy and maintain their various systems, middleware and
applications. This comprehensive approach to providing ITV solutions to our customers distinguishes us from many of our competitors, particularly those that merely license technology without providing
the full array of support services that we provide.

In
addition to any sales revenue and service and licensing fees we receive for the use of our technologies, once our cable operator customers have the necessary systems, middleware and
applications installed and deployed, we may receive revenue from advertising and television commerce, or t-commerce. For example, our interactive television service, the
WorldGateSM ITV Service, contains advertisements for which we receive revenues. Our products and services also provide cable subscribers with opportunities to execute transactions via
their television sets, for which we also receive revenues. We partner with, and share these revenues with, our content providers and cable operator customers, which ensures that our subscribers have a
wide variety of viewer-friendly content when using our service. In addition, we may provide aggregation and packaging services to our cable operator customers for the interactive information and other
content that may be offered through their ITV applications. This content may include news, sports, weather, business and entertainment data feeds as well as other types of content. Finally, we provide
a full range of aggregating and reporting functions to help our cable operator customers and content providers manage their interactive offerings.

Deployments

As of December 31, 2002, our products and services were deployed to approximately 576,000 revenue generating units, or RGUs. RGUs represent unique revenue
generating opportunities for us, possibly from the same subscriber. For example a subscriber who utilizes both our WorldGate ITV Service and the TVGateway Service would represent two RGUs, reflecting
the two revenue streams that WorldGate receives from the cable operator for that subscriber.

2

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Material Developments for WorldGate in 2002

The following is a summary of material developments for us that have occurred since December 31, 2001:



Go!TV Infoprovides news, sports, weather, horoscopes, soap opera synopses, and other entertainment information in a
TV-formatted and user friendly presentation. This walled-garden content is update each 1/2 hour every day through WorldGate's automated network operations center.

Go!TV Linksprovides viewers with program or series descriptions, episode synopses, cast lists and bios, current
air-time and end-time, viewership ratings, broadcast schedules, and photos, as well as access to program and network-related Web links and TV trivia questions.

Go!TV Gamesfeatures a suite of interactive games including card, casino, kids, strategy and trivia games, and gives the cable
subscriber the opportunity to compete against other subscribers in their home town, or from locations around the world. A real-time leaderboard enables consumers to see their ranking with
other family members or against others from around the world.

Go!TV Promotional Portalenables the cable operator to provide a 24/7 promotion of all of the cable services offered in that
market. The Go!TV Promotional Portal sends a broadcast stream of promotional videos to the channel of the operator's choosing. Consumers' set-top boxes are force-tuned to this channel when
they power-on the set-top box. In addition to cable service promotions, the consumer can navigate an interactive on-screen menu of services, including any of
WorldGate's interactive services, such as Go!TV Games and Go!TV Chat.



Continued Decline in Liquidity and Need for Financing.

The Company has continued to fund operating losses from its available cash. Based on our current operating budget and cash flow projection for 2003, we believe
that we will only have enough cash to continue operating into the summer of 2003 unless additional financing is obtained prior to such time.

3

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Support Services

In addition to the various products we offer our customers, the following is a description of the full suite of services and support we also provide as an
important complement to our products:



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WorldGate Business Model

We derive revenues from cable operators, e-commerce merchants and advertisers and from management and service fees. We expect to enhance these revenue
opportunities by implementing the strategies described below.

Revenue Derived from Cable Operators.In most instances, we sell our headend server equipment and wireless keyboards to cable
operators and license the software for our various ITV products, including
CableWare and the WorldGate ITV Service, to cable operators for a monthly subscriber fee. We believe that cable operators either offer our services to their subscribers as a premium service, requiring
subscribers to pay a separate monthly fee for the service, or as a part of a package of services in which the subscriber pays a monthly fee for the entire package. Generally, we receive monthly fees
from the cable operators based on the total number of subscribers to our services.

Revenue Derived from E-commerce Merchants.We have negotiated agreements with companies in the business of
selling products and services online and via ITV through which these companies pay for the opportunity to promote their business through portals by sharing a portion of the revenues they are paid or
by paying a fixed fee per transaction. Although such revenues are currently not significant we intend to make access to online shopping opportunities both simple and convenient for our subscribers so
that we can participate in the rapid growth forecasted for e-commerce on television. No meaningful revenue has been derived from e-commerce since our inception.

Revenue Derived from Advertisers.We have space on our various menu pages that is available for banner advertising and other
promotions. When subscribers click on these banners, they can be linked quickly to another Web page that gives more detailed information about the subject of the banner ad. Advertisers typically pay
fees based on the number of times that their ad is displayed on a page viewed by a subscriber, so as the number of WorldGate subscribers grows, we expect our advertising revenues to grow. We believe
we provide advertisers with a particularly attractive opportunity since information derived from the cooperating cable system will permit us to know the general geographic area in which each of our
subscribers lives, and in many cases the zip codes and perhaps more extensive demographic information regarding our subscribers if they consent to share that information with us. In order to protect
the confidentiality of this information we have designed our system to maintain encrypted subscriber information on separate computers that are independent of the servers for the WorldGate ITV
Service. We expect to share the revenues derived from Internet advertising with cable operators. No meaningful revenue has been derived from advertising since our inception.

Our
Channel HyperLinking technology will provide one button linking from television and advertising content to a related interactive Internet web site. This sort of advertising is "self
targeted" because subscribers themselves decide whether they want to get more information. This is in sharp contrast to traditional television advertising that typically includes sending messages to
large numbers of viewers on an unsolicited basis. In addition to the value achieved by self-targeting, the value of our Channel HyperLinking technology is enhanced by both the availability
of demographic information and interactivity. By delivering an interactive experience, we are able to give the subscribers the opportunity to follow a variety of paths to gain extensive information
about the subject of interest. The interactivity also allows the subscribers in many cases to purchase a product or service online. With the average cable household being exposed to tens of thousands
of television advertisements annually, we believe that there are many opportunities for use of our Channel HyperLinking technology.

5

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Our
Channel HyperLinking technology business model is based on a revenue split with our cable operator customers and the television networks. We expect revenues to come from advertisers
seeking
to engage the WorldGate ITV Service subscribers in some form of interactivity while using our Channel HyperLinking technology. This business model assumes that interactions will be on a
pay-for-performance basis such that advertisers and others will pay us based on the number of "clicks" that occur. No meaningful revenue was derived from this service since our
inception.

Revenue Derived from TVGateway Joint Venture.We are the provider of headend equipment for the TVGateway joint venture and
receive licensing fee revenue for providing certain technology to the venture on behalf of its partners. During 2002 we also provided development, support, sales and management services to the venture
pursuant to a Management Agreement between TVGateway and us (the "Management Agreement"). In 2002, approximately 83% of our revenues was attributable to fees from TVGateway for services provided under
the Management Agreement. The Management Agreement provides for our company and TVGateway to cooperate to transition to TVGateway some or all of the support services being provided by us and/or the
employees providing these services. The Management Agreement also requires that we remain available to provide support services until July 24, 2005. During 2002, our company and TVGateway
negotiated an agreement to transition the services to TVGateway. During the first quarter 2003 the agreed transition was substantially completed. Accordingly, future revenue from the TVGateway joint
venture is expected to be largely comprised of licensing fees and equipment sales revenue as opposed to consulting revenue.

Business Strategy

We offer technology in the form of hardware sales and software licensing; provide services and support for our business partners; and earn revenue from
interactive advertising and commerce via our technology and services via the television. The principal elements of our business strategy include the following:

Provide Compelling Value for End-Users.Unlike other companies who can offer just one of the many pieces that
make up interactive television, we enable our subscribers to access an array of ITV applications. Our products and services were designed to operate on the widely available existing cable television
systems, as well as future set-top technologies, and were developed to provide consumers with an easy to use, cost-effective product. For example, to access the WorldGate ITV
Service, a consumer needs only their existing television, a WorldGate enabled digital or advanced analog cable set-top box and a wireless remote or keyboard, with all but the television
typically supplied by the cable operator. In addition, WorldGate's Channel HyperLinking and CableWare technology have been designed to offer consumers easy, fast and interactive access to content that
is associated with a television program or advertisement they are viewing.

Provide Compelling Value for Cable Operators.We believe that cable operators assess the viability of an investment in a new
service by considering the cost of initial investment in equipment, service reliability, overall operating and maintenance expenses and the incremental revenue that can be generated by such service.
The WorldGate ITV Service can be offered to cable subscribers through the cable operators' existing two-way infrastructure, or its one-way infrastructure with certain of our
products. Furthermore, the WorldGate ITV Service has been designed to be deployed with low capital costs for headend equipment, at less than $5 per WorldGate subscriber. These systems are also
designed to be efficiently upgraded as the cable operator's infrastructure is improved through the deployment of new generation cable boxes or the deployment of cable modem ready plant, i.e. a cable
plant that has been upgraded to improve the original transmission quality to permit the use of cable modems, and easily expanded as the number of subscribers grows. There is, however, no need for any
costly upgrades to make the plant cable modem ready as a requirement for the WorldGate ITV Service. Accordingly, the WorldGate ITV Service can provide cable operators with the low investment

6

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opportunity for immediate incremental revenue streams from subscriber fees and sharing of advertising and online transaction fees.

Provide Compelling Value for Programmers, Advertisers, Advertising Agencies and E-Commerce Merchants.Through
WorldGate's Channel HyperLinking and CableWare technology, programmers and advertisers may enhance their television content with related Web-based materials by providing their viewers with
the ability to interact on a real-time basis with their television programming or advertising. As observed in our deployments, we are facilitating a market of active subscribers for
interactive advertising. Giving consumers the ability to link immediately to an advertiser's Internet site to find more information about the product or to place an order is a valuable user feature
and an effective way for advertisers to reach their customers using a new method. We believe this ability increases the value of the program or advertising to the television networks or advertisers,
and that as a result, programmers and advertisers will be able to increase their revenues, brand extension and loyalty.

Competition

The ITV industry is highly competitive in the general categories of applications and middleware. We are likely to encounter significant competition with respect
to each of these areas.



ITV applications include email, chat, online games, web browsing, electronic program guides, or EPGs, and broadcast data and information services. Various
companies are attempting to provide these ITV applications to cable television consumers through a set-top box appliance connected to a television. In some instances this appliance may be
a dedicated unit or a cable converter box. The use of a dedicated unit adds incremental costs that are not present when the service is offered directly over a cable box. Generally, these solutions are
cable-based and do not use the telephone infrastructure, thus mitigating bandwidth constraints. Several companies have developed and/or are testing these applications. We believe that our major
competitors in the ITV applications category are Gemstar International Group Ltd., Microsoft, Liberate Technologies and OpenTV Corporation. Each of these companies has developed and is
marketing one or more of the ITV applications we have developed and are marketing.



Several companies are attempting to leverage the use of their platforms to obtain greater distribution for their ITV applications. For example, our competitors,
Gemstar, Liberate, Microsoft and OpenTV are developing and have developed middleware products that compete with our CableWare middleware. We believe that middleware vendors are pursuing a business
strategy based on the premise that once a cable operator adopts their middleware platform, that cable operator would be more likely to use their ITV applications as well. Therefore, if our competition
is more successful than we are in marketing and deploying middleware on a large scale, and their business strategy is validated, we may find it more difficult to deploy our applications on a large
scale. In addition, a cable set-top box manufacturer, Scientific-Atlanta, Inc., has developed a middleware product, PowerTV, that competes with our CableWare middleware.
Scientific-Atlanta could use its position as a set-top box developer to exclude other middleware developers from deploying on its set-top boxes, limiting our ability to
successfully deploy our middleware product to cable operators deploying Scientific-Atlanta boxes.



We will also experience competition from providers of other TV applications. Two examples are the providers of video-on-demand, or VOD,
and personal video recording, or PVR. VOD allows television viewers to order movies or television programs when they want them and PVR lets viewers

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pause, rewind, and replay broadcasts of television programming, as well as record programs. While these personalized television services do not compete directly with the WorldGate products, they may
compete for "space" within the cable set-top box. WorldGate has attempted to mitigate this form of competition by integrating its software with the software provided by the leading
providers of VOD technology, including Concurrent Computer Corporation, nCube, and SeaChange.

Technology

Our technology can be classified under three major product lines:



CableWareSM Middleware

Middleware is an important part of the overall thin-client ITV offering to cable operators. Middleware consists of a software layer that allows easier
integration of new applications and content services. Ideal middleware would enable application developers to write highly sophisticated applications for the set-top box that seamlessly
communicate and interact with other applications. This middleware can also include a presentation engine that would allow content developers to easily offer simple applications, such as stock tickers,
without having the cost and schedule burden of engaging a professional computer programmers. All of this needs to be implemented in a manner efficient enough to run on today's thin-client
set-top boxes, but also needs to include the sophisticated facilities necessary to get the most from advanced set-tops. Our Cableware middleware is designed to meet these
goals. Cableware includes a sophisticated software interface layer that enables coexistence and communication of multiple set-top applications. With Cableware, developers can create
content and applications that execute either at the headend or at the set-top box.



WorldGate's patentedUltra-Thin Clientplatform allows substantially all client-related processing to
be performed at the cable headend. This platform is comprised of three primary components:



There
are typically two servers located at the cable headend. One server manages all information traveling to and from this server to the Internet. This server also manages individual
Internet sessions, processes data for presentation on the television screen, and manages the Web browsing client. The second server manages real-time communications from the cable headend
to a subscriber's cable box. This server acts as a bi-directional router for data on a cable network. These servers:



General
Web surfing is provided on this platform by our browser technology using high performance server headend systems. The WorldGate ITV Service browser currently supports HTML
Version 3.2, HTTP Version 1.0 and 1.1, HTML Frames, Image formats such as GIF Animations, JPEG, and XBM formats. We believe we are the only company that supports a full Java implementation

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offering on a set-top platform. Java is used for such applications as chat and instant messaging. The WorldGate platform supports JavaScript that is compatible with the Netscape browser.

Channel HyperLinkingSM

Our patented Channel HyperLinking technology interactively links a television viewer with enhanced information or other content related to the advertisement
and/or program being viewed. When a cable television subscriber makes a Channel HyperLinking request, the subscriber's cable box sends a signal to the cable headend indicating the channel and program
information of the program the subscriber is viewing. This information is then matched with the corresponding Web address for the program, which has been stored at a cable headend database. The
subscriber is then linked to the corresponding Web site for full Internet interactivity. This entire process occurs within seconds.

Intellectual Property

WorldGate regards its technology as proprietary, and relies on a combination of patents, copyrights, trademarks, trade secret laws, contractual restrictions,
restrictions on disclosure and other methods to establish and protect our technology and proprietary rights and information. WorldGate has filed patent applications in the United States and
internationally covering aspects of its real-time, two-way interactive systems, including its Ultra-Thin Client architecture, centralized data processing,
communications schemes, Channel HyperLinking technology and other aspects of its interactive television products.

We
have devoted significant attention to our research and development efforts that have already been recognized by the issuance of six patents in the United States containing over 170
claims collectively. In addition, we currently have over 50 applications pending worldwide containing over 1,700 claims collectively. Our intellectual property covers numerous facets of interactive
television, enhanced television and interactive advertising applications, including systems and techniques for the transmission, retrieval, display and means of navigating through interactive
information. In particular, we have received significant intellectual property coverage for our pioneering work in developing ultra-thin client solutions for the cable industry. Given the
breadth and pioneering nature of our efforts, we continue to enhance our position as the worldwide leader in the interactive television marketplace. In addition, we have built upon these achievements
and our industry leading ability to manage transmission bandwidth and client resources in the home to develop efficient and effective, standards based middleware solutions that are capable of
operating within the low resource current generation set-tops while being migratable to the more powerful set-tops being introduced.

Backlog

The Company typically delivers ordered equipment to customers within a few days of receiving such orders. We do not generally maintain a material amount of orders
in backlog.

Research and Development

To date, engineering and product development has been a significant focus of WorldGate. Development of the WorldGate ITV Service has required combining technical
experience and knowledge from two historically separate industries, the Internet and cable. The principal elements of WorldGate's engineering and development activities during 2002 were enhancing our
existing Ultra-Thin ClientSM technology and developing our Go!TV line of applications. Our engineering and development expenditures, excluding engineering and development
expenses rendered in connection with our TVGateway management agreement, were approximately $21,734,000, $12,894,000 and $7,705,000 for the years ended December 31, 2000, 2001 and 2002,
respectively.

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Financial Information Relating to Foreign and Domestic Operations and Export Sales

2000

2001

2002(dollars in thousands)Revenues by geographic area:United States

$
16,496

$
12,794

$
13,289Other North America* (including Latin America)


1,897


659


489South America*


408


2,293


11Asia*


366


32


3Europe*


74


1,069


86Total

$
19,241

$
16,847

$
13,878Loss from operations (all from United States operations)

$
(51,837
)
$
(31,070
)
$
(19,466
)Identifiable Assets (all within the United States)

$
74,841

$
33,792

$
14,019


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Employees

As of December 31, 2002, on a consolidated basis, we had approximately 93 full-time employees. All of our employees are located in Trevose,
Pennsylvania, except for a salesperson located in New York. None of our employees are represented by a labor union, and we have no collective bargaining agreement. We consider our employee relations
to be good.

Item 2. Properties.

Our corporate headquarters is located in Trevose, Pennsylvania in a leased facility consisting of approximately 72,000 square feet. The lease for this space will
expire in June 2009, with an option to extend for an additional 10 years. We are currently subleasing approximately 19,000 square feet of this space to TVGateway, LLC. This sublease
expires May 31, 2003, but will be automatically renewed for additional one month periods unless either TVGateway or WorldGate provides notice to the contrary.

Item 3. Legal Proceedings.

None.

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

WorldGate
held its Annual Meeting of Shareholders on October 5, 2002. At this meeting, the shareholders voted in favor of the following items listed in the Proxy Statement dated
October 30, 2002:



Nominee

FOR

WITHHELDSteven C. Davidson

20,540,379

99,351Martin Jaffe

20,540,129

99,601Clarence L. Irving, Jr.

20,540,379

99,351Hal M. Krisbergh

20,414,158

225,572Jeff Morris

20,540,379

99,351Lemuel Tarshis

20,540,339

99,391


10

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FOR

AGAINST

ABSTAIN20,538,922

67,046

33,762


PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Our
common stock, $0.01 par value, commenced trading on the NASDAQ National Market under the symbol "WGAT" since our initial public offering in April 15, 1999. The Company applied
for and received permission, effective January 9, 2003 to transfer the listing of its common stock to the NASDAQ Small Cap Market. The following table shows the high and low closing sales price
as reported by the NASDAQ National Market and the NASDAQ Small Cap Market, as is applicable, for each quarter of 2001 and 2002.

High

LowYear Ended December 31, 2001First Quarter

$
10.00

$
3.75Second Quarter


6.70


2.40Third Quarter


4.99


1.65Fourth Quarter


2.69


1.85Year Ended December 31, 2002First Quarter


2.73


1.31Second Quarter


2.55


1.30Third Quarter


1.38


0.60Fourth Quarter


0.91


0.41


On
March 17, 2003, the last reported sale price of our common stock as reported on the NASDAQ Small Cap Market was $0.299 per share.

As
of March 17, 2003, we had 343 holders of record of our common stock.

Dividends

We have never paid or declared any cash dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently
expect to retain future earnings, if any, to finance the growth and development of our business.

Sale of Unregistered Securities



11

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12

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Item 6. Selected Financial Data.

The following selected financial information for each of the years ended December 31, 1998 through 2002 are derived from our audited financial statements.
You should read the following information in conjunction with our financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.

|                                                                                     |                                | Year ended December 31,                     |                         
|------------------------------------------------------------------------------------ | ------------------------------ | ------------------------------------------- | ------------------------
|
|
|Statement of operations data:                                                        |                                |                                             |                         
|Revenues                                                                             |                                |                                             |                         
|                                                                                     |                                | Equipment product revenues                  |                         
|                                                                                     |                                | Service fee revenues                        |                         
|                                                                                     |                                |                                             | Total revenues          
|Costs and expenses:                                                                  |                                |                                             |                         
|                                                                                     |                                | Cost of equipment product revenues          |                         
|                                                                                     |                                | Cost of service fee revenues                |                         
|                                                                                     |                                | Engineering and development                 |                         
|                                                                                     |                                | Sales and marketing                         |                         
|                                                                                     |                                | General and administrative                  |                         
|                                                                                     |                                | Depreciation and amortization               |                         
|                                                                                     |                                | Goodwill impairment recorded under SFAS 142 |                         
|                                                                                     |                                |                                             |                         
|                                                                                     |                                |                                             | Total costs and expenses
|Loss from operations                                                                 |                                |                                             | (27,444                 
|Other income, net                                                                    |                                |                                             | 423                     
|Interest expense                                                                     |                                |                                             | (101                    
|Loss from unconsolidated entity                                                      |                                |                                             |                        
|Loss before extraordinary item                                                       |                                |                                             | (27,122                 
|Extraordinary itemextinguishment of debt                                            |                                |                                             |                        
|Net loss                                                                             |                                |                                             | (27,122                 
|Accretion on preferred stock                                                         |                                |                                             | (6,145                  
|Net loss available to common Stockholders                                            |                                | $                                           | (33,267                 
|                                                                                     |                                |                                             |                         
|Basic and diluted net loss per common share:(1)                                      |                                |                                             |                         
|                                                                                     | Loss before extraordinary item |                                             | $                       
|                                                                                     | Extraordinary item             |                                             |                         
|                                                                                     |                                | Net loss                                    |                         
|                                                                                     |                                |                                             |                         
|Weighted average common stock Outstandingbasic and diluted                          |                                |                                             | 9,100,801               
|                                                                                     |                                |                                             |                         
|As adjusted net loss available to common stockholders before extraordinary item(2)   |                                |                                             |                        
|As adjusted net loss available to common stockholders(2)                             |                                |                                             |                        
|As adjusted basic and diluted net loss per common share before extraordinary item(2) |                                |                                             |                        
|As adjusted basic and diluted net loss per common share(2)                           |                                |                                             |                        
|Balance sheet data:                                                                  |                                |                                             |                         
|Cash and cash equivalents, restricted cash And short term equivalents                |                                | $                                           | 368                     
|Total assets                                                                         |                                |                                             | 5,621                   
|Long-term obligations, including current portion                                     |                                |                                             | 1,128                   
|Total mandatory redeemable preferred stock                                           |                                |                                             | 49,276                  
|Warrant for mandatory redeemable preferred Stock                                     |                                |                                             | 881                     
|Total stockholders' equity (deficit)                                                 |                                |                                             | (52,240                 
|Other data:                                                                          |                                |                                             |                         
|Common shares outstanding                                                            |                                |                                             | 9,100,801               

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13

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Dollar
amounts contained in this Item 7 are in thousands, except for per share amounts)

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

We may from time to time make written or oral forward-looking statements, including those contained in the following Management's Discussion and Analysis of
Financial Condition and Results of Operations. The words "estimate," "project," "believe," "intend," "expect," and similar expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. In order to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we are hereby
identifying certain important factors that could cause our actual results, performance or achievement to differ materially from those that may be contained in or implied by any forward-looking
statement made by or on behalf of WorldGate. The factors, individually or in the aggregate, that could cause such forward-looking statements not to be realized include, without limitation, the
following: (1) difficulty in developing and implementing marketing and business plans, (2) continued losses, (3) difficulty or inability to raise additional financing on terms
acceptable to us, (4) loss of any one of our other largest customers (5) industry competition factors and other uncertainty that a market for our interactive TV products will develop,
(6) challenges associated with cable operators (including, uncertainty that they will offer our interactive TV products, inability to predict the manner in which they will market and price our
interactive TV products and existence of potential conflicts of interests and contractual limitations impeding their ability to offer our interactive TV products), (7) challenges with
advertisers and television programmers (including uncertainties that they will support our Channel HyperLinkingSM technology), (8) departure of one or more key persons and
(9) delisting of our common stock from the NASDAQ Small Cap Market, (10) changes in regulatory requirements and (11) other risks identified in our filings with the Securities and
Exchange Commission. We caution you that the foregoing list of important factors is not intended to be, and is not, exhaustive. We do not undertake to update any forward-looking statement that may be
made from time to time by or on behalf of WorldGate.

Results of Operations:

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally
accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates.

Our
significant accounting policies are described in note 2 to our consolidated financial statements included elsewhere in this report. We believe that the following discussion
addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require management's most difficult, subjective and
complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue Recognition.Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or
determinable, the collectibility is reasonably assured, and either the delivery and the acceptance of the equipment has occurred or services have been rendered. In the event terms of the sale provide
for a lapsing customer acceptance period, we recognize revenue based upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. There are inherent
difficulties in predicting the timing and magnitude of equipment sales. As such, the potential for fluctuations in quarterly revenues and operating results exists. Revenue related to services is

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generally recognized upon performance of the services requested by a customer order. Revenue from license agreements is recognized in accordance with the contract terms, generally based on the number
of monthly subscribers. Included in our financial statements is a provision for the estimated amount of future returns that we believe is appropriate based on historical experience and current trends.
While such returns have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have in the
past.

Accounts Receivable.We generate accounts receivable primarily from sales of equipment to and services performed for our
cable operator customers and from services performed for managing the TVGateway joint venture. This equipment is primarily headend equipment for use in deploying the Company's interactive television
services. The services represent fees from the cable operator based on the number of subscribers using our services and fees for managing the TVGateway joint venture. We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required. If economic or political conditions were to change in the countries where we do business, it could have an impact
on the results of our operations, and our ability to realize the full value of our accounts receivable.

Inventories.We value our inventories, which consist primarily of raw materials, work in process and finished goods equipment
to be sold to our customers for use in deploying interactive television services, at the lower of cost or market. The cost is determined on an average cost basis. A periodic review of inventory
quantities on hand is performed in order to determine and record a provision for excess and obsolete inventories. Factors related to current inventories such as technological obsolescence and market
conditions are analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values. Any significant unanticipated
changes in the factors noted above could have an impact on the value of our inventories and our reported operating results.

Long-Lived Assets.Our long-lived assets consist of property and equipment. These
long-lived assets are recorded at cost and are depreciated or amortized using the straight-line method over their estimated useful lives. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash flows from such assets are separately identifiable and are less than the carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined by using the anticipated cash
flows discounted at a rate commensurate with the risk involved. Measurement of the impairment, if any, will be based upon the difference between carrying value and the fair value of the asset. If
useful life estimates or anticipated cash flows change in the future, we may be required to record an impairment charge.

Accounting for Income Taxes.As part of the process of preparing our consolidated financial statements we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting
from differing treatment of items, such as depreciation of property and equipment and valuation of inventories, for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent
we believe that recovery is not more likely than not, we must establish valuation allowances. To the extent we establish valuation allowances or increase the allowances in a period, we must include an
expense within the tax provision in the statement of operations.

We
have a full valuation allowance against the net deferred tax asset of $69,494 as of December 31, 2002, due to the Company's lack of earnings history and the uncertainty as to
the

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reliability of the asset. In the future, if sufficient evidence of our ability to generate sufficient future taxable income becomes apparent, we would be required to reduce our valuation allowance,
resulting in a benefit from income tax in the consolidated statement of operations.

Accounting for Contractual Obligation related to Equity Financing.In July 2000, four cable operators purchased shares
in the Company. As part of the financing arrangement, the Company agreed to provide the four cable operators with a credit to be used to purchase products that pertain to the development and
deployment of the WorldGate service equal to 25% of the amount they invested. The Company recorded a liability to satisfy this obligation based on the Company's best estimate of what it would cost to
satisfy the credit. The Company's policy has been not to adjust the liability after it had been established. When equipment credits are utilized by the cable operators, the value of the equipment is
reflected in its entirety in the cost of revenues and a portion of the recorded contractual obligation is adjusted against additional paid in capital. The equipment credit expires on August 24,
2003. Any credit amounts that are not utilized by the cable operators will be reclassified from the recorded liability to additional paid in capital.

2002 versus 2001



Revenues decreased from $16,847 for the year ended December 31, 2001 to $13,878 for the year ended December 31, 2002. WorldGate derives revenue by
providing technology and services to its customers for their delivery of interactive television, or ITV products. Our technology consists of the hardware, software and know-how for
delivering over traditional television distribution platforms, such as those provided by cable television operators, the data, information and applications that comprise these ITV products, as well as
the data, information and applications to be delivered through the use of our hardware and software. The Company has three primary revenue components (i) the purchase price received from the
cable operator for the required hardware to deliver the data, information and applications, (ii) service fees from the cable operator for the (a) end-users' access to the
delivered data, information and applications, and (b) for the services provided by the Company to support the cable operator with configuring, installing and maintaining the required equipment
and configuring and delivering the data, information and applications, and (iii) advertising and transaction revenue received from advertisers and e-commerce merchants for
advertising and transaction opportunities placed in the data, information and applications delivered to the end-user.

At
December 31, 2001 we had deployed our technology in 61 cable systems with approximately 472,000 Revenue Generating Units. As of December 31, 2002 we had deployed our
technology in 66 cable systems, representing approximately 576,000 Revenue Generating Units. During recent quarters our sales of equipment has been reduced as the result of a delay in the introduction
of interactive television products as well as a reduced capital expenditure posture within the cable television industry, and is currently running at a rate considerably lower than we anticipated. The
service fees and advertising and transaction revenue components, which are largely dependent upon the delivery of the data, information and applications made possible through the use of the installed
equipment, would be expected to grow as the equipment is installed and more end-users are added. These components of our revenues have increased in both magnitude and significance,
however, the significance of the service
component of our revenues has been made even more apparent by the reduction in significance of the equipment revenue component as described above. Furthermore, the service component of our revenues
has grown faster than we expected as a result of the services provided to TVGateway LLC as discussed below. The services component of our revenues will be reduced by the value of the transitioned
services. Although there can be no certainty as to if and when a resumption in capital spending might take place or whether such resumption will result in increased deployment of ITV products, we do
expect the resumption of a more traditional balance in the significance of the hardware and service components of our revenues.

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As
of December 31, 2002, substantially all revenues of the Company are attributable to service fees for providing engineering, operations and administrative consulting support to
TVGateway, LLC, an unconsolidated entity, and to the commercial deployments of WorldGate's interactive television products and services and cable subscribers subscribing to these services. A
substantial portion of the revenue decrease for the twelve months ended December 31, 2002, as compared to the twelve months ended December 31, 2001, is attributable to reduced equipment
sales during a period when we believe the industry was focused on consolidation and other non-ITV issues. For the twelve months ended December 31, 2002, we derived revenues of
$12,930, or 93% of total revenues from service fee revenues consisting of consulting fees, subscriber fees and advertising fees. For the twelve months ended December 31, 2002, we derived
revenues of $948, or 7% of total revenues from the delivery of headends, keyboards, and related equipment products. Included in the twelve months ended December 31, 2002 equipment product
revenues are sales of excess inventory in the amount of $561. For the twelve months ended December 31, 2001, we derived revenues of $11,340, or 67% of total revenues, from service fee revenues
and $5,507 or 33% of total revenues from the delivery of headends, keyboards, and related equipment products.

The
business conducted by the Company outside the United States includes Spain, Canada, Latin America and Mexico. The majority of this international business is in Mexico and as a result
we do not believe the potential financial instability of any of these markets would have a significant impact on our business.



Cost of Revenues.Cost of revenues consists primarily of equipment product costs related to initial trials and commercial
deployments and service fee revenue costs related primarily to the provision of engineering and administrative services. Costs of equipment product revenues for the twelve months ended
December 31, 2002 was $4,537, or approximately 479% of equipment product revenues, compared to the product costs of revenues of $8,770, or approximately 159% of equipment product revenues, for
the twelve months ended December 31, 2001. The increase in the cost of equipment
product revenues as a percent of total equipment product revenues for the twelve months ended December 31, 2002, as compared to the twelve months ended December 31, 2001, was primarily
the result of differences in product mix, a reduced level of equipment revenues, and the magnitude, in relation to sales, of the inventory provisions recorded against the carrying amount of certain
inventory products to adjust them to their net realizable value. For the twelve months ended December 31, 2002, inventory adjustments were $2,209. For the twelve months ended
December 31, 2001, inventory adjustments were $1,307. Service fee costs of revenues for the twelve months ended December 31, 2002 were $11,284, or approximately 87% of service fee
revenues. Service fee costs of revenues were $10,343 or approximately 91% of service fee revenues for the twelve months ended December 31, 2001. The increase in service fee cost of revenues of
$941 for the twelve months ended December 31, 2002 when compared to 2001 is primarily attributable to increased consulting fees with TVGateway and the additional support costs relating to a
larger subscriber base.

Engineering and Development.Engineering and development expenses primarily consist of the cost of design, programming,
testing, documentation and support of the Company's hardware, software and services. For the twelve months ended December 31, 2002, engineering and development costs were $7,705, a decrease of
approximately 40% when compared to $12,894 for the twelve months ended December 31, 2001. This decrease in expenses of $5,189 is primarily attributable to declines in staffing over the last two
years that have resulted in a significant payroll cost reduction, a significant portion of which is the result of termination of all of the personnel of the former Digital Video Art, Inc.
("DVA"). Employee compensation costs declined for the twelve months ended December 31, 2002 by $4,984, or 49%, when compared to the same periods in 2001.

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Sales and Marketing.Sales and marketing costs consist primarily of compensation, attendance at conferences and trade shows,
travel costs necessary to cover a domestic and international customer market base, promotions and other marketing programs substantially related to initial trial installations and commercial
deployments. For the twelve months ended December 31, 2002 sales and marketing expenses were $2,585. This represents a decrease of approximately 62% when compared to sales and marketing
expenses of $6,770 for the twelve months ended December 31, 2001. This decrease in expenses is primarily attributable to declines in staffing over the last two years, significant expense
reductions beginning in 2001, and to operating efficiencies achieved under management's continuing efforts to monitor the Company's growth and development and adjust expenditures appropriately. These
actions resulted in employee compensation costs declining in the twelve months ended December 31, 2002 by $2,314, or 59%, when compared to the same periods in 2001. Advertising, marketing and
travel expenses also declined for the twelve months ended December 31, 2002 by $1,367, or 64%, when compared to the same period in 2001.

General and Administrative.General and administrative expenses consist primarily of expenditures for administration, office
and facility operations, finance and general management activities, including legal, accounting, insurance and other professional fees. General and administrative expenses were $3,069 for the twelve
months ended December 31, 2002, a decrease of 60% when compared to expenses of $7,629 for the same period in 2001. This decrease in expenses is primarily attributable to declines in staffing
over the last two years, significant expense reductions beginning in 2001, and to operating efficiencies achieved under management's continuing efforts to monitor the Company's growth and development
and adjust expenditures appropriately. These actions resulted in employee compensation costs declining in the twelve months ended December 31, 2002 by $1,103, or 37%, when compared to the same
period in 2001. Travel and facility expenses also declined for the twelve months ended December 31, 2002 by $2,975, or 71%, when compared to the same period in 2001.

The
Company recently announced multiple actions that it believes will further reduce operating expenses and increase operating efficiencies. These actions include a reduction in work
force as well as the implementation of an agreement with TVGateway, LLC to transfer to TVGateway certain WorldGate employees and functions that WorldGate was providing for TVGateway. This transfer
will permit TVGateway to directly absorb the costs and expenses for the transferred employees and functions and will allow WorldGate employees to more directly focus upon the priorities of WorldGate's
products and services. WorldGate will be negatively impacted in that it will no longer receive revenues from providing these services and potentially there will be some overhead which cannot be
reduced or otherwise allocated and which was previously passed on to TVGateway (see Note 13 to the financial statements).

The
Company expects that general and administrative expense may increase in future quarters as it responds to changes in reporting requirements as a public company and makes efforts to
maintain its listing on the NASDAQ Small Cap Market.

Goodwill Impairment.During the second quarter of 2002, in an effort to cut costs and achieve operational efficiencies, the
Company commenced the termination of all personnel of the former DVA which performed engineering development services. In conjunction with this action, it was determined that the carrying amount of
the Company's remaining goodwill, which was originally recorded with the Company's acquisition of DVA, exceeded its fair value. As such, the Company measured the impairment loss by the amount the
carrying value exceeded the implied fair value of the goodwill. The amount of the non-cash impairment loss was $3,006. The fair value of goodwill was estimated using the expected present
value of future cash flows.

Interest and Other Income and Interest Expense.Interest and other income and interest expense consist of interest earned on
cash and cash equivalents and short-term investments, and interest expense on equipment financing and short-term debt. Interest and other income decreased from $1,027

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for the twelve months ended December 31, 2001 to $462 for the twelve months ended December 31, 2002, primarily due to declining average cash and short term investment balances and to
declining interest rates. During the twelve months ended December 31, 2001, the Company earned interest on average cash balances of approximately $27,498 and incurred interest expense related
to its equipment financing facility in the amount of $5. In comparison, during the twelve months ended December 31, 2002 the Company earned interest on average cash balances of approximately
$8,311 and incurred interest expense related to its insurance financing in the amount of $7.

Income Taxes.The Company has incurred net operating losses since inception and accordingly had no income taxes and has not
recorded any income tax benefit for those losses.

2001 versus 2000



Revenues decreased from $19,241 for the year ended December 31, 2000 to $16,847 for the year ended December 31, 2001. Substantially all revenues are
attributable to the commercial deployments of WorldGate's interactive television products and services and cable subscribers subscribing to these services and consulting fees with TVGateway, an
unconsolidated entity, as of December 31, 2001. A substantial portion of the revenue decrease is attributable to approximately $6,824 in shipments of equipment to certain TVGateway partners in
2000 to support the newly introduced TVGateway interactive program guide. Service fee revenues increased by $4,987 in 2001 to $11,340 from a total $6,353 in 2000. This increase in revenues was
primarily attributable to revenues from consulting fees with TVGateway of $5,344 in 2000 increasing to $10,045 in 2001, pursuant to the TVGateway Management Agreement described in Note 13 to
our financial statements. Our equipment product revenues declined in 2001 by $7,381, primarily reflecting the absence of shipments to the TVGateway partners noted above and the slowdown in ITV
deployments within the U.S. cable marketplace. At December 31, 2000, we had deployed our services in 28 cable systems and had agreements to deploy an additional 17 cable systems with
approximately 114,000 Revenue Generating Units from deployed systems. As of December 31, 2001, we had deployed our services in 61 cable systems with approximately 472,000 Revenue Generating
Units. For the year ended December 31, 2001, there were revenues of $5,507 derived from the delivery of headends, keyboards, and related equipment products, and $1,184 attributable to
subscriber fees and advertising fees. For the year ended December 31, 2000, revenues of $12,888 were derived from the delivery of headends, keyboards, and related equipment products and $539
attributable to subscriber fee and advertising revenues.



Cost of Revenues.Cost of equipment product revenues consists primarily of equipment product costs related to initial trials
and commercial deployments and service fee revenue costs, related primarily to the provision of engineering and administrative services. Costs of equipment product revenues for the year ended
December 31, 2001 were $8,770, or approximately 159% of equipment product revenues, compared to the product costs of revenues of $20,314, or approximately 158%, of equipment product revenues
for the year ended December 31, 2000. Service fee costs of revenues for the year ended
December 31, 2001 were $10,343, or approximately 91% of service fee revenues. Service fee costs of revenues for the year ended December 31, 2000 were $4,849, or 76% of total service fee
revenues. The increase in service fee cost of revenues of $5,494 for the year ended December 31, 2001 when compared to 2000 is attributable to increased revenues from consulting fees with
TVGateway and additional subscriber fees.

Engineering and Development.Engineering and development expenses primarily consist of the cost of design, programming,
testing, documentation and support of the Company's hardware, software and services. Engineering and development costs were $12,894 for the year ended December 31, 2001, a

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decrease of approximately 41% when compared to $21,734 for the year ended December 31, 2000. This decrease in expenses is primarily attributable to significant expense reductions beginning in
the second quarter of 2001, activities supporting the TVGateway joint venture for which reimbursement is received, and to operating efficiencies achieved under management's continuing efforts to
monitor the Company's growth and development and adjust expenditures appropriately. These actions resulted in employee compensation costs declining by $1,672, or 15%, in 2001 when compared to 2000.
Other operating expenses, net of the contingent consideration expensed in 2000 of $4,174 related to our acquisition of DVA (see Note 14 to our financial statements), declined by $2,995, or 53%,
in 2001 when compared to 2000. This decline consisted primarily of decreases in engineering and product development expenditures of $2,910.

Sales and Marketing.Sales and marketing costs consist primarily of compensation, attendance at conferences and trade shows,
travel costs necessary to cover a domestic and international customer market base, promotions and other marketing programs substantially related to initial trial installations and commercial
deployments. For the year ended December 31, 2001 sales and marketing expenses were $6,770. This represents a decrease of approximately 47% when compared to sales and marketing expenses of
$12,779 for the year ended December 31, 2000. This decrease in expenses is primarily attributable to significant expense reductions beginning in the second quarter of 2001, activities
supporting the TVGateway joint venture for which reimbursement is received, and to operating efficiencies achieved under management's continuing efforts to monitor the Company's growth and development
and adjust expenditures appropriately. These actions resulted in employee compensation costs declining by $1,149, or 21%, in 2001 when compared to 2000. Other operating expenses declined by $4,861, or
63%, in 2001 when compared to 2000. This decline consisted primarily of decreases in advertising and marketing expenses of $2,209 and trade show expenditures of $1,076.

General and Administrative.General and administrative expenses consist primarily of expenditures for administration, office
and facility operations, finance and general management activities, including legal, accounting and other professional fees. General and administrative expenses were $7,629 for the year ended
December 31, 2001, a decrease of approximately 27% when compared to expenses of $10,507 for 2000. This decrease in expenses is primarily attributable to significant expense reductions beginning
in the second quarter of 2001, activities supporting the TVGateway joint venture for which reimbursement is received, and to operating efficiencies achieved under management's continuing efforts to
monitor the Company's growth and development and adjust expenditures appropriately. These actions resulted in employee compensation costs declining by $220, or 11%, in 2001 when compared to 2000.
Other operating expenses declined by $4,488, or 54%, in 2001 when compared to 2000. This decline consisted primarily of decreases in facility costs of $2,376 and professional fees and travel expenses
of $1,620.

Interest and Other Income and Interest Expense.Interest and other income and interest expense consist of interest earned on
cash and cash equivalents and short-term investments, and interest expense on equipment financing and short-term debt. Interest and other income decreased from $3,562 for the
year ended December 31, 2000 to $1,027 for the year ended December 31, 2001, primarily due to declining average cash balances and to declining interest rates. During the year ended
December 31, 2000, the Company earned interest on average cash balances of approximately $57,755 and incurred interest expense related to its equipment financing facility in the amount of $30.
In comparison, for the year ended December 31, 2001 the Company earned interest on average cash balances of approximately $27,498 and incurred interest expense related to its equipment
financing facility in the amount of $5.

Income Taxes.The Company has incurred net operating losses since inception and accordingly had no income taxes due and has
not recorded any income tax benefit for those losses.

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Liquidity and Capital Resources

As of December 31, 2002, our primary source of liquidity consisted of cash and cash equivalents and short-term investments that are highly
liquid, are of high quality investment grade and have maturities of less than one year.

At
December 31, 2002, we had cash and cash equivalents of $589 (in addition to $3,218 in short-term investments) as compared to cash and equivalents of $3,356 (in
addition to $11,257 in short-term investments) at December 31, 2001. Net cash used in operations was $10,767 for the twelve months ended December 31, 2002, as compared to
$23,996 used for the same period in 2001. The decrease in net cash used for operations was primarily attributable to the Company's decrease in expenditures beginning in 2001 and during the twelve
months ended December 31, 2002, including its reduction in workforce programs. Accounts receivable and inventory reductions were partially offset by other changes in working capital during the
year. The Company increased its Allowance for Doubtful Accounts by $600 during the twelve months ended December 31, 2002 to reflect its current assessment of the collectability of certain
receivables, primarily in Latin and South America. The Company has instituted tighter credit procedures to minimize its collection exposure with particular emphasis on international customers.

Cash
provided by investing activities during the twelve months ended December 31, 2002, totaled $7,937 compared to $12,416 provided during the same period in 2001. During the
twelve months ended December 31, 2002, we utilized the net proceeds from our maturing short-term investments of $8,039 compared to $14,833 for the twelve months ended
December 31, 2001. Capital expenditures were $112 and $1,451 for the twelve months ended December 31, 2002 and 2001, respectively. During the twelve months ended December 31,
2001, we invested $1,000 in TVGateway, an unconsolidated entity.

Net
cash provided by financing activities was $63 for the twelve months ended December 31, 2002 compared to cash used of $5,479 for the twelve months ended December 31,
2001. The increase in net cash provided by financing activities was primarily due to the settlement in 2001 of acquisition consideration due to the shareholders of DVA, the company we acquired in
April 2000.

We
have the following long term financing and lease obligations as of December 31, 2002:

|                                                   |  | Obligations Due by Period (in thousands)
|-------------------------------------------------- |  | ----------------------------------------
|
|Notes payable                                      |  | 50                                      
|Operating leases                                   |  | 6,210                                   
|Contractual obligation related to equity financing |  | 3,283                                   
|Total contractual obligations                      |  | 9,543                                   

To
date, the Company has funded operations primarily through private sales of equity securities and through an initial public offering of common stock in April 1999. As of
December 31, 2002 the Company had cash, cash equivalents, and short-term investments of $3,807. The operating cash usage for the twelve months ended December 31, 2002 was
$10,767. In October 2002, the Company announced multiple actions that it believed will further reduce operating expenses and increase operating efficiencies. These actions included a reduction
in work force as well as the implementation of an agreement with TVGateway to transfer to TVGateway certain WorldGate employees and functions that
WorldGate was currently providing for TVGateway. During the first quarter 2003, the Company substantially finalized the transition settlement and other matters with TVGateway and in
January 2003 received $2,400 in cash as part of this settlement. This amount largely comprises payment of our receivable balance as of December 31, 2002 in the amount of $1,089, payment
of January 2003 service fees in the amount of $300 and other payments largely related to our January 2003 sale of

21

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certain equipment and inventory in the approximate amount of $1,000. This transition of services removes both the obligation of WorldGate to provide the service as well as TVGateway's obligation to
pay WorldGate for rendering the service. Thus, although WorldGate's revenue attributable to the transitioned service was reduced, so was the corresponding expense of providing the service. As such,
WorldGate was negatively impacted in that it no longer received a profit from providing these services. Also there was some overhead which was reduced or otherwise allocated and which was previously
passed on to TVGateway. Based on the Company's current operating budget and cash flow projections for 2003 we believe that we have sufficient cash and short-term investments to fund our
operations into the summer of 2003. Accordingly, our accountants have stated in their audit opinion that there is substantial doubt about our ability to continue as a going concern. As a strategy
employed by the Company to obtain additional funding to continue operations beyond this period, the Company filed a registration statement with the SEC for a stock rights offering as described in more
detail in Note 17 of the Notes to the Consolidated Financial Statements.

We
have virtually no outstanding debt and our assets are not pledged as collateral. We continue to evaluate possibilities to obtain additional financing through public or private equity
or debt offerings, bank debt financing, asset securitizations or from other sources. Such additional financing would be subject to the risk of availability, may be dilutive to our shareholders, or
could impose restrictions on operating activities. There can be no assurance that this additional financing will be available on terms acceptable to us, if at all.

The
Company also has the ability to further reduce its workforce and scale back on capital and operational expenditures to decrease cash burn. The Company however can provide no
assurance that such reductions in cash spending, if they are made, will extend the Company's operations.

The
Company received a letter dated October 8, 2002, from the NASDAQ, which notified it that the bid price for its common stock had been below $1.00 per share for a period of
thirty consecutive days. Subsequently the Company sought and received NASDAQ approval to transfer its listing to the NASDAQ Small Cap Market, and on January 9, 2003 the Company's common stock
commenced trading on this market. WorldGate cannot offer any assurance that other NASDAQ requirements for continued listing will be satisfied. If the Company's common stock is delisted, this may have
a negative impact on the liquidity and price of its common stock and investors may find it more difficult to purchase or dispose of, or to obtain accurate quotations as to the market value of, its
common stock. Furthermore, the listing of the Company's common stock on the NASDAQ Small Cap Market, makes it ineligible for certain exemptions from the various state securities or "blue sky" laws,
which makes it more difficult for the Company to raise capital through issuances of securities.

Recent Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires, among other things,
retirement obligations to be recognized when they are incurred and displayed as liabilities, with a corresponding amount capitalized as part of the related long-lived asset. The
capitalized element is required to be expensed using a systematic and rational method over its useful life. SFAS No. 143 was adopted by the Company on January 1, 2003 and did not have an
impact on the Company's financial statements.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," effective for exit or disposal activities initiated after
December 31, 2002. SFAS No. 146 addresses the financial accounting and reporting for certain costs associated with exit or disposal activities, including restructuring actions. SFAS
No. 146 excludes from its scope severance benefits that are subject to an on-going benefit arrangement governed by SFAS No. 112, "Employer's Accounting for
Post-employment Benefits," and asset impairments governed by SFAS No. 144,

22

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"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 146 was adopted by the Company on January 1, 2003 and did not have an impact on the Company's
financial statements.

In
December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based compensation. The statement amends the disclosure
requirements of SFAS No.123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the
methods used on reported results. While SFAS No.148 does not amend SFAS No.123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS
No.148 are applicable to all companies with employee stock-based compensation, regardless of whether they account for that compensation using the fair value method of SFAS No.123 or the intrinsic
value method of APB Opinion No. 25, "Accounting for Stock Issued to Employees". The transition guidance and annual disclosure provisions of SFAS No.148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure provisions are effective for interim periods beginning after December 15, 2002. We adopted the annual disclosure provisions as of
December 31, 2002 and the interim disclosure provisions will be adopted during the first quarter of 2003.

In
November 2002, the FASB issued FASB Interpretation No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such
guarantee. FIN 45 also requires additional disclosure requirements about the guarantor's obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of
this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, and the disclosure requirements are effective for financial statement periods
ending after December 15, 2002. The Company is currently assessing, but at this point does not believe the adoption of the recognition and
initial measurement requirements of FIN 45 will have a material impact on the financial position, cash flows or results of operations of the Company.

In
January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 requires a variable interest to be consolidated
by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to entities created prior to January 31,
2003 in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. Management is currently assessing the impact of the new standard on our financial statements.

23

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FACTORS AFFECTING OUR BUSINESS CONDITION

In addition to other information in this Form 10-K, the following risk factors should be carefully considered in
evaluating our company and our business. Investing in our common stock involves a high degree of risk, and you should be able to bear the complete loss of your investment. We also caution you that
this Form 10-K includes forward-looking statements that are based on management's beliefs and assumptions and on information currently available to management. Future events and
circumstances and our actual results could differ materially from those projected in any forward-looking statements. You should carefully consider the risks described below, the other information in
this Form 10-K, the documents incorporated by reference herein and the risk factors discussed in our other filings with the Securities and Exchange Commission when evaluating our
company and our business. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known by us or that we currently deem immaterial
also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock would
decline.

Risks Related to Our Business and Industry

We may be unable to obtain necessary additional capital to fund operations in the future.

To date, we have funded operations primarily through private sales of equity securities and through our initial public offering of common stock in
April 1999. As of December 31, 2002, we had cash, cash equivalents, and short-term investments of $3.8 million. Our quarterly operating cash and short-term
investments usage was $2.1 million for the fourth quarter of 2002, and is expected to decrease in the remainder of 2003. We believe that if we achieve this expected decrease, we could fund our
cash requirements from cash-on-hand into the summer of 2003. If, however, our operating cash usage increases during one or more quarters, we may not have
cash-on-hand necessary to fund our cash requirements for this period without obtaining additional financing. If we are unable to obtain additional financing on terms acceptable
to us as needed, our business, operating results and financial condition will be materially adversely affected. If we are unable to secure such additional financing, we will have to curtail or suspend
our business activities and may have to seek protection of the
bankruptcy courts. If that happens, you could lose your entire investment. If we cannot raise additional financing on acceptable terms, we may not be able to, among other things:



In
addition, we cannot predict with certainty the timing or amount of our capital requirements. Our capital requirements depend on numerous factors, including:



24

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Any
additional equity financing, if available, may be dilutive to our stockholders, and debt financing, if available, may involve significant restrictions on our financing and operating
activities. Due to the factors mentioned herein, our accountants have stated in their audit opinion that there is substantial doubt about our ability to continue as a going concern.

We have a limited operating history and we may experience difficulties developing and implementing our marketing and business plans.

We began operations in March 1995 and our service was first made commercially available in the third quarter of 1998. As a result, our operating, sales and
marketing and other strategies are still being developed, and though our software is now in over 66 cable systems, we are still in the early stages of development and have not yet deployed our product
widely. As a result, forecasts of our future revenues, expenses and operating results may not be as accurate as they would be if we had a longer history of operations or if our products and strategies
were fully developed and deployed. Further, there can be no assurance that we will successfully implement our strategies or develop and deploy our products. If we are not successful in implementing
our marketing and business plans on a timely basis or otherwise effectively managing our development, our business, operating results, financial condition and cash flows will be materially adversely
affected.

If we continue to incur losses, we may not be able to finance the commercial deployment of our products.

We have experienced losses and have had negative operating cash flow in each quarter and year since inception, and we expect to continue to operate at a loss for
the foreseeable future. We may be unable to sustain our historical revenue growth rates or achieve any growth at all. To achieve profitability, we must increase our revenues and gross profit margin.
If we are not able to do so, our losses may extend beyond the foreseeable future and we may not be able to continue financing the commercial deployment, development and enhancement of our products.
Our aggregate revenues from inception to December 31, 2002 were approximately $56,723,000, and our aggregate accumulated deficit at December 31, 2002 was approximately $189,238,000. We
currently are stabilizing our operating expenses and capital expenditures in order to bring us closer to profitability. As a result, we expect to experience additional operating, but smaller than
historical, losses and negative cash flow for the foreseeable future.

We have a limited product offering and because ITV products and services are new, we cannot be certain that a market or sustainable demand for our products will develop.

We derive a substantial portion of our revenue from a limited number of existing products. We expect that our ITV products will account for a substantial portion
of our total revenue for the foreseeable future. The market for interactive TV products and services is new and evolving, and no single
technology or approach to providing this access has been widely adopted by consumers or cable operators. As a result, we cannot guarantee that a market for ITV products and services in general, or for
our interactive TV products in particular, will develop or that demand for our interactive TV products and services will be sustainable. If the market does not develop, develops more slowly than
expected or becomes saturated with competitors or competing technology becomes more widely accepted, our business, operating results, and financial condition will be materially adversely affected.

We could fail to overcome the intense competitive market for ITV and services which may limit demand or pricing for the WorldGate ITV Service and impair our overall financial
condition.

We experience significant competition. Many companies presently provide and others may in the future provide products and services with functionality similar to
any of our products and services. As a result of this and future competition, demand for our products may suffer, we may be restricted in the

25

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pricing we can charge for our interactive TV products and our business, financial condition and results of operations may be adversely affected. We believe that our competitors include
Gemstar-TV Guide International, Inc., Microsoft Corporation, Liberate Technologies, OpenTV Corp. and Liberty Broadband Interactive Television Inc. in the applications
category; Liberate Technologies and Scientific-Atlanta, Inc., in the middleware product category; and Concurrent Computer Corp., Diva, nCube Corporation and SeaChange, providers of
video-on-demand and personal video recording, which competes for "space" within the cable set-top box. Competitors provide their services through a variety of
technologies, which are in various stages of implementation and adoption. Some of our competitors have significantly greater financial, technical, marketing, distribution, customer support, name
recognition, compelling content, access to consumers and other resources, and more established relationships with cable operators, advertisers and content and application providers than we have.

We may not succeed if cable operators do not offer our ITV products to their subscribers.

Because our ITV products are made available to cable subscribers through a cable operator's system, our growth and future success depends substantially on cable
operators offering our ITV products to their subscribers at satisfactory rates. If cable operators determine that our service is not viable as a business proposition or if they determine that the
service does not meet their business or operational expectations or strategies, they will not offer our ITV products to their subscribers. Furthermore, because there are a limited number of cable
operators, as well as consolidation in the industry, the failure to reach agreements with one or more major cable operators which service a significant number of cable subscribers could materially
adversely affect the market for our ITV products. In addition, demand for our ITV products could decline if the cable industry is affected by general economic conditions and fluctuations in consumer
confidence and spending, caused by factors beyond our control, such as terrorist attacks and acts of war.

Our international operations are subject to many uncertainties.

A key component of our strategy is the expansion of our sales of ITV products into international markets. International revenues accounted for approximately 24%
and 1% of our total revenues for the fiscal years 2001 and 2002, respectively, and our international affiliates made up three of our top ten customers on a percentage of revenue basis for fiscal 2002.
We anticipate that a significant portion of our revenues will continue to be derived from sources outside the United States. Accordingly, our success will depend, in part, upon international economic
conditions and our ability to manage international sales and marketing operations. We have limited experience in developing localized versions of our service and in developing relationships with
international cable system operators. We may not be successful in expanding our service offerings into foreign markets. In addition to the uncertainty regarding our ability to generate revenues from
foreign operations and expand our international presence, there are certain risks inherent in doing business on an international level, such as:



In
addition, although substantially all of our revenues and costs to date have been denominated in U.S. dollars, we may enter into agreements resulting in payments in foreign currency.
Although we may

26

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from time to time undertake foreign exchange hedging transactions to cover a portion of our foreign currency exposure, we do not currently attempt to cover potential foreign currency exposure.
Accordingly, any fluctuation in the value of foreign currency could seriously harm our ability to increase international revenues. Any of the above factors could materially adversely affect the
success of our current and future domestic and international operations.

Our revenues will depend on the manner in which cable operators market and price our ITV products.

We depend on cable operators to provide our ITV products to their subscribers and therefore have limited or no control over a number of important factors,
including:



Our
revenues may not meet our expectations if the cable operators' marketing, pricing and operating strategies are inconsistent with our business model.

Cable operators and cable box manufacturers may not offer our ITV products because they may have potential conflicts of interest or for other reasons.

Some cable operators and cable box manufacturers are stockholders of other companies that provide ITV products and services. To the extent that these cable
operators elect not to offer our products and services because of these affiliations or other reasons, our business, financial condition and results of operations could be materially adversely
affected. Some companies that provide Internet services, such as Microsoft Corporation, are stockholders of cable operators or cable box manufacturers. We cannot assure you that there will not be
other investments among providers of ITV services, cable operators and/or cable box manufacturers. As a result, or for other reasons, these cable operators and cable box manufacturers may be reluctant
to provide any service, including our products and services, or to otherwise work with any entity that provides other Internet services in competition with their affiliates.

Only cable television subscribers who utilize a cable set-top box can receive our ITV products.

For cable television subscribers to receive our ITV products, they must have a cable set-top box that can be WorldGate enabled. Currently, many cable
television subscribers receive their cable television service through the cable line directly into their televisions, without a set-top box. We cannot assure you that
cable operators serving these subscribers will elect to provide them with set-top boxes for the purpose of offering our ITV products, or that these customers will choose to utilize a
set-top box in order to receive our ITV products.

We are subject to capacity constraints and system failures.

Due to the limited size of our ITV deployments, the ability of our service to accommodate a substantial number of users is still being tested. We cannot assure
you that we will be able to provide high quality performance and high transaction speeds as the number of subscribers grows or their usage increases. In addition, as subscriber penetration grows it
may be necessary for cable operators to purchase additional equipment, and we cannot assure you that they will do so. The performance of our ITV products is also subject to reduction in performance
and interruption from human errors, telecommunication failures, computer viruses and similar events. Any of these problems in our systems or those of cable operators could result in reduced subscriber
demand. We have experienced

27

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performance reduction and service interruptions from time to time in the past and we expect that these problems will continue from time to time. Our failure to provide uninterrupted service at a
level of performance acceptable to subscribers would have a material adverse effect on our business, financial condition and results of operations.

If we fail to adequately protect our intellectual property rights or if we are subject to intellectual property infringement claims of third parties, our business will be
harmed.

Our success depends, in part, on our ability to maintain and continue to develop a strong patent position for our products and technologies both in the United
States and other countries. We rely on a combination of contract, patent, copyright, trademark, trade-secret laws, restrictions on disclosure and other measures to protect our intellectual property
rights and proprietary information. Our patent position involves complex legal and factual questions. Without our patent and other intellectual property protections, other companies could offer
substantially identical products for sale without incurring the sizeable development and testing costs that we have incurred. Our ability to recoup these expenditures and realize profits upon the
licensing of our products and services could be diminished. The process of obtaining patents is time consuming and expensive. Even if we spend the necessary time and money, a patent may not issue or
it may insufficiently protect the technology it was intended to protect. We can never be certain that we were the first to develop the technology or that we were the first to file a patent
application for the particular technology because U.S. patent applications are maintained in secrecy until a patent issues and publications in the scientific or patent literature lag behind actual
discoveries. Even after the U.S. Patent and Trademark Office issues patent rights to us, our competitors may develop similar or duplicate technologies or design around the patented aspects of our
technology, which may decrease sales of our prospective products, therefore causing a negative impact on our profit. Competitors and others may also challenge our intellectual property rights in court
by alleging infringement. If we are found to infringe the intellectual property rights of others, we could be precluded from using certain technologies that are important components of our products,
or forced to pay significant license fees, royalties or damages for infringement. Irrespective of the validity
or the successful assertion of any patent claims, any litigation could result in significant costs and diversion of management time and resources.

We could become subject to burdensome government regulation which affects our ability to offer our service or which affects demand for our service.

We are subject to varying degrees of federal, state, local and foreign regulations as well as laws enacted by the U.S. Congress and other governments. The Federal
Communications Commission has established regulations that, among other things, set licensing, access, installation and equipment standards for communications systems. We are uncertain how these
regulations may be applied to Internet services offered over cable television systems. These laws and regulations could expose us to liability, materially increase our cost of providing our service,
and decrease the growth and acceptance of the Internet in general and access to the Internet over cable systems.

Our business would suffer if we were to lose the services of Hal M. Krisbergh or other key personnel.

Our success depends in significant part upon the continued service of our key technical, sales and senior management personnel, particularly Mr. Krisbergh,
who has significant relevant experience in the cable television industry. No officer or employee of our company is bound by an employment agreement, and any officer or employee of our company could
terminate his or her relationship with us at any time. Our future success will also depend on our ability to attract, train, retain and motivate highly qualified senior management, technical,
marketing and sales personnel. Because competition for these personnel is intense, we cannot assure you that we will be able to do so.

28

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The ability to influence the outcome of stockholder votes may be limited by the significant ownership interest of our chairman and chief executive officer.

Hal M. Krisbergh beneficially owns approximately 25.0% of our outstanding common stock as of January 30, 2003. Mr. Krisbergh has the voting power to
exercise substantial control over the election of our entire board of directors and all votes on matters requiring stockholder approval. This concentration of ownership may also have the effect of
delaying or preventing a change in control of our company.

Anti-takeover provisions in our charter documents could discourage unwanted takeover attempts and could reduce the opportunity for stockholders to get a premium for
their shares.

We are subject to Delaware laws and to provisions of our certificate of incorporation and by-laws that could have the effect of delaying, deterring or
preventing a change in control of our company. These include provisions generally prohibiting our stockholders from calling special meetings of stockholders and requiring advance notice for nomination
of directors and stockholder proposals. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law which, in general, prevents an interested
stockholder, defined generally as a person owning 15% or more of the corporation's outstanding voting stock, from engaging in a business combination, as defined, for three years following the date
that person became an interested stockholder unless specified conditions are satisfied.

Our
certificate of incorporation and by-law provisions and Delaware law could diminish the opportunities for a stockholder to participate in tender offers, including tender
offers at prices above the then-current fair market value of our common stock, that could result from takeover attempts. In addition, our certificate of incorporation permits our board of
directors to issue, without further stockholder approval, preferred stock that could have the effect of delaying, deferring or preventing a change in control. The issuance of preferred stock also
could adversely affect the voting power of the holders of our common stock, including the loss of voting control to others. The provisions of our certificate of incorporation and by-laws,
as well as provisions of Delaware law, may have the effect of discouraging or preventing an acquisition, or disposition of, our business. As a result, our management could attempt to utilize these
laws and provisions to discourage or reject unsolicited bids to acquire us, including bids that would have paid stockholders a premium over the then current market price of their shares.

We may not be able to continue to meet the continued listing criteria for NASDAQ, which could materially and adversely affect our business and financial condition and the
liquidity of our common stock.

On October 8, 2002, we received notification from the NASDAQ National Market that we were not in compliance with the minimum bid price rule. On
November 26, 2002 we received notification that we were not in compliance with the minimum stockholders' equity requirement. Following such notifications, we applied for listing on the NASDAQ
Small Cap Market. We were notified by NASDAQ that our application to transfer to the NASDAQ Small Cap Market had been accepted and was effective at the opening of business on January 9, 2003.
Although the transfer has been effected, our continued listing cannot be assured because, we are not in compliance with the minimum bid price, although we have a 180-day grace period for
regaining compliance. We have received approval from our Board to request shareholder approval for a discretionary reverse stock split and have filed a preliminary proxy statement as required for a
special meeting of stockholders to consider such reverse split. The Company is still evaluating whether it will proceed with the reverse split.. If it elects to proceed, there can, however, be no
assurance that such stock split will be approved or that any increased share price resulting from any stock split will be maintained in order to continue to comply with the listing requirements.
Furthermore the approval we are seeking from our shareholders for

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reverse stock split provides the board of directors with discretion as to whether or not the split is implemented as well as the timing of the reverse split, if implemented. Accordingly the board of
directors of the company may choose not to implement the reverse split if market forces sufficiently increase our share price. There can be no assurance that other NASDAQ requirements for continued
listing will be satisfied. If we fail such requirements, our common stock may be delisted and trading in our common stock, if any, would have to be conducted on the OTC Bulletin Board or in the
non-NASDAQ over-the-counter market (or "pink sheet" market). Since our common stock is no longer on the NASDAQ National Market, we are not eligible for certain
exemptions from the various state securities or "blue sky" laws, which could make it more difficult for us to raise capital through issuances of securities. The failure to be listed on NASDAQ may have
a negative impact on the liquidity and price of our common stock and investors may find it more difficult to purchase or dispose of, or to obtain accurate quotations as to the market value of, our
common stock.

Our financial results could be adversely affected by the bankruptcy of one of the members of the TVGateway joint venture.

During the second quarter of 2002, Adelphia Communications Corporation, a MSO and a member of the TVGateway joint venture filed a voluntary petition under Chapter
11 of the U.S. Bankruptcy Code. This filing may affect Adelphia's ability to participate in future additional capital contributions to the joint venture. The TVGateway joint venture partners are not
obligated to make any capital infusions. Rather, if they elect not to contribute to a capital call, their equity interest in the joint venture is diluted and either less capital is raised by TVGateway
or the other joint venture partners may elect, individually or jointly, to increase their capital contributions to make up the deficit. Our operating budget and cash flow projections for 2002 and 2003
are heavily dependent upon revenues generated by TVGateway. In turn, funding of the joint venture is heavily dependent upon the capital contributions of its members. In addition the TVGateway joint
venture partners made commitments to deploy our products as part of the formation of the venture. We are still working with Adelphia to determine if and how they will fulfill these commitments.
Further, under the bankruptcy laws, TVGateway could be precluded from taking actions relating to the joint venture that could affect the estate of the bankrupt partner without the prior approval of
the bankruptcy court, which would, in most cases, entail prior notice to the other members and a hearing in bankruptcy court. The requirement to obtain court approval may delay or prevent actions
TVGateway may want to take.

Substantial sales of our common stock could lower our stock price.

The market price for our common stock could drop as a result of sales of a large number of our presently outstanding shares, including shares issued upon the
exercise of outstanding options and warrants, or the perception that these sales could occur. These factors also could make it more difficult for us to raise funds through future offerings of our
common stock. Certain holders of our common stock have demand and piggy-back registration rights. The exercise of such rights could adversely affect the market price of our common stock.
We have filed:



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Legislative actions, higher insurance cost and potential new accounting pronouncements are likely to cause our operating expenses to increase and impact our future financial
position and results of operations.

In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as proposed changes to listing standards by NASDAQ, and proposed accounting changes
by the Securities and Exchange Commission, we may be required to enhance our internal controls, hire additional personnel and utilize additional outside legal, accounting and advisory services, all of
which will cause our operating expenses to increase. Insurers are also likely to increase premiums as a result of higher claims rates incurred over the past year, and so our premiums for our various
insurance policies, including our directors' and officers' insurance policies, are likely to increase. Proposed changes in the accounting rules, including
legislative and other proposals to account for employee stock options as a compensation expense among others, could materially increase the expenses that we report under generally accepted accounting
principles and adversely affect our operating results.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk.Our exposure to market risk related to changes in interest rates relates primarily to our investment
portfolio. We invest in instruments that meet high credit quality standards, and we limit the amount of credit exposure to any one issue, issuer and type of investment.

As
of December 31, 2002, our cash and cash equivalents and investments consisted of $3,807, most of which were cash equivalents having a maturity of less than one year. Due to the
average maturity and conservative nature of our investment portfolio, a sudden change in interest rates would not have a material effect on the value of the portfolio. Management estimates that had
the average yield of our investments decreased by 100 basis points, our interest income for the year ended December 31, 2002 would have decreased by less than $91. This estimate assumes that
the decrease occurred on the first day of 2002 and reduced the yield of each investment instrument by 100 basis points. The impact on our future interest income of future changes in investment yields
will depend largely on the gross amount of our investments.

Foreign Currency Exchange Risk.Although we transact business in various foreign countries, the principal portion of our
business is in the United States and substantially all of our revenues and costs to date have been denominated in U.S. dollars. As a result, adverse movements in foreign currency exchange rates would
not have a material adverse effect on us.

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Item 8.

WORLDGATE COMMUNICATIONS, INC.        INDEX TO FINANCIAL STATEMENTS

|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|Report of PricewaterhouseCoopers LLP, Independent Accountants                                        |  | F-2 
|Consolidated Balance Sheets as of December 31, 2001 and 2002                                         |  | F-3 
|Consolidated Statements of Operations for the years ended December 31, 2000, 2001 and 2002           |  | F-4 
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 2001 and 2002 |  | F-5 
|Consolidated Statements of Cash Flows for the years ended December 31, 2000 2001 and 2002            |  | F-6 
|Notes to Consolidated Financial Statements                                                           |  | F-7 

F-1

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Report of Independent Accountants

To
the Board of Directors
of WorldGate Communications, Inc.:

In
our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 41 present fairly, in all material respects, the financial
position of WorldGate Communications, Inc. and its subsidiaries at December 31, 2001 and December 31, 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial
statement schedule appearing under Item 15(a)(2) on page 42 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As
discussed in Notes 2 and 5 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002.

PricewaterhouseCoopers
LLP
Philadelphia, PA
February 14, 2003

F-2

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WORLDGATE COMMUNICATIONS, INC.        CONSOLIDATED BALANCE SHEETS        (DOLLARS IN THOUSANDS)

|                                                                                                                                                           |                                                                                             | December 31 |                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------- | ------------------------------------------
|
|ASSETS                                                                                                                                                     |                                                                                             |             |                                           
|Current assets:                                                                                                                                            |                                                                                             |             |                                           
|                                                                                                                                                           | Cash and cash equivalents                                                                   |             | $                                         
|                                                                                                                                                           | Short-term investments                                                                      |             |                                           
|                                                                                                                                                           | Accounts receivable less allowance for doubtful accounts of $996 in 2001 and $1,596 in 2002 |             |                                           
|                                                                                                                                                           | Inventory                                                                                   |             |                                           
|                                                                                                                                                           | Prepaid and other assets                                                                    |             |                                           
|                                                                                                                                                           |                                                                                             |             |                                           
|                                                                                                                                                           |                                                                                             |             | Total current assets                      
|                                                                                                                                                           |                                                                                             |             |                                           
|Property and equipment                                                                                                                                     |                                                                                             |             | 5,867                                     
|                                                                                                                                                           | Less: accumulated depreciation and amortization                                             |             |                                           
|                                                                                                                                                           |                                                                                             |             | Property and equipment, net               
|Deposits and other assets                                                                                                                                  |                                                                                             |             | 938                                       
|Goodwill                                                                                                                                                   |                                                                                             |             | 3,006                                     
|                                                                                                                                                           |                                                                                             |             |                                           
|                                                                                                                                                           |                                                                                             |             | Total assets                              
|                                                                                                                                                           |                                                                                             |             |                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                       |                                                                                             |             |                                           
|Current liabilities:                                                                                                                                       |                                                                                             |             |                                           
|                                                                                                                                                           | Current portion, notes payable                                                              |             | $                                         
|                                                                                                                                                           | Accounts payable                                                                            |             |                                           
|                                                                                                                                                           | Accrued expenses                                                                            |             |                                           
|                                                                                                                                                           | Accrued compensation and benefits                                                           |             |                                           
|                                                                                                                                                           | Contractual obligations related to equity financing                                         |             |                                           
|                                                                                                                                                           | Deferred rent credit, current and other                                                     |             |                                           
|                                                                                                                                                           |                                                                                             |             |                                           
|                                                                                                                                                           |                                                                                             |             | Total current liabilities                 
|                                                                                                                                                           | Deferred rent credit                                                                        |             |                                           
|                                                                                                                                                           |                                                                                             |             |                                           
|                                                                                                                                                           |                                                                                             |             | Total liabilities                         
|                                                                                                                                                           |                                                                                             |             |                                           
|Commitments and contingencies                                                                                                                              |                                                                                             |             |                                           
|Stockholders' equity:                                                                                                                                      |                                                                                             |             |                                           
|Preferred Stock, $.01 par value, 13,500,000 shares authorized                                                                                              |                                                                                             |             |                                          
|Class A Common Stock, $0.01 par value; 50,000,000 shares authorized, 23,565,295 and 23,577,963 shares issued and outstanding at December 31, 2001 and 2002 |                                                                                             |             | 236                                       
|Additional paid-in capital                                                                                                                                 |                                                                                             |             | 193,488                                   
|Warrant for Class A Common Stock                                                                                                                           |                                                                                             |             | 1,911                                     
|Accumulated deficit                                                                                                                                        |                                                                                             |             | (170,028                                  
|Unearned stock-based compensation                                                                                                                          |                                                                                             |             | (192                                      
|Less Treasury Stock, at cost500,000 shares as of December 31, 2002                                                                                        |                                                                                             |             |                                          
|                                                                                                                                                           |                                                                                             |             |                                           
|                                                                                                                                                           |                                                                                             |             | Total stockholders' equity                
|                                                                                                                                                           |                                                                                             |             |                                           
|                                                                                                                                                           |                                                                                             |             | Total liabilities and stockholders' equity
|                                                                                                                                                           |                                                                                             |             |                                           

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

F-3

---

WORLDGATE COMMUNICATIONS, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                                               |                                                        | 2000                                                                                                                  |                          | 2001   |        | 2002       |       
|-------------------------------------------------------------- | ------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------ | ------ | ---------- | ------
|Revenues:                                                      |                                                        |                                                                                                                       |                          |        |        |            |       
|                                                               | Equipment product revenues earned from third parties   |                                                                                                                       | $                        | 5,017  |        | $          | 4,138 
|                                                               | Equipment product revenues earned from related parties |                                                                                                                       |                          | 7,871  |        |            | 1,369 
|                                                               | Service fee revenues earned from third parties         |                                                                                                                       |                          | 854    |        |            | 1,001 
|                                                               | Service fee revenues earned from related parties       |                                                                                                                       |                          | 5,499  |        |            | 10,339
|                                                               |                                                        |                                                                                                                       |                          |        |        |            |       
|                                                               |                                                        |                                                                                                                       | Total revenues           |        |        | 19,241     |       
|                                                               |                                                        |                                                                                                                       |                          |        |        |            |       
|Costs and expenses:                                            |                                                        |                                                                                                                       |                          |        |        |            |       
|                                                               | Cost of product revenues                               |                                                                                                                       |                          | 20,314 |        |            | 8,770 
|                                                               | Cost of consulting revenues                            |                                                                                                                       |                          | 4,849  |        |            | 10,343
|                                                               |                                                        | Engineering and development (excluding depreciation and amortization amounts of $475, $1,005 and $597, respectively). |                          |        | 21,734 |            |       
|                                                               |                                                        | Sales and marketing (excluding depreciation and amortization amounts of $241, $308 and $221, respectively).           |                          |        | 12,779 |            |       
|                                                               |                                                        | General and administrative (excluding depreciation and amortization amounts of $179, $198 and $340, respectively).    |                          |        | 10,507 |            |       
|                                                               | Depreciation and amortization                          |                                                                                                                       |                          | 895    |        |            | 1,511 
|                                                               | Goodwill impairment                                    |                                                                                                                       |                          |       |        |            |      
|                                                               |                                                        |                                                                                                                       |                          |        |        |            |       
|                                                               |                                                        |                                                                                                                       | Total costs and expenses |        |        | 71,078     |       
|                                                               |                                                        |                                                                                                                       |                          |        |        |            |       
|Loss from operations                                           |                                                        |                                                                                                                       | (51,837                  | )      |        | (31,070    | )     
|Interest and other income                                      |                                                        |                                                                                                                       | 3,562                    |        |        | 1,027      |       
|Interest and other expense                                     |                                                        |                                                                                                                       | (72                      | )      |        | (303       | )     
|Loss from unconsolidated entity                                |                                                        |                                                                                                                       | (1,250                   | )      |        | (1,000     | )     
|                                                               |                                                        |                                                                                                                       |                          |        |        |            |       
|Net loss                                                       |                                                        | $                                                                                                                     | (49,597                  | )      | $      | (31,346    | )     
|                                                               |                                                        |                                                                                                                       |                          |        |        |            |       
|Net loss per common share
(Basic and Diluted)                  |                                                        |                                                                                                                       |                          |        |        |            |       
|                                                               |                                                        |                                                                                                                       | Net loss                 |        | $      | (2.23      | )     
|                                                               |                                                        |                                                                                                                       |                          |        |        |            |       
|Weighted average common shares outstanding (Basic and Diluted) |                                                        |                                                                                                                       | 22,246,143               |        |        | 23,501,543 |       
|                                                               |                                                        |                                                                                                                       |                          |        |        |            |       

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

F-4

---



WORLDGATE COMMUNICATIONS, INC.    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY    (DOLLARS AND SHARES IN THOUSANDS)

|                                                    |  | Common Stock |  |   |     |  |         |  |   |       |  |   |          |   |  
|--------------------------------------------------- |  | ------------ |  | - | --- |  | ------- |  | - | ----- |  | - | -------- | - | -
|
|
|
|Balance at December 31, 1999                        |  | 21,488       |  | $ | 215 |  | 170,592 |  | $ | 1,911 |  | $ | (89,085  | ) | $
|Authorization of deferred Compensation              |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  
|Sale of Common Stock                                |  | 1,531        |  |   | 15  |  | 19,482  |  |   |       |  |   |          |   |  
|Issuance of Common stock in Acquisition of DVA Inc. |  | 119          |  |   | 1   |  | 2,498   |  |   |       |  |   |          |   |  
|Exercise of Stock Options                           |  | 114          |  |   | 2   |  | 327     |  |   |       |  |   |          |   |  
|Other                                               |  | 26           |  |   |     |  |         |  |   |       |  |   |          |   |  
|Net Loss for the year                               |  |              |  |   |     |  |         |  |   |       |  |   | (49,597  | ) |  
|                                                    |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  
|Balance at December 31, 2000                        |  | 23,308       |  |   | 233 |  | 192,899 |  |   | 1911  |  |   | (138,682 | ) |  
|                                                    |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  
|Authorization of deferred                           |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  
|Sale of Common Stock                                |  | 11           |  |   |     |  | 31      |  |   |       |  |   |          |   |  
|Issuance of Common stock in Acquisition of DVA Inc. |  | 231          |  |   | 3   |  | 387     |  |   |       |  |   |          |   |  
|Exercise of Stock Options                           |  | 15           |  |   |     |  | 44      |  |   |       |  |   |          |   |  
|Other                                               |  |              |  |   |     |  | 127     |  |   |       |  |   |          |   |  
|Net Loss for the year                               |  |              |  |   |     |  |         |  |   |       |  |   | (31,346  | ) |  
|                                                    |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  
|Balance at December 31, 2001                        |  | 23,565       |  |   | 236 |  | 193,488 |  |   | 1,911 |  |   | (170,028 | ) |  
|                                                    |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  
|Authorization of deferred Compensation              |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  
|Sale of Common Stock                                |  | 13           |  |   |     |  | 15      |  |   |       |  |   |          |   |  
|Exercise of Stock Options                           |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  
|Acquisition of Treasury Stock                       |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  
|Other                                               |  |              |  |   |     |  | 888     |  |   |       |  |   |          |   |  
|Net Loss for the year                               |  |              |  |   |     |  |         |  |   |       |  |   | (19,210  | ) |  
|                                                    |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  
|Balance at December 31, 2002                        |  | 23,578       |  | $ | 236 |  | 194,391 |  | $ | 1,911 |  |   | (189,238 | ) | $
|                                                    |  |              |  |   |     |  |         |  |   |       |  |   |          |   |  

The accompanying notes are an integrated part of these consolidated financial statements

F-5

---

WORLDGATE COMMUNICATIONS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (DOLLARS IN THOUSANDS)

|                                               |                                                                         | 2000                                          |                                                      | 2001                                  |       | 2002   |        
|---------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------- | ---------------------------------------------------- | ------------------------------------- | ----- | ------ | -------
|Cash flows from operating activities:          |                                                                         |                                               |                                                      |                                       |       |        |        
|                                               | Net loss                                                                |                                               | $                                                    | (49,597                               | )     | $      | (31,346
|                                               | Adjustments to reconcile net loss to cash used in operating activities: |                                               |                                                      |                                       |       |        |        
|                                               |                                                                         | Depreciation and amortization                 |                                                      |                                       | 654   |        |        
|                                               |                                                                         | Bad debt expense                              |                                                      |                                       | 1,300 |        |        
|                                               |                                                                         | Provision for inventory                       |                                                      |                                       |      |        |        
|                                               |                                                                         | Amortization of deferred compensation         |                                                      |                                       | 396   |        |        
|                                               |                                                                         | Amortization of Goodwill                      |                                                      |                                       | 241   |        |        
|                                               |                                                                         | Impairment of Goodwill                        |                                                      |                                       |      |        |        
|                                               |                                                                         | Loss on the disposition of fixed assets       |                                                      |                                       |      |        |        
|                                               |                                                                         | Non-employee stock compensation expense       |                                                      |                                       | 3,454 |        |        
|                                               |                                                                         | Loss from investment in unconsolidated entity |                                                      |                                       | 1,250 |        |        
|                                               |                                                                         | Changes in operating assets and liabilities:  |                                                      |                                       |       |        |        
|                                               |                                                                         |                                               | Accounts receivable                                  |                                       |       | (4,569 | )      
|                                               |                                                                         |                                               | Inventories                                          |                                       |       | (5,664 | )      
|                                               |                                                                         |                                               | Prepaid and other assets                             |                                       |       | (492   | )      
|                                               |                                                                         |                                               | Accounts payable                                     |                                       |       | (728   | )      
|                                               |                                                                         |                                               | Accrued expenses                                     |                                       |       | 1,223  |        
|                                               |                                                                         |                                               | Accrued compensation and benefits                    |                                       |       | 2,813  |        
|                                               |                                                                         |                                               | Other liabilities                                    |                                       |       | (30    | )      
|                                               |                                                                         |                                               |                                                      |                                       |       |        |        
|                                               |                                                                         |                                               |                                                      | Net cash used in operating activities |       |        | (49,749
|                                               |                                                                         |                                               |                                                      |                                       |       |        |        
|Cash flows from investing activities:          |                                                                         |                                               |                                                      |                                       |       |        |        
|                                               | Capital expenditures                                                    |                                               |                                                      | (2,324                                | )     |        | (1,451 
|                                               | Proceeds from maturities of short-term investments, net                 |                                               |                                                      | 40,324                                |       |        | 14,833 
|                                               | Investment in unconsolidated entity                                     |                                               |                                                      | (1,250                                | )     |        | (1,000 
|                                               | Proceeds from sale of equipment                                         |                                               |                                                      |                                      |       |        | 34     
|                                               | Net cash acquiredacquisition of DVA                                    |                                               |                                                      | 63                                    |       |        |       
|                                               |                                                                         |                                               |                                                      |                                       |       |        |        
|                                               | Net cash provided by investing activities                               |                                               |                                                      | 36,813                                |       |        | 12,416 
|                                               |                                                                         |                                               |                                                      |                                       |       |        |        
|Cash flows from financing activities:          |                                                                         |                                               |                                                      |                                       |       |        |        
|                                               | Proceeds from issuance of common stock                                  |                                               |                                                      | 24,530                                |       |        | 31     
|                                               | Proceeds from exercise of stock options                                 |                                               |                                                      | 329                                   |       |        | 44     
|                                               | Proceeds from issuance of notes payable                                 |                                               |                                                      |                                      |       |        |       
|                                               | Repayment of notes payableDVA Shareholders                             |                                               |                                                      |                                      |       |        | (5,134 
|                                               | Repayments of capital leases and notes payable                          |                                               |                                                      | (764                                  | )     |        | (420   
|                                               |                                                                         |                                               |                                                      |                                       |       |        |        
|                                               |                                                                         |                                               | Net cash provided by (used in) financing activities  |                                       |       | 24,095 |        
|                                               |                                                                         |                                               |                                                      |                                       |       |        |        
|                                               |                                                                         |                                               | Net increase (decrease) in cash and cash equivalents |                                       |       | 11,159 |        
|Cash and cash equivalents, beginning of period |                                                                         |                                               | 9,256                                                |                                       |       | 20,415 |        
|                                               |                                                                         |                                               |                                                      |                                       |       |        |        
|Cash and cash equivalents, end of period       |                                                                         | $                                             | 20,415                                               |                                       | $     | 3,356  |        
|                                               |                                                                         |                                               |                                                      |                                       |       |        |        

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

F-6

---



WORLDGATE COMMUNICATIONS, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (Dollars in thousands except for per share amounts)

1.    Organization

WorldGate Communications, Inc. ("WorldGate" or "the Company") provides a television service that delivers Internet access and interactivity through cable
television systems. The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All intercompany transactions and balances have
been eliminated. The Company accounts for its investment in the TVGateway joint venture under the equity method.

2.    Summary of Significant Accounting Policies



As of December 31, 2002 the Company had cash, cash equivalents and short-term investments of $3,807. The operating cash usage for the twelve
months ended December 31, 2002 was $10,767. In October 2002, the Company announced multiple actions which it believes will further reduce operating expenses and increase operating
efficiencies. These actions included a reduction in work force as well as the implementation of an agreement with TVGateway to transfer to TVGateway certain WorldGate employees and functions that
WorldGate is currently providing for TVGateway. The transfer was
substantially finalized by the Company and TVGateway during the first quarter 2003. As a result, WorldGate's revenue attributable to the transitioned service will be reduced, as will be the
corresponding expense of providing the service. As such, WorldGate's Consolidated Statement of Operation will be negatively impacted in that it will have less revenues, cost of sales and resulting
profit from providing these services and potentially there will be some overhead which cannot be reduced or otherwise allocated and which was previously passed on to TVGateway. Based on the Company's
current operating budget and cash flow projections for 2003, we believe that we have sufficient cash and short-term investments to fund our operations into the summer of 2003. As a
strategy employed by the Company to obtain additional funding to continue operations beyond this period, the Company filed a registration statement with the SEC for a stock rights offering as
described in more detail in Note 17 to Condensed Financial Statements. There is no guarantee when the registration statement will be declared effective and as to the level of the participation
or the amount of proceeds, if any, to be received in connection with the rights offering.

The
Company has virtually no outstanding debt and its assets are not pledged as collateral. The Company continues to evaluate possibilities to obtain additional financing through public
or private equity or debt offerings, bank debt financing, asset securitizations or from other sources. Such additional financing would be subject to the risk of availability, may be dilutive to our
shareholders, or could impose restrictions on operating activities. There can be no assurance that this additional financing will be available on terms acceptable to the Company, if at all. The
Company also has the ability to further reduce its workforce and scale back on capital and operational expenditures to decrease cash burn. The Company however can provide no assurance that such
reductions in cash spending, if they are made, will extend the Company's operations.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date the

F-7

---

financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.



The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains cash balances
at financial institutions, which at times exceed the $100 FDIC limit.



Short-term investments consist of debt securities with original maturities greater than three months and less than one year. All such debt securities
are classified as available for sale. Available for sale securities are carried at fair market value, with unrealized gains and losses reported in stockholders' equity as a component of other
comprehensive income (loss). As of December 31, 2001 and 2002, the fair market value of available for sale securities equaled the carrying value. Gains or losses on securities sold are based on
the specific identification method.



Inventories are stated at the lower of cost or market on an average cost basis.



Property and equipment is carried at original cost. Depreciation is recorded on the straight-line method over the estimated useful lives of the related assets.
The Company depreciates furniture and fixtures over seven years; office equipment over five years; and computer equipment and trade show exhibits over three years. Leasehold improvements are
capitalized and amortized on the straight-line basis over the shorter of their useful life or the term of the lease. Maintenance and repairs are expensed as incurred. When the property or
equipment is retired or otherwise disposed of, related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations.

Qualified
internally developed software costs for internal use are capitalized subsequent to both the preliminary project stage and when management has committed to funding, in
accordance with Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed and obtained for Internal Use." The external direct costs of software, materials and
services directly associated with the project are capitalized. Upon completion, internally developed software costs are depreciated over their estimated useful life of three years. The Company
capitalized software development costs of $276 and $5 during the years ended December 31, 2001 and 2002, respectively.



Goodwill in the amount of $3,608 was recorded in connection with the Company's acquisition of Digital Video Art, Inc. ("DVA") and represents the excess of
cost over the fair value of net assets acquired. In 2000 and 2001, goodwill was amortized using the straight-line method over ten years. On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS")

F-8

---

No. 142, "Goodwill and Other Intangible Assets." This pronouncement changes the accounting for goodwill and intangible assets with indefinite lives from an amortized method to an impairment
approach. SFAS No. 142 requires that goodwill and intangible assets be tested annually for impairment using a two-step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the beginning of the fiscal year. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the
beginning of the year of adoption), if any, and must be completed by the end of the Company's fiscal year. The Company's transitional impairment test, measured as of January 1, 2002, did not
result in an impairment loss. However, as described in Note 5, an impairment of our goodwill was recorded in the second quarter of 2002.



The Company periodically evaluates the carrying value of long-lived assets when events and circumstances warrant such review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash flows from such assets are separately identifiable and are less than the carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined by using the anticipated cash
flows discounted at a rate commensurate with the risk involved. Measurement of the impairment, if any, will be based upon the difference between carrying value and the fair value of the asset.

On
January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 provides new
guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of, and also broadens the definition of what constitutes a discontinued
operation and how the results of a discontinued operation are to be measured and presented.



In addition to the following criteria, the Company does not recognize revenue before evidence of an agreement exists, prices are fixed or determinable and
collectibility is reasonably assured. The Company derives revenue from the sale of headend units and other equipment to cable operators. Revenue from the sale of equipment is recognized by the Company
when the products are shipped to and accepted by the customer.

The
Company also derives revenue from charges to cable operators for their subscribers' monthly access to the Company's service and service and maintenance fees. These revenues are
recognized as services are rendered.

Revenues
from advertising are recognized by the Company when earned. Depending on specific arrangements, advertising revenues are earned when a customer's advertisement is displayed on
our page or when a subscriber clicks on the banner advertisement.

The
Company derives revenue from TVGateway from charges for licensing fees, management consulting, engineering, product delivery services and certain administrative costs. These revenues
are recognized as services are rendered.

F-9

---



Cost of equipment product revenues includes costs related to the production of hardware, installation and training as well as costs incurred for the assembly,
installation and testing of systems. Cost of service fee revenues includes consulting fees covering engineering, development, support and administrative services.



Engineering and development costs are expensed as incurred.



Advertising costs, included in sales and marketing expense, are expensed in the period incurred. Advertising expenses were $1,177, $714 and $298 for the years
ended December 31, 2000, 2001 and 2002, respectively.



Provision for income taxes is determined based on the asset and liability method. The asset and liability method provides that deferred tax balances are recorded
based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities or assets at the end of each period are
determined using the tax rate enacted under the current tax law. The measurement of net deferred tax assets is reduced by the amount of any tax benefits that, based on available evidence, are not
expected to be realized, and a corresponding valuation allowance is established.



The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations and has presented the required SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
CompensationTransition and Disclosure," pro forma disclosure in the table below.

At
December 31, 2002, the Company had stock based compensation plans, which are described separately in Note 8. The Company applies Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans, and accordingly, no compensation cost has been recognized for the Company's fixed
stock based compensation. Had

F-10

---

compensation cost been determined consistent with SFAS No. 123, as amended by SFAS No. 148, the Company's net loss would have been increased to the following pro forma amounts:

|                                                                                                                                  |                               | Year Ended December 31 |        
|--------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ---------------------- | -------
|
|Net loss, as reported                                                                                                             |                               | $                      | (49,597
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                        |                               |                        | 396    
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax of $0 |                               |                        | (6,115 
|Pro forma net income                                                                                                              |                               | $                      | (55,316
|                                                                                                                                  |                               |                        |        
|Net loss per share:                                                                                                               |                               |                        |        
|                                                                                                                                  | Basic and dilutedas reported |                        | $      
|                                                                                                                                  |                               |                        |        
|                                                                                                                                  | Basic and dilutedpro forma   |                        | $      
|                                                                                                                                  |                               |                        |        

Such
pro forma disclosures may not be representative of future compensation expense because options vest over several years and additional grants are made each year.



Basic and diluted net loss per common share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of
shares of common stock outstanding during the period. The calculation of diluted net loss per common share excludes potential common shares if the effect is antidilutive. Potential common shares are
composed of shares of common stock issuable upon the exercise of stock options and warrants. The number of potential common shares which would have been assumed to be converted in the years ended
December 31, 2000, 2001 and 2002
have a dilutive effect if the Company had income from continuing operations is 8,310,197, 5,540,056 and 6,001,324, respectively.



As it relates to the Company, components of comprehensive loss include net loss and unrealized gains and losses on available for sale securities. For the years
ended December 31, 2000, 2001 and 2002, Net loss and comprehensive loss were identical because the carrying value of the Company's available for sale securities equaled the fair market value of
such securities.



The Company's financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable and accounts payable.
The book value of cash and cash equivalents, accounts receivable, and accounts payable is considered to be representative of their fair value because of their short maturities. Short-term
investments are carried at market value.

F-11

---



Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents,
short-term investments, and accounts receivable. The Company has its cash and cash equivalents placed with high quality, creditworthy financial institutions. As part of its cash management
process, the Company performs periodic evaluation of the relative credit standing of these institutions. Credit risk on the Company's short-term investments is managed through
diversification and by investing in mortgage-backed securities issued by U.S. government agencies and high-quality corporate issuers.

Accounts
receivables consist of receivables from cable operators and TVGateway. Furthermore, a significant portion of our revenues is generated outside the U.S. The Company performs
ongoing credit evaluations of its customers' financial condition and generally requires no collateral. The Company has established allowances for potential credit losses and such losses have not
exceeded management expectations.

Accounts
receivable from major customers in excess of 10% of total accounts receivable were as follows:

|Customer |  | 2001 |   | 2002 |  
|-------- |  | ---- | - | ---- | -
|A        |  | 11   | % | 12   | %
|B        |  | 2    | % | 3    | %
|C        |  |     |   | 21   | %
|D        |  |     |   | 13   | %
|E        |  | 14   | % |     |  
|F        |  | 16   | % | 24   | %
|G        |  | 16   | % | 1    | %
|         |  |      |   |      |  
|         |  | 59   | % | 74   | %
|         |  |      |   |      |  

Sales
to major customers, in excess of 10% of total revenues, were as follows for each of the years ended December 31:

|Customer |  | 2000 |   | 2001 |   | 2002 |  
|-------- |  | ---- | - | ---- | - | ---- | -
|A        |  | 28   | % | 60   | % | 84   | %
|B        |  | 33   | % | 1    | % | 3    | %
|         |  |      |   |      |   |      |  
|         |  | 61   | % | 61   | % | 87   | %
|         |  |      |   |      |   |      |  

F-12

---

Revenues
by geographic area are attributed to the United States and to all foreign countries based on customer locations as follows:

|                                              |  | 2000 |        | 2001 |   | 2002  
|--------------------------------------------- |  | ---- | ------ | ---- | - | ------
|
|United States                                 |  | $    | 16,496 |      | $ | 12,794
|Other North America (including Latin America) |  |      | 1,897  |      |   | 659   
|South America                                 |  |      | 408    |      |   | 2,293 
|Asia                                          |  |      | 366    |      |   | 32    
|Europe                                        |  |      | 74     |      |   | 1,069 
|                                              |  |      |        |      |   |       
|Total                                         |  | $    | 19,241 |      | $ | 16,847

All
of the Company's long-lived assets are located in the United States.



The Company's growth and future success is substantially dependent upon its ability to convince cable operators to offer and continue to offer our interactive TV
products to their subscribers.

The
Company is highly reliant on two suppliers of set-top cable boxes. At present the agreements with these manufacturers do not require them to ensure compatibility of the
WorldGate technology with their current or next generation cable boxes or prohibit them from establishing relationships with the Company's competitors.



In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires, among other things,
retirement obligations to be recognized when they are incurred and displayed as liabilities, with a corresponding amount capitalized as part of the related long-lived asset. The
capitalized element is required to be expensed using a systematic and rational method over its useful life. SFAS No. 143 was adopted by the Company on January 1, 2003 and did not have an
impact on the Company's financial statements.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," effective for exit or disposal activities initiated after
December 31, 2002. SFAS No. 146 addresses the financial accounting and reporting for certain costs associated with exit or disposal activities, including restructuring actions. SFAS
No. 146 excludes from its scope severance benefits that are subject to an on-going benefit arrangement governed by SFAS No. 112, "Employer's Accounting for
Post-employment Benefits," and asset impairments governed by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 146 was
adopted by the Company on January 1, 2003 and did not have an impact on the Company's financial statements.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based compensation. The statement
amends the disclosure requirements of SFAS No.123 to require prominent disclosures in both annual and interim financial statements of the method

F-13

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of accounting for stock-based employee compensation and the effect of the methods used on reported results. While SFAS No.148 does not amend SFAS No.123 to require companies to account for employee
stock options using the fair value method, the disclosure provisions of SFAS No.148 are applicable to all companies with employee stock-based compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No.123 or the intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to Employees". The transition guidance and annual
disclosure provisions of SFAS No.148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for interim periods beginning after
December 15, 2002. We adopted the annual disclosure provisions as of December 31, 2002 and the interim disclosure provisions will be adopted during the first quarter of 2003.

In
November 2002, the FASB issued FASB Interpretation No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such
guarantee. FIN 45 also requires additional disclosure requirements about the guarantor's obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of
this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, and the disclosure requirements are effective for financial statement periods
ending after December 15, 2002. The Company is currently assessing, but at this point does not believe the adoption of the recognition and initial measurement requirements of FIN 45 will have a
material impact on the financial position, cash flows or results of operations of the Company.

In
January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 requires a variable interest to be consolidated
by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to entities created prior to January 31,
2003 in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. Management is currently assessing the impact of the new standard on our financial statements.

F-14

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3.    Inventories

Inventories as of December 31, 2001 and 2002 are summarized as follows:

|                                        |  | 2001 |       | 2002
|--------------------------------------- |  | ---- | ----- | ----
|
|Raw material                            |  | $    | 4,813 |     
|Work-in-progress                        |  |      | 19    |     
|Finished goods                          |  |      | 1,013 |     
|Inventory held by customers and vendors |  |      | 1,131 |     
|                                        |  |      |       |     
|Inventory                               |  | $    | 6,976 |     
|                                        |  |      |       |     

During
the years ended December 31, 2001 and 2002, as a response to the continued slow economy, turmoil in the cable industry and the Company's slower than expected deployment of
WorldGate's ITV
products and services, the Company periodically re-evaluated its inventory and determined that it was in excess of foreseeable needs and should be resold. The carrying values of the
inventory that were identified to be used in operations were written down to market value. Total charges to reduce the carrying amount of inventory to the lower of cost of market was $0, $1,307 and
$2,209 during the years ended December 31, 2000, 2001 and 2002, respectively.

These
non-cash charges are included in the "cost of equipment product revenues" line item on the consolidated statements of operations.

4.    Property and Equipment

Property and equipment consist of the following at December 31, 2001 and 2002:

|                                                     |                        | 2001 |       | 2002   |  
|---------------------------------------------------- | ---------------------- | ---- | ----- | ------ | -
|
|Computer equipment and internally developed software |                        | $    | 1,673 |        | $
|Office equipment                                     |                        |      | 1,267 |        |  
|Furniture and fixtures                               |                        |      | 1,335 |        |  
|Trade show exhibits                                  |                        |      | 730   |        |  
|Leasehold improvements                               |                        |      | 840   |        |  
|Capital leases:                                      |                        |      |       |        |  
|                                                     | Equipment              |      |       | 22     |  
|                                                     |                        |      |       |        |  
|                                                     |                        |      | 5,867 |        |  
|Less accumulated depreciation and amortization:      |                        |      |       |        |  
|                                                     | Property and equipment |      |       | (2,137 | )
|                                                     | Capital leases         |      |       | (20    | )
|                                                     |                        |      |       |        |  
|Property and equipment, net                          |                        | $    | 3,710 |        | $
|                                                     |                        |      |       |        |  

Depreciation
and amortization on property and equipment in the amount of $654, $1,150 and $1,158 was recorded during the three years ending December 31, 2002.

F-15

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5.    Goodwill

The Company had goodwill of $3,608 and accumulated amortization of $602 at December 31, 2001. In accordance with SFAS No. 142, no goodwill
amortization expense was recognized during the twelve month period ended December 31, 2002. During the second quarter of 2002, in an effort to cut costs and achieve operational efficiencies,
the Company commenced the termination of all personnel of the former Digital Video Art, Inc. ("DVA") who performed engineering development services. In conjunction with this action, it was
determined that the carrying amount of the Company's remaining goodwill exceeded its fair value. As such, the Company measured the impairment loss by the amount the carrying value exceeded the implied
fair value of the goodwill. The amount of the non-cash impairment loss was $3,006. The fair value of goodwill was estimated using the expected present value of future cash flows. The
change in the carrying amount of goodwill for the twelve months ended December 31, 2002, is as follows:

|                                |  | Goodwill |        | Accumulated
Amortization |   | Carrying Value |  
|------------------------------- |  | -------- | ------ | ------------------------ | - | -------------- | -
|Balance as of January 1, 2002   |  | $        | 3,608  |                          | $ | 602            |  
|Impairment loss                 |  |          | (3,608 | )                        |   | (602           | )
|                                |  |          |        |                          |   |                |  
|Balance as of December 31, 2002 |  | $        | 0      |                          | $ | 0              |  
|                                |  |          |        |                          |   |                |  

The
following table provides comparative earnings and earnings per share had the non-amortization provisions of SFAS No. 142 been adopted for the previous periods
presented:

|                                      |                       | Year Ended December 31, |        
|------------------------------------- | --------------------- | ----------------------- | -------
|
|Reported net loss                     |                       | $                       | (49,597
|Add back: Goodwill amortization       |                       |                         | 241    
|Adjusted net loss                     |                       | $                       | (49,356
|Basic and diluted earnings per share: |                       |                         |        
|                                      | Reported net loss     |                         | $      
|                                      | Goodwill amortization |                         |        
|                                      | Adjusted net income   |                         | $      

6.    Financing Agreements

At December 31, 2001, the remaining equipment notes payable balance totaled $1. This balance was paid subsequent to year end.

During
2002, the Company financed its Directors and Officers' Insurance Policy. At December 31, 2002, the remaining unpaid portion of the note payable totaled $50. This balance
was paid subsequent to year end. The weighted average interest rate on the outstanding note payable borrowing for the year ended December 31, 2002 was 4.78%.

F-16

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7.    Income Taxes

The significant components of deferred tax assets at December 31, 2001 and 2002 are as follows:

|                                                   |  | 2001 |         | 2002 |  
|-------------------------------------------------- |  | ---- | ------- | ---- | -
|
|Federal tax loss carryforward                      |  | $    | 50,741  |      | $
|State tax loss carryforward                        |  |      | 4,759   |      |  
|Property and equipment                             |  |      | 2,023   |      |  
|Research and experimentation credit                |  |      | 1,958   |      |  
|Officers' compensation, accrued expenses and other |  |      | 670     |      |  
|Bad debt expense                                   |  |      | 1,199   |      |  
|Compensation on non-qualified stock options        |  |      |        |      |  
|                                                   |  |      |         |      |  
|                                                   |  |      | 61,350  |      |  
|Less: valuation allowance                          |  |      | (61,350 | )    |  
|                                                   |  |      |         |      |  
|                                                   |  |      |        |      |  
|                                                   |  |      |         |      |  

A
valuation allowance was established against the Company's net deferred tax asset due to the Company's lack of earnings history and, accordingly, the uncertainty as to the reliability
of the asset.

In
accounting for income taxes, the Company recognizes the tax benefits from current stock option deductions after utilization of net operating loss carryforwards from operations
(i.e., net operating loss carryforwards determined without deductions for exercised stock options) to reduce income tax expense. Because stock options
deductions are not recognized as an expense for financial statement purposes, the tax benefit of stock option deductions must be credited to additional paid-in capital.

At
December 31, 2002, the Company had a net operating loss carryforward of approximately $171,822 for federal tax purposes, expiring between 2012 and 2022 if not utilized. The net
operating loss carryforward for state tax purposes is approximately $67,568, which will expire in 2012. These carryforwards may be applied as a reduction to future taxable income of the Company, if
any. The state net operating loss carryforwards are limited by state tax law to a maximum utilization of $2,000 per year. The Company also has research and experimentation credit carryforwards of
approximately $2,284, expiring between 2012 and 2022. The Company's ability to utilize its net operating loss carryforwards and credit carryforwards may be subject to annual limitations as a result of
prior or future changes in ownership and tax law as defined under Section 382 of the Internal Revenue Code of 1986. Such limitations are based on the market value of the Company at the time of
ownership change multiplied by the long-term exempt note supplied by the Internal Revenue Service.

8.    Stockholders' Equity



The Company has the authority to issue from time to time up to an aggregate of 13,500,000 shares of preferred stock in one or more classes or series and to
determine the designation and the number of
shares of any class or series as well as the voting rights, preferences, limitations and special rights, if any, of the shares of any class or series. The issuance of preferred stock may have the
effect of

F-17

---

delaying, deferring or preventing a change of control of our company. There are no shares of preferred stock outstanding.



In connection with the issuance of notes payable in March 1999 (that have since been repaid), the holders of the notes received warrants to purchase up to
331,490 shares of common stock, subject to adjustment, at an exercise price of $16.50 per share, subject to adjustment. The warrants expired unexercised in March 2002.

In
August 2000, the Company issued warrants to the TVGateway partners as part of the TVGateway Joint Venture more fully described in Note 13. These warrants may be
exercised to purchase in the aggregate up to 1,500,000 shares of common stock at an exercise price of $24.78 and up to 500,000 additional shares of common stock at an exercise price of $12.39. The
warrants are subject to vesting at varying rates based on the deployment of the Company's Internet TV service on each operator's digital cable systems. At December 31, 2002, none of the
warrants have vested.

In
November 2000, we entered into a deployment agreement with AT&T Broadband to deploy the Company's interactive services to AT&T digital customers in Cedar Falls and Waterloo,
Iowa and Tacoma, Washington. As part of this agreement, the Company issued warrants to AT&T to purchase up to 1,000,000 shares of the Company's common stock at a per share exercise price of $16.02.
The warrants are subject to vesting at varying rates based on the deployment of the Company's Internet TV service on AT&T's digital cable systems. At December 31, 2002, none of the warrants
have vested.



In December 1996, the Company adopted the 1996 Stock Option Plan ("1996 Plan"). This plan provides for the granting of stock options to officers,
directors, employees and consultants. Grants under this plan may consist of options intended to qualify as incentive stock options ("ISO s"), or nonqualified stock options that are not intended to so
qualify ("NQSOs"). The option price of any ISO will not be less than the fair market value on the date the option is granted (110% of fair value in certain instances). The option price of NQSOs may be
greater than, equal to, or less than the fair market value on the date the option is granted. The 1996 plan originally authorized a maximum of 933,333 shares of common stock.

In
May 1999 and May 2000, the Board increased the total number of shares of common stock available under the 1996 Plan to 1,600,000 and 3,200,000 shares, respectively. In
October 2000, the Company's stockholders approved these increases. In February 2001, the Board approved an automatic annual increase of shares reserved under the 1996 Plan in an amount
equal to the lesser of 4% of the then outstanding shares of the Company's common stock or 1,000,000 shares. In October 2001, the Company's stockholders approved this increase.

The
Plan is administered by a committee of the Board of Directors. The committee determines the term of each option, provided, however, that the exercise period may not exceed ten years
from the date of grant, and for ISOs, in certain instances, may not exceed five years. The options granted under this plan vest ratably over a four-year period from the date of grant.

F-18

---

Unearned
compensation expense of approximately $1,133 and $340 was recorded, for certain options which were granted to employees in 1998 and 1999, respectively, at below the estimated
fair value at the time of grant, to acquire 213,343 and 39,058 shares of common stock, respectively. The compensation expense is being recognized over a four-year vesting period. No such
options were granted during 2000, 2001 and 2002. Compensation expense of approximately $396, $388 and $192 was recognized in 2000, 2001 and 2002, respectively, related to these grants. As of
December 31, 2002, no compensation expense remains to be recognized.

On
February 15, 2001, the Company's Board of Directors approved a plan (the "Exchange Offer") pursuant to which the Company would offer its employees and directors the opportunity
to exchange all outstanding options to purchase shares of the Company's common stock granted under the Company's 1996 stock option plan having an exercise price of $5.00 or more per share (the
"eligible options") together with all options granted to holders of eligible options within the six month period prior to the expiration date of the Exchange Offer, for new options to be granted six
months and one day after the expiration of the Exchange Offer. On June 22, 2001, the Company commenced the Exchange Offer and filed with the SEC a Tender Offer Statement on Schedule TO. The
Exchange Offer expired on July 30, 2001. Pursuant to the Exchange Offer, the Company accepted for exchange options to purchase 696,359 shares of the Company's common stock, representing
approximately 21.31% of the options that were eligible to be tendered in the Exchange Offer. Subject to the terms of the Exchange Offer, on January 31, 2002 the Company granted options to
purchase an aggregate of 558,742 shares of common stock, in exchange for such tendered options, having an exercise price per share equal to the closing price of a share of the Company's common stock
as reported on the NASDAQ National Market on January 31, 2002, which was $1.9297. The Exchange Offer did not result in the recognition of compensation expense by the Company.

The
weighted-average fair value of the options granted was $14.33, $2.29 and $1.47 per option during the years ended December 31, 2000, 2001 and 2002, respectively. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes minimum value option valuation model. The
following weighted-average assumptions were used for grants in 2000, 2001 and 2002, respectively: expected volatility of 80%, 100% and 100%; average risk-free interest rates of 6.1%, 4.83%
and 4.69%; dividend yield of 0%; and expected lives of 5.5, 5.0 and 5.8 years.

F-19

---



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

|                               |  | Stock
Options |   | Weighted-Average
Exercise Price
|------------------------------ |  | ------------- | - | -------------------------------
|Outstanding, December 31, 1999 |  | 1,171,585     |   | $                              
|Granted                        |  | 1,736,663     |   | $                              
|Exercised                      |  | (127,549      | ) |                                
|Cancelled/forfeited            |  | (181,266      | ) |                                
|                               |  |               |   |                                
|Outstanding, December 31, 2000 |  | 2,599,433     |   | $                              
|                               |  |               |   |                                
|Granted                        |  | 1,456,640     |   | $                              
|Exercised                      |  | (15,449       | ) |                                
|Cancelled/forfeited            |  | (1,832,058    | ) |                                
|                               |  |               |   |                                
|Outstanding, December 31, 2001 |  | 2,208,566     |   | $                              
|                               |  |               |   |                                
|Granted                        |  | 1,548,494     |   | $                              
|Exercised                      |  |              |   |                                
|Cancelled/forfeited            |  | (755,736      | ) |                                
|                               |  |               |   |                                
|Outstanding, December 31, 2002 |  | 3,001,324     |   | $                              
|                               |  |               |   |                                

The
following table summarizes information about stock options outstanding at December 31, 2002:

|                  |  | Stock Options Outstanding |  | Stock Options Exercisable
|----------------- |  | ------------------------- |  | -------------------------
|
|$  0.49 - $  2.25 |  | 1,063,394                 |  | 8.4                      
|$  2.40 - $  3.01 |  | 1,217,626                 |  | 8.5                      
|$  4.16 - $  8.25 |  | 500,896                   |  | 7.0                      
|$16.50 - $22.88   |  | 136,186                   |  | 6.8                      
|$23.57 - $41.13   |  | 83,222                    |  | 7.4                      
|                  |  |                           |  |                          
|                  |  | 3,001,324                 |  | 8.1                      
|                  |  |                           |  |                          

For
a period of approximately three (3) weeks in May 2001, executives (including the Chief Executive Officer) were granted four options, which vest in equal installments
over a three-year period, for each share of common stock they purchased. The 4-for-1 matching grant was capped at the point

F-20

---

that the aggregate purchase price of shares bought by an executive reached one hundred thousand dollars.



In October 2001, our shareholders approved the WorldGate 2001 Employee Stock Purchase Plan that provides eligible participants with the opportunity to
periodically acquire shares of our common stock through payroll deductions. Eligible participants may contribute up to fifteen percent of their compensation towards the purchase of our common stock.
At the end of each calendar quarter, the contributions of the participants are used to purchase shares of the Company's common stock at the lower of eighty-five percent of the market price
of our common stock: (i) at the beginning of each calendar quarter or (ii) at the end of each calendar quarter. A maximum of 750,000 shares of the Company's common stock (plus an annual
increase of 375,000 shares) may be purchased in the aggregate by participants in the Stock Purchase Plan.

During
2001 and 2002, the Company sold 10,697 and 12,668 shares of common stock under the Stock Purchase Plan for proceeds of $31 and $15, respectively.

9.    Agreement with Argentine customer

In 2001, the Company sold $742 worth of deployment equipment, keyboards and other items to a cable operator in Argentina who at the time, was not experiencing
economic difficulties. Shortly after the sale, the country of Argentina encountered economic difficulties that adversely affected our Argentine customer's financial position. Our Argentine customer
made a $400 payment on the equipment purchased but was having difficulties satisfying the remaining unpaid portion of their invoice. During the second quarter of 2002, after further negotiations with
our Argentine customer, the Company believed that the best course of action to salvage value from the remaining $342 unpaid balance was to agree to a cash payment of $55, take back a portion of the
keyboards previously sold worth $150 which was recorded as a reduction in revenues, and write off the remaining unsatisfied portion of their invoice of $137 through general and administrative expense.
The keyboards taken back from our customer can be resold to other cable operators in Spanish speaking countries. It is not a normal policy or practice of the Company to take back inventory previously
sold; it was done only due to the extenuating circumstances. Our Argentine customer has made the cash payment stipulated in the agreement and is now paying their monthly service fees on a regular
basis.

F-21

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10.    Net Loss Per Share

The following table is a reconciliation of the numerators and denominators of the basic and diluted per share computations:

|                                       |  | Years Ended December 31 |           
|-------------------------------------- |  | ----------------------- | ----------
|
|Net loss                               |  | $                       | (49,597   
|                                       |  |                         |           
|Basic loss per average common share:   |  |                         |           
|Weighted average shares outstanding    |  |                         | 22,246,143
|Net loss                               |  | $                       | (2.23     
|Diluted loss per average common share: |  |                         |           
|Weighted average shares outstanding    |  |                         | 22,246,143
|Net loss                               |  | $                       | (2.23     

11.    Commitments and Contingencies



The Company has entered into non-cancelable operating leases for its office facilities and certain equipment.

The
future minimum rental commitments under non-cancelable capital leases and operating leases for each fiscal years ended December 31 are as follows:

|Fiscal Year |  | (Dollars in Thousands)
|----------- |  | ----------------------
|2003        |  | $                     
|2004        |  |                       
|2005        |  |                       
|2006        |  |                       
|2007        |  |                       
|Thereafter  |  |                       
|            |  |                       
|            |  | $                     
|            |  |                       

Total
rent expense for operating leases for the years ended December 31, 2000, 2001 and 2002 amounted to approximately $1,361, $1,785 and $1,442, respectively.

See
Note 13 regarding the commitments the Company has in its agreements with certain cable operators.

12.    Related Party Transactions

In 1997, the Company entered into an affiliation agreement with a cable operator who is an investor. Revenues recognized from this investor were approximately
$6,362, $242 and $387 for the years ended December 31, 2000, 2001 and 2002, respectively. Accounts receivable amounted to approximately $73 and $97 at December 31, 2001 and 2002,
respectively.

F-22

---



12.    Related Party Transactions (Continued)

The
Company has agreements with some investors to provide engineering and development support. As a result of these agreements, the Company has expensed approximately $7,499, $1,379 and
$1,837 for the years ended December 31, 2000, 2001 and 2002, respectively. Accounts payable amounted to approximately $733 and $468 at December 31, 2001 and 2002, respectively. These
stockholders are suppliers of technology and components for the Company's products and services. The agreements the Company has with these investors provide for licensing of technology, as well as
contracted services, including hardware and software development, product testing and certification, and the creation and development of tools and systems to facilitate the Company's engineering
efforts. These agreements do not provide for ongoing royalties, purchase provisions, or for any requirement to provide additional funding to the Company.

In
1998, the Company entered into a leasing arrangement for a building with an entity formed by non-employee investors. Included in Deposits and other is approximately $900
related to this lease.

13.    TVGateway Joint Venture and Related Cable Operator Agreements



On July 24, 2000, the Company formed a separate joint venture, TVGateway, LLC, with four cable operators.

As
part of this venture WorldGate entered into a management agreement with TVGateway to provide engineering, operations and administrative support services. In addition to providing for
the terms and conditions under which such services were to be provided the management agreement contained a provision providing for WorldGate and TVGateway to cooperate to transition to TVGateway some
or all of the support services being provided by WorldGate and/or the employees providing these services. In addition, this provision required WorldGate to remain available to provide support services
until July 24, 2005. During 2002 WorldGate and TVGateway agreed to commence the transition of services pursuant to this provision. In addition, the parties agreed that the management agreement
shall be of no further force and effect with respect to the services that are transferred as of the completion of the specific transfers. The companies substantially completed this transition in first
quarter 2003 and accordingly, WorldGate has now been relieved of any continuing obligation to provide such transitioned services.

As
part of its settlement with TVGateway the Company received from TVGateway a cash payment of $2,400. This amount largely comprises payment of receivables balance as of
December 31, 2002 in the amount of $1,089, payment of January 2003 service fees in the amount of $300 and other payments largely related to our January 2003 sale of certain
equipment and inventory in the approximate amount of $1,000.

Charges
for such services, which are included in service fee revenue, totaled $5,344, $9,982, and $11,484 for the years ended December 31, 2000, 2001 and 2002, respectively. In
addition, product sales to TVGateway totaled $70, $961, and $92 for the years ended December 31, 2000, 2001 and 2002, respectively. Accounts Receivable from TVGateway amounted to $559 at
December 31, 2001 and $1,089 at December 31, 2002. WorldGate is accounting for its 22% investment in the joint venture under the equity method.

F-23

---

The
Company's share of TVGateway losses to date have exceeded our investment, and given that the Company is not contemplating additional investment in TVGateway, nor is there any
requirement for WorldGate to invest further in TVGateway, we do not foresee any additional losses to the Company as a result of growing TVGateway losses. TVGateway continues to develop the guide
products and it is envisioned that the partner MSOs will deploy the product though it is unclear as to when this might happen and the level of deployment the MSOs will commit to TVGateway. It should
also be understood that the cable operators continue to use competitive guide products and there is no certainty that they will convert some of these competitive products to TVGateway. TVGateway is
fully
dependent on funding from its MSO owners and to the extent one or more of the partners decides not to provide additional funding this could impact on the viability of TVGateway.

Summarized
financial information for the Company's investment in the TVGateway joint venture, accounted under the equity method is summarized below:

|TVGateway LLC       |  | 2001 |       | 2002
|------------------- |  | ---- | ----- | ----
|
|Total assets        |  | $    | 5,314 |     
|Current liabilities |  |      | 129   |     
|Members' interest   |  | $    | 5,185 |     

|                     |  | Year Ended December 31, |       
|-------------------- |  | ----------------------- | ------
|
|
|
|Net sales            |  | $                       | 2     
|Loss from operations |  |                         | (5,381
|Net loss             |  | $                       | (5,287

During
the second quarter of 2002, Adelphia Communications, Inc., one of the cable operator joint venture partners, filed a voluntary petition for relief under Chapter 11 of the
U.S. Bankruptcy Code. As such, this may affect its ability to participate in future additional capital contributions to the joint venture. The joint venture partners are not obligated to continue
funding TVGateway.



Concurrent with the formation of the TVGateway joint venture, the Company entered into multi-year agreements with four cable operators for the digital
deployment of the Company's ITV- service to a predetermined number of households. In addition to the deployment agreements, the cable providers purchased an aggregate of 1,531,211 shares
of the Company's Common Stock yielding proceeds to the Company of $24,530. These same cable operators were issued warrants to purchase additional shares of Common Stock which will vest at varying
rates based on the deployment of the Company's ITV-SM- service on the cable operator's digital cable system.

Furthermore,
the Company entered into a supply agreement with the cable operators whereby the Company agreed to supply these cable operators, on a pro rata basis, products that pertain
to the development and deployment of the WorldGate service. The Company initially recorded a liability in

F-24

---

the amount of $5,110 related to this obligation. The recorded amount was based on the Company's best estimate of what it would cost to satisfy the contractual obligation to the various cable
operators. The Company's policy has been not to adjust the liability after it had been established. Any future change in the contractual obligation liability would be a reclassification to additional
paid in capital. When equipment credits are utilized by the cable operators, the value of the equipment is reflected in its entirety in the cost of revenues. The equipment credit expires on
August 24, 2003. At December 31, 2002, the Company had a remaining liability of $3,283 for the anticipated cost of satisfying this obligation.

In
December 2002, WorldGate entered into a settlement agreement with CoxCom, Inc., of the cable operator joint venture partners, stemming from a Term Sheet entered into by
the two parties on July 24, 2000 whereby, among other things, CoxCom had agreed to make the WorldGate service available to a specified number of two-way interactive digital homes
passed. As the cable operator had not complied and no longer intended to comply with the provisions in the Term Sheet, a settlement was reached between the two parties whereby the cable operator paid
the Company $300 in cash, returned 500,000 shares of common stock of WorldGate that it previously purchased, and cancelled their right to the
remaining unused portion of the above-mentioned equipment credit. The cash received has been recorded as other income and the common stock returned is reflected in treasury stock. The Company also
reduced its contractual liability in the amount of $801 (with an offsetting entry to additional paid in capital) due to the operator's cancellation of their right to the equipment credit.

14.    Digital Video Art, Inc. Acquisition

On April 28, 2000, the Company completed the acquisition of Digital Video Art, Inc. ("DVA"), a Campbell, California based engineering services
operation providing out-sourced product development, with expertise in digital television and 3D graphics.

The
total purchase consideration of $3,977 consisted of 119,000 shares of Common Stock with a value of $2,500, assumption of obligations totaling $1,332, and acquisition costs of $145.
The purchase consideration of the acquired assets and assumed liabilities were allocated based on fair values as follows:

|Assets acquired              |  | $ | 582   |  
|---------------------------- |  | - | ----- | -
|Liabilities assumed          |  |   | (213  | )
|Goodwill                     |  |   | 3,608 |  
|                             |  |   |      
|Total purchase consideration |  | $ | 3,977 |  
|                             |  |   |      

In
addition, the total purchase price included $4,174 in contingent consideration which became determinable during the fourth quarter of 2000. The Company expensed this contingent
consideration as compensation in engineering and development expense.

During
March 2001, the Company placed $4,424 into an escrow account for the payment of this contingent consideration and the remainder of the then outstanding purchase
consideration. In April 2001, the Company began making payments from the escrow fund to the DVA shareholders of $3,225, of which $2,836 was paid in cash and $390 was paid by delivery of 231,000
shares of common

F-25

---

stock, leaving $1,199 remaining in the escrow account as of September 30, 2001. The remaining obligation of the Company to DVA in the amount of $1,199 was paid by the Company in cash in
October 2001. During all of 2001, the above amounts included, the Company paid $5,134 in cash and $390 in stock to satisfy their liability to the DVA shareholders.

15.    Employee Benefit Plan

In 2000, the Company established a Retirement Savings Plan that is funded by the participant's salary reduction contributions. All employees of the Company are
eligible to participate in the plan upon joining the Company. The plan is intended to permit any eligible employee who wishes to participate to contribute up to 12% of the employee's compensation on a
before-tax basis under Section 401(k) of the Internal Revenue Code. The plan provides for discretionary Company matching contributions and discretionary Company profit-sharing
contributions. Contributions are invested, in such proportions as the employee may elect in any of 10 mutual investment funds. In 2001 and 2002, the Company made no discretionary profit-sharing
contributions to the plan.

16.    Supplemental disclosure of cash flow information

|                                                                                                     |  | Year ended December 31,
|---------------------------------------------------------------------------------------------------- |  | -----------------------
|
|
|Cash paid for interest                                                                               |  | $                      
|                                                                                                     |  |                        
|Non-cash investing and financing activities:                                                         |  |                        
|Issuance of common stock for Acquisition of business.                                                |  | $                      
|Issuance of notes payable for acquisition of business                                                |  |                        
|Establishment of contractual obligation related to equity financing                                  |  |                        
|Utilization of contractual obligation related to equity financing                                    |  |                        
|Settlement of contractual obligation related to equity financing                                     |  |                        
|Acquisition of treasury stock resulting from settlement of contractual obligation                    |  |                        
|Issuance of common stock in payment of notes payable to DVA shareholders                             |  |                        
|Increase in notes payable to DVA shareholders from reduced valuation realized on common stock issued |  |                        
|Issuance of notes payable for Directors and Officers' insurance policy                               |  |                        

17.    Recent Developments

The Company filed a registration statement with the Securities and Exchange Commission on September 16, 2002 relating to a proposed distribution to its
shareholders of subscription rights to purchase additional shares of common stock and warrants of the Company. The timing of any rights offering will, however, be dependent upon an evaluation of our
stock price and other material factors. If the Company elects to proceed with the offering it is anticipated that each right will entitle the holder to purchase one share of the Company's common stock
and a warrant to purchase one share of common stock at a subscription price to be determined. The Company does not know when the registration statement will be declared effective and there is no
guarantee as to the level of the

F-26

---

participation or the amount of the proceeds, if any, to be received in connection with the rights offering.

Supplemental Quarterly Data (unaudited):

|                                            |  | First |         | Second |   | Third  |   | Fourth |       
|------------------------------------------- |  | ----- | ------- | ------ | - | ------ | - | ------ | ------
|
|2002                                        |  |       |         |        |   |        |   |        |       
|Net revenues                                |  | $     | 3,176   |        | $ | 3,917  |   | $      | 4,296 
|Loss from operations                        |  |       | (4,220  | )      |   | (9,484 | ) |        | (3,160
|Net loss                                    |  |       | (4,155  | )      |   | (9,479 | ) |        | (3,163
|Basic and diluted net loss per common share |  |       | (0.18   | )      |   | (0.40  | ) |        | (0.13 
|2001                                        |  |       |         |        |   |        |   |        |       
|Net revenues                                |  |       | 4,080   |        |   | 4,776  |   |        | 3,795 
|Loss from operations                        |  |       | (9,897  | )      |   | (9,078 | ) |        | (7,575
|Net loss                                    |  |       | (10,587 | )      |   | (8,803 | ) |        | (7,408
|Basic and diluted net loss per common share |  |       | (.45    | )      |   | (.38   | ) |        | (.31  

F-27

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

None

PART III

Item 10. Directors and Executive Officers of the Registrant.

As of December 31, 2002 the executive officers and directors were as follows:

|Name                       |  | Age |  | Position(s)                                                   
|-------------------------- |  | --- |  | --------------------------------------------------------------
|Hal M. Krisbergh(1)        |  | 55  |  | Chairman of the Board of Directors and Chief Executive Officer
|Gerard K. Kunkel           |  | 44  |  | President                                                     
|Joel Boyarski              |  | 56  |  | Vice President, Chief Financial Officer                       
|Joseph E. Augenbraun       |  | 38  |  | Chief Technology Strategist                                   
|Randall J. Gort            |  | 53  |  | Chief Legal Officer and Secretary                             
|James E. McLoughlin        |  | 49  |  | Vice President, Account Development and Marketing             
|Richard Westerfer          |  | 44  |  | Chief Operations Officer                                      
|Steven C. Davidson(2)      |  | 50  |  | Director                                                      
|Clarence L. Irving, Jr.(1) |  | 46  |  | Director                                                      
|Martin Jaffe(2)            |  | 57  |  | Director                                                      
|Jeff Morris(1)             |  | 50  |  | Director                                                      
|Lemuel Tarshis(2)          |  | 61  |  | Director                                                      

---

Hal M. Krisberghhas served as our Chairman and Chief Executive Officer since our inception in March 1995. From
September 1981 to September 1994, Mr. Krisbergh was an executive officer of General Instrument (now a part of Motorola, Inc.). Mr. Krisbergh served as President of
General Instrument's Communications Division and, for the past 17 years, has been a well-known figure in the cable industry. He is a recognized leader in the development of
addressable cable boxes, impulse pay-per-view, opto-electronics and digital audio technologies. In 1991, Mr. Krisbergh received cable television's
prestigious Vanguard award. Prior to joining General Instrument, Mr. Krisbergh was employed by W. R. Grace & Co., Deloitte & Touche and Raytheon Company.

Gerard K. Kunkeljoined our company in February 1997, and was named President in August 2001. As President,
Mr. Kunkel is responsible for the day-to-day operations of our ITV products and services business. Prior to becoming President Mr. Kunkel served as Vice
President, Strategic Programs and later as Senior Vice President, Sales and Marketing. From May 1995 to February 1997, Mr. Kunkel was President of Broadband Applications
Development Company, a developer of backoffice solutions for
interactive television. From March 1993 to April 1995, he served as Vice President, Product Development of StarNet, Inc., a cable television technology and services company. From
June 1991 to March 1993, Mr. Kunkel was President of The Kunkel Group. From May 1984 to June 1991, Mr. Kunkel was Director of Design and Electronic Publishing
for PC MAGAZINE. For the period 1977 through 1984, Mr. Kunkel was an award winning art director for various New York City based magazines.

Joel I. Boyarskijoined our company in October 1999 and was named Vice President and Chief Financial Officer in
September 2002. Prior to becoming Vice President and Chief Financial Officer, Mr. Boyarski served as General Manager of TVGateway, LLC from December 2001 until

32

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September 2002 and as Vice President of Business Development for TVGateway, LLC from June 2000 until December 2001. From October 1999 to June 2000, he served as a
consultant for our company. Prior to joining us, Mr. Boyarski was a business and financial consultant from June 1998 to October 1999, and for 23 years prior to
June 1998, he held a variety of management positions at Joseph E. Seagram and Sons, Inc., including Vice President of Finance and Business Planning for several of Seagram's Domestic and
International divisions including North America, Asia Pacific and Global Duty Free.

Joseph E. Augenbraunjoined our company in August 1995, and in February 2002, was named our Chief Technology Strategy
Officer. During his tenure at our company, Mr. Augenbraun also served from August 1995 to January 1998 as Director of Subscriber Systems, from January 1998 to
June 2000 as Vice President of Engineering and from June 2000 to February 2002 as Senior Vice President of Engineering. From August 1992 to August 1995,
Mr. Augenbraun was a researcher for Hitachi's HDTV Advanced Television and Systems Laboratory. From November 1987 to August 1992, Mr. Augenbraun was on the engineering
staff at Commodore-Amiga Inc. where he served in various capacities including Project Manager on the Amiga 1500 Computer System and lead designer in ASIC development.

Randall J. Gortjoined our company in August 1997 as Vice President, Legal and Corporate Affairs, General Counsel and Secretary. In
January 2003 Mr. Gort became the Company's Chief Legal Officer. From July 1995 to August 1997, Mr. Gort was General Counsel, Secretary, and Director of Legal and
Corporate Affairs for Integrated Circuit Systems, Inc. Mr. Gort was in private practice from August 1994 through June 1995. Prior to that time, from May 1987 through
July 1994, he was an Associate General Counsel for Commodore International Ltd. Mr. Gort was with Schlumberger Ltd. from October 1982 through early 1987, originally
as Senior Attorney and then as General Counsel, FACTRON Division. From April 1979 through October 1982, Mr. Gort was Counsel for various divisions of the 3M Company, including
Medical and Surgical Products Divisions, Orthopedic Products Division, Electro-Mechanical Resources Division and 3M's four tape divisions.

James E. McLoughlinjoined our company in February 2001 and in January 2002 was named Vice President, Marketing, Business
and Account Development. Prior to this position, Mr. McLoughlin served as Vice President, Sales and Marketing. From February 1981 through February 2001, Mr. McLoughlin was
Vice President, Affiliate Operations for Home Box Office, where he was responsible for sales and marketing of premium television services to affiliated cable television companies.

Richard Westerferjoined our company in February 2000 as Vice President of Engineering. In December of 2000, Mr. Westerfer
became Senior Vice President of Operations. He served in this position until April 2002, when he became Chief Operations Officer of WorldGate. Prior to joining us, from 1979 to
February 2000, Mr. Westerfer served as the Senior Director of Engineering for General Instruments (now a part of Motorola, Inc.).

Steven C. Davidsonhas been a member of our board of directors since April 2002. From 1979 until his retirement in
April 2002, Mr. Davidson held various executive positions with HBO, Inc., most recently serving as senior vice president and general manager of affiliate operations.

Clarence L. Irving, Jr.has been a member of our board of directors since July 2000. He has been President and Chief Executive
Officer of Irving Information Group, a consulting services firm, since October 1999 and has served as a director of Covad Communications Group, Inc. since April 1999. On
August 15, 2002, Covad Communications Group, Inc. filed a voluntary petition for relief under Chapter 11 of the Federal bankruptcy code in the United States Bankruptcy Court for the
District of Delaware. Mr. Irving served as Assistant Secretary of Commerce to the United States Department of Commerce from June 1993 to October 1999.

33

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Martin Jaffehas been a member of our board of directors since April 2002. Since January 2002, Mr. Jaffe has been the
Chief Operating Officer, Managing Director and Founder of Silvercrest Asset Management Corporation. From November 2000 until September 2001, Mr. Jaffe was Chief Financial Officer
of Credit Suisse Asset Management Corporation, and from 1981 until November 2000, Mr. Jaffe was Chief Operating Officer of Donaldson, Lufkin & Jenrette Asset Management Group.

Jeff Morrishas been a member of our board of directors since April 2001. Since April 2001, Mr. Morris has been the
President of Digital Media Consulting, a new media consulting company. From July 2000 to April 2001, he was President and Chief Executive Officer of Yack, Inc., an Internet events
and program guide. Mr. Morris is a veteran of the cable television industry, including a fifteen-year tenure from 1984 through 2000 at Showtime Networks, Inc., where his last
position was Senior Vice President of New Media and Technology Development.

Lemuel Tarshishas been a member of our board of directors since April 2001. Since August 1991, Dr. Tarshis has been
a director for the Alliance for Technology Management at the Stevens Institute of Technology. In addition, he recently worked as a consultant for Lucent Technologies Inc., Tyco International
(US) Inc., GTECH, Inc., AT&T Corporation, Aequus Technologies, LLC and Verizon Communications, Inc.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than 10% of our
common stock (collectively, the "reporting persons") to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish us with copies of these reports.
Based solely on our review of those documents received by us, and written representations, if any, received from reporting persons with respect to the filing of reports on Form 3, 4 and 5, we
believe that all filings required to be made by the reporting persons for fiscal year 2002 were made on a timely basis.

Item 11. Executive Compensation.

The following table sets forth information concerning compensation paid with respect to our chief executive officer and four other most highly compensated
officers who were serving as such as of

34

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December 31, 2001, each of whose aggregate compensation for fiscal 2001 exceeded $100,000, for services rendered in all capacities for us and our subsidiaries.

SUMMARY COMPENSATION TABLE  FISCAL YEARS 2002, 2001 and 2000

|                                                      |  |                |  | Annual Compensation |                         | Long Term Compensation Awards
|----------------------------------------------------- |  | -------------- |  | ------------------- | ----------------------- | -----------------------------
|
|Hal M. Krisbergh
Chairman and Chief Executive Officer |  | 2000
2001
2002 |  | $$$                 | 337,080
337,080
337,080 |                              
|Gerard K. Kunkel
President                            |  | 2000
2001
2002 |  | $$$                 | 175,280
212,036
250,962 |                              
|Richard Westerfer
Chief Operations Officer            |  | 2000
2001
2002 |  | $$$                 | 132,693
184,500
214,616 |                              
|Joseph E. Augenbraun
Chief Technology Strategist      |  | 2000
2001
2002 |  | $$$                 | 177,660
190,800
197,750 |                              
|Randall J. Gort
Chief Legal Officer                   |  | 2000
2001
2002 |  | $$$                 | 171,774
187,650
200,769 |                              

We
have established a bonus plan which provides for the payment of bonuses to executive officers and other employees based upon the performance of WorldGate, the performance of the
business division of which the officer or employee is a member and the performance of the officer or employee. Under this plan, we generally assess the prior year's performance and makes bonus
payments during the first calendar quarter of each year.

We
have a Retirement Savings Plan that is funded by the participants' salary reduction contributions. All our employees are eligible to participate in the plan upon joining WorldGate.
The plan is intended to permit any eligible employee who wishes to participate to contribute up to 12% of the employee's compensation on a before-tax basis under Section 401(k) of
the Internal Revenue Code, subject to certain limitations. The plan provides for discretionary Company matching contributions that are to be made in proportion to each employee's contribution as well
as discretionary Company profit-sharing contributions, subject to certain limitations. Discretionary Company matching contributions and profit-sharing contributions vest based upon the employee's
length of service and are payable upon an employee's retirement, death, disability or termination of employment or, under specified circumstances, upon an employee's immediate and heavy financial
emergency. Contributions are invested, in such proportions as the employee may elect in any of 10 mutual investment funds. In 2002, we made no discretionary profit-sharing contributions to the plan.

In
addition to salary and bonus compensation, we have a stock option plan, the WorldGate 1996 Stock Option Plan. The Option Plan provides for the granting of awards to such officers,
other employees, consultants and directors of WorldGate and our affiliates as the Compensation Committee may determine from time to time. Generally, outstanding options vest in equal installments over
a four-year period, but in no event may an option be exercised more than ten years following the date of

35

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its grant, subject to acceleration in the event of some changes of control of WorldGate. On October 5, 2000, our shareholders approved an increase in the total number of our shares of common
stock available under the plan to 3,200,000. On October 5, 2001, our shareholders approved an automatic annual increase of shares reserved under the 1996 Plan in an amount equal to the lesser
of 4% of the then outstanding shares of the Company's common stock or 1,000,000 shares.

The
Compensation Committee has the authority to administer the stock option plan and to exercise all the powers and authorities either specifically granted to it under, or necessary or
advisable in the administration of, the stock option plan, including, without limitation, the authority to grant awards; to determine the persons to whom and the time or times at which awards shall be
granted; to determine the type and number of awards to be granted, the number of shares of common stock to which an award may relate and the terms, conditions, restrictions and performance goals
relating to any award; to determine whether, to what extent, and under what circumstances an award may be settled, canceled, forfeited, exchanged, or surrendered; to make adjustments in the
performance goals in recognition of unusual or non-recurring events affecting WorldGate or the financial statements of WorldGate (to the extent not inconsistent with Section 162(m)
of the Code, if applicable), or in response to changes in applicable laws, regulations, or accounting principles; to construe and interpret the stock option plan and any award; to prescribe, amend and
rescind rules and regulations relating to the stock option plan; to determine the terms and provisions of agreements evidencing awards; and to make all other determinations deemed necessary or
advisable for the administration of the stock option plan.

The
purchase price per share payable upon the exercise of an option (the "option exercise price") will be established by the Compensation Committee, provided, however, that Incentive
Stock Options may not have an option exercise price less than the fair market value of a share of common stock on the date of grant. The option exercise price is payable by any one of the following
methods or a combination thereof, to the extent permitted by the Compensation Committee:



The
board of directors or the Compensation Committee may suspend, revise, terminate or amend the stock option plan at any time, provided, however, that:



On
October 5, 2001, our shareholders approved the WorldGate 2001 Employee Stock Purchase Plan. The Stock Purchase Plan provides our eligible employees with the opportunity to
periodically acquire shares of our common stock through payroll deductions. In general, the Stock Purchase Plan provides that:



36

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As
part of our philosophy that increased ownership of equity in WorldGate facilitates greater alignment of executive interests with shareholder interests, the Compensation Committee, in
consultation with outside compensation advisors, instituted a special short-term program to incentivize executives to purchase our common stock on the open market. For a period of
approximately three (3) weeks in May 2001, executives (including the Chief Executive Officer) were granted four options, which vest in equal installments over a three-year
period, for each share of common stock they purchased. The 4-for-1 matching grant was capped at the point that the aggregate purchase price of shares bought by an executive
reached $100,000.

The
following table presents information regarding options granted to our named executive officers during fiscal 2002 to purchase shares of our Common Stock. In accordance with SEC
rules, the table shows the hypothetical "gains" or "option spreads" that would exist for the respective options based on assumed rates of annual compound stock price of 5% and 10% from the date the
options were granted over the full option term.

Options/SAR Grants in Last Fiscal Year

|                                                      |  | Individual Grants |  | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
|----------------------------------------------------- |  | ----------------- |  | ----------------------------------------------------------------------------------------------
|
|Hal M. Krisbergh
Chairman and Chief Executive Officer |  | 80,000            |  | 5.2                                                                                           
|Gerard K. Kunkel
President                            |  | 24,000            |  | 1.6                                                                                           
|Richard Westerfer
Chief Operations Officer            |  | 49,000            |  | 3.2                                                                                           
|Joseph E. Augenbraun
Chief Technology Strategist      |  | 24,000            |  | 1.6                                                                                           
|Randall J. Gort
Chief Legal Officer                   |  | 24,000            |  | 1.6                                                                                           

37

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The following table shows the number of shares of common stock subject to exercisable and unexercisable stock options held by each of the named executive officers as of
December 31, 2002. The table also reflects the values of such options based on the positive spread between the exercise price of such options and $0.42, which was the per share closing sales
price reported on the NASDAQ National Market on December 31, 2002.

Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option SAR Values

|Name                                                  |  | Shares acquired on exercise (#) |  | Value Realized ($) |  | Number of securities underlying unexercised options/SARS at fiscal year end (#) Exercisable/Unexercisable |  | Value of unexercised in-the-money options/SARS at fiscal year end ($) Exercisable/Unexercisable
|----------------------------------------------------- |  | ------------------------------- |  | ------------------ |  | --------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------
|Hal M. Krisbergh
Chairman and Chief Executive Officer |  |                                |  |                   |  | 63,334/196,666                                                                                            |  | 0/0                                                                                            
|Gerard K. Kunkel
President                            |  |                                |  |                   |  | 130,081/140,918                                                                                           |  | 0/0                                                                                            
|Richard Westerfer
Chief Operations Officer            |  |                                |  |                   |  | 77,835/134,832                                                                                            |  | 0/0                                                                                            
|Joseph E. Augenbraun
Chief Technology Strategist      |  |                                |  |                   |  | 62,666/86,667                                                                                             |  | 0/0                                                                                            
|Randall J. Gort
Chief Legal Officer                   |  |                                |  |                   |  | 63,666/87,667                                                                                             |  | 0/0                                                                                            

Compensation of Directors

We adopted a new director compensation plan commencing in 2001. Pursuant to the new director plan, non-employee directors, currently
Messrs. Davidson, Jaffe, Irving, Morris and Tarshis, will receive an annual stock grant of 6,500 shares, vesting in equal amounts over four years, issued at the fair market value on the date of
grant, and a stipend of $1,000 for each board or committee meeting the director attends in person. We will continue to reimburse non-employee directors for reasonable travel expenses for
attending board or committee meetings.

Prior
to the adoption of the new director plan, on July 26, 2000, we granted to Mr. Irving options to purchase 25,000 shares of common stock at an exercise price of $28.375
per share. In addition, upon becoming a director, we granted to Messrs. Davidson, Jaffe, Morris and Tarshis options to purchase 20,000 shares of common stock. These options were issued at the
fair market value on the date of their appointment as a director. These options will vest in four equal installments on the anniversary of the grant date. Other than Messrs. Davidson, Jaffe,
Irving, Morris and Tarshis, no other board member was reimbursed for his travel and other expenses or compensated for his service on the board.

Compensation Committee Interlocks and Insider Participation

The Compensation and Stock Option Committee (the "Compensation Committee") is currently composed of Messrs. Krisbergh, Morris and Irving. The Compensation
Committee makes recommendations to the board concerning the compensation and benefits programs for its directors, officers and employees, including all options granted under the Company's option plan.
With the exception of Mr. Krisbergh, no member of the Compensation Committee is an officer or employee of the Company. Mr. Krisbergh does not, however, participate in the determination
of his own compensation.

38

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Item 12.    Security Ownership of Certain Beneficial Owners and Management.

The following table sets forth information as of December 31, 2002 regarding securities authorized for issuance under the Company's equity compensation
plans:

Equity Compensation Plan Information

|Plan Category                                              |  | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a) |  | Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) |  | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a)
(c)
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     |  | 2,896,702                                                                                       |  | 3.73                                                                            |  | 1,762,314                                                                                                                                     
|Equity compensation plans not approved by security holders |  |                                                                                                |  |                                                                                |  |                                                                                                                                              

The
following table sets forth information as of January 9, 2003 regarding beneficial ownership of our common stock by the following persons:



Unless
otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is
shared by spouses under applicable law. Beneficial ownership is determined in accordance with the rules of the SEC, based on factors including voting and investment power with respect to shares,
subject to applicable community property laws. Shares of common stock subject to options or warrants exercisable within 60 days of January 9, 2003 are deemed outstanding for the purpose
of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for

39

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computing the percentage ownership of any other person. Unless otherwise indicated, the mailing address of the beneficial owners is 3190 Tremont Avenue, Suite 100, Trevose, Pennsylvania 19053.

|Name of Beneficial Owner                                                |  | Number of Shares of Common Stock Beneficially Owned |  | Percent of Ownership |  
|----------------------------------------------------------------------- |  | --------------------------------------------------- |  | -------------------- | -
|Hal M. Krisbergh(1)                                                     |  | 5,921,371                                           |  | 25.06                | %
|Joseph E. Augenbraun(2)                                                 |  | 327,208                                             |  | 1.4                  |  
|Randall J. Gort(3)                                                      |  | 278,128                                             |  | 1.2                  |  
|Gerard K. Kunkel(4)                                                     |  | 130,081                                             |  | *                    |  
|Richard Westerfer(5)                                                    |  | 77,835                                              |  | *                    |  
|Steven C. Davidson                                                      |  | 2,000                                               |  |                      |  
|Martin Jaffe                                                            |  | 0                                                   |  |                      |  
|Clarence L. Irving, Jr.(6)                                              |  | 14,125                                              |  | *                    |  
|Jeff Morris(7)                                                          |  | 7,334                                               |  | *                    |  
|Lem Tarshis(8)                                                          |  | 23,867                                              |  | *                    |  
|                                                                        |  |                                                     |  |                      |  
|All current directors and executive officers as a group (12 persons)(9) |  | 6,832,317                                           |  | 28.4                 | %
|                                                                        |  |                                                     |  |                      |  

---

Item 13. Certain Relationships and Related Transactions.

Stockholders' Agreement.Certain stockholders of WorldGate, including Messrs. Krisbergh and Wachob, and some other
management personnel of WorldGate, are parties to a stockholders' agreement. Pursuant to the stockholders' agreement certain stockholders had the right to appoint members to our board of directors as
follows:

40

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The
material provisions of the stockholders' agreement, including the right to designate members of our board of directors, terminated upon the consummation of our initial public offering in
April 1999, except for the registration rights provided in the stockholder's agreement. Our Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock and the Series C Convertible Preferred Stock converted in our common stock upon the consummation of our initial public offering.

Item 14. Controls and Procedures.

As of a date within 90 days of the filing date of this annual report, an evaluation of the effectiveness of the Company's disclosure controls and
procedures was performed under the supervision and with the participation of the Company's management, including the chief executive officer and the chief financial officer. Based on that evaluation,
the Company's management, including the chief executive officer and chief financial officer, concluded that the Company's disclosure controls and procedures were effective as of the evaluation date.

Subsequent
to the evaluation date, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls.

In
accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as amended by Section 202 of the Sarbanes-Oxley Act of 2002, the Company is required to
disclose the approval by the Audit Committee of the Board of Directors of non-audit services to be performed by PricewaterhouseCoopers LLP, the Company's independent auditors. Non-audit services are
services other than those provided in connection with an audit or review of the financial statements. During the period covered by this filing, the Audit Committee approved non-audit services,
including (1) tax compliance assistance; (2) tax consultation and (3) tax support and compensation and administrative services.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

The
following financial statements have been included as part of this report:

Report of PricewaterhouseCoopers LLP, Independent Accountants

F-2Consolidated Balance Sheets

F-3Consolidated Statements of Operations

F-4Consolidated Statements of Stockholders' Equity

F-5Consolidated Statements of Cash Flows

F-6Notes to Consolidated Financial Statements

F-7


41

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WORLDGATE COMMUNICATIONS, INC.  SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

|                                             |                              | Balance at
Beginning of
Year |        | Additions Charged
to Cost and
Expenses |        | Deductions
Credited to
Costs and
Expenses |        | Balance at
end of Year
|-------------------------------------------- | ---------------------------- | ---------------------------- | ------ | -------------------------------------- | ------ | ----------------------------------------- | ------ | ----------------------
|
|Allowance for doubtful accounts:             |                              |                              |        |                                        |        |                                           |        |                       
|                                             | Year ended December 31, 2000 |                              | 150    |                                        | 1,300  |                                           |        |                       
|                                             | Year ended December 31, 2001 |                              | 1,450  |                                        | 1,522  |                                           | (1,976 | )                     
|                                             | Year ended December 31, 2002 |                              | 996    |                                        | 628    |                                           | (28    | )                     
|Valuation Allowance for Deferred Tax Assets: |                              |                              |        |                                        |        |                                           |        |                       
|                                             | Year ended December 31, 1999 |                              | 15,179 |                                        | 11,587 |                                           |        |                       
|                                             | Year ended December 31, 2000 |                              | 26,766 |                                        | 20,937 |                                           |        |                       
|                                             | Year ended December 31, 2001 |                              | 47,703 |                                        | 13,647 |                                           |        |                       
|                                             | Year ended December 31, 2002 |                              | 61,350 |                                        | 8,144  |                                           |        |                       



The
following is a list of exhibits filed as a part of this annual report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are
incorporated herein by reference. For

42

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exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated parenthetically except for those situations where the exhibit number was the same as set forth
below.

|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                           
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1     |  | Amended and Restated Certificate of Incorporation.(1)                                                                                                                                                                                                                                                                                 
|3.2     |  | Amended and Restated Bylaws.(1)                                                                                                                                                                                                                                                                                                       
|10.1    |  | Lease Agreement dated October 7, 1998 between WorldGate and Balanced Capital LLC, as amended by First Amendment to Lease Agreement dated December 7, 1998 between WorldGate and Balanced Capital LLC, as further amended by
Second Amendment to Lease Agreement dated December 17, 1998 between WorldGate and Balanced Capital LLC.(2)
|10.2    |  | Development Agreement dated October 15, 1998 between WorldGate and Scientific-Atlanta, Inc.(2)(3) (filed as Exhibit 10.4 to the IPO Registration Statement)                                                                                                                                                                           
|10.3    |  | Memorandum of Understanding dated September 2, 1998 between WorldGate and General Instrument Corporation.(2)(3) (filed as Exhibit 10.5 to the IPO Registration Statement)                                                                                                                                                             
|10.4    |  | Master Agreement dated November 7, 1997 between Charter Communications, Inc. ("Charter") and WorldGate.(2)(3) (filed as Exhibit 10.7 to the IPO Registration Statement)                                                                                                                                                               
|10.5    |  | Affiliation Agreement dated November 7, 1997 between Charter and WorldGate.(2)(3) (filed as Exhibit 10.9 to the IPO Registration Statement)                                                                                                                                                                                           
|10.6    |  | First Amended and Restated Stockholders' Agreement dated September 2, 1998 among WorldGate and the stockholders identified therein.(2) (filed as Exhibit 10.16 to the IPO Registration Statement)                                                                                                                                     
|10.7    |  | Amendment to First Amended and Restated Stockholders' Agreement dated July 21, 2000 among WorldGate and the stockholders identified therein.(4) (filed as Exhibit 10.9 to the 2000 Annual Report)                                                                                                                                     
|10.8    |  | Amended and Restated 1996 Stock Option Plan, as amended.(4) (filed as Exhibit 10.10 to the 2000 Annual Report)                                                                                                                                                                                                                        
|10.9    |  | 2001 Employee Stock Purchase Plan.(4) (filed as Exhibit 10.11 to the 2000 Annual Report)                                                                                                                                                                                                                                              
|10.10   |  | TVGateway Management Agreement dated as of July 24, 2000, by and between TVGateway, LLC and WorldGate Service, Inc.(4)(5) (filed as Exhibit 10.12 to the 2000 Annual Report)                                                                                                                                                          
|21      |  | Subsidiaries.*                                                                                                                                                                                                                                                                                                                        
|23      |  | Consent of PricewaterhouseCoopers LLP.*                                                                                                                                                                                                                                                                                               
|24      |  | Power of Attorney. (included in signature page)                                                                                                                                                                                                                                                                                       
|99.1    |  | Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002**                                                                                                                                                                                                                                                                 
|99.2    |  | Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002**                                                                                                                                                                                                                                                                 

---

Filed
herewith.

None.

43

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

| |  | WORLDGATE COMMUNICATIONS, INC.
| |  | ------------------------------
| |  | By:                           

Power of Attorney

Each person whose signature appears below hereby constitutes and appoints Hal M. Krisbergh and Randall J. Gort the true and lawful
attorneys-in-fact and agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned, in any and all
capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
and hereby grants to such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to
all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|Name                                              |  | Capacity                                                                        |  | Date          
|------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | --------------
|                                                  |  |                                                                                 |  |               
|                                                  |  |                                                                                 |  |               
|/s/HAL M. KRISBERGHHal M. Krisbergh               |  | Chairman of the Board and Chief Executive Officer (principal executive officer) |  | March 29, 2003
|/s/JOEL BOYARSKIJoel Boyarski                     |  | Vice President and Chief Financial Officer                                      |  | March 29, 2003
|/s/STEVEN C. DAVIDSONSteven C. Davidson           |  | Director                                                                        |  | March 29, 2003
|/s/MARTIN JAFFEMartin Jaffe                       |  | Director                                                                        |  | March 29, 2003
|/s/CLARENCE L. IRVING, JR.Clarence L. Irving, Jr. |  | Director                                                                        |  | March 29, 2003
|                                                  |  |                                                                                 |  |               

44

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|/s/JEFF MORRISJeff Morris       |  | Director |  | March 29, 2003
|------------------------------- |  | -------- |  | --------------
|/s/LEMUEL TARSHISLemuel Tarshis |  | Director |  | March 29, 2003

45

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CERTIFICATION

I,
Hal M. Krisbergh, certify that:





|Dated: |  | March 28, 2003 | /s/HAL M. KRISBERGHHal M. Krisbergh Chief Executive Officer
|------ |  | -------------- | -----------------------------------------------------------

46

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CERTIFICATION

I,
Joel Boyarski, certify that:





|Dated: |  | March 28, 2003 | /s/JOEL BOYARSKIJoel Boyarski Chief Financial Officer
|------ |  | -------------- | -----------------------------------------------------

47

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Exhibit Index

|Exhibit |  | Description                                                        
|------- |  | -------------------------------------------------------------------
|21      |  | Subsidiaries                                                       
|23      |  | Consent of PricewaterhouseCoopers LLP                              
|99.1    |  | Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|99.2    |  | Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002

48

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