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

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FORM 10-K

(Mark One)

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

For the Fiscal Year Ended December 31, 2001

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(IRS 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. [    ]

The
aggregate market value of the common stock held by non-affiliates of the registrant was approximately $25.4 million as of March 18, 2002, based on the
closing sale price per share of common stock, as quoted on the Nasdaq National Market.

The
number of shares of the registrant's common stock outstanding as of March 18, 2002 was 23,568,312.

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, 2001

TABLE OF CONTENTS



|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  
|Item 1.  |  | Business                                                                              |  | 3   
|Item 2.  |  | Properties                                                                            |  | 13  
|Item 3.  |  | Legal Proceedings                                                                     |  | 13  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 13  
|PART II 
|Item 5.  |  | Market for Registrant's Common Stock and Related Stockholder Matters                  |  | 14  
|Item 6.  |  | Selected Financial Data                                                               |  | 16  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 33  
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | F-1 
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 34  
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 34  
|Item 11. |  | Executive Compensation                                                                |  | 36  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 43  
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 44  
|PART IV 
|Item 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 45  

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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 5,000,000 shares of our common stock. Our common stock is
listed on the NASDAQ National Market and 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 products and services to the cable television industry. Interactive television, or ITV, is a
rapidly growing sector of the cable television industry, with its focus on deploying services and applications to allow television viewers to interact with programs, advertisements and other content
on their television sets. Viewers input information via wireless keyboards or other remote control devices. We offer our customers, the cable operators who want to offer ITV applications to their
subscribers, a wide array of ITV applications and related services and products.

We
believe that we are unique 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 and enhanced television, or eTV, products. We provide a platform,
called middleware, that 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. Thirdly, 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 which 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.

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, in addition to any licensing fees we receive for the use of our technologies. For example,

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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.

Furthermore,
we are the manager and a partial owner of TVGateway, LLC, a joint venture between us and four of the largest six multiple system operators, or MSOs, in the U.S. This joint
venture was formed during 2000 to provide cable operators with interactive applications for their digital products, including an IPG. We receive licensing fees from TVGateway for the use of our
proprietary technology in their IPG service, the TVGatewaySM Service, and we receive management fees for managing the joint venture.

Products and Services

We have tailored our business strategy around the diverse variety of services and products described above. Specifically, the core products and services that we
have developed and/or are deploying include:



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Deployments

As of December 31, 2001, our products and services were deployed to approximately 472,000 revenue generating units, or RGUs, on more than 60 cable systems
in over 12 countries around the world. 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.

Among
the cable operator customers who have deployed or agreed to deploy our services, are five of the six largest MSOs in the U.S., including AT&T Broadband, Comcast Cable
Communications, Charter Communications, Inc., Cox Communications, Inc. and Adelphia Communications Corp. We believe that we are currently the only provider in the ITV industry that
deploys our interactive television services and products over both analog and digital cable platforms.

Domestically,
we added significant deployments to our list in 2001, including a deployment with AT&T Broadband in Tacoma, Washington and Astound Broadband in Minnesota. Internationally,
our business strategy continues to include a significant commitment to deploy our services to cable operators around the world. To that end, in 2001 and early 2002 we have added deployments, or have
obtained agreements to deploy, with:



Material Developments for WorldGate in 2001

The following is a summary of material developments for us that have occurred since December 31, 2000:



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Services and Support

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 these 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.

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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 and T-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 and t-commerce.

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 which 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 was 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.

Our
Channel HyperLinking technology business model is based on a revenue split with our cable operator customers and the television networks. We expect revenue 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 and management fee revenue for providing certain technology, development, support, sales and management services to the venture on behalf of its partners. In 2001, approximately 60%
of our revenues was attributable to consulting fees from

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TVGateway pursuant to a Management Agreement between TVGateway and us (the "TVGateway Management Agreement"). The TVGateway Management Agreement expires on December 31, 2002 and will
automatically renew for one additional year unless TVGateway elects not to renew by providing written notice at least 90 days prior to the expiration of the then current term. TVGateway may
also terminate the agreement upon four (4) months notice to us.

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. Consumers no longer have to subscribe to several different complicated services in order to get the
features they want, with WorldGate they can get it in one simple package. 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 which 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, as low as $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 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.

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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 which 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, OpenTV Corporation and Wink
Communications. 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 our 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 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's 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, Diva, nCube, and SeaChange.

Technology

Our technology can be classified under three major product lines:



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CableWareSM Middleware

Middleware has become an important new category of product offering for 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 professional computer programmers. All of this needs to be implemented in a manner efficient enough to run on low-end set-top boxes,
but also needs to include the sophisticated facilities necessary to get the most from advanced set-tops.

Our
CableWare middleware is being designed to meet these disparate goals. CableWare includes a sophisticated software interface layer that enables coexistence and communication of
multiple native set-top applications. It also includes an advanced presentation engine that allows artists and content developers to create compelling content for the platform.
Additionally, CableWare provides a Java facility.

Ultra-Thin Client Platform

WorldGate's patentedUltra-Thin ClientSMplatform 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 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 HyperLinking

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

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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 four 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, and continues to be, 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 2001 were enhancing our existing
Ultra-Thin ClientSM technology and continuing development of our CableWare middleware and Channel HyperLinking SM technologies. Our engineering and development
expenditures, excluding engineering and development expenses rendered in connection with our TVGateway management agreement, were approximately $12,440,000, $21,734,000 and $12,894,000 for the years
ended December 31, 1999, 2000, and 2001, respectively.

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Financial Information Relating to Foreign and Domestic Operations and Export Sales

|                                                         |                                                | 1999    |       | 2000    |        | 2001    |       
|-------------------------------------------------------- | ---------------------------------------------- | ------- | ----- | ------- | ------ | ------- | ------
|
|Revenues by geographic area:                             |                                                |         |       |         |        |         |       
|                                                         | United States                                  |         | 3,744 |         | 16,496 |         | 12,794
|                                                         | Other North America* (including Latin America) |         | 76    |         | 1,897  |         | 659   
|                                                         | South America*                                 |         | 342   |         | 408    |         | 2,293 
|                                                         | Asia*                                          |         | 1,151 |         | 366    |         | 32    
|                                                         | Europe*                                        |         | 281   |         | 74     |         | 1,069 
|                                                         | Total                                          |         | 5,594 |         | 19,241 |         | 16,847
|Loss from operations (all from United States operations) |                                                | (37,720 | )     | (51,837 | )      | (31,070 | )     
|Identifiable Assets (all within the United States)       |                                                | 89,170  |       | 74,841  |        | 33,792  |       

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Employees

As of December 31, 2001, on a consolidated basis, we had approximately 184 full-time employees. All of our employees are located in Trevose,
Pennsylvania, except for 18 employees located at our offices in Campbell, California and a salesperson located in Florida and 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 also lease a facility in Campbell, California, consisting of approximately 3,800 square feet. The lease for
this space will expire in July 2002, and we are negotiating a renewal while considering other premises as well.

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, 2001. At this meeting, the shareholders voted in favor of the following items listed in the Proxy Statement dated
October 5, 2001:



|Nominee                 |  | For        |  | Withheld
|----------------------- |  | ---------- |  | --------
|Alan Gerry*             |  | 20,139,898 |  | 203,596 
|Clarence L. Irving, Jr. |  | 20,216,324 |  | 127,170 
|Hal M. Krisbergh        |  | 20,209,265 |  | 134,229 
|Jeff Morris             |  | 20,216,024 |  | 127,470 
|Lemuel Tarshis          |  | 20,217,024 |  | 126,470 
|David E. Wachob         |  | 20,212,265 |  | 131,229 
|Ronald A. Walter*       |  | 20,216,774 |  | 126,720 

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For

Against

Abstain11,157,874

536,387

65,307




For

Against

Abstain11,100,099

541,098

118,371




For

Against

Abstain20,062,701

243,972

36,821


PART II

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

Our
common stock, $0.01 par value, has been traded on the Nasdaq National Market under the symbol "WGAT" since our initial public offering in April 15, 1999. The following table
shows the high and low closing sales price as reported by the Nasdaq National Market for each quarter since we have been public.

|                             |                                        | High |   | Low  
|---------------------------- | -------------------------------------- | ---- | - | -----
|Year Ended December 31, 2000 |                                        |      |   |      
|                             | First Quarter                          |      | $ | 45.00
|                             | Second Quarter                         |      |   | 27.88
|                             | Third Quarter                          |      |   | 29.44
|                             | Fourth Quarter                         |      |   | 25.00
|Year Ended December 31, 2001 |                                        |      |   |      
|                             | First Quarter                          |      |   | 10.00
|                             | Second Quarter                         |      |   | 6.70 
|                             | Third Quarter                          |      |   | 4.99 
|                             | Fourth Quarter                         |      |   | 2.69 
|Year Ended December 31, 2002 |                                        |      |   |      
|                             | First Quarter (through March 18, 2002) |      |   | 2.73 

On
March 18, 2002, the last reported sale price of our common stock as reported on the Nasdaq National Market was $1.54 per share.

As
of March 18, 2002, we had 356 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

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Item 6. Selected Financial Data.

The following selected financial information for each of the years ended December 31, 1997 through 2001 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

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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      |                         
|                                                                      |                                |                                    |                         
|                                                                      |                                |                                    | Total costs and expenses
|Loss from operations                                                  |                                |                                    | (14,447                 
|Other income, net                                                     |                                |                                    | 423                     
|Interest expense                                                      |                                |                                    | (17                     
|Loss from unconsolidated entity                                       |                                |                                    |                        
|Loss before extraordinary item                                        |                                |                                    | (14,041                 
|Extraordinary itemextinguishment of debt                             |                                |                                    |                        
|Net loss                                                              |                                |                                    | (14,041                 
|Accretion on preferred stock                                          |                                |                                    | (2,436                  
|Net loss available to common Stockholders                             |                                | $                                  | (16,477                 
|                                                                      |                                |                                    |                         
|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               
|                                                                      |                                |                                    |                         
|Balance sheet data:                                                   |                                |                                    |                         
|Cash and cash equivalents, restricted cash and short term equivalents |                                | $                                  | 17,318                  
|Total assets                                                          |                                |                                    | 18,412                  
|Long-term obligations, including current portion                      |                                |                                    | 591                     
|Total mandatory redeemable preferred stock                            |                                |                                    | 34,366                  
|Warrant for mandatory redeemable preferred Stock                      |                                |                                    | 881                     
|Total stockholders' equity (deficit)                                  |                                |                                    | (19,177                 
|Other data:                                                           |                                |                                    |                         
|Common shares outstanding                                             |                                |                                    | 9,100,801               

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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 which 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, if needed, on terms acceptable to us, (4) loss of TVGateway or 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) other risks identified below and 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
generally recognized upon performance of the services requested by a customer order. Revenue from

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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 and includes the cost of merchandise
and freight. 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 and goodwill. 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 $61,350 as of December 31, 2001, due to the Company's lack of earnings history and the uncertainty as to
the reliability of the asset. In the future, if sufficient evidence of our ability to generate sufficient future

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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.

2001 versus 2000

Revenues

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 11 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.

Costs and Expenses

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 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 Digital Video Art (see Note 12 to our financial statements), declined by $2,995,
or 53%,

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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.

2000 versus 1999

Revenues

Revenues increased from $5,594 for the year ended December 31, 1999 to $19,241 for the year ended December 31, 2000. Seventy percent of all revenues
were attributable to the commercial deployments of WorldGate's interactive television products and services and cable subscribers subscribing to these services as of December 31, 2000. At
December 31, 1999, we had deployed our services in 14 deployed cable systems and approximately 15,000 participating cable customers, representing 15,000 RGUs, subscribing to our interactive
products. At December 31, 2000, we had

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deployed our services in 28 deployed cable systems, with approximately 104,000 cable customers, representing 114,000 RGU's, subscribing to our interactive TV products. Thirty percent of all revenues
in 2000 were attributable to consulting fees with TVGateway, an unconsolidated entity.

Costs and Expenses

Cost of Revenues.Cost of revenues consists primarily of product costs, related to initial trials, commercial deployments and
WorldGate modules to be incorporated into set-top boxes, and consulting revenue costs, related primarily to TVGateway revenues for engineering and administration services we incurred.
Product costs of revenues for the years ended December 31, 2000 and 1999 were $20,314 and $15,593, respectively, or approximately 151% and 279%, respectively, of product revenues. Consulting
cost of revenues for the year ended December 31, 2000 were $4,849, or approximately 85% of consulting revenues. There were no consulting revenues or cost of revenues in 1999. The reduction in
the product cost of revenues as a percent of revenues is primarily attributable to our reduction of unit costs and the reduced requirement for the WorldGate modules to be incorporated into
set-top box deliveries.

Engineering and Development.Engineering and development expenses primarily consist of compensation of employees, cost of
design and programming, testing, documentation and support of our hardware, software and services. Engineering and development costs were $21,734 and $12,440, respectively, for the years ended
December 31, 2000 and 1999. Staff increases accounted for approximately $2,400 of this increase along with $7,300 of costs incurred in 2000 relating to our acquisition of Digital Video
Art, Inc. on April 28, 2000 and its operations from that date. Digital Video Art, Inc. is an engineering development firm in Campbell, California.

Sales and Marketing.Sales and marketing costs consist primarily of compensation, attendance at conferences and trade shows,
travel costs necessary to support our domestic and international customer market base, promotions and other marketing programs substantially related to initial trial installations and commercial
deployments. For the years ended December 31, 2000 and 1999, sales and marketing expenses were $12,779 and $8,719. The increase of approximately 47% was primarily the result of additional trade
show costs of approximately $500 and increases in staff, travel and marketing and promotional expenditures of approximately $3,300 for our growth in system deployment.

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 $10,507 and $6,270, respectively,
for the years ended December 31, 2000 and 1999. This increase of approximately 68% was primarily due to $396 of additional deferred compensation expense related to options previously granted,
and $2,300 of additional legal, consulting, travel, facility and insurance costs incurred during the year ended December 31, 2000. Additionally, we recorded an increase in our reserve for
doubtful accounts receivable of $1,300 for the year ended December 31, 2000.

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 increased from $3,319 for the
year ended December 31, 1999, to $3,562 for the year ended December 31, 2000. During 1999 we earned interest on an average cash balance of approximately $54,000, primarily as a result of
the net proceeds received of $111,192 from our initial public offering ("IPO") in April 1999, and incurred interest expense related to our $6,000 financing and $1,100 equipment financing
facility. In comparison, during the year ended December 31, 2000, we earned interest on an average cash balance of $57,755, primarily from the net proceeds received from our IPO and the
proceeds of $24,530 from the sale of our common stock in July 2000.

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

Liquidity and Capital Resources

As of December 31, 2001, 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, 2001, the Company had cash and cash equivalents of $3,356 and additionally $11,257 in short-term investments, as compared to cash and cash equivalents
of $20,415 (in addition to $26,090 in short-term investments) at December 31, 2000. Net cash used in operations was $23,996 for the year ended December 31, 2001, as compared
to $49,749 used for the same period in 2000. The decrease in net cash used for operations was primarily attributable to the Company's decrease in expenditures in 2001, including its significant
expense reduction program, and accounts receivable and inventory reductions, partially offset by accruals that were paid in the year.

Cash
provided by investing activities during the year ended December 31, 2001 totaled $12,416 compared to $36,813 during the same period in 2000. During the year ended
December 31, 2001, we utilized the net proceeds from our maturing short-term investments of $14,833 compared to $40,324 for the year ended December 31, 2000. Capital
expenditures were $1,451 and $2,324 for the years ended December 31, 2001 and 2000, respectively. During the years ended December 31, 2001 and 2000 the Company invested $1,000 and
$1,250, respectively, in TVGateway, an unconsolidated entity.

Net
cash used in financing activities was $5,481 for the year ended December 31, 2001 compared to cash provided of $24,095 from financing activities for the year ended
December 31, 2000. The net cash used in financing activities in 2001 was primarily due to the payment of acquisition consideration due to the shareholders of Digital Video Art, Inc., the
company we acquired in April 2000 (See Note 12 to our financial statements). The prior year net cash provided by financing activities was primarily from the sale of our common stock in
July 2000.

We
have the following long term financing and lease obligations as of December 31, 2001:

|Contractual Obligations                            |  | Total  |  | Less than 1 Year |  | 1-3 Years |  | 4-5 Years |  | After 5 Years
|-------------------------------------------------- |  | ------ |  | ---------------- |  | --------- |  | --------- |  | -------------
|
|Notes payable                                      |  | 1      |  | 1                |  |          |  |          |  |             
|Operating leases                                   |  | 7,161  |  | 953              |  | 2,781     |  | 1,943     |  | 1,484        
|Contractual obligation related to equity financing |  | 4,167  |  | 4,167            |  |          |  |          |  |             
|                                                   |  |        |  |                  |  |           |  |           |  |              
|Total contractual obligations                      |  | 11,329 |  | 5,121            |  | 2,781     |  | 1,943     |  | 1,484        
|                                                   |  |        |  |                  |  |           |  |           |  |              

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. At
December 31, 2001, we had cash, cash equivalents, and short-term investments of $14,613. The net cash and short-term investment usage during the fourth quarter ending
December 31, 2001 was $4,821. In late 2000 and in April and October 2001, we implemented an organizational restructuring, staff reduction programs and other measures to reduce cash usage
and manage inventory. We realized some of the benefits of this program
in fiscal 2001. We have continued to aggressively manage our expenses, and we believe the program should have an additional annualized impact of approximately $5,000, or approximately $1,300 of cash
savings per quarter. Based on the Company's operating budget and cash flow projections for 2002 we believe that we have sufficient cash and short-term investments to fund our operations
beyond December 31, 2002. Even if we meet our budget and cash flow projections, we may need to obtain additional financing in early 2003. Should we miss our budget and cash flow targets, we
believe that we

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have the ability to quickly scale back operations in order to conserve enough cash and short-term investments to fund our operations beyond December 31, 2002.

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
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.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("FAS 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142"). FAS 141 requires that all business combinations be accounted for under the purchase method, and the use of the pooling-of-interests method is
prohibited for business combinations initiated after June 30, 2001. FAS 141 also establishes criteria for the separate recognition of intangible assets acquired in a business
combination. FAS 142 requires that goodwill no longer be amortized to earnings, but instead be subject to periodic testing for impairment. As of December 31, 2001, the Company has $3,006
of unamortized goodwill, and incurred $361 of amortization expense in the year ending December 31, 2001. The Company will adopt the provisions of FAS 142 in its first quarter ended
March 31, 2002. The Company expects that it will no longer record $361 of annual amortization relating to its existing goodwill.

FAS 142
requires that goodwill 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. However, a company has six months from the date of adoption to complete the first step. The Company expects to complete that first
step of the goodwill impairment test during the second quarter of 2002. 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. Any impairment loss resulting from the transitional impairment tests will be reflected as the cumulative
effect of a change in accounting principle in the first quarter 2002. The Company has not yet determined what effect these impairment tests will have on the Company's earnings and financial position.

In
August 2001, the FASB issued SFAS no. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"). FAS 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. FAS 143 will be adopted by the Company commencing January 1, 2003 and is not expected to have a
significant impact on the Company's financial statements.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 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. FAS 144 will be adopted by the Company in the first quarter of 2002 and is not expected to have a significant
impact on the Company's financial statements.

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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.

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. 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.
As of December 31, 2001, we had cash, cash equivalents, and short-term investments of $14.6 million. Our quarterly operating cash usage was $4.6 million for the fourth
quarter of 2001, and is expected to decrease in 2002. We believe that if we achieve this expected decrease, we could fund our cash requirements from cash-on-hand beyond
December 31, 2002. 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 need additional financing and cannot raise it 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:



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.

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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 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, 2001 were approximately $43,970,000, and our aggregate accumulated deficit at December 31, 2000 was approximately
$169,687,000. 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.

The loss of our largest customer could adversely affect our revenues and future prospects.

We have in the past derived, and expect in the future to derive, a significant portion of our revenues from a limited number of customers. In 2001, revenues from
consulting fees from our TVGateway joint venture accounted for approximately 60% of our revenues. We cannot assure you that TVGateway will continue to use our consulting and management services. The
current term of our management agreement with TVGateway expires on December 31, 2002. This term will automatically renew for an additional one-year term, until December 31,
2003, unless TVGateway elects not to renew the agreement by providing written notice at least 90 days prior to that date. TVGateway may also transition all or part of the services provided by
the Company to a third party with four months notice to the Company. If TVGateway stops using our consulting and management services, our business, operating results, financial condition and cash
flows could be materially adversely affected.

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 in over 60 systems now, we still are in the early stages of development and have not yet deployed our product
widely. 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 and financial
condition will be materially adversely affected.

Because interactive television products and services are new, we cannot be certain that a market or sustainable demand for our products will develop.

The market for interactive television 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 interactive television 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.

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The competitive market for interactive television and services may limit demand or pricing for the WorldGate ITV Service.

We experience intense competition. Many companies 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 pricing we can charge for our interactive TV products and our
business, financial condition and results of operations may be adversely affected. 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 interactive TV products to their subscribers.

Because our interactive TV 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 interactive TV products to their subscribers at satisfactory rates. We have entered into a limited number of agreements with cable operators providing for the
commercial launch of our interactive TV products in some of the markets served by these cable operators. 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 interactive TV 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 interactive TV products.

Our international operations are subject to many uncertainties.

A key component of our strategy is the expansion of our sales of interactive TV products into international markets. International revenues accounted for
approximately 24% of our total revenues for fiscal 2001, and international affiliates made up seven of our top ten customers on a percentage of revenue basis. 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 foreign currency payables.
Although we may from time to time undertake foreign exchange hedging transactions to cover a portion of our foreign

27

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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 interactive TV products.

We depend on cable operators to provide our interactive TV 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 interactive TV 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 interactive television products and services. To the extent that
these cable operators elect not to offer WorldGate's 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 interactive television 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 WorldGate's 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 interactive TV products.

For cable television subscribers to receive our interactive TV 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 interactive TV products, or that these customers will choose to utilize a set-top box in order to receive our
interactive TV products.

We are subject to capacity constraints and system failures.

Due to the limited size of our interactive TV 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.

28

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The
performance of our interactive TV 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 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.

Intellectual property claims against us could be costly and result in the loss of significant rights.

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. As with most technology companies, 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 patent rights in court by alleging patent infringement. If we lose a patent infringement suit, third parties may claim significant damages,
require us to license the disputed technology or require us to cease using the disputed technology. We cannot assure you that licenses to the technology owned by any third parties would be available
to us on commercially reasonable terms, if at all. 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.

The success of our Channel HyperLinking technology will be adversely affected if advertisers and television programmers do not provide us with necessary content.

Our future growth and long-term success depends substantially on our ability to convince advertisers and television programmers to use our Channel
HyperLinking technology with their advertisements and television programs. We believe that the adoption of the Channel HyperLinking technology is substantially dependent on:



We
cannot assure you that we will achieve either of the above goals. If we fail to incorporate ourChannel HyperLinkingtechnology in a
substantial number of advertisements and programs, our business, operating results and financial condition could be materially adversely affected.

29

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Rapid technological change could render our services obsolete.

The market for consumer Internet access services and online content is characterized by rapid technological developments, frequent new product introductions and
evolving industry standards. The
nature of the market for these products and services and their rapid evolution requires that we continually improve the performance, features and reliability of our interactive TV products,
particularly in response to competitive offerings. We may not be successful in responding quickly, cost-effectively and adequately to these developments. There may be a
time-limited market opportunity for our interactive TV products, and we may not be successful in achieving widespread acceptance of our interactive TV products before competitors offer
products and services with speed and performance similar to, or better than, our current offerings.

We may have liability for information retrieved or replicated on the Internet.

Claims for negligence, copyright or trademark infringement or other legal theories could be made against us because information can be downloaded and
redistributed by users of our interactive TV products. Copyright and trademark laws are evolving both domestically and internationally and we are uncertain how they apply to our interactive TV
products. The imposition of liability for information carried by us would have a material adverse effect on our business, operating results and financial condition.

We may have liability for e-commerce transactions.

As part of our business, we are seeking to enter into agreements with content providers, advertisers and e-commerce merchants under which we will
receive a share of revenue from the purchase of goods and services by users of our interactive TV products. These arrangements may expose us to additional legal risks and uncertainties, including
potential liabilities to consumers of these products and services. Our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be
imposed.

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.

We
also anticipate that due to its increasing popularity and use, the Internet will be subject to increased attention and regulation. These laws and regulations may regulate issues such
as:



30

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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 WorldGate is bound by an employment agreement, and any officer or employee of WorldGate 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.

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 25.06% of our outstanding common stock as of March 18, 2002. 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 WorldGate.

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 WorldGate. 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 be unable to maintain our listing on the Nasdaq National Market, which could cause our stock price to fall and decrease the liquidity of our common stock.

Our common stock is currently listed on the Nasdaq National Market, which has requirements for the continued listing of stock. One of the continued listing
requirements is that our common stock maintain a minimum bid price of $1.00 per share. For the period commencing on September 1, 2001 through March 18, 2002, the high and low closing
sales price as reported by the Nasdaq National Market for the period was $2.73 and $1.54, respectively. If our common stock trades below $1.00 for 30 consecutive trading days, or if we fail to meet
any of the other listing requirements including the market capitalization and minimum stockholders equity requirements, our common stock may be delisted from the Nasdaq National Market and the trading
market for our common stock could decline, which could depress our stock price and adversely affect the liquidity of our common stock.

Our common stock price is likely to be highly volatile.

The market price of our common stock has been and will likely continue to be highly volatile, as is the stock market in general, and the market for
Internet-related and technology companies in particular. Investors may not be able to resell their shares of our common stock following periods of volatility
because of the market's adverse reaction to such volatility. Factors that could cause such volatility may include, among other things:



31

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Many
of these factors are beyond our control. These factors may materially adversely affect the market price of our common stock, regardless of our operating performance.

We are at risk of securities class action litigation due to our expected stock price volatility.

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities.
This risk is especially acute for us because technology companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a
greater number of securities class action claims than companies in other industries. Due to the potential volatility of our stock price, we may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's attention and resources.

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:



32

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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, 2001, our cash and cash equivalents and investments consisted of $14,613, 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, 2001 would have decreased by less than $227. This estimate assumes
that the decrease occurred on the first day of 2001 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.

33

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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, 2000 and 2001                                                                                  |  | F-3 
|Consolidated Statements of Operations for the years ended December 31, 1999, 2000 and 2001                                                    |  | F-4 
|Consolidated Statements of Stockholders' Equity (Deficit) and Redeemable Preferred Stock for the years ended December 31, 1999, 2000 and 2001 |  | F-5 
|Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001                                                    |  | F-6 
|Notes to Consolidated Financial Statements                                                                                                    |  | F-7 

F-1

---

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 14(a)(1) on page 45 present fairly, in all material respects, the financial position of
WorldGate Communications, Inc. and its subsidiaries at December 31, 2001 and December 31, 2000, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001 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 14 (a) (2) on page 45 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
Company has a history of losses from operations and has a limited amount of cash and short-term investments on hand. Management's plans to fund operations beyond 2002 are
discussed in Note 2.

PricewaterhouseCoopers
LLP
Philadelphia, PA
February 27, 2002

F-2

---

WORLDGATE COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                      |                                                                                            | December 31,                               |      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------ | -----
|
|
|ASSETS                                                                                                                                                                                                |                                                                                            |                                            |      
|Current assets:                                                                                                                                                                                       |                                                                                            |                                            |      
|                                                                                                                                                                                                      | Cash and cash equivalents                                                                  |                                            | $    
|                                                                                                                                                                                                      | Short-term investments                                                                     |                                            |      
|                                                                                                                                                                                                      | Accounts receivable less allowance for doubtful accounts of 1,450 in 2000 and $996 in 2001 |                                            |      
|                                                                                                                                                                                                      | Inventory                                                                                  |                                            |      
|                                                                                                                                                                                                      | Prepaid and other assets                                                                   |                                            |      
|                                                                                                                                                                                                      |                                                                                            |                                            |      
|                                                                                                                                                                                                      |                                                                                            | Total current assets                       |      
|                                                                                                                                                                                                      |                                                                                            |                                            |      
|Property and equipment                                                                                                                                                                                |                                                                                            |                                            | 4,563
|                                                                                                                                                                                                      | Less: accumulated depreciation and amortization                                            |                                            |      
|                                                                                                                                                                                                      |                                                                                            | Property and equipment, net                |      
|Deposits and other assets                                                                                                                                                                             |                                                                                            |                                            | 1,098
|Goodwill                                                                                                                                                                                              |                                                                                            |                                            | 3,367
|                                                                                                                                                                                                      |                                                                                            |                                            |      
|                                                                                                                                                                                                      |                                                                                            | Total assets                               |      
|                                                                                                                                                                                                      |                                                                                            |                                            |      
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                  |                                                                                            |                                            |      
|Current liabilities:                                                                                                                                                                                  |                                                                                            |                                            |      
|                                                                                                                                                                                                      | Current portion, notes payable                                                             |                                            | $    
|                                                                                                                                                                                                      | Notes payable-shareholders of DVA                                                          |                                            |      
|                                                                                                                                                                                                      | Accounts payable                                                                           |                                            |      
|                                                                                                                                                                                                      | Accrued expenses                                                                           |                                            |      
|                                                                                                                                                                                                      | Accrued compensation and benefits                                                          |                                            |      
|                                                                                                                                                                                                      | Contractual Obligations related to equity financing                                        |                                            |      
|                                                                                                                                                                                                      | Deferred rent credit, current and other                                                    |                                            |      
|                                                                                                                                                                                                      |                                                                                            |                                            |      
|                                                                                                                                                                                                      |                                                                                            | Total current liabilities                  |      
|                                                                                                                                                                                                      | Capital leases                                                                             |                                            |      
|                                                                                                                                                                                                      | Deferred rent credit                                                                       |                                            |      
|                                                                                                                                                                                                      |                                                                                            |                                            |      
|                                                                                                                                                                                                      |                                                                                            | Total liabilities                          |      
|                                                                                                                                                                                                      |                                                                                            |                                            |      
|Stockholders' equity:                                                                                                                                                                                 |                                                                                            |                                            |      
|Class A common stock, $0.01 par value; 50,000,000 shares authorized, 23,565,295 shares issued and outstanding at December 31, 2001 and 23,308,196 shares issued and outstanding at December 31, 2000. |                                                                                            |                                            | 233  
|                                                                                                                                                                                                      | Additional paid-in capital                                                                 |                                            |      
|                                                                                                                                                                                                      | Warrant for Class A Common Stock                                                           |                                            |      
|                                                                                                                                                                                                      | Accumulated deficit                                                                        |                                            |      
|                                                                                                                                                                                                      | Unearned stock-based compensation                                                          |                                            |      
|                                                                                                                                                                                                      |                                                                                            |                                            |      
|                                                                                                                                                                                                      |                                                                                            | 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

|                                                               |                                                                                                                       | 1999                           |            | 2000   |         | 2001       |       
|-------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | ------ | ------- | ---------- | ------
|
|Revenues                                                       |                                                                                                                       |                                |            |        |         |            |       
|                                                               | Equipment product revenues                                                                                            |                                | $          | 5,594  |         | $          | 12,888
|                                                               | Service fee revenues                                                                                                  |                                |            |        |         |            | 6,353 
|                                                               |                                                                                                                       |                                |            |        |         |            |       
|                                                               |                                                                                                                       | Total revenues                 |            |        | 5,594   |            |       
|                                                               |                                                                                                                       |                                |            |        |         |            |       
|Costs and expenses:                                            |                                                                                                                       |                                |            |        |         |            |       
|                                                               | Cost of product revenues                                                                                              |                                |            | 15,593 |         |            | 20,314
|                                                               | Cost of consulting revenues                                                                                           |                                |            |        |         |            | 4,849 
|                                                               | Engineering and development (excluding depreciation and amortization amounts of $103, $475 and $1,005, respectively). |                                |            | 12,440 |         |            | 21,734
|                                                               | Sales and marketing (excluding depreciation and amortization amounts of $124, $241 and $308, respectively).           |                                |            | 8,719  |         |            | 12,779
|                                                               | General and administrative (excluding depreciation and amortization amounts of $65, $179 and $198, respectively).     |                                |            | 6,270  |         |            | 10,507
|                                                               | Depreciation and amortization                                                                                         |                                |            | 292    |         |            | 895   
|                                                               |                                                                                                                       |                                |            |        |         |            |       
|                                                               |                                                                                                                       | Total costs and expenses       |            |        | 43,314  |            |       
|                                                               |                                                                                                                       |                                |            |        |         |            |       
|Loss from operations                                           |                                                                                                                       |                                | (37,720    | )      |         | (51,837    | )     
|Interest and other income, net                                 |                                                                                                                       |                                | 3,319      |        |         | 3,562      |       
|Interest and other expense                                     |                                                                                                                       |                                | (230       | )      |         | (72        | )     
|Loss from unconsolidated entity                                |                                                                                                                       |                                |            |        |         | (1,250     | )     
|                                                               |                                                                                                                       |                                |            |        |         |            |       
|                                                               |                                                                                                                       | Loss before extraordinary item |            |        | (34,631 | )          |       
|Extraordinary itemextinguishment of debt                      |                                                                                                                       |                                | (1,019     | )      |         |            |       
|                                                               |                                                                                                                       |                                |            |        |         |            |       
|                                                               |                                                                                                                       | Net loss                       |            |        | (35,650 | )          |       
|Accretion on preferred stock                                   |                                                                                                                       |                                | (2,475     | )      |         |            |       
|                                                               |                                                                                                                       |                                |            |        |         |            |       
|Net loss available to common stockholders                      |                                                                                                                       | $                              | (38,125    | )      | $       | (49,597    | )     
|                                                               |                                                                                                                       |                                |            |        |         |            |       
|Net loss per common share (Basic and Diluted)                  |                                                                                                                       |                                |            |        |         |            |       
|                                                               |                                                                                                                       | Loss before extraordinary item |            | $      | (2.07   | )          | $     
|                                                               |                                                                                                                       | Extraordinary item             |            |        | (0.06   | )          |       
|                                                               |                                                                                                                       |                                |            |        |         |            |       
|                                                               |                                                                                                                       | Net loss                       |            | $      | (2.13   | )          | $     
|                                                               |                                                                                                                       |                                |            |        |         |            |       
|Weighted average common shares outstanding (Basic and Diluted) |                                                                                                                       |                                | 17,869,827 |        |         | 22,246,143 |       
|                                                               |                                                                                                                       |                                |            |        |         |            |       

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

F-4

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WORLDGATE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE PREFERRED STOCK

|                                                     |  |        |   |   |         |   |        |   |   |         |   |        |   | Stockholders' Equity (Deficit) |        
|---------------------------------------------------- |  | ------ | - | - | ------- | - | ------ | - | - | ------- | - | ------ | - | ------------------------------ | -------
|
|
|
|
|
|
|Balance at December 31, 1998                         |  | 2,752  |   | $ | 16,578  |   | 2,803  |   | $ | 23,569  |   | 832    |   | $                              | 9,129  
|Warrants issued related to notes payable             |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Deferred compensation                                |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Amortization of deferred compensation                |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Sale of Preferred Stock, net                         |  |        |   |   |         |   |        |   |   |         |   | 697    |   |                                | 7,591  
|Accretion on Preferred Stock                         |  |        |   |   | 660     |   |        |   |   | 985     |   |        |   |                                | 830    
|Sale of Common Stock in Initial Public Offering, net |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Sale of Common Stock in Overallotment, net           |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Exercise of stock options                            |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Exercise of warrants                                 |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Conversion of Preferred Stock to Common Stock        |  | (2,752 | ) |   | (17,238 | ) | (2,803 | ) |   | (24,554 | ) | (1,529 | ) |                                | (17,550
|Conversion of Class B Common Stock to Common Stock   |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Net loss for the year                                |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|                                                     |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Balance at December 31, 1999                         |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|                                                     |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Authorization of deferred compensation               |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Sale of Common Stock                                 |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Issuance of Common Stock in acquisition of DVA Inc.  |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Exercise of Stock Options                            |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Other                                                |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Net Loss for the year                                |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|                                                     |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Balance at December 31, 2000                         |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|                                                     |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Authorization of deferred compensation               |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Sale of Common Stock                                 |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Issuance of Common Stock in acquisition of DVA Inc.  |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Exercise of Stock Options                            |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Other                                                |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Net Loss for the year                                |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|                                                     |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|Balance at December 31, 2001                         |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        
|                                                     |  |        |   |   |         |   |        |   |   |         |   |        |   |                                |        

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

F-5

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WORLDGATE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                               |                                                                         | 1999                                                 |                                       | 2000    |         | 2001    |        
|---------------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------- | ------- | ------- | ------- | -------
|
|Cash flows from operating activities:          |                                                                         |                                                      |                                       |         |         |         |        
|                                               | Net loss                                                                |                                                      | $                                     | (35,650 | )       | $       | (49,597
|                                               | Adjustments to reconcile net loss to cash used in operating activities: |                                                      |                                       |         |         |         |        
|                                               | Depreciation and amortization                                           |                                                      |                                       | 292     |         |         | 654    
|                                               | Bad debt expense                                                        |                                                      |                                       | 150     |         |         | 1,300  
|                                               | Amortization of deferred compensation                                   |                                                      |                                       | 395     |         |         | 396    
|                                               | Amortization of Goodwill                                                |                                                      |                                       |        |         |         | 241    
|                                               | Amortization of debt issue costs                                        |                                                      |                                       | 108     |         |         |       
|                                               | Loss on the disposition of fixed assets                                 |                                                      |                                       | 20      |         |         |       
|                                               | Extraordinary loss on early extinguishment of debt                      |                                                      |                                       | 1,019   |         |         |       
|                                               | Non-employee stock compensation expense                                 |                                                      |                                       |        |         |         | 3,454  
|                                               | Loss from investment in unconsolidated entity                           |                                                      |                                       |        |         |         | 1,250  
|                                               | Changes in operating assets and liabilities:                            |                                                      |                                       |         |         |         |        
|                                               |                                                                         | Accounts receivable                                  |                                       |         | (2,826  | )       |        
|                                               |                                                                         | Inventories                                          |                                       |         | (2,863  | )       |        
|                                               |                                                                         | Prepaid and other assets                             |                                       |         | (1,557  | )       |        
|                                               |                                                                         | Accounts payable                                     |                                       |         | (2,356  | )       |        
|                                               |                                                                         | Accrued expenses                                     |                                       |         | 261     |         |        
|                                               |                                                                         | Accrued compensation and benefits                    |                                       |         | 562     |         |        
|                                               |                                                                         | Other liabilities                                    |                                       |         | 285     |         |        
|                                               |                                                                         |                                                      |                                       |         |         |         |        
|                                               |                                                                         |                                                      | Net cash used in operating activities |         |         | (42,160 | )      
|                                               |                                                                         |                                                      |                                       |         |         |         |        
|Cash flows from investing activities:          |                                                                         |                                                      |                                       |         |         |         |        
|                                               | Capital expenditures                                                    |                                                      |                                       | (1,463  | )       |         | (2,324 
|                                               | Proceeds from maturities of short-term investments, net                 |                                                      |                                       | (66,414 | )       |         | 40,324 
|                                               | Investment in unconsolidated entity                                     |                                                      |                                       |        |         |         | (1,250 
|                                               | Proceeds from sale of equipment                                         |                                                      |                                       |        |         |         |       
|                                               | Net cash acquiredacquisition of DVA                                    |                                                      |                                       |        |         |         | 63     
|                                               | Restricted cash                                                         |                                                      |                                       | 240     |         |         |       
|                                               |                                                                         |                                                      |                                       |         |         |         |        
|                                               | Net cash provided by (used in) investing activities                     |                                                      |                                       | (67,637 | )       |         | 36,813 
|                                               |                                                                         |                                                      |                                       |         |         |         |        
|Cash flows from financing activities:          |                                                                         |                                                      |                                       |         |         |         |        
|                                               | Proceeds from issuance of common stock                                  |                                                      |                                       | 120,750 |         |         | 24,530 
|                                               | Proceeds from issuance of preferred stock                               |                                                      |                                       | 7,672   |         |         |       
|                                               | Proceeds from exercise of stock options                                 |                                                      |                                       | 117     |         |         | 329    
|                                               | Stock issuance costs                                                    |                                                      |                                       | (9,574  | )       |         |       
|                                               | Proceeds from issuance of notes payable                                 |                                                      |                                       | 6,784   |         |         |       
|                                               | Debt issue costs                                                        |                                                      |                                       | (530    | )       |         |       
|                                               | Repayment of notes payableDVA Shareholders                             |                                                      |                                       |        |         |         |       
|                                               | Repayments of capital leases and notes payable                          |                                                      |                                       | (6,294  | )       |         | (764   
|                                               |                                                                         |                                                      |                                       |         |         |         |        
|                                               |                                                                         | Net cash provided by (used in) financing activities  |                                       |         | 118,925 |         |        
|                                               |                                                                         |                                                      |                                       |         |         |         |        
|                                               |                                                                         | Net increase (decrease) in cash and cash equivalents |                                       |         | 9,128   |         |        
|Cash and cash equivalents, beginning of period |                                                                         |                                                      | 128                                   |         |         | 9,256   |        
|                                               |                                                                         |                                                      |                                       |         |         |         |        
|Cash and cash equivalents, end of period       |                                                                         | $                                                    | 9,256                                 |         | $       | 20,415  |        
|                                               |                                                                         |                                                      |                                       |         |         |         |        

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

F-6

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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 material 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



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. At December 31, 2001, the Company had cash, cash equivalents, and short-term investments of $14,613. The net cash and short-term investment usage
during the fourth quarter ending December 31, 2001 was $4,821. In late 2000 and in April and October 2001, the Company implemented an organizational restructuring, staff reduction
programs and other measures to reduce cash usage and manage inventory. The Company realized some
of the benefits of this program in fiscal 2001. The Company has continued to aggressively manage its expenses, and it believes the program should have an additional annualized impact of approximately
$5,000, or approximately $1,300 of cash savings per quarter. Based on the Company's operating budget and cash flow projections for 2002, the Company believes that it has sufficient cash and
short-term investments to fund its operations beyond December 31, 2002. Even if the Company meets its budget and cash flow projections, the Company may need to obtain additional
financing in early 2003. Should the Company miss its budget and cash flow targets, it believes that it has the ability to quickly scale back operations in order to conserve enough cash and
short-term investments to fund its operations beyond December 31, 2002.

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 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 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 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.

F-7

---



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, 1999, 2000 and 2001, 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.



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. Goodwill is amortized using the straight-line method over ten years.



The Company periodically evaluates the carrying value of long-lived assets, including goodwill, 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

F-8

---

value and the fair value of the asset. There have been no asset impairments for the years ended December 31, 1999, 2000 and 2001.



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.



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 $972, $1,177 and $1,163 for the years
ended December 31, 1999, 2000 and 2001, 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

F-9

---

benefits that, based on available evidence, are not expected to be realized, and a corresponding valuation allowance is established.



Stock-based compensation is recognized using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair value of the Company's stock at the date of grant
over the amount an individual must pay to acquire the stock and amortized over the vesting period. All transactions, with other than employees, in which goods and services are the consideration
received for the issuance of equity instruments, such as stock options, are expensed based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever
is more reliably measured. The Company has adopted the disclosure only provisions of Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) (see
Note 7).



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 and upon conversion of Series A, Series B, and Series C Preferred Stock. The
Series A, Series B, and Series C Preferred Stock were converted into shares of the Company's common stock at the time of the IPO in April 1999. The number of potential
common shares which would have been assumed to be converted in the years ended December 31, 1999, 2000 and 2001 and have a dilutive effect if the Company had income from continuing operations
is 918,905, 8,310,197, and 2,211,662, 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, 1999, 2000 and 2001, 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-10

---



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., in particular in South
America and Asia. 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 |  | 2000 |   | 2001 |  
|-------- |  | ---- | - | ---- | -
|A        |  | 24   | % |     |  
|B        |  | 11   | % | 14   | %
|C        |  | 15   | % | 11   | %
|D        |  | 15   | % |     |  
|E        |  | 12   | % |     |  
|F        |  |     |   | 16   | %
|G        |  |     |   | 16   | %
|         |  |      |   |      |  
|         |  | 77   | % | 57   | %
|         |  |      |   |      |  

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

|Customer |  | 1999 |   | 2000 |   | 2001 |  
|-------- |  | ---- | - | ---- | - | ---- | -
|A        |  | 26   | % | 33   | % |     |  
|B        |  | 13   | % |     |   |     |  
|C        |  |     |   | 28   | % | 60   | %
|D        |  | 17   | % |     |   |     |  
|         |  |      |   |      |   |      |  
|         |  | 56   | % | 61   | % | 60   | %
|         |  |      |   |      |   |      |  

F-11

---

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

|                                              |  | 1999  |  | 2000   |  | 2001  
|--------------------------------------------- |  | ----- |  | ------ |  | ------
|
|United States                                 |  | 3,744 |  | 16,496 |  | 12,794
|Other North America (including Latin America) |  | 76    |  | 1,897  |  | 659   
|South America                                 |  | 342   |  | 408    |  | 2,293 
|Asia                                          |  | 1,151 |  | 366    |  | 32    
|Europe                                        |  | 281   |  | 74     |  | 1,069 
|                                              |  |       |  |        |  |       
|Total                                         |  | 5,594 |  | 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.



Certain items related to 2000 and 1999 have been reclassified to conform with the 2001 reporting format.



In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("FAS 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142"). FAS 141 requires that all business combinations be accounted for under the purchase method, and the use of the pooling-of-interests method is
prohibited for business combinations initiated after June 30, 2001. FAS 141 also establishes criteria for the separate recognition of intangible assets acquired in a business
combination. FAS 142 requires that goodwill no longer be amortized to earnings, but instead be subject to periodic testing for impairment. As of December 31, 2001, the Company has $3,006
of unamortized goodwill, and incurred $361 of amortization expense in the year ending December 31, 2001. The Company will adopt the provisions of FAS 142 in its first quarter ended
March 31, 2002. The Company expects that it will no longer record $361 of annual amortization relating to its existing goodwill.

FAS 142
requires that goodwill 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. However, a company has six months from the date of adoption to complete the first step. The Company expects to complete that first
step of the goodwill impairment test during

F-12

---

the second quarter of 2002. 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. Any impairment loss resulting from the transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle
in the first quarter 2002. The Company has not yet determined what effect these impairment tests will have on the Company's earnings and financial position.

In
August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"). FAS 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. FAS 143 will be adopted by the Company commencing January 1, 2003 and is not expected to have a
significant impact on the Company's financial statements.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 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. FAS 144 will be adopted by the Company in the first quarter of 2002 and is not expected to have a significant
impact on the Company's financial statements.

3.    Inventories

Inventories as of December 31, 2000 and 2001 are summarized as follows:

|                                        |  | 2000 |        | 2001
|--------------------------------------- |  | ---- | ------ | ----
|
|Raw material                            |  | $    | 5,280  |     
|Work-in-progress                        |  |      | 2,295  |     
|Finished goods                          |  |      | 1,746  |     
|Inventory held by customers and vendors |  |      | 1,943  |     
|                                        |  |      |        |     
|                                        |  | $    | 11,264 |     
|                                        |  |      |        |     

F-13

---

4.    Property and Equipment

Property and equipment consist of the following at December 31, 2000 and 2001:

|                                                     |                        | 2000 |       | 2001   |  
|---------------------------------------------------- | ---------------------- | ---- | ----- | ------ | -
|
|Computer equipment and internally developed software |                        | $    | 1,373 |        | $
|Office equipment                                     |                        |      | 751   |        |  
|Furniture and fixtures                               |                        |      | 1,252 |        |  
|Trade show exhibits                                  |                        |      | 530   |        |  
|Leasehold improvements                               |                        |      | 635   |        |  
|Capital leases:                                      |                        |      |       |        |  
|                                                     | Equipment              |      |       | 22     |  
|                                                     |                        |      |       |        |  
|                                                     |                        |      | 4,563 |        |  
|Less accumulated depreciation and amortization:      |                        |      |       |        |  
|                                                     | Property and equipment |      |       | (1,040 | )
|                                                     | Capital leases         |      |       | (16    | )
|                                                     |                        |      |       |        |  
|Property and equipment, net                          |                        | $    | 3,507 |        | $
|                                                     |                        |      |       |        |  

5.    Financing Agreements

In March 1999, the Company received proceeds of $912 and $4,558 through the issuance of $1,000 and $5,000 of notes payable with a stated interest rate of
12.48% due September 1999 and December 1999, respectively. These notes became immediately due, and were paid, upon the completion of the IPO.

At
December 31, 2001, the remaining equipment notes payable balance totaled $1. This balance was paid subsequent to year end. The weighted average interest rate on the outstanding
notes payable borrowings for the years ended December 31, 2000 and 2001 was 8.89% and 10.6%, respectively.

F-14

---

6.    Income Taxes

The significant components of deferred tax assets at December 31, 2000 and 2001 are as follows:

|                                                   |  | 2000 |         | 2001 |  
|-------------------------------------------------- |  | ---- | ------- | ---- | -
|
|Federal tax loss carryforward                      |  | $    | 37,594  |      | $
|State tax loss carryforward                        |  |      | 4,046   |      |  
|Property and equipment                             |  |      | 2,761   |      |  
|Research and experimentation credit                |  |      | 1,277   |      |  
|Officers' compensation, accrued expenses and other |  |      | 424     |      |  
|Bad debt expense                                   |  |      | 589     |      |  
|Compensation on non-qualified stock options        |  |      | 1,012   |      |  
|                                                   |  |      |         |      |  
|                                                   |  |      | 47,703  |      |  
|Less: valuation allowance                          |  |      | (47,703 | )    |  
|                                                   |  |      |         |      |  
|                                                   |  |      |        |      |  
|                                                   |  |      |         |      |  

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, 2001, the Company had a net operating loss carryforward of approximately $149,238 for federal tax purposes, expiring between 2011 and 2021 if not utilized. The net
operating loss carryforward for state tax purposes is approximately $47,642, which will expire in 2011. 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
$1,958, expiring between 2011 and 2021. 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.

7.    Stockholders' Equity (Deficit)



In February 1999, the Board of Directors approved a 2-for-3 reverse stock split effective simultaneously with the IPO. All common
stock share data have been retroactively adjusted to reflect this change.

F-15

---



7.    Stockholders' Equity (Deficit) (Continued)

In
April 1999, the Company completed its IPO of 5,000,000 shares of its common stock at $21.00 per share. The proceeds to the Company, net of underwriting discounts, commissions,
and offering expenses were approximately $96,559. Concurrent with the closing of the IPO, all outstanding shares of Series C Convertible Preferred Stock and Series B Convertible
Preferred Stock automatically converted into an equal number of shares of Class B Common Stock, and all outstanding shares of Series A Convertible Preferred Stock automatically converted
into two shares of Class B Common Stock. All of the outstanding shares of Class B Common Stock then converted into Class A Common Stock. In May 1999 the Company closed on
the exercise by the underwriters of their over-allotment option to purchase 750,000 additional shares of common stock at $21.00 per share. The proceeds to the Company, net of underwriting
discounts, were approximately $14,640. Upon completion of the IPO in April 1999, the Company repaid the loans obtained during March 1999 (see Note 5). As a result of the repayment
of the loans the Company recognized a loss on the early extinguishment of debt of $1,019 in April 1999.



In 1997, the Company sold 819,111 shares of Series A preferred Stock for $4.395 per share for $3,401, net of $199 of offering expenses. Upon completion of
the IPO these shares were converted into shares of common stock.

In
December 1997, the Company sold 2,783,031 shares of Series B Preferred Stock at $7.10 per share for $18,640, net of $1,120 of offering expenses. Upon completion of the
IPO these shares were converted into shares of common stock.

In
December 1998, the Company sold 832,277 shares of Series C Preferred Stock for $11.00 per share for $8,623, net of $532 of offering expenses. Upon completion of the IPO
these shares were converted into shares of common stock.

In
January and February 1999, the Company sold 697,437 shares of Series C Preferred Stock at a purchase price of $11.00 per share for $7,672. Upon completion of the IPO
these shares were converted into shares of common stock.



In connection with the Series B Preferred Stock private placement in December 1997, the underwriter received warrants to purchase 60,474 and 12,375
shares of Series B Preferred Stock at $7.10 per share. Upon the completion of the IPO the warrants were converted to warrants to purchase shares of common stock. These warrants were exercised
in December 1999 for 35,674 shares of common stock.

In
connection with the issuance of notes payable in March 1999 (see Note 5), 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 fair value of the warrants have been accounted for as an additional discount on the notes payable. As a
result of the issuance of the warrants, the Company recorded approximately $1.0 million as an additional discount of the notes payable which was the estimated fair market value of the warrant
at that time.

F-16

---

In
August 2000, the Company issued warrants to the TVGateway partners as part of the TVGateway Joint Venture more fully described in Note 11. These warrants may be
exercised to purchase in the aggregate up to 1,500,000 shares of common stock at a per share exercise price of $24.78 and up to 500,000 additional shares of common stock at a per share 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.

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.



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

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

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.

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 and 2001. Compensation expense of approximately $395, $396, and $388 was recognized in 1999, 2000 and 2001, respectively, related to these grants. As of
December 31, 2001, there remains $192 of compensation expense 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

F-17

---

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.

If
compensation expense had been determined based on the fair value of the options at the grant dates for those options for which no compensation expense has been recognized, consistent
with the method of SFAS 123, the Company's net loss and loss per share would have been:

|                                           |                   | 1999        |  | 2000 |         | 2001 |  
|------------------------------------------ | ----------------- | ----------- |  | ---- | ------- | ---- | -
|
|Net loss available
to common stockholders: |                   |             |  |      |         |      |  
|                                           |                   | As reported |  | $    | (38,125 | )    | $
|                                           |                   | Pro forma   |  | $    | (39,165 | )    | $
|Net loss per common Share:                 |                   |             |  |      |         |      |  
|                                           | Basic and diluted |             |  |      |         |      |  
|                                           |                   | As reported |  | $    | (2.13   | )    | $
|                                           |                   | Pro forma   |  | $    | (2.19   | )    | $

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.

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 1999, 2000 and 2001, respectively: expected volatility of 0%, 80% and 100%; average risk-free interest rates of 5.3%, 6.1%; and 4.83% dividend yield of 0%; and expected lives
of 6.0, 5.5 and 5.0 years. The weighted-average fair value of the options granted during the year was $14.42, $14.33 and $2.29 per option at December 31, 1999, 2000 and 2001, respectively.

F-18

---



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

|                               |                     | Stock
Options |           | Weighted-Average
Exercise Price
|------------------------------ | ------------------- | ------------- | --------- | -------------------------------
|Outstanding, December 31, 1998 |                     | 556,203       |           | $                              
|                               | Granted             |               | 707,555   |                                
|                               | Exercised           |               | (43,405   | )                              
|                               | Cancelled/forfeited |               | (48,768   | )                              
|                               |                     |               |           |                                
|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     |           | $                              
|                               |                     |               |           |                                

The
following table summarizes information about stock options outstanding at December 31, 2001:

|              |  | Stock Options Outstanding |  |     |  |  
|------------- |  | ------------------------- |  | --- |  | -
|
|
|
|$0.75$2.25   |  | 183,293                   |  | 5.7 |  | $
|$2.50-$3.01   |  | 1,166,315                 |  | 9.3 |  |  
|$4.16-$8.25   |  | 584,828                   |  | 8.1 |  |  
|$16.50$22.88 |  | 149,563                   |  | 7.8 |  |  
|$23.57-$41.00 |  | 124,567                   |  | 8.4 |  |  
|              |  |                           |  |     |  |  
|              |  | 2,208,566                 |  | 8.6 |  | $
|              |  |                           |  |     |  |  

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 one hundred thousand dollars.



On February 15, 2001, our Board of Directors adopted the WorldGate 2001 Employee Stock Purchase Plan. The Stock Purchase Plan provides the Company's
eligible employees with the

F-19

---

opportunity to periodically acquire shares of our common stock through payroll deductions. In general, the Stock Purchase Plan provides that:



The
Company's shareholders approved the Stock Purchase Plan at the Annual Meeting in October 2001. During 2001, the Company sold 10,697 shares of common stock under the Stock
Purchase Plan for proceeds of $31.

F-20

---

8.    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 |           
|------------------------------------------------------- |  | ----------------------- | ----------
|
|Loss before extraordinary item                          |  | $                       | (34,631   
|Extraordinary item                                      |  |                         | (1,019    
|Preferred stock dividend and Accretion requirements     |  |                         | (2,475    
|                                                        |  |                         |           
|                                                        |  | $                       | (38,125   
|                                                        |  |                         |           
|Basic loss per average common share:                    |  |                         |           
|Weighted average shares outstanding                     |  |                         | 17,869,827
|Loss per average common share before extraordinary item |  | $                       | (2.07     
|Extraordinary Item                                      |  | $                       | (0.06     
|Net loss to common shareholders                         |  | $                       | (2.13     
|Diluted loss per average common share:                  |  |                         |           
|Weighted average shares outstanding                     |  |                         | 17,869,827
|Loss per average common share before extraordinary item |  | $                       | (2.07     

9.    Commitments and Contingencies



The Company is not currently a party to any legal action.



The Company has entered into noncancelable operating leases for its office facilities and certain equipment.

The
future minimum rental commitments under noncancelable capital leases and operating leases for each fiscal year ended December 31 are as follows:

|Fiscal Year                                                               |  | Capital
Leases |    | Operating
Leases
|------------------------------------------------------------------------- |  | -------------- | -- | ----------------
|
|2002                                                                      |  |                | 2  |                 
|2003                                                                      |  |                |   |                 
|2004                                                                      |  |                |   |                 
|2005                                                                      |  |                |   |                 
|2006                                                                      |  |                |   |                 
|Thereafter                                                                |  |                |   |                 
|                                                                          |  |                |    |                 
|                                                                          |  | $              | 2  |                 
|                                                                          |  |                |    |                 
|Less amounts representing interest                                        |  |                | (1 | )               
|                                                                          |  |                |    |                 
|Present value of net minimum lease payments (including currently payable) |  | $              | 1  |                 
|                                                                          |  |                |    |                 

F-21

---

Total
rent expense for operating leases for the years ended December 31, 1999, 2000, and 2001 amounted to approximately $1,041, $1,361, and $1,785, respectively.

10.    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
$1,479, $6,362, and $242 for the years ended December 31, 1999, 2000, and 2001, respectively. Accounts receivable amounted to approximately $1,711 and $73 at December 31, 2000 and 2001,
respectively.

The
Company has agreements with some investors to provide engineering and development support. As a result of these agreements, the Company has expensed approximately $5,823, $7,499, and
$1,379 for the years ended December 31, 1999, 2000, and 2001, respectively. Accounts payable amounted to approximately $12 and $733 at December 31, 2000 and 2001, 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, nor 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.

11.    TVGateway Joint Venture and Related Cable Operator Agreements

The Company is providing certain administrative services to a joint venture formed in July 2000 with four cable operators on a cost plus management fee
basis pursuant to a management agreement entered into with those cable operators (the "TVGateway Management Agreement"). The current term of the TVGateway Management Agreement will expire on
December 31, 2002. This term will automatically renew for an additional one-year term, until December 31, 2003, unless TVGateway elects not to renew by providing written
notice at least 90 days prior to that date. TVGateway may transition all or part of the services provided by the Company to a third party with four months notice to the
Company. For the years ended December 31, 2000 and 2001, charges for such services, which are included in service fee revenue, totaled $5,344 and $10,045, respectively. In addition, product
sales to TVGateway for the years ended December 31, 2000 and 2001 were $70 and $961, respectively. Accounts receivable from TVGateway amounted to $1,035 and $559 at December 31, 2000 and
2001, respectively. WorldGate is accounting for its investment in the joint venture under the equity method. For the years ended December 31, 2000 and 2001, WorldGate recorded losses of $1,250
and $1,000, respectively, for this investment.

Concurrent
with the consummation of multi-year agreements with four cable operators, 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 ITV Service. The Company recorded a liability of $5,110 for the
anticipated cost of satisfying this obligation. At December 30, 2001 the Company had a remaining liability of $4,167 relating to this obligation.

F-22

---



11.  TVGateway Joint Venture and Related Operator Agreements (Continued)

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

|TVGateway LLC       |  | 2000 |       | 2001
|------------------- |  | ---- | ----- | ----
|
|Total assets        |  | $    | 1,437 |     
|Current liabilities |  |      | 1,074 |     
|Members' interest   |  | $    | 363   |     

|                     |  | Year Ended December 31, |       
|-------------------- |  | ----------------------- | ------
|
|
|Net sales            |  | $                       | 2,425 
|Loss from operations |  |                         | (5,381
|Net loss             |  | $                       | (5,287

12.    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

$
582Liabilities assumed


(213
)Goodwill


3,608Total 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 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.

F-23

---

The
pro forma results of operations for DVA for the twelve months ended December 31, 2000 were not significant.

13.    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, 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 2000 and
2001, the Company made no discretionary profit-sharing contributions to the plan.

14.    Supplemental disclosure of cash flow information

|                                                                                                     |  | Year ended December 31,
|---------------------------------------------------------------------------------------------------- |  | -----------------------
|
|
|Cash paid for interest                                                                               |  | $                      
|                                                                                                     |  |                        
|Noncash investing and financing activities:                                                          |  |                        
|Accretion on preferred stock                                                                         |  | $                      
|Issuance of warrant related to note payable                                                          |  |                        
|Conversion of preferred stock to common stock                                                        |  |                        
|Conversion of warrants to purchase preferred stock                                                   |  |                        
|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                                    |  |                        
|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 |  |                        

F-24

---

Supplemental Quarterly Data (unaudited):

|                                            |  | Fourth |         | Third |   | Second  |   | First |        
|------------------------------------------- |  | ------ | ------- | ----- | - | ------- | - | ----- | -------
|
|2001                                        |  |        |         |       |   |         |   |       |        
|Net revenues                                |  | $      | 4,195   |       | $ | 3,795   |   | $     | 4,776  
|Loss from operations                        |  |        | (4,520  | )     |   | (7,575  | ) |       | (9,078 
|Net loss                                    |  |        | (4,547  | )     |   | (7,408  | ) |       | (8,803 
|Basic and diluted net loss per common share |  |        | (0.19   | )     |   | (0.31   | ) |       | (0.38  
|2000                                        |  |        |         |       |   |         |   |       |        
|Net revenues                                |  |        | 7,472   |       |   | 6,618   |   |       | 3,576  
|Loss from operations                        |  |        | (14,991 | )     |   | (13,106 | ) |       | (11,746
|Net loss                                    |  |        | (14,887 | )     |   | (12,893 | ) |       | (10,984
|Basic and diluted net loss per common share |  |        | (0.64   | )     |   | (0.57   | ) |       | (0.51  

F-25

---



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, 2001 the executive officers and directors were as follows:

|Name                          |  | Age |  | Position(s)                                                   
|----------------------------- |  | --- |  | --------------------------------------------------------------
|Hal M. Krisbergh(1)           |  | 54  |  | Chairman of the Board of Directors and Chief Executive Officer
|Gerard K. Kunkel              |  | 43  |  | President                                                     
|James V. Agnello              |  | 48  |  | Vice President, Chief Financial Officer                       
|Joseph E. Augenbraun          |  | 37  |  | Senior Vice President, Engineering                            
|Randall J. Gort               |  | 52  |  | Vice President, General Counsel and Secretary                 
|James E. McLoughlin           |  | 49  |  | Vice President, Account Development                           
|David E. Wachob               |  | 47  |  | Director, Vice President and General Manager                  
|Richard Westerfer             |  | 43  |  | Senior Vice President, Operations                             
|Clarence L. Irving, Jr.(1)(2) |  | 46  |  | Director                                                      
|Jeff Morris(1)(2)             |  | 50  |  | Director                                                      
|Lemuel Tarshis(2)             |  | 61  |  | Director                                                      

---

Hal M. Krisberghhas been with WorldGate since its inception in March 1995. From September 1981 to September 1994,
Mr. Krisbergh was an executive officer of General Instrument. Mr. Krisbergh served as President of General Instrument's Communications Division and, for the past 15 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 WorldGate in February 1997 as Vice President of Strategic Programs and was named President in
August 2001. As President, Mr. Kunkel is responsible for the day-to-day operations of WorldGate's ITV products and services business. 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. Prior to 1993, Mr. Kunkel has served as an
executive at a number of New York based magazines, including McGraw-Hill's Business Week, Ziff Davis' PC Magazine and the Financial Times of London's World Business Weekly.

James V. Agnellojoined WorldGate in April 2000. Mr. Agnello is a Certified Public Accountant and for the past eighteen
years prior to joining WorldGate, he has held a variety of financial management positions with SmithKline Beecham Corporation, including: from November 1990 to February 2000 as Vice
President-Controller for the company's Clinical Laboratory division, from January 1986 to November 1990 as Finance Director/Regional Controller, Southeast Region, from March 1985
to January 1986 as Manager, Financial Planning, Northeast Region, and from August 1982 to March 1985

34

---

as Internal Auditor. From August 1977 to August 1982, he held a variety of positions with the public accounting firm of Touche Ross & Co. (now Deloitte and Touche).

Joseph E. Augenbraunjoined WorldGate in August 1995. Mr. Augenbraun is responsible for the management of the hardware and
software teams developing the WorldGate platform. 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 WorldGate in August 1997. 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, he was an Associate General Counsel for Commodore International Ltd. from May 1987 through July 1994. 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 WorldGate in February 2001. Mr. McLoughlin is responsible for domestic sales and marketing and
account development. 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.

David E. Wachobhas served as Vice President, General Manager and director of WorldGate since its inception in 1995. Between 1991 and
1995, Mr. Wachob was President of Network Resources Incorporated, an independent consulting company for the cable, cellular, telecommunications and consumer electronics industries. From
June 1988 to September 1991, Mr. Wachob was Director of Advanced Technologies for General Instrument where he managed strategic planning, market research, technical assessment and
business development of advanced technologies for the cable television industry. Mr. Wachob's other positions with General Instrument included, from July 1986 to June 1988,
Manager of Product Support Engineering, and from November 1984 to July 1986, Radio Frequency Systems Engineer.

Richard Westerferhas served as Senior Vice President, Operations, since December 2000. Mr. Westerfer served as Vice
President, Engineering for the Company from February 2000 to December 2000. From 1979 to 1999, Mr. Westerfer served as the Senior Director of Engineering for General Instruments.

Clarence L. Irving, Jr.has been a member of WorldGate's board of directors since July 2000. Mr. Irving 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 2000. Mr. Irving served as Assistant Secretary of Commerce to the United States Department of Commerce from June 1993 to October 1999.

Jeff Morrishas been a member of WorldGate's 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 1999 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 at Showtime Networks, Inc., from 1984 through
1999, where his last position was senior vice president of New Media and Technology Development.

35

---

Lemuel Tarshishas been a member of WorldGate's board of directors since April 2001. Since August 1991, Mr. Tarshis
has been the director of management technology transfer at the Stevens Institute of Technology University. In addition, he currently works as a consultant for AM Communications, NeST Technologies and
Broadband Innovations.

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 2001 were made on a timely basis, except for a late Form 4 filing by Mr. Krisbergh.

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 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 2001, 2000 and 1999

|                           |  |      |  |   |         |  |   | Long Term Compensation Awards
|-------------------------- |  | ---- |  | - | ------- |  | - | -----------------------------
|
|
|
|Hal M. Krisbergh           |  | 1999 |  | $ | 339,465 |  | $ | 152,759                      
|Chairman and Chief         |  | 2000 |  | $ | 337,080 |  | $ | 148,769                      
|Executive Officer          |  | 2001 |  | $ | 337,080 |  | $ | 151,650                      
|Gerard K. Kunkel           |  | 1999 |  | $ | 165,273 |  | $ | 49,582                       
|Senior Vice President      |  | 2000 |  | $ | 175,280 |  | $ | 61,348                       
|Sales and Marketing        |  | 2001 |  | $ | 212,036 |  | $ | 63,925                       
|David E. Wachob            |  | 1999 |  | $ | 161,254 |  | $ | 48,376                       
|Vice President and General |  | 2000 |  | $ | 177,660 |  | $ | 53,298                       
|Manager                    |  | 2001 |  | $ | 190,800 |  | $ | 66,800                       
|Joseph E. Augenbraun       |  | 1999 |  | $ | 148,731 |  | $ | 42,932                       
|Senior Vice President      |  | 2000 |  | $ | 177,660 |  | $ | 53,298                       
|Engineering                |  | 2001 |  | $ | 190,800 |  | $ | 66,800                       
|Randall J. Gort            |  | 1999 |  | $ | 156,422 |  | $ | 43,050                       
|Vice President and General |  | 2000 |  | $ | 171,774 |  | $ | 54,748                       
|Counsel                    |  | 2001 |  | $ | 187,650 |  | $ | 63,925                       

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.

36

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Under this plan, we generally assess the prior year's performance and makes bonus payments during the first calendar quarter of each year.

We
maintain key man insurance policy in the amount of $3,000,000 on Mr. Krisbergh.

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 2001, 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 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:


in cash or by check or wire transfer,

37

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
subject to the approval of the Compensation Committee, in common stock owned by the participant for at least six months prior to the date of exercise and valued at their
fair market value on the effective date of such exercise, or


subject to the approval of the Compensation Committee, by such other provision as the Compensation Committee may from time to time authorize.

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


stockholder approval will be obtained if and to the extent required under Rule 16b-3 promulgated under the Exchange Act or if and to the extent the board
determines that such approval is required for purposes of satisfying Section 162(m) or Section 422 of the Code, and


no such suspension, revision, termination or amendment may, without the consent of a participant, reduce the participant's rights under any outstanding award.

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:



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.

38

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The following table presents information regarding options granted to our named executive officers during fiscal 2001 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 |  |         |    |  
|------------------------------------------------------------ |  | ----------------- |  | ------- | -- | -
|
|
|
|Hal M. Krisbergh
Chairman and Chief Executive
Officer        |  | 160,000           |  | 10.9    | %  | $
|Gerard K. Kunkel
Senior Vice President, Sales and
Marketing  |  | 132,333
67,667    |  | 9.0
4.6 | %% | $
|David E. Wachob
Director, Vice President and General
Manager |  | 127,333           |  | 8.7     | %  | $
|Joseph E. Augenbraun
Senior Vice President, Engineering      |  | 125,333           |  | 8.5     | %  | $
|Randall J. Gort
Vice President and General Counsel           |  | 127,333           |  | 8.7     | %  | $

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, 2001. The table also reflects the values of such options based on the positive spread between the exercise price of
such options and $2.50, which was the per share closing sales price reported on the Nasdaq National Market on December 31, 2001.

39

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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        |  |                                |  |                   |  | 5,000/175,000                                                                                              |  | 0/0                                                                                             
|Gerard K. Kunkel
Senior Vice President,
Sales and Marketing  |  |                                |  |                   |  | 80,082/166,917                                                                                             |  | 0/0                                                                                             
|David E. Wachob
Director, Vice President
and General Manager |  |                                |  |                   |  | 31,383/95,950                                                                                              |  | 0/0                                                                                             
|Joseph E. Augenbraun
Senior Vice President,
Engineering      |  |                                |  |                   |  | 31,333/94,000                                                                                              |  | 0/0                                                                                             
|Randall J. Gort
Vice President and
General Counsel           |  |                                |  |                   |  | 31,833/95,950                                                                                              |  | 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. 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, on April 25, 2001, we granted to Mr. Morris and Mr. Tarshis options to purchase 20,000 shares of common stock each at an exercise price of $2.78. These
options will vest in four equal installments on the anniversary of the grant date. Other than Messrs. 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.

40

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Report of Compensation and Stock Option Committee on Executive Compensation

This report by the Compensation Committee of the Board of Directors (the "Committee") discusses the Committee's compensation objectives and policies applicable to
the Company's executive officers. The report reviews the Committee's policy generally with respect to the compensation of all executive officers as a group for fiscal 2001 and specifically reviews the
compensation established for the Company's Chief Executive Officer as reported in the Summary Compensation Table. Other than Mr. Krisbergh, the Committee is composed entirely of
non-employee directors of the Company. The Committee also administers the Company's Stock Option Plan and Employee Stock Purchase Plan.

Compensation Philosophy

The Committee consists of two non-employee directors and Mr. Krisbergh. Mr. Krisbergh does not, however, participate in the
determination of his own compensation. The Committee is responsible for setting cash and long-term incentive compensation for executive officers and other key employees of the Company. The
Company's compensation policies are intended to create a direct relationship between the level of compensation paid to executives and the Company's current and long-term level of
performance. The Committee believes that this relationship is best implemented by providing a compensation package of separate components, all of which are designed to enhance the Company's overall
performance. The components are base salary, short-term compensation in the form of annual bonuses and long-term incentive compensation in the form of stock options.

The
base salaries, targeted bonus amounts and number of stock options established for or granted to the Company's executive officers for 2001 are based, in part, on the Committee's
understanding of compensation amounts and forms paid to persons in comparable roles performing at comparable levels at other companies in the same or related industries. Such amounts however, mainly
reflect the subjective discretion of the members of the Committee based on the evaluation of the Company's current and anticipated future performance and the contribution of the individual executive
officers to such performance, and the contribution of the individual executive officers to the Company in areas not necessarily reflected by the Company's performance.

Base Salaries

The base salaries for the Company's senior executive officers for 2001 were established subjectively by the Committee based on the market environment and the
Company's need to attract and retain key personnel for whom the Company must compete against larger, more established companies.

Short-Term Annual Bonuses

Annual bonuses established for the executive officers are intended to provide an incentive for improved performance in the short term. The Committee establishes
target bonus levels at the beginning of the year based on predetermined goals with respect to individual, department and Company performance.

Long-Term Incentive Compensation

The Company's long-term incentive compensation plan for its senior executive officers, administered through the Company's stock option plan, promotes
ownership of the Company's Common Stock, which, in turn, provides a common interest between the shareholders of the Company and the executive officers of the Company. Options granted to executive
officers under the plan have an exercise price equal to the fair market value of the shares on the date of grant, an exercise period of ten years and generally vest over four years. The number of
options granted to executive officers is determined by the Committee, which is charged with administering the stock option plan.

41

---

Compensation of the Chief Executive Officer

During fiscal year 2001, Mr. Krisbergh's base salary was not increased. Mr. Krisbergh requested that the Committee consider allowing him to forego a
salary increase for the year, and the Committee agreed.

Mr. Krisbergh
also had an opportunity to earn additional incentive pay under the Company's short-term annual bonus program, based on his performance against
qualitative objectives. The Committee approved payment of $151,650 based on excellent performance. In reaching its decision, the Committee noted the continued growth and development of the TVGateway,
LLC joint venture formed in July 2000, the development of CableWare, an interactive broadcast service and a new and improved user interface for the WorldGate ITV Service, successful system
rollouts of the Company's various products, including new international deployments in Canada, Spain and throughout Latin and South America, strengthening already excellent relations with major US
customers and the financial community, and actions to further develop organizational and individual competencies.

Limitations on Deductibility of Compensation

Under the 1993 Omnibus Budget Reconciliation Act, a portion of annual compensation payable after 1993 to any of the Company's five highest paid executive officers
would not be deductible by the Company for federal income tax purposes to the extent such officer's overall compensation exceeds $1,000,000. Qualifying performance-based incentive compensation,
however, would be both deductible and excluded for purposes of calculating the $1,000,000 base. Although the Committee does not presently intend to award compensation in excess of the $1,000,000 cap,
it will continue to address this issue when formulating compensation arrangements for the Company's executive officers.

| |  |                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------
| |  | Respectfully submitted,
Compensation Committee
Hal M. Krisbergh
Jeff Morris and
Clarence L. Irving, Jr.

Performance Graph

The following indexed line graph indicates the Company's total return to stockholders from April 15, 1999, the date on which the Company's Common Stock
began trading on the Nasdaq National Market, to December 31, 2001, as compared to the total return for the Nasdaq Stock MarketUS Index, the Nasdaq Telecommunications Index and the
Chase H & Q Internet Index for the same period. The calculations in the graph assume that $100 was invested on April 15, 1999, in each of the Company's Common Stock and each index and
also assume dividend reinvestment.

42

---

Comparison of Cumulative Total Return
Among WorldGate Communications, Inc., The Nasdaq Stock Market (U.S.) Index
The Nasdaq Telecommunications Index And
The Internet Index

Edgar
Representation Of Data Points Used In Printed Graphic

|                               |  | 4/15/99 |  | 12/31/99 |  | 12/31/00 |  | 12/31/01
|------------------------------ |  | ------- |  | -------- |  | -------- |  | --------
|WorldGate Communications, Inc. |  | 100     |  | 139.89   |  | 11.21    |  | 7.35    
|Nasdaq Stock Market (U.S.)     |  | 100     |  | 161.94   |  | 97.46    |  | 77.26   
|Nasdaq Telecommunications      |  | 100     |  | 131.34   |  | 56.48    |  | 37.66   
|JP Morgan H & Q Internet 100   |  | 100     |  | 181.82   |  | 62.96    |  | 45.02   

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

The following table sets forth information as of March 23, 2002 regarding beneficial ownership of our common stock by the following persons:

each
person who is known to us to own beneficially more than 5% of the outstanding shares of common stock,

each
director of WorldGate,

each
executive officer of WorldGate named in the executive compensation table above, and

all
directors and executive officers of WorldGate as a group.

Unless
otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent
authority is shared by spouses under applicable law. Beneficial ownership is determined in accordance with the rules of the SEC, based on factors including voting and investment power with respect to
shares, subject to applicable community property laws. Shares of common stock subject to options or warrants exercisable within 60 days of March 23, 2002 are deemed outstanding for the
purpose of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage ownership of any other person. Unless
otherwise indicated, the mailing address of the beneficial owners is 3190 Tremont Avenue, Suite 100, Trevose, Pennsylvania 19053.

|Name of Beneficial Owner                                                |  | Number of Shares of Common
Stock Beneficially Owned |  | Percent of
Ownership |  
|----------------------------------------------------------------------- |  | --------------------------------------------------- |  | -------------------- | -
|Hal M. Krisbergh(1)                                                     |  | 5,921,371                                           |  | 25.06                | %
|David E. Wachob(2)                                                      |  | 407,563                                             |  | 1.72                 |  
|Joseph E. Augenbraun(3)                                                 |  | 327,208                                             |  | 1.38                 |  
|Randall J. Gort(4)                                                      |  | 278,128                                             |  | 1.18                 |  
|Gerard K. Kunkel(5)                                                     |  | 113,165                                             |  | *                    |  
|Clarence L. Irving, Jr.(6)                                              |  | 6,250                                               |  | *                    |  
|Jeff Morris(7)                                                          |  | 6,000                                               |  | *                    |  
|Lem Tarshis(8)                                                          |  | 23,867                                              |  | *                    |  
|                                                                        |  |                                                     |  |                      |  
|All current directors and executive officers as a group (11 persons)(9) |  | 7,271,280                                           |  | 30.13                | %
|                                                                        |  |                                                     |  |                      |  

---

43

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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:

Hal
M. Krisbergh designated David E. Wachob, Alan Gerry and Thomas G. Baxter,

Motorola
designated Graham Pattison, who has since resigned as a member of our board of directors in connection with his resignation from Motorola,

the
investors who purchased our Series A Convertible Preferred Stock, other than Motorola, designated Marcia J. Hooper, who has since resigned as a member of our
board of directors, and

the
investors who purchased our Series B Convertible Preferred Stock designated Ronald A. Walter to our board of directors.

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.

44

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PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(A)  Documents filed as part of this report.

1.    Financial Statements

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

Report of PricewaterhouseCoopers LLP, Independent Accountants

F-2Consolidated Balance Sheets

F-3Consolidated Statements of Operations

F-4Consolidated Statements of Stockholders' Equity (Deficit)

F-5Consolidated Statements of Cash Flows

F-6Notes to Consolidated Financial Statements

F-7


2.    Financial Statement Schedule

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, 1999 |                              |       |                                        | 150    |                                           |       |                       
|                                             | Year ended December 31, 2000 |                              | 150    |                                        | 1,300  |                                           |       |                       
|                                             | Year ended December 31, 2001 |                              | 1,450  |                                        | 1,522  |                                           | 1,976 |                       
|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 |                                        |        |                                           |       |                       

All
other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.

45

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3.    Exhibits

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 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)                                                                                                                                                                                                                                                                                       

---

(B)  Reports on Form 8-K

None.

46

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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 restraint 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, 2002
|/s/JAMES V. AGNELLOJames V. Agnello     |  | Vice President and Chief Financial Officer                                      |  | March 29, 2002
|/s/DAVID E. WACHOBDavid E. Wachob       |  | Director, Vice President and General Manager                                    |  | March 29, 2002
|/s/CLARENCE L. IRVINGClarence L. Irving |  | Director                                                                        |  | March 29, 2002
|Jeff Morris                             |  | Director                                                                        |  | March 29, 2002
|/s/LEMUEL TARSHISLemuel Tarshis         |  | Director                                                                        |  | March 29, 2002

---

Exhibit Index

|Exhibit |  | Description                          
|------- |  | -------------------------------------
|21      |  | Subsidiaries                         
|23      |  | Consent of PricewaterhouseCoopers LLP

---