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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the Fiscal Year Ended December 31, 2001

or

For the transition period from                              to                             

Commission file number 000-25755

WORLDGATE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)

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

Common Stock $0.01 Par Value
(Title of Class)

        Indicate by check mark whether the registrant (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]

WORLDGATE COMMUNICATIONS, INC.

ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2001

TABLE OF CONTENTS

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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 WorldGate^SM 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 TVGateway^SM 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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WorldGate^SM ITV Service. Developed as our flagship product and now enhanced by a full range of other offerings, the WorldGate ITV Service is the focus of our business strategy. The WorldGate ITV Service provides a variety of compelling ITV applications to our cable operator customers. The WorldGate ITV Service operates on both already existing cable set-top boxes, and on more advanced, next-generation set-top boxes. The WorldGate ITV Service works as an application on our CableWare middleware, and on PowerTV middleware, and is integrated with the TVGateway and TV Guide IPGs. The WorldGate ITV Service includes enhanced television applications such as broadcast data services, access to the Internet over television, news headlines, sports scores, stock quotes, shopping links, e-mail and chat. In addition, the service interfaces with other applications including video on demand, or VOD, and a variety of IPGs and t-commerce features.



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CableWare^SM. CableWare is a middleware product that allows multiple ITV applications to run simultaneously on a television set-top box. CableWare is based upon our patented "Ultra-Thin Client^SM" technology, which uses existing cable television architecture to deploy a centralized interactive system. "Ultra-Thin Client" enables us to install, maintain and upgrade our hardware at the cable operator's plant, also called a headend. Because most of our technology is located at the headend, cable subscribers need only use the currently deployed generation of low cost set-top boxes with limited memory and processing resources to offer ITV applications. This significantly reduces the cost of deploying ITV applications. In addition, our Ultra-Thin Client architecture permits upgrades to be made either at the headend or through software downloads to the set-top boxes. This minimizes the need to repair or upgrade these boxes.



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Services. We provide a comprehensive set of services to support our interactive TV technology, matching our services with the needs of our cable operator customers. We package a variety of support services that include the necessary assistance required to install, launch, and maintain an interactive cable system. Other additional support programs are specifically designed to assist partners in developing applications and content. Our services provided include technical support, monitoring and reporting, customizing content, and training.

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•

Channel HyperLinking^SM. Channel HyperLinking is our patented ITV application that allows cable subscribers to link instantly from television programming and advertising to related internet or other content. This powerful feature supplements the WorldGate ITV Service and the TVGateway Service and has a variety of revenue producing uses for cable operators, broadcasters and advertisers and provides a valuable tool for viewers, who can flip back and forth almost instantly between watching television and enjoying the benefits of interactive TV.

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:

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Retecal Cable, Spain



•

Digital Latin America



•

Cogeco Cable, Canada



•

GigaCable, S.A., Argentina



•

TV Cable, S.A., Colombia



•

Liberty Cablevision, Puerto Rico.

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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Digital Latin America Distribution Agreement. In March 2001, we signed an agreement with Digital Latin America, or DLA, a distributor of digital cable content to cable operators throughout Central and South America and the Caribbean. This agreement allows DLA to distribute the WorldGate ITV Service to its many cable operator affiliates in these regions. In December 2001, we strengthened our strategic relationship with DLA by developing a digital cable interactive video offering specifically for DLA affiliates, including customized content for specific regions and additional Spanish language features. Four of DLA's cable operator affiliates agreed to deploy this new joint offering in 2002, including Intercable in Venezuela, Amnet in Costa Rica, Cable Onda in Panama and Telecable Nacional in the Dominican Republic.



•

Introduction of New Products. In March 2001, we introduced a new product, the Ultra-Compact Server, that allows our cable operator customers to deploy our service to more subscribers, while

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taking up less space in the cable operator's head-end. In June 2001, we introduced a smaller scale equipment package, called the ITV Starter Kit, to allow our cable operator customers an inexpensive way to begin using our services. These new offerings removed two important hurdles we have experienced when marketing our product, the initial capital expense and the space requirement for our hardware in the limited environment of the cable head-end.

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Issuance of New Patents. In August 2001, the U.S. Patent and Trademark Office issued a fourth patent to us covering a unique method for efficiently encoding digital image data, such as Internet Web pages, for delivery over cable TV network systems. In early 2002, we were informed that the U.S. Patent and Trademark Office issued a notice of allowance for another new patent also related to this encoding technology.



•

Deployment with AT&T Broadband. In June 2001, AT&T Broadband, the nation's largest cable operator, deployed our interactive services to digital cable subscribers in Tacoma, Washington using Motorola DCT-2000 set top boxes, remote controls and optional wireless keyboards.



•

Deployment with Charter Communications. Also in 2001, Charter Communications' Newtown, CT site became WorldGate's largest domestic commercial deployment, growing its WorldGate subscriber base three-fold to over 30,000 subscribers. Charter, which originally launched WorldGate in April 1998, has currently installed WorldGate in 10 locations throughout the country.



•

Deployment with Astound Broadband. WorldGate continued to expand its reach within the United States through a commercial deployment agreement with Astound Broadband in the fourth quarter of 2001. Astound selected WorldGate to provide a robust set of interactive entertainment content to their digital subscribers. Commercial deployment is expected to begin during early 2002.



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Deployment with TV Cable Bogotá. Late 2001 marked the Company's first commercial deployment in Bogotá, Colombia with TV Cable S.A., the largest cable operator in Colombia. WorldGate's ITV services are now being bundled with TV Cable S.A.'s premium cable TV package, creating a valuable consumer offering intended to drive the penetration of premium cable subscriptions in this country.



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Additional International Deployments. Other international deployments and agreements to deploy were finalized in 2001, including those with Cogeco Cable, Canada's fourth largest cable operator, Retecal Cable in Spain, GigaCable S.A. in Argentina, and CableVision Monterrey in Mexico.

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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Customer Support Representatives (CSRs). Our technical support team has in-depth experience with all of our products and a high degree of expertise with the set-top boxes manufactured by Motorola and Scientific Atlanta, the most utilized boxes in the industry. They can answer technical questions for our deployed systems, including questions involving network interfaces, system hardware and software operation. Our CSRs use state-of-the-art technology as well as leading customer service management tools to track customer questions and problems. Reported issues generate a ticket number, which is tracked and escalated according to the situation's severity and priority. Our data shows that the majority of these issues are resolved by our CSRs. Our CSR's have been integrated with many of our cable operator customer call centers to respond seamlessly to issues and to provide effective problem resolutions.

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•

Network Operations Center (NOC). Our Network Operations Center, or NOC, monitors and troubleshoots cable systems where our products are deployed. Our NOC contains network monitoring and system management applications that proactively monitor all installed and deployed systems. The NOC staff of network, systems, and software engineers supports our cable operator customers 24 hours a day, 7 days a week in troubleshooting issues escalated through the CSR center, upgrading software remotely, and performing routine maintenance to ensure optimal system performance. We collect this data using several different processes, all of which are based on industry standards, with procedures in place to ensure the privacy of cable subscribers utilizing our service. Our servers are off-the-shelf units incorporating the latest redundancy techniques, including dual power supplies and hot swappable subsystems (that is, live subsystems that can immediately replace problem subsystems if required). We have tools that monitor our internal servers, our vendor feeds, our local servers at the cable head-end, and our backup systems. With our NOC capabilities, most issues can be identified and resolved before service is interrupted. When the NOC monitoring system detects a problem, it automatically activates alarms, e-mails, and personal pagers as appropriate.



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Field Operations and Deployment. Our staff of experienced project managers, field engineers, and technicians allows us to launch our products and support our customers on an ongoing basis. Our project managers develop the framework for all project communications, contractual obligations and deliverables. They identify critical needs, define responsibilities, establish controls, and manage schedules. Project managers also keep customers informed with reports including Project Planning, Status, Change Management, and Problem Resolution. The maintenance and installation engineers are responsible for installing systems. Before installation, our engineers ensure that the site meets our equipment requirements. The engineers document complex channel mapping issues, environmental, and radio frequency connectivity requirements; they present their report to our cable operator customers and our personnel. The system configuration is fully recorded, maintained, and verified prior to delivery and installation. The project manager can then coordinate the installation and test procedures to ensure the system works as designed.



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Content Customization. We offer a suite of professional services to assist customers in building a user interface design, aggregating content, or other ITV applications. Customers may move beyond our core product by designing a custom interface and content. Working with a WorldGate Account Development Representative, partners can customize their user experience by hand picking the design and content to be included on each site. We will work with specified content partners or will independently provide those resources. Our creative services department can design a user interface from "scratch," or can work with a preferred agency to apply the customer's brand and colors to the custom ITV product.



•

Training. Our training department offers a variety of training classes developed for cable operator personnel ranging from CSRs to headend technicians. The design of the training can be geared from basic to advanced levels. The training department provides flexible options for a variety of standard and customized courses on the WorldGate Interactive Service. Our trainers develop and maintain training modules for customer support representatives, headend technicians, field installers, content developers, and Pay-Per-View schedulers.

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.

Applications

        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.

Middleware

        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.

Other

        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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CableWare Middleware



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Ultra-Thin Client platform



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Channel HyperLinking^SM

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CableWare^SM 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 patented Ultra-Thin Client^SM platform allows substantially all client-related processing to be performed at the cable headend. This platform is comprised of three primary components:

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Servers are located at the cable headend;



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A WorldGate enabled digital or advanced analog cable box; and



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A remote control and/or optional wireless infrared keyboard.

        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:

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Are based on a multi-processor architecture



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Can be accessed remotely by WorldGate for performance monitoring and software upgrades



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Are configured such that typical full screen refresh times are:



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Five seconds or less on an analog platform



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One thirtieth (¹/30^th) of a second on a digital platform.

        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 Client^SM 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

*

These represent export sales. Contracts and orders are denominated in U.S. dollars

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:

(1)

Election of Directors:

*

Mr. Gerry and Mr. Walter resigned in November 2001.

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(2)

Proposal to ratify and approve the WorldGate Communications, Inc. 2001 Employee Stock Purchase Plan:

(3)

Proposal to approve amendments to our 1996 Stock Option Plan:

(4)

Ratification of the selection of PricewaterhouseCoopers LLP as our Independent Auditors for the year ending December 31, 2001:

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.

        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

(1)

On March 2, 1999 WorldGate issued its senior secured promissory notes in the aggregate principal amount of $6 million and issued warrants to purchase up to 331,490 shares of common stock. These sales were exempt from registration pursuant to Section 4(2) of the Securities Act.

(2)

On August 15, 2000, we completed a private placement of an aggregate of 1,531,211 shares of our common stock (the "MSO Shares") to four cable operators who are accredited investors (each a

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"MSO"). The shares were sold for $16.02 per share, resulting in proceeds from the offering of $24.5 million. The MSOs were also issued warrants (the "MSO Warrants") to purchase in the aggregate up to 1,500,000 additional 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 MSO Warrants are subject to vesting at varying rates based on the deployment of the Company's Internet TV service on the MSOs' digital cable system.

The MSO Shares and the MSO Warrants were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933 afforded to transactions not involving a public offering by Section 4(2) of that Act and Rule 506 thereunder. The MSO Shares issued in the offering have been registered for resale by the MSOs. In addition, the MSO Warrants grant to the MSOs certain "piggyback" and "demand" registration rights. Generally, a "piggyback" registration right allows holders to include their shares of common stock in registration statements we or other stockholders initiate and a "demand" registration right allows holders to require us to file a registration statement to register their shares of common stock.

(3)

In November 2000, we entered into a deployment agreement with AT&T Broadband to deploy our interactive services to AT&T digital customers in Cedar Falls and Waterloo, Iowa and Tacoma, Washington. As part of this agreement, we issued warrants to AT&T to purchase up to 1,000,000 shares of our 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 our Internet TV service on AT&T's digital cable systems.

The AT&T warrants were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933 afforded to transactions not involving a public offering by Section 4(2) of that Act and Rule 506 thereunder. The warrants grant to AT&T certain demand registration rights.

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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.

(1)

For purposes of computing the net loss per common share before extraordinary item, loss before extraordinary item has been reduced by the accretion on preferred stock.

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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