Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT 1934

For the fiscal year ended December 31, 2002

OR

For the transition period from                      to                     

Commission File Number 001-15473

OPENTV CORP.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (650) 429-5500.

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Class A ordinary shares, no par value

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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act. Yes  ¨    No  x

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.  x

The aggregate market value of the Class A ordinary shares of the Registrant held of record by nonaffiliates of the Registrant as of June 28, 2002, computed by reference to the last sales price of such Class A ordinary shares on the Nasdaq National Market as of the closing of trading on June 28, 2002, was approximately $115,338,000. For purposes of this calculation the directors and executive officers of the Registrant as of June 28, 2002, and the holders of record of 10% or more of any class of the Registrant’s ordinary shares outstanding as of June 28, 2002 (excluding Cede & Co., nominee of the Depository Trust Company), are deemed to be affiliates of the Registrant. Treasury shares are excluded. The determination of affiliate status for this calculation is not necessarily a conclusive determination for other purposes.

As of February 28, 2003, the Registrant had outstanding (not including 54,247 Class A ordinary shares held in treasury):

41,600,995 Class A ordinary shares; and

30,631,746 Class B ordinary shares.

Table of Contents

OPENTV CORP.

2002 ANNUAL REPORT ON FORM 10-K

Table of Contents

Table of Contents

PART I

Item 1.     Business

General Development of the Business

We are one of the world’s leading interactive television companies. We provide technology, content, applications, and professional services that enable digital television network operators in over sixty countries to deliver and manage interactive television services for their subscribers. Our technology is available on all major digital television platforms—cable, satellite and terrestrial—and is currently deployed in the major geographic areas of the world.

We were formed as an international business company incorporated under the International Business Companies Act of the British Virgin Islands in September 1999 to act as a holding company for OpenTV, Inc., which then became our principal operating subsidiary. OpenTV, Inc. began operations when Thomson Sun Interactive, LLC, a joint venture formed by THOMSON multimedia S.A. and Sun Microsystems, Inc., was converted into OpenTV, Inc., a newly formed Delaware corporation, in March 1998. Following the conversion, THOMSON sold its interest in OpenTV, Inc. to Sun and MIH Limited. We completed a strategic financing round in October 1999 and completed our initial public offering in November 1999.

In July 2000, we completed our merger with Spyglass, Inc., a provider of strategic Internet consulting, software and professional services that enable content providers, service operators and device manufacturers to capitalize on the potential of the Internet.

In November 2000, we completed our acquisition of CableSoft Corporation, a provider of “on-demand information” software solutions for broadband network operators. Also in November 2000, we established a co-owned venture with Motorola, Inc. named Spyglass Integration, Inc., in which we own a 90% equity interest, for the purposes of providing integration, testing and development services to digital cable and satellite network operators.

In July 2001, we completed our acquisition of Static 2358 Holdings Limited, a privately-held interactive television media and entertainment company. Static’s products include PlayJam^™, the most widely deployed interactive television games channel in the world, which is available to over twelve million subscribers in the United Kingdom, France and the United States. In January 2002, we began managing our content and applications offerings under the Static^™ name.

Recent Developments

Corporate Restructurings and Office Closings.    In January 2002, we implemented a workforce reduction plan in an effort to reduce our operating expenses. This restructuring plan resulted in the termination of employment for approximately 50 employees in offices located in the United States and Korea, consolidation of excess office space in the United States, France and Korea, and asset write-offs incurred in connection with leasehold improvements and other fixed assets that were abandoned. In September 2002, we announced the closure of our regional office located in Naperville, Illinois, which resulted in the termination of employment for approximately 60 employees, the abandonment of an office lease and the write-down of certain fixed assets. In October 2002, we began to implement additional restructuring initiatives to reduce our worldwide workforce by approximately 150 personnel, further consolidate our facilities and write-off additional leasehold improvements and other fixed assets that were abandoned. A restructuring of our French operations, which resulted in the termination of approximately 70 employees and the reduction of excess office space, was approved during the first quarter of 2003.

Change in Control of OpenTV.    On August 27, 2002, the transactions contemplated by the Stock Purchase Agreement, dated May 8, 2002, as amended, among MIH Limited, OTV Holdings Limited, a wholly-owned subsidiary of MIH Limited, Liberty Media Corporation and LDIG OTV, Inc., a wholly-owned subsidiary of Liberty Media Corporation, were consummated. We were not a party to this stock purchase agreement. Pursuant

I-1

Table of Contents

to this stock purchase agreement, LDIG OTV purchased 365,460 of our Class A ordinary shares from OTV Holdings and Liberty Media purchased 30,206,154 of our Class B ordinary shares from OTV Holdings, all for an aggregate purchase price of $184,958,265, which was paid by delivery of $46,239,567 in cash and 15,385,836 shares of Liberty Media’s Series A common stock. This transaction is referred to as the “Liberty Media stock purchase transaction.”

Based on information provided by Liberty Media to us, following the Liberty Media stock purchase transaction, Liberty Media held, directly and indirectly through its control of LDIG OTV, an aggregate of 2,313,716 of our Class A ordinary shares and 30,510,150 of our Class B ordinary shares, representing approximately 45.5% of the economic interest and approximately 88.4% of the voting power of our ordinary shares outstanding as of December 31, 2002. As a result of its direct and indirect ownership of our ordinary shares, and the voting power attributable thereto, Liberty Media has the ability to elect all of the members of our board of directors and, subject to applicable law and the terms of an Amended and Restated Stockholders’ Agreement, dated October 23, 1999, among us, OpenTV, Inc., OTV Holdings, Sun Microsystems, Inc. and Sun TSI Subsidiary, Inc., to approve or disapprove all matters presented to a vote of our shareholders, including the power to approve or disapprove mergers and other extraordinary corporate transactions and amendments to our memorandum of association and articles of association. For more information about the Amended and Restated Stockholders’ Agreement, see “Item 13. Certain Relationships and Related Transactions—Transactions with Management and Others.”

A majority of the members of our board of directors resigned in connection with the Liberty Media stock purchase transaction. Messrs. Robert R. Bennett, Peter C. Boylan III, J. David Wargo and Anthony G. Werner, each a designee of Liberty Media, were appointed to our board of directors in place of the directors who resigned.

Acquisition of Wink Communications, Inc.    On October 4, 2002, our wholly-owned subsidiary, OpenTV US Holdings, Inc., acquired Wink Interactive, Inc., which owns all of the capital stock of Wink Communications, Inc., from Liberty Broadband Interactive Television, Inc., a wholly-owned subsidiary of Liberty Media, for $101 million in cash. The purchase price reflected the total cash consideration plus expenses paid by Liberty Broadband in connection with Liberty Broadband’s acquisition of Wink Communications on August 22, 2002. Wink Communications creates interactive enhancements to traditional television advertisements and programs.

Pending Acquisition of ACTV, Inc.    On September 26, 2002, we announced that we had entered into an Agreement and Plan of Merger for the acquisition of ACTV, Inc. in a stock-for-stock merger. ACTV provides proprietary technologies, tools, and technical and creative services for interactive television advertising, personalized programming applications and enhanced media.

Under the terms of the Agreement and Plan of Merger, each outstanding share of ACTV common stock on the closing date of the merger will be exchanged for a fraction of an Open TV Class A ordinary share equal to $1.65 divided by the “average market price” of an OpenTV Class A ordinary share, calculated as the average of the closing prices of an OpenTV Class A ordinary share over the five-trading day period ending on the third trading day prior to the closing date of the merger; provided that (a) if the average market price of an OpenTV Class A ordinary share as so calculated is less than $2.25, the average market price of an OpenTV Class A ordinary share will be deemed to be $2.25 for this purpose and (b) if the average market price of an OpenTV Class A ordinary share as so calculated is greater than $6.05, the average market price of an OpenTV Class A ordinary share will be deemed to be $6.05 for this purpose. If the average market price, as so calculated, of an OpenTV Class A ordinary share is less than $0.80, then ACTV will have the right to terminate the Agreement and Plan of Merger unless we elect to adjust the exchange ratio so that the ACTV shareholders receive a fraction of an OpenTV Class A ordinary share, or a number of OpenTV Class A ordinary shares, having a value, based upon the average market price of the OpenTV Class A ordinary shares, equal to not less than $0.584 per ACTV common share. Consummation of the merger is conditioned upon the approval of our stockholders of the issuance of OpenTV Class A ordinary shares in the merger and the approval of ACTV’s stockholders of the Agreement and Plan of Merger.

I-2

Table of Contents

On February 14, 2003, we announced that we had amended the merger agreement to extend the date after which either we or ACTV may unilaterally elect to terminate the merger from February 15, 2003 to June 30, 2003. The acquisition is expected to close in the second quarter of 2003.

Nasdaq Delisting Notification.    On February 19, 2003, we received a letter notifying us of a determination by the Nasdaq staff to delist our Class A ordinary shares from The Nasdaq Stock Market at the opening of business on February 28, 2003, absent an appeal by us. On February 26, 2003, we filed a request for a hearing before a Nasdaq Listing Qualifications Panel to review the determination of the Nasdaq staff. On that same day, we were informed that the Nasdaq had granted our request for a hearing, which was held on April 3, 2003. Pending the decision of the panel at the hearing, the delisting determination of the Nasdaq staff has been stayed and our Class A ordinary shares continue to trade on The Nasdaq Stock Market. No assurance can be given that the Listing Qualifications Panel will grant our request for continued listing.

The delisting letter was given by the Nasdaq staff due to our noncompliance with Marketplace Rules 4350(e) and 4350(g), which require Nasdaq issuers to hold annual shareholder meetings and to solicit proxies therefore. We did not hold an annual meeting during 2002 prior to Liberty Media’s acquisition of a controlling interest in us on August 27, 2002. After that change in control transaction, we sought to combine our annual shareholders meeting with a shareholders meeting to be called to approve the issuance of our Class A ordinary shares in the previously announced proposed merger transaction with ACTV, Inc. To that end, we sought and received from Nasdaq an extension of the December 31, 2002 deadline to February 15, 2003, however, the joint proxy statement/prospectus could not be completed and mailed in time to meet the deadline.

Financial Information About Operating Segments

We are not organized into business units and we do not calculate our revenues, profits or loss, or total assets based on segmentation of our business. We believe that we operate in a single industry segment. Please see “Note 15. Segment Information” to our Consolidated Financial Statements for a further discussion of segment information.

Narrative Description of Business

Overview

We are one of the world’s leading interactive television companies. We provide technology, content and applications, and professional services that enable digital television network operators in over sixty countries to deliver and manage interactive television services on all major digital television platforms—cable, satellite and terrestrial—across all major geographic areas of the world. Our software products, including our core middleware and our Wink interactive service platform, have been shipped in more than forty-two million digital set-top boxes worldwide. More than eighteen million digital set-top boxes enabled with our software products have been shipped in the United States. Our interactive services and content offerings, including the Wink interactive service and the PlayJam interactive games channel, are available to over nineteen million subscribers worldwide.

Products and Services

At its most basic level, interactive television enables viewers to turn passive viewing experiences into active ones. Using a standard remote control viewers may, for example, shop at their favorite stores, conduct home banking transactions, interact with television advertisements, send and receive e-mail messages, chat with friends, play interactive games, receive instant news, sports and other information, view electronic programming guides, order on-demand content and surf the Internet.

We provide an integrated set of products and services to industry participants that enable the provision of digital interactive television services to television viewers. Customers using our products and services include network operators, set-top box manufacturers, application and content developers, retail advertisers and

I-3

Table of Contents

programming networks. In addition, through Static and its PlayJam entertainment and games channel, we have begun to manage the provision of certain interactive television services directly to consumers.

The products and services we provide can be broken down into the following categories:

During the three years ended December 31, 2002, product and service categories contributing to more than 10% of our revenues on an annual basis were as follows (revenue totals in millions):

In addition, 2000 revenues from licenses of our stand-alone Device Mosaic product, which are included in the application category, were $7 million, or 11% of our total revenues in 2000.

Middleware Solutions

Our middleware solutions provide a common software platform that enables digital television network operators to deliver and manage interactive television applications and content for different digital television environments—including basic and advanced set-top boxes—across all digital television network architectures (cable, satellite and terrestrial). With our middleware solutions, an interactive television application can typically be developed once for a network operator using our middleware platform and then used in a variety of set-top boxes made by different set-top box manufacturers used by that network.

OpenTV Core, our basic middleware product, contains our core middleware and related components that provide network operators with a full-featured interactive television delivery and development environment for both basic and advanced set-top boxes. OpenTV Core can manage a wide range of interactive television applications, including virtual channels, enhanced broadcasts, electronic commerce applications, games and on-demand news and information services.

I-4

Table of Contents

Key features of OpenTV Core include:

Revenues associated with our middleware solutions are generated in the form of one-time royalties as set-top boxes incorporating our middleware are sold to manufacturers and network operators around the world and as network operators upgrade or add additional features to the versions of our middleware running on their networks.

Network and Enterprise Solutions

Our network solutions, which consist of OpenTV Streamer^™, OpenTV Publisher^™, OpenTV H2O^™ and OpenTV Gateway^™, are used in conjunction with our middleware solutions and enable network operators to utilize their existing digital television broadcast infrastructure to manage the generation and delivery of interactive television services to, and from, the set-top box.

Our enterprise solutions, which consist of OpenTV Account^™ and OpenTV Advertise^™, are also used in conjunction with our middleware solutions and manage the secure commerce and advertising functions of a network operator’s interactive television service.

I-5

Table of Contents

Revenues from our network and enterprise solutions generally are recognized in the form of one-time license fees upon shipment of software with annual support fees recognized in future periods as and if the customer elects support.

Interactive Channels

We develop and operate branded interactive television channels that are distributed by network operators utilizing our middleware platform and interactive television middleware platforms provided by third parties.

PlayJam, our flagship branded channel, is the world’s first multi-platform interactive television entertainment and gaming channel. Launched in early 2001 on BSkyB in the United Kingdom, PlayJam currently is available to over twelve million subscribers through distribution on BSkyB, NTL and Telewest in the United Kingdom, TPS and Canal Satellite in France, and Cablevision in the United States. PlayJam runs on our interactive television platform as well as those provided by Liberate Technologies and Media Highway. PlayJam also runs on the Sony platform, which uses our Device Mosaic technology, on the Cablevision system in the greater New York area.

We have developed a library of more than 200 different single- or multi-player games that have run on PlayJam. These include quizzes, arcade-style games, gambling, casino and lottery games, puzzles, adult-theme games, and competition and editorial games.

In the United Kingdom and in France, PlayJam charges a fee, via a premium rate telephone call using the telephone or the remote control, for membership registration, game score registration for the chance to win prizes, and for access to pay-per-play content. We have also sold advertising and sponsorship space from time to time on PlayJam games.

From time to time as our business strategies and market conditions warrant, we may consider the development and launch of additional branded interactive television channels.

Enhanced iTV Services

Our Wink service, which is available to more than seven million subscribers on over ten million set-top boxes in North America, provides an end-to-end solution for sending interactive applications along with broadcast video to viewers’ televisions. This system of enhanced services, which is composed of core, proprietary technologies developed by our subsidiary Wink Communications as well as off-the-shelf electronic commerce and database solutions, consists of the following components:

I-6

Table of Contents

Our Wink service enables advertisers and programmers to process e-commerce transactions while offering viewers instant interactive entertainment and information retrieval. For example, our Wink service enables interactive weather services on The Weather Channel and sports information services on ESPN. In addition, it collects, analyzes and routes viewer behavior and response data to give advertisers and network operators a tool to collect consumer and viewer research and to evaluate the success and value of television advertising campaigns. Advertisers recently having enhanced their advertisements with our Wink service include Coca-Cola, Ford and Wal-Mart.

Revenues historically have been earned principally through the license of Wink’s proprietary technologies and consulting, engineering and installation services, and are included in license fees and services, support and other in our income statement.

iTV Applications

We develop and market interactive applications for use by network operators that have adopted our middleware platform. Our applications offerings include a suite of standardized applications that can be licensed by and customized for particular network operator customers. These applications include:

We also offer OpenTV Device Mosaic, a customizable, stand-alone browser designed specifically for information appliances other than personal computers. OpenTV Device Mosaic supports HTML and JavaScript based applications and is optimized and designed for advanced products and applications. We have developed a Japanese derivative of OpenTV Device Mosaic that supports Broadcast Markup Language, the Japanese interactive content standard.

Apart from these standardized applications, we develop stand-alone applications for network operators on a revenue sharing or fee-for-service basis.

We also encourage television program developers and independent parties to design and create applications for our middleware platform. To this end, we provide a series of application development tools, the OpenTV Software Developers Kit, and the OpenTV Publisher Developer’s Version, and supporting toolsets that allow third-party content developers to develop and market applications directly to network operators. In addition, we offer the OpenTV Partner Program to support independent developers that create OpenTV-enabled applications. Through the OpenTV Partner Program, members can gain access to various resources, including free evaluation periods for selected releases of our software, discounts on our authoring and development tools, training sessions, e-mail support, access to a members-only Web site and regional conferences.

Revenues are earned in the form of one-time license fees upon shipment of software and annual support fees in future periods as and if the customer elects support.

I-7

Table of Contents

Professional Services and Support

We provide a comprehensive array of professional services on a worldwide basis to network operators, set-top box manufacturers and content and application developers in support of our product offerings. The services that we provide include interactive television business consulting, middleware porting and integration, application customization and localization, launch management and educational training services. Our services include round-the-clock maintenance and support for our products after they have been installed and commercially deployed by our network operator and set-top box manufacturer customers, including the provision of product updates and upgrades. Services are provided on a paid engagement basis and are either executed on a time and materials or fixed price contract basis.

We also provide platform-neutral testing, development, integration and certification services through Spyglass Integration, a co-owned venture that we established with Motorola in November 2000 and in which we own a 90% equity interest. Spyglass Integration is a state-of-the-art interactive television infrastructure solution center that enables network operators, set-top box manufacturers, infrastructure providers and application developers to develop interactive television products and services in a controlled environment. Key services provided by Spyglass Integration include set-top box integration and certification, network validation and certification for interactive television applications, end-to-end systems testing, strategic consulting, field deployment services and training.

Customer and Industry Relationships

We have established significant relationships with network operators, set-top box manufacturers, chip set manufacturers, programming networks and advertisers around the world. Our customer and industry relationships include the following:

Motorola (together with its subsidiary General Instrument) and the Digital Interactive Television Group, a British telecommunications company that supports the collection of premium rate telephony charges for the PlayJam channel on BSkyB, each accounted for approximately 11% of our revenues in 2002. The revenues received from Motorola in 2002 were associated with professional services and support. In addition, BSkyB directly and indirectly accounted for approximately 9% of our revenues during the year in the form of set-top box royalties and services and support.

I-8

Table of Contents

Competition

Current and potential competitors in one or more aspects of our business include interactive television technology companies and companies developing interactive television content and applications.

Primary competitors that provide interactive television enabling products include Microsoft Corporation, Liberate Technologies, Inc., Canal+ Technologies, which was acquired by Thomson Multimedia in February, 2003, NDS Limited and Power TV, Inc.

Microsoft is working to create interactive television solutions and has acquired equity interests in several network operators. These investments may potentially give Microsoft influence in the network operator’s choice of providers of interactive television solutions. With its vastly greater financial, technical and marketing resources, Microsoft will likely be a strong competitor in the market for interactive television solutions.

Liberate Technologies manufactures and licenses its software to network operators and set-top box manufacturers to enable the delivery of Internet-enabled content and applications to information appliances. Liberate Technologies has significant financial resources as well as relationships with United States and United Kingdom cable operators.

Canal+ Technologies provides its Media Highway interactive television system for distribution on Canal Satellite’s pay-television platforms in France and has successfully marketed its middleware to over 30 digital operators and broadcasters worldwide.

NDS, a subsidiary of News Corporation, is expanding from the conditional access and interactive application markets into the interactive television platform market. NDS is promoting an end-to-end interactive television strategy similar to ours and is attempting to break into the United States market. NDS competes directly with us in the Asia Pacific markets. While NDS does compete with us in these respects, NDS also is a partner of ours in the sense that it is the conditional access vendor for many of our network operator customers.

PowerTV, a subsidiary of Scientific-Atlanta, Inc., develops and markets operating system and middleware software products for the advanced digital interactive cable television markets. PowerTV also has developed a number of interactive applications, such as e-mail, Internet web browsing, chat and video on demand applications.

Our interactive applications face competition from numerous parties. Companies that compete with our efforts to develop and launch applications on our middleware platform include dedicated applications providers (such as Gemstar-TV Guide International, NDS, Visiware, WorldGate Communications, and MetaTV), independent third parties that develop and provide applications for our middleware platform, and other middleware providers (such as Microsoft, Liberate Technologies and Canal+ Technologies). We also face competition from media companies that have publicly announced interactive television initiatives, such as The Discovery Channel, ESPN, Time Warner Cable and CNN. In addition, certain network operators such as BSkyB in the United Kingdom have entered into agreements, joint ventures, and other relationships with technology and entertainment companies. We expect competition in the interactive content and applications area to intensify as the general market for interactive television services further develops, particularly in the case of independent third parties that have the ability to develop applications for our middleware platform at relatively modest expense through the use of our applications development tools.

In the interactive television professional services area, we compete primarily with third party system integrators such as Accenture and Imagine Broadband, as well as with internal information technology staffs at our network operator customers. Other interactive television technology providers, such as Liberate Technologies, Canal+ Technologies and NDS, also provide a level of professional services in conjunction with their product offerings. In addition, Spyglass Integration faces competition from companies such as itaas, Rachis and Imagine Broadband.

I-9

Table of Contents

In the interactive gaming channels area, we face competition from network operators such as BSkyB, which operates its own branded gaming channel, Gamestar. We also face competition from independent interactive channel providers such as Visiware, which operates the Playin!TV channel.

Our Wink service faces competition from other providers and companies operating in the direct marketing business, especially operators of toll-free response call centers.

Intellectual Property and Research and Development

We have built a substantial intellectual property portfolio as a result of sustained research and development efforts over the past years. On a consolidated basis, our subsidiaries currently have forty-nine patents issued in the United States, 114 patents issued outside of the United States, and 354 patent applications pending throughout the world. We believe that our patent portfolio protects many of the key elements necessary to support digital interactive television. Our research and development expenses, excluding in-process research and development charges related to acquisitions, amortization of share-based compensation, and non-cash warrant expense, for the years ended December 31, 2002, 2001 and 2000 were $33.9 million, $40.3 million and $33.1 million, respectively.

Our ability to compete is dependent in part upon our ability to protect and further mature our intellectual property, both internally-developed and acquired. We rely on patent, trademark, trade secret and copyright law, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights in our technology. We believe that our current portfolio of patents is strong. This portfolio of patents contains many early patents in the digital interactive television field. Nevertheless, other companies may develop technologies that are similar or superior to our patents. In addition, it may be possible for third parties to copy or otherwise obtain and use our software and other proprietary information without authorization. Litigation may be necessary in the future to enforce or protect our intellectual property rights or to determine the validity and scope of our intellectual property rights and the proprietary rights of others. Any such litigation could cause us to incur substantial costs and diversion of resources, which in turn could adversely affect our business and our ability to compete. In addition, an adverse ruling or settlement resulting from such litigation could negatively impact our business, including our ability to offer certain products and/or features and thus our ability to compete.

Environmental Matters

Environmental laws vary significantly among the countries in which we operate. Under certain environmental laws, a current or previous owner of real property, and parties that generate or transport hazardous substances that are disposed of on real property, may be liable for the costs of investigating and remediating such substances on or under the property. Certain environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require expenditures by us for compliance. In connection with the ownership or operation of our facilities throughout the world, we may be liable for such costs in the future. We are not aware of any material environmental claims pending or threatened against us and we do not believe we are subject to any material environmental remediation obligations. However, there can be no assurance that a material environmental claim or compliance obligation will not arise in the future.

Employees

As of December 31, 2002, 2001 and 2000 we employed 443, 607 and 484, respectively, full-time equivalent employees, excluding temporary personnel and consultants. In 2002, we announced several restructuring initiatives that resulted in a substantial reduction in the size of our global employee base from December 31, 2001. We expect that our global employee base will be further reduced as we complete these initiatives during 2003. See “Item 1. Business.—General Development of the Business—Recent Developments.”

I-10

Table of Contents

Business Risk Factors

Certain statements in this Annual Report on Form 10-K are forward-looking statements that involve risks and uncertainties. Any statements in this document that are not statements of historical fact, including statements on our expectations, beliefs, intentions or strategies regarding the future are forward-looking statements within the meaning of the securities laws of the United States, and are subject to the safe harbor created by those laws. In some cases, you can identify forward-looking statements by words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “project,” “potential,” or “continue.” In particular, statements under Item 1. “Business,” Item 2. “Properties,” Item 3. “Legal Proceedings” and “Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

Interactive television is an emerging business and it may not attract widespread market acceptance or demand.

Our success will depend upon, among other things, the broad acceptance of interactive television by industry participants, including operators of broadcast and pay television networks, cable and direct broadcast satellite system operators and manufacturers of televisions and set-top boxes, as well as by television viewers and advertisers. Because the market for interactive television is emerging, the potential size of the market opportunity and the timing of its development are uncertain. The growth and future success of our business will depend in part upon our ability to penetrate new markets and convince cable and direct broadcast satellite system operators, television viewers and advertisers to adopt and maintain their use of our products and services.

Many key participants have not embraced interactive television, which is in its relative infancy, for a variety of reasons, including:

Accordingly, such participants may continue to perceive interactive television as an unproven business proposition and be reluctant to participate. If cable and direct broadcast satellite system operators determine that interactive television is not viable as a business proposition or if they determine that interactive television services are not consistent with their business or operational strategies, they may not choose, or may stop using, our products and services.

Unfavorable economic conditions may continue to affect the business decisions of industry participants in a manner that adversely impacts our business, results of operations and future prospects.

Worldwide economic growth has slowed significantly in recent periods and there is considerable uncertainty relating to the prospects for near-term economic growth. In addition, spending by participants in the interactive television industry has slowed significantly over this same time frame. These factors significantly and adversely impacted our business and results of operations during the year ended December 31, 2002.

Although we cannot predict when conditions will improve for the interactive television industry, we expect that industry participants will continue to spend cautiously over at least the short term. As a result, network operators may be less inclined to make capital investments in digital television infrastructure or place orders for our products, which may negatively impact our license and services and support revenues. To the extent that

I-11

Table of Contents

network operators reduce their rates of set-top box deployment, our royalty revenues would be adversely impacted. Our professional services and support revenues may suffer to the extent that network operators slow

down their selection of new applications and the design and installation of new interactive television services. There can be no assurance that any of these factors will not harm our business, results of operations or future prospects, particularly as they might impact the business decisions of customers such as BSkyB and Motorola that have contributed significantly to our overall revenues during prior periods.

Moreover, in the current economic climate, the large debt burdens, operating challenges and cash constraints of some of our customers may interfere with their ability to meet their payment obligations to us. Our bad debt expense might increase if customers go into bankruptcy or are otherwise unable to satisfy their payment obligations to us in full.

Our core middleware has achieved significant market penetration and, accordingly, our ability to generate future revenues may be limited.

We have on a historic basis derived a substantial amount of our total revenues from royalties associated with the deployment of our core middleware and fees charged for services rendered in support of our middleware deployments. Because there are currently only a limited number of cable and direct broadcast satellite system operators worldwide that deploy interactive products and services, and because our core middleware has achieved significant penetration in the markets that have adopted interactive television on a large scale, it has become increasingly difficult for us to generate substantial additional core middleware-related revenues. These difficulties contributed to the substantial revenue decline we experienced during 2002. For the year ended December 31, 2002, our total revenues declined 31% and our royalties attributable to the deployment of our middleware products declined 41%, compared to 2001.

Our capacity to generate future revenues associated with our core middleware may be limited due to a number of reasons. For example, network operators that have selected our core middleware may reduce their pace of set-top box deployment or stop deploying set-top boxes enabled with our core middleware altogether. They may also decrease or stop their use of our support services, or choose not to upgrade or add additional features to the version of our core middleware running on their networks. In addition, network operators that have not selected our core middleware in the limited number of markets that have adopted interactive television on a large scale may choose another middleware platform for the provision of interactive services, due to pre-existing economic relationships between such network operators and other middleware providers or otherwise, or determine that interactive television is not part of their long-term business strategies. Moreover, a meaningful opportunity to deploy our core middleware in the markets that have not yet adopted interactive television on a large scale may never develop or may develop at a very slow pace. Any of these eventualities would have an adverse effect on our results of operations.

We may have difficulty generating substantial content and applications revenues in the future.

We hope that growth in our content and applications revenues will mitigate or reverse the effects of the core middleware-related revenue declines on our overall revenues. In the past, we have derived only a small portion of our total revenues from our content and applications offerings and may have difficulty generating substantial applications-related revenues in the future. Because cable and direct broadcast satellite system operators control the marketing and distribution of our content and applications offerings, we cannot predict the amount of revenues that will be generated by those offerings, or whether such revenues will be sufficient to offset our costs of development. Moreover, due to the continuing global economic downturn, cable and direct broadcast satellite system operators may slow down their deployment of new content and applications offerings. In addition, our content and applications offerings are subject to general risks related to consumer preferences; consumer preferences change rapidly and we may not be able to monitor, anticipate and successfully respond to these changes. Accordingly, our ability to generate substantial revenues from our content and applications offerings is uncertain.

I-12

Table of Contents

Our restructuring initiatives may result in unanticipated consequences and may not be as successful in reducing expenses as we had anticipated.

As described in “Item 1. Business. General Development of the Business—Recent Developments,” we began to implement various restructuring initiatives in 2002 in an effort to streamline our worldwide operations and reduce our operating expenses. In this regard, we have undertaken and are continuing to undertake efforts to consolidate our operations, close various offices around the world, move our headquarters facilities from Mountain View, California to San Francisco, California and reduce our headcount by over 50% across all areas of our business. These initiatives may yield unanticipated consequences, such as attrition beyond our planned reduction in workforce and loss of employee morale and decreased performance. In addition, the recent reduction or elimination of cash bonuses and other employee benefits may reduce incentives for employees to remain with us. These reductions in personnel, both anticipated and unanticipated, could materially and adversely impact our sales and marketing efforts, our research and development efforts, and our professional services and our general and administrative functions.

In conjunction with these restructuring initiatives, we have engaged and are continuing to engage in a review of our operations with a view towards improving our business performance. There is a risk that, as new business strategies and administrative processes are developed and implemented, the changes we adopt will be unduly disruptive or less effective than our old strategies and processes. This may adversely affect our business, results of operations and future prospects.

We may be unable in the future to raise additional capital required to support our operating activities.

We expect that our capital resources, which included cash, cash equivalents and marketable debt securities of $87.7 million at December 31, 2002, will be sufficient to meet our cash requirements through at least the next twelve months.

Nevertheless, we have incurred to date and expect that we will continue to incur in the future significant research and development, sales and marketing, and general and administrative expenses, many of which result from non-cancelable operating commitments. We used approximately $41 million in cash for operating activities during the fiscal year ended December 31, 2002 and we expect that cash used in operating activities for the year ending December 31, 2003 will be in the range of $30 to $40 million. Based on these levels of cash uses, we may need to raise additional capital in the future if we are unable to reduce substantially the amount of cash used in our operating activities. While we are implementing various initiatives designed to reduce our operating expenses and bring them in line with our revenues, there can be no assurance that we will be successful in doing so.

To the extent we are required to raise additional capital, we may not be able to do so at all or we may be able to do so only on unacceptable terms. If we cannot raise additional capital on acceptable terms, we may not be able to develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, any of which could have an adverse effect on our business, results of operations or future prospects.

If additional capital is raised through the issuance of equity securities or convertible debt securities, the percentage ownership of our existing shareholders will be reduced and shareholders may experience dilution in net book value per share. Any debt financing, if available, may involve covenants limiting or restricting our operations or future opportunities.

We may have difficulty integrating the operations, products and personnel of acquired companies.

We expect our recent acquisition of Wink Communications to enhance our existing product offerings, research and development capabilities and ability to offer customers interactive television solutions across a wide range of technical platforms, and hope to achieve similar benefits through our proposed acquisition of ACTV. Nevertheless, we may have difficulty integrating the product lines, technologies, operations, financial systems and distinct corporate culture of Wink Communications. We may face similar difficulties upon completion of the

I-13

Table of Contents

proposed acquisition of ACTV. If our integration efforts are not successful, we will not receive the benefits we expected from these acquisitions. In addition, any difficulties arising during our integration efforts may impair relationships with employees and customers and distract us from operating our business. Any of these eventualities could have a negative effect on our business, results of operations and future prospects.

We depend upon key personnel to manage and operate our business, and we may be unable to attract or retain such personnel.

Our business and success depends in part on our ability to attract and retain experienced management, technical, sales, marketing and financial personnel. In 2002, we began to implement various restructuring initiatives that have resulted in substantial reductions in personnel and significant turnover among key members of management. If our new organization of senior management does not work well together, or if we have difficulties retaining remaining key non-management personnel or replacing key non-management personnel who leave our employment, our ability to manage day-to-day operations, develop and deliver new technologies, attract and retain customers, attract and retain other employees, and generate revenues could be materially and adversely affected.

Our business also requires highly trained consulting and support personnel to assist customers with launch and deployment of our products. In the future, we may need to increase our consulting and support staff to support new customers and the expanding needs of our existing customers. Notwithstanding the current economic climate, hiring consulting and support personnel has remained very competitive in our industry due to the limited number of people available with the necessary technical skills and understanding of the interactive television market, and we have experienced difficulty in recruiting qualified personnel in the past. Even if we invest significant resources in attempting to attract, train and retain these qualified personnel, we may not be successful in our efforts, which may have a negative effect on our business and results of operations.

To achieve our business objectives, we may recruit and employ skilled technical professionals from other countries to work in the United States. Limitations imposed by federal immigration laws and the availability of visas could adversely affect our ability to attract necessary qualified personnel. This also may have a negative effect on our business and results of operations.

The trend of consolidation among industry participants may adversely impact our business, results of operations and future prospects.

There has been a worldwide trend of consolidation in the cable and satellite industries, as evidenced in the United States by the combination of AT&T Broadband with Comcast Corporation and in the European Union by the acquisition of United Pan-Europe Communication’s Wizja Network in Poland by Canal + Group and by the proposed combination transaction with Via Digital and Canal + Group in Spain. We believe this trend is likely to continue due to economic and competitive concerns. This trend may expand to include other companies involved with the interactive television industry. While the full impact of this trend is uncertain at the present time, we will need to adapt to changing relationships with industry participants as companies consolidate. If we are unable to successfully manage these changing relationships, our business and results of operations may be adversely affected. In addition, we believe that prior to making any decisions to commit significant resources to interactive television in the near term, network operators are likely to assess the changing industry landscape, which may delay further proliferation of our products and services and thereby harm our future prospects.

The market for our products and services is subject to significant competition, which could adversely affect our business.

We face competition from a number of companies, including many that have significantly greater financial, technical and marketing resources and a better recognized brand name than we do. Current and potential competitors in one or more aspects of our business include interactive television technology companies,

I-14

Table of Contents

companies developing interactive television content and entertainment, and, in the professional services area, third party system integrators and internal information technology staffs at our cable and direct broadcast satellite system operator customers. If any of these competitors achieves significant market penetration or other significant success within the markets upon which we rely as a significant source of revenue, or in new markets that we may enter in the future, our ability to maintain market share and sustain our revenues may be materially and adversely affected. For further information concerning our competition, see “Item 1. Business—Narrative Description of Business—Competition.”

Because much of our success and value lies in our ownership and use of our intellectual property, our failure to protect our intellectual property and develop new proprietary technology may negatively affect us.

Our ability to conduct our business effectively is dependent in part upon the maintenance and protection of our intellectual property. We rely on patent, trademark, trade secret and copyright law, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights in and to our technology. We have typically entered into confidentiality or license agreements with our employees, consultants, customers, strategic partners and vendors, in an effort to control access to, and distribution of, our software, related documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our software and other proprietary information without authorization.

Policing unauthorized use of our software and proprietary information is difficult. The steps we have taken may not prevent misappropriation of our intellectual property and the agreements we enter into may not be enforceable in some instances. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries or, alternatively, such protection may be difficult to enforce. Litigation may be necessary in the future to enforce or protect our intellectual property rights or to determine the validity and scope of our intellectual property rights and the proprietary rights of others. Any such litigation could cause us to incur substantial costs and diversion of resources, which in turn could adversely affect our business.

Intellectual property infringement claims may be asserted against us, which could have the effect of disrupting our business.

The emerging interactive television industry is highly litigious, particularly regarding claims of intellectual property infringement. The defense of any such claims could cause us to incur significant costs and could result in the diversion of resources to the defense of any claims brought, which could adversely affect our financial condition and operating results. As a result of such infringement claims, a court could issue an injunction preventing us from distributing certain products, which could adversely affect our business. If any claims or actions are asserted against us, we may seek to obtain a license of a third party’s intellectual property rights in order to avoid any litigation. However, a license under such circumstances may not be available on commercially reasonable terms, if at all.

In addition, many of our agreements with customers contain an indemnification obligation, which could be triggered in the event that a customer is named in an infringement suit involving their products or involving the customer’s products or services that incorporate or use their products. If it is determined that our products infringe any of the asserted claims in such a suit, we may be prevented from distributing certain of our products and we may incur significant indemnification liabilities that may not be covered by insurance, which may adversely affect our business, financial condition and operating results. See “Item 3. Legal Proceedings.”

The adoption of incompatible standards by our industry and rapid technological advances could render our products and services obsolete or non-competitive.

The migration of television from analog to digital transmission, the convergence of television, the Internet, communications and other media, and other emerging trends are creating a dynamic and unpredictable

I-15

Table of Contents

environment in which to operate. Our ability to anticipate trends and adapt to new technologies and evolving standards is critical to our success.

Recent attempts to establish industry-wide standards for interactive television software include an initiative by cable network operators in the United States to create a uniform platform for interactive television called Open Cable and an initiative by European television industry participants to create a platform called Multimedia Home Platform. The establishment of these standards or other similar standards could adversely affect the pricing of our products and services, significantly reduce the value of our intellectual property and the competitive advantage our proprietary technology provides, cause us to incur substantial expenditures to adapt our products or services to respond to these developments, or otherwise hurt our business, particularly if our products require significant redevelopment in order to conform to newly established standards.

Any delay or failure on our part to respond quickly, cost-effectively and sufficiently to these developments could render our products and services obsolete or non-competitive and have an adverse effect on our business, financial condition and operating results.

In addition, we must stay abreast of cutting-edge technological developments and evolving service offerings to remain competitive and increase the utility of our services, and we must be able to incorporate new technologies into our products in order to address the increasingly complex and varied needs of our customer base. There can be no assurance that we will be able to do so successfully, and any failure to do so may adversely affect us.

Government regulations may adversely affect our business.

The telecommunications, media, broadcast and cable television industries are subject to extensive regulation by governmental agencies. These governmental agencies continue to oversee and adopt legislation and regulation over these industries, particularly in the areas of user privacy, consumer protection, the online distribution of content and the characteristics and quality of online products and services, which may affect our business, the development of our products, the decisions by market participants to adopt our products and services or the acceptance of interactive television by the marketplace in general. In particular, governmental laws or regulations restricting or burdening the exchange of personally identifiable information could delay the implementation of interactive services or create liability for us or any other manufacturer of software that facilitates information exchange. These governmental agencies may also seek to regulate interactive television directly. Future developments relating to any of these regulatory matters may adversely affect our business.

Our multinational operations expose us to certain financial and operational risks.

We derive our revenues from, and have business activities in, a number of countries throughout the world. This exposes us to a number of risks, such as:

Any of these factors could have an adverse effect on our business, financial condition and operating results.

I-16

Table of Contents

Our software products may contain errors, which could cause us to lose revenue and incur unexpected expenses.

Software development is an inherently complex and subjective process, which frequently results in products that contain errors, as well as defective features and functions. Moreover, our technology is integrated into the products and services of our cable and direct broadcast satellite system operator customers. Accordingly, a defect, error or performance problem with our technology could cause the systems of our cable and direct broadcast satellite system operator customers to fail for a period of time. Any such failure could subject us to damage claims and claims for indemnification by our customers that may not be covered by insurance and result in severe customer relations problems and harm to our reputation.

*    *    *    *    *

The forward-looking statements and risks and uncertainties discussed herein speak only as of the date of this Annual Report on Form 10-K, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

Financial Information About Geographic Areas

Please see Note 15 to our Consolidated Financial Statements for financial information about our geographic areas.

Item 2.     Properties

Our corporate headquarters and executive offices are presently located in Mountain View, California, where we occupy 78,257 square feet of space under three separate leases. The first lease is for 36,257 square feet of space and expires on October 31, 2004. The second lease is for 25,000 square feet of space and also expires on October 31, 2004. The third lease is for 17,000 square feet of space and expires on August 31, 2003. The principal administrative, marketing and product development facilities for our subsidiary Wink Communications are located in approximately 48,000 square feet of office space in Alameda, California under a sublease that expires in September 2004. In addition to the foregoing, we have leased regional office space elsewhere in the United States and throughout the world.

In 2002, we announced restructuring initiatives that resulted in the closure of certain regional offices and are expected to result in the closure of additional offices in 2003. See “Item 1. Business.—General Development of the Business—Recent Developments.” In furtherance of these restructuring initiatives, we entered into a lease in March 2003 for 60,458 square feet of space located in San Francisco, California in an effort to reduce lease expense, consolidate operations and generate operational synergies and efficiencies. We intend to move our Mountain View and Alameda operations to this San Francisco space, which would then become our corporate headquarters and executive offices. We expect that this move will be completed during the second quarter of 2003. This lease expires on January 31, 2010.

We expect that we may from time to time close further regional offices or open additional regional offices as the circumstances of our business may require.

Item 3.     Legal Proceedings

OpenTV, Inc. v. Liberate Technologies, Inc., Case No. C-02-06555. On February 7, 2002, OpenTV, Inc., our subsidiary, filed a lawsuit against Liberate Technologies, Inc. alleging patent infringement in connection with two patents held by OpenTV, Inc. relating to interactive technology. The lawsuit is pending in the United States District Court for the Northern District of California. On March 21, 2002, Liberate Technologies filed a

I-17

Table of Contents

counterclaim against OpenTV, Inc. for alleged infringement of four patents allegedly owned by Liberate Technologies. Liberate Technologies has since dismissed its claims of infringement on two of those patents. In January 2003, the Court granted two of OpenTV, Inc.’s motions for summary judgment pursuant to which the court dismissed Liberate Technologies’ claim of infringement on one of the remaining patents and dismissed a defense asserted by Liberate Technologies to OpenTV, Inc.’s infringement claims, resulting in only one patent of Liberate Technologies remaining in the counterclaim. We believe that our subsidiary’s lawsuit is meritorious and that it intends to vigorously pursue prosecution of its claims against Liberate Technologies. In addition, we believe that OpenTV, Inc. has meritorious defenses to the counterclaims brought against OpenTV, Inc. and will defend itself vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of a favorable outcome or estimate our potential liability, if any.

In re OpenTV Corp. Initial Public Offering Securities Litigation, Civil Action No. 01-CV-7032. In July 2001, Brody v. OpenTV Corp., et al., Civil Action No. 01-CV-7032, the first of a series of putative securities class actions, was filed in United States District Court for the Southern District of New York against certain investment banks which acted as underwriters for our initial public offering, us, and various of our officers and directors. These lawsuits were consolidated and are captioned In re OpenTV Corp. Initial Public Offering Securities Litigation, Civil Action No. 01-CV-7032. The complaints allege undisclosed and improper practices concerning the allocation of our initial public offering shares, in violation of the federal securities laws, and seek unspecified damages on behalf of persons who purchased our Class A ordinary shares during the period from November 23, 1999 through December 6, 2000. The Court has appointed a lead plaintiff for the consolidated cases. On April 19, 2002, the plaintiffs filed an amended complaint. Other actions have been filed making similar allegations regarding the initial public offerings of more than 300 other companies, including Wink Communications as discussed in greater detail below. All of these lawsuits have been coordinated for pretrial purposes as In re Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. Defendants in these cases have filed omnibus motions to dismiss on common pleading issues. Oral arguments on these omnibus motions to dismiss were held on November 1, 2002. All claims against our officers and directors have been dismissed without prejudice in this litigation. On February 19, 2003, the Court denied in part and granted in part the motion to dismiss filed on behalf of defendants, including us. The Court’s order dismissed all claims against us except for a claim brought under Section 11 of the Securities Act of 1933. However, the Court has given plaintiffs an opportunity to amend their claims in order to state a claim. We believe that we have meritorious defenses to the claims brought against us and will defend these claims vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of a favorable outcome or estimate our potential liability, if any.

In re Wink Communications, Inc. Initial Public Offering Securities Litigation, Civil Action No. 01-Civ. 10638 (SAS). In November 2001, Collegeware v. Wink Communications, Inc., et al., the first of a series of putative securities class actions, was filed in United States District Court for the Southern District of New York against certain investment banks which acted as underwriters for Wink Communications’ initial public offering, Wink Communications, and two of Wink Communications’ officers and directors. These lawsuits are captioned In re Wink Communications, Inc. Initial Public Offering Securities Litigation, Civil Action No. 01-Civ. 10638 (SAS). The complaints allege undisclosed and improper practices concerning the allocation of Wink Communications’ initial public offering shares, in violation of the federal securities laws, and seek unspecified damages on behalf of persons who purchased Wink Communications’ common stock during the period from August 19, 1999 through December 6, 2000. On April 19, 2002, the plaintiffs filed an amended complaint. This action is among the over 300 lawsuits that have been consolidated for pretrial purposes as In re Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. Defendants in these cases have filed motions to dismiss on common pleading issues. Oral arguments on these omnibus motions to dismiss were held on November 1, 2002. On February 19, 2003, the Court ruled on the motions to dismiss. The Court denied the motions to dismiss claims against the company and the individual defendants under Sections 11 and 15 of the Securities Act of 1933. The Court granted the motion to dismiss the claims under Section 10(b) of the Securities Exchange Act of 1934 against the company and one individual defendant, and denied that motion against the other individual defendant and 59 individual defendants in the related cases, on the basis that the respective

I-18

Table of Contents

amended complaints alleged that the individuals sold stock. The Court granted the motion to dismiss the claims under Section 20(a) of the Securities Exchange Act of 1934. OpenTV believes that Wink Communications has meritorious defenses to the claims brought against it and that Wink Communications intends to defend itself vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of a favorable outcome or estimate our potential liability, if any.

James Brown v. OpenTV, Inc., Case No. CV815906. On April 1, 2003, James Brown, one of our former executive officers, filed a lawsuit in the Superior Court of the State of California, Country of Santa Clara, against OpenTV, Inc. in connection with the termination of his employment with us in January 2003. The lawsuit alleges, among other things, breach of contract, breach of the covenant of good faith and fair dealing, failure to pay wages, wrongful termination in violation of public policy and the intentional infliction of emotional distress. We believe that OpenTV, Inc. has meritorious defenses to the claims brought against it and will defend itself vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of a favorable outcome or estimate our potential liability, if any.

Litigation Relating to the Proposed Acquisition of ACTV, Inc.    On November 18, 2002, a purported class action complaint was filed in the Court of Chancery of the State of Delaware in and for the County of New Castle against ACTV, its directors and us. The complaint generally alleges that the directors of ACTV breached their fiduciary duties to the ACTV shareholders in approving the merger agreement and that, in approving the merger agreement, ACTV’s directors failed to take steps to maximize the value of ACTV to its shareholders. The complaint further alleges that we aided and abetted the purported breaches of fiduciary duties committed by ACTV’s directors on the theory that the potential merger could not occur without our participation. The complaint seeks certain forms of equitable relief, including enjoining the consummation of the merger. We believe that the allegations are without merit and intend to defend against the complaint vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of a favorable outcome or estimate our potential liability, if any.

Arbitration Demand from Thomas Weisel Partners LLC.    On March 3, 2003, Thomas Weisel Partners LLC filed a demand for arbitration against our subsidiary, OpenTV, Inc., asserting claims for breach of contract and other legal and equitable claims arising from the acquisition of Wink Communications by OpenTV U.S. Holdings, Inc., another one of our subsidiaries. The arbitration, styled Thomas Weisel Partners LLC v. OpenTV, Inc., is pending in a JAMS Alternative Dispute Resolution forum in San Francisco, California. The demand alleges that OpenTV, Inc. failed to pay Thomas Weisel Partners LLC $1,903,623.60 upon the acquisition of Wink Communications as required by the terms of a letter agreement between the parties, and seeks undisclosed damages. We believe that OpenTV, Inc. has meritorious defenses to the claims brought against it and will defend itself vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of a favorable outcome.

*    *    *    *    *

On December 4, 2000, a suit was filed in the United States District Court for the District of Delaware by Pegasus Development Corporation and Personalized Media Communications, LLC alleging that DIRECTV, Inc., Hughes Electronics Corp., Thomson Consumer Electronics and Philips Electronics North America, Inc. are willfully infringing certain claims of seven U.S. patents assigned or licensed to Personalized Media Communications. Though Wink Communications is not a defendant in the suit, Personalized Media Communications may allege that certain products of Wink Communications, possibly in combination with products provided by the defendants, infringe Personalized Media Communication’s patents. The agreements between Wink Communications and each of the defendants include indemnification obligations that may be triggered by this litigation. If it is determined that Wink Communications is obligated to defend any defendant in this matter, and/or that the products of Wink Communications infringe any of the asserted claims, our business performance, financial position, results of operations or cash flows may be adversely affected. No provision has been made in our consolidated financial statements for this matter. We are unable to estimate our potential liability, if any.

I-19

Table of Contents

On November 30, 2001, a suit was filed in the United States District Court for the District of Colorado by Broadcast Innovation, L.L.C. alleging that DIRECTV, Inc., EchoStar Communications Corporation, Hughes Electronics Corporation, Thomson Multimedia, Inc., Dotcast, Inc. and Pegasus Satellite Television, Inc. are infringing certain claims of United States patent no. 6,076,094, assigned to or licensed by Broadcast Innovation. Though neither we nor any of our subsidiaries is currently a defendant in the suit, Broadcast Innovation may allege that certain of the products of Wink Communications and OpenTV, Inc., possibly in combination with the products provided by some of the defendants, infringe Broadcast Innovation’s patent. The agreements between (1) OpenTV, Inc. and EchoStar and (2) Wink Communications and DIRECTV include indemnification obligations for OpenTV, Inc. and Wink Communications, respectively, that may be triggered by the litigation. If liability is found against EchoStar in this matter, and if such a decision implicates OpenTV, Inc.’s technology or products, EchoStar has notified OpenTV, Inc. of its expectation of indemnification, in which case our business performance, financial position, results of operations or cash flows may be adversely affected. Likewise, if OpenTV, Inc. were to be named as a defendant and it is determined that the products of OpenTV, Inc. infringe any of the asserted claims, and/or it is determined that OpenTV, Inc. is obligated to defend EchoStar in this matter, our business performance, financial position, results of operations or cash flows may be adversely affected. Further, if liability is found against DIRECTV in this matter, and if such a decision implicates Wink Communications’ technology or products, DIRECTV has notified Wink Communications of its expectation of indemnification, in which case our business performance, financial position, results of operations or cash flows may be adversely affected. Likewise, if Wink Communications were to be named as a defendant and it is determined that the products of Wink Communications infringe any of the asserted claims, and/or it is determined that Wink Communications is obligated to defend DIRECTV in this matter, our business performance, financial position, results of operations or cash flows may be adversely affected. No provision has been made in our consolidated financial statements for these matters. We are unable to estimate our potential liability, if any.

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

None.

I-20

Table of Contents

PART II.

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

Market Information

Our Class A ordinary shares began trading on the Nasdaq National Market and what is now operating as the Official Segment of the stock market of Euronext Amsterdam N.V., or Euronext Amsterdam, under the symbol “OPTV” on November 23, 1999. Our Class B ordinary shares are not publicly traded.

On February 19, 2003, we received a letter notifying us of a determination by the Nasdaq staff to delist our Class A ordinary shares from The Nasdaq Stock Market at the opening of business on February 28, 2003, absent an appeal by us. The delisting letter was given by the Nasdaq staff due to our noncompliance with Marketplace Rules 4350(e) and 4350(g), which require Nasdaq issuers to hold annual shareholder meetings and to solicit proxies therefore. We did not hold an annual meeting during 2002. On February 26, 2003, we filed a request for a hearing before a Nasdaq Listing Qualifications Panel to review the determination of the Nasdaq staff. On that same day, we were informed that the Nasdaq had granted our request for a hearing which was held on April 3, 2003. Pending the decision of the panel at the hearing, the delisting determination of the Nasdaq staff has been stayed and our Class A ordinary shares continue to trade on The Nasdaq Stock Market. No assurance can be given that the Listing Qualifications Panel will grant our request for continued listing.

The following table lists the high and low sales prices for our Class A ordinary shares on both the Nasdaq National Market and the Euronext Amsterdam for the periods indicated. We obtain our Euronext Amsterdam quotes, which are reported in United States dollars, from Dialog, a business of The Thomson Corporation that provides online-based information services.

Holders

As of February 28, 2003, there were 428 holders of record of our Class A ordinary shares (which amount does not include the number of beneficial owners of our ordinary shares whose shares are held of record by banks, brokerage houses or other institutions) and three holders of record of our Class B ordinary shares.

Dividends

We have never paid any cash dividends on our ordinary shares. We anticipate that any earnings in the foreseeable future will be retained to finance our business, and we have no current intention to pay cash dividends on our ordinary shares. The payment of dividends is within the discretion of our board of directors and will be dependent upon, among other factors, our results of operations, financial condition, capital requirements, legal requirements and any restrictions imposed by financing arrangements.

II-1

Table of Contents

Certain Aspects of British Virgin Islands Law

There are no governmental laws, decrees or regulations in the British Virgin Islands that restrict the export or import of capital, including, but not limited to, foreign exchange controls, or that affect the remittance of dividends or other payments to holders of our ordinary shares who are not residents of the British Virgin Islands. In particular, the British Virgin Islands does not impose a withholding tax on dividends paid by companies such as us that are incorporated under the International Business Companies Act of the British Virgin Islands.

Under the International Business Companies Act of the British Virgin Islands, a holder of our ordinary shares who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid on our ordinary shares and no holders of our ordinary shares are liable to the British Virgin Islands for income tax on gains realized during any taxable year on sale or disposal of our ordinary shares. There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on the holders of our ordinary shares. In addition, our ordinary shares are not subject to transfer taxes, stamp duties or other similar charges as a matter of British Virgin Islands law.

There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table presents information about our equity compensation plans as of December 31, 2002:

Equity Compensation Plan Information

(as of December 31, 2002)

Our board of directors has suspended offering periods under our Amended and Restated 1999 Employee Stock Purchase Plan (the “ESPP”), and no options or purchase rights are currently outstanding under the ESPP.

II-2

Table of Contents

Exchange rights granted under the Exchange Plan enable the holder to exchange, generally on a one for one basis, shares of the common stock of our majority-owned subsidiary OpenTV, Inc. (including shares of OpenTV, Inc. common stock that may be acquired pursuant to the exercise of options outstanding under OpenTV, Inc.’s Amended and Restated 1998 Stock Purchase/Stock Issuance Plan (the “1998 Plan”)) for newly-issued Class A ordinary shares. Although 996,221 Class A ordinary shares were reserved for future issuance under the Exchange Plan as of December 31, 2002, only 979,511 shares of OpenTV, Inc. common stock (149,000 of which were underlying options to purchase shares of OpenTV, Inc. common stock previously granted under the 1998 Plan at a weighted-average exercise price of $3.94) were actually eligible for exchange under the Exchange Plan as of that date. We no longer grant options from the 1998 Plan.

Pursuant to the Ackerman Employment Agreement, which is described in greater detail under “Item 13. Certain Relationships and Related Transactions”, we agreed, among other things and subject to certain conditions, to issue Class A ordinary shares to him having an aggregate fair market value of approximately $148,000 on each of January 1, 2003 and January 1, 2004. Although the Ackerman Employment Agreement was not approved by the holders of our Class A ordinary shares, we expect to issue these shares pursuant to the share issuance feature of the 1999 Plan.

Our board of directors adopted the 2001 Nonstatutory Stock Option Plan (the “2001 Plan”) in October 2001. The 2001 Plan did not require the approval of our shareholders, and no shareholder approval was obtained or sought. The material features of the 2001 Plan are summarized below.

Share Reserve.    We have reserved an aggregate of 500,000 Class A ordinary shares for issuance upon the exercise of options granted under the 2001 Plan, and no Class A ordinary shares have been issued upon the exercise of options granted under the 2001 Plan to date. Options to purchase 114,540 Class A ordinary shares were outstanding under the 2001 Plan as of December 31, 2002. As of December 31, 2002, 385,460 Class A ordinary shares were reserved for future issuance under the 2001 Plan. If options awarded under the 2001 Plan are forfeited or cancelled, expire or otherwise terminate without being exercised, then those options will again become available for grant under the 2001 Plan.

Administration.    The compensation committee of our board of directors administers the 2001 Plan. The compensation committee has complete discretion to make all decisions relating to the administration, interpretation and operation of the 2001 Plan.

Eligibility.    The following groups of individuals are eligible to participate in the 2001 Plan:

Structure of Plan.    The 2001 Plan permits the grant of options to purchase Class A ordinary shares to eligible participants. Options to purchase our Class A ordinary shares that may be granted under the 2001 Plan are non-statutory options and do not qualify for the favorable tax treatment afforded incentive options under Section 422 of the Code. The exercise price and other terms of non-statutory options granted under the 2001 Plan will be determined by the compensation committee. The compensation committee may provide that non-statutory options will be transferable.

II-3

Table of Contents

Corporate Transaction.    Options granted under the 2001 Plan will automatically vest in full upon the occurrence of certain change of control events, if such options are not assumed or exchanged for equivalent rights by the successor entity in accordance with the terms of the 2001 Plan. In the event of a corporate transaction that does not result in the automatic vesting of options and other awards, the board of directors or the compensation committee has discretion to accelerate vesting of such options and other awards.

Amendment and Termination.    The board of directors may amend the 2001 Plan at any time. If our board of directors amends the 2001 Plan, shareholder approval will only be sought if required by applicable law. The 2001 Plan will terminate upon the earliest of (i) ten years after its adoption by our board, or (ii) such earlier date as determined by our board of directors.

Recent Sales of Unregistered Securities

On December 6, 2002 we issued 626,872 Class A ordinary shares to certain of the former shareholders of Static 2358 Holdings Limited, none of which is a resident of the United States, pursuant to the earn-out provisions contained in that certain Principal Share Purchase Agreement dated as of June 13, 2001 by and among OpenTV Corp., the Vendors named therein and Paul Bustin. These shares were issued without registration in reliance on Regulation S, which provides an exemption from the registration requirements of the Securities Act of 1933, as amended, for certain types of offshore transactions.

Use of Proceeds

On November 23, 1999, we commenced an initial public offering of 8,625,000 Class A ordinary shares (including an underwriters’ over-allotment option of 1,125,000 Class A ordinary shares) at $20.00 per Class A ordinary share pursuant to a Registration Statement on Form F-1, as amended (File No. 333-89609), that was declared effective by the Securities and Exchange Commission on November 22, 1999. The offering was completed on November 29, 1999, and all shares were sold. Merrill Lynch & Co. acted as lead manager and Thomas Weisel Partners LLC acted as co-manager in the offering of 4,312,500 Class A ordinary shares in the United States and Canada; Merrill Lynch International acted as lead manager and MeesPierson N.V. and Thomas Weisel Partners LLC acted as co-lead managers in the offering of 4,312,500 Class A ordinary shares outside the United States and Canada. Aggregate gross proceeds from our initial public offering were $172.5 million. After deducting $15.5 million in underwriting discounts and other related costs, net proceeds from our initial public offering were approximately $157 million. None of our underwriters was affiliated with our directors, our officers, or us and we directly paid the underwriting discounts. The net proceeds from our initial public offering have been applied in full toward working capital needs, the development of our applications business, and acquisitions and investments, with our cash reserves having been replenished with revenues from operations, proceeds from the sale of our ordinary shares, and cash acquired through acquisitions.

II-4

Table of Contents

Item 6.     Selected Financial Data

The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Consolidated Financial Statements, and Notes thereto included elsewhere in this report. The historical results are not necessarily indicative of results to be expected for any future period. The selected financial data for 2001 and 2000 contain certain financial information that has been restated. See Note 16 of the Notes to Consolidated Financial Statements.

II-5

Table of Contents

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

The following discussion and analysis provides information concerning our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto.

The financial information for the years ended December 31, 2001 and 2000 has been restated for the correction in accounting for the exchangeable shares and the goodwill impairment as discussed in Note 16 to our consolidated financial statements. The financial information for the years ended December 31, 2001 and 2000 presented for comparative purposes has been reclassified consistent with the current income statement presentation as discussed in Note 2 to our consolidated financial statements. As a result of the adoption of the EITF No. 01-09 in 2002, the comparative revenues for 2001 have been reduced due to the reclassification of a one-time payment for marketing the BSkyB hard-drive set-top box.

Overview

We are one of the world’s leading interactive television companies. We provide operating middleware, interactive content and applications, interactive advertising and games, content creation tools, professional support services and strategic consulting for digital television network operators.

During 2002, reductions by cable and satellite providers in their capital spending and rollout of interactive television-related products and similar reductions by other customers had a significant adverse effect on the interactive television market, and on our operations. As more fully described below, we expect this trend to continue until economic conditions improve for interactive television participants.

We have made several acquisitions over the past three years, the effects of which impact the comparability of our operating results. These acquisitions were:

We have earned significant revenues from customers who are also strategic investors in our business. Revenues from these strategic investors were as follows (in millions):

II-6

Table of Contents

Critical Accounting Policies

Our consolidated financial statements include the accounts of OpenTV and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. In preparing these consolidated financial statements, we made our best estimates and judgments, which are normally based on knowledge and experience with regards to past and current events and assumptions about future events, giving due consideration to materiality. Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported. All of these accounting policies, estimates and assumptions, as well as the resulting impact to our financial statements, have been discussed with our audit committee. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the notes to the consolidated financial statements.

Revenue Recognition

We derive revenue from four primary sources: (i) royalties, (ii) professional services, support and other, (iii) channel fees, and (iv) license fees. These revenue categories are discussed below.

Royalties.    We recognize royalties upon notification of set-top box shipments from licensees. For non-refundable prepaid royalties, we recognize revenue upon delivery of software provided that all other requirements of Statement of Position No. 97-2, “Software Revenue Recognition,” are met.

Professional Services, Support and Other.    For contracts with multiple obligations (e.g. maintenance and other services), and for which vendor-specific objective evidence of fair value for the undelivered elements exists, we recognize revenue for the delivered elements based upon the residual contract value as prescribed by Statement of Position No. 98-9, “Modification of SOP No. 97-2 with Respect to Certain Transactions.” Generally we have vendor-specific objective evidence of fair value for the maintenance element of software arrangements based on the renewal rates for maintenance in future years as specified in the contracts. In such cases, we defer the maintenance revenue at the outset of the arrangement and recognize it ratably over the period, during which the maintenance is to be provided, which generally commences on the date the software is delivered. Payments for maintenance and support fees are generally made in advance and are non-refundable. Vendor-specific objective evidence of fair value for the service element is determined based on the price charged when those services are sold separately. For revenue allocated to consulting services and for consulting services sold separately, we recognize revenue as the related services are performed.

Professional services revenues from software development contracts are recognized generally on the percentage of completion method. Under the percentage of completion method, the extent of progress towards completion is measured based on actual costs incurred to total estimated costs. Provisions for estimated losses on uncompleted contracts are made in the period in which estimated losses are determined. Revenues from professional services agreements which include software customization services and implementation support to customers, are recognized on the percentage of completion method based on the costs incurred relative to total estimated costs for fixed bid contracts or based on the hours incurred multiplied by the hourly rate for time and material engagements.

Advertising revenues earned under the Wink brand are recognized based upon response transactions generated by television viewers at the time the response data is routed to the customer.

Channel Fees.    Under the Static brand, premium rate telephony charges are derived as consumers interact with our PlayJam channel. Premium rate telephony charges are recorded as revenue upon notification from the telecommunications companies with the amount due to the service providers and network operators recorded as cost of services.

II-7

Table of Contents

License Fees.    In accordance with Statement of Position 97-2, we recognize product license revenue upon shipment if a signed contract exists, delivery has occurred, the fee is fixed or determinable and collection of the resulting receivable is probable.

We generally enter into arrangements with network operators whereby we license our application software to network operators in exchange for a percentage of the revenue they earn from their customers. When we have delivered all of the software under the arrangement, we recognize the revenue as the network operator reports to us its revenue share, which is done generally on a quarterly basis. Under arrangements where the customer receives rights for unspecified future applications when they are made available, we recognize the revenue over the term of the arrangement.

For the Wink Engine software we recognize license revenue on a “sell through” basis based upon notification of set-top box shipments from licensees.

We comply with the requirements of Emerging Issues Task Force (“EITF”) No. 01-09 which require that consideration, including equity instruments, given to a customer should be classified in the vendor’s income statement as a reduction of revenue unless the consideration relates to a separable identifiable benefit received from the customer and the fair value of such benefit can be reasonably estimated.

Allowance for Doubtful Accounts

We periodically make estimates of the uncollectability of our accounts receivable. Our customer base is dispersed across many geographic areas and we generally do not require collateral. We analyze, among other things, historic collection experience, customer credit-worthiness, current economic trends in each country where our customers are located, and customer payment history when evaluating the adequacy of the allowance for doubtful accounts. Significant management judgment is required in determining the adequacy of the allowance for doubtful accounts. Changes in market or customer conditions could affect this evaluation.

Valuation of Investments in Privately-Held Companies

We invest in equity and debt instruments of privately-held companies for the promotion of business and strategic objectives, and typically we do not attempt to reduce or eliminate the inherent market risks of these investments. We perform periodic reviews of our investments for impairment. Our investments in privately-held companies are considered impaired when a review of the investee’s operations and other indicators of impairment indicate that there has been a decline in the fair value that is other than temporary and the carrying value of the investment is not likely to be recoverable. Such indicators include, but are not limited to, limited capital resources, need for additional financing, and prospects for liquidity of the related securities. Impaired investments in privately-held companies are written down to estimated fair value, which is the amount we believe is recoverable from our investment.

Valuation of Goodwill and Intangible Assets

Goodwill and intangible assets are stated at cost less accumulated amortization. Under SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of,” which was followed through December 31, 2001, amortization was computed on the straight-line basis over the estimated benefit periods and long-lived assets were reviewed for impairment when events or changes in circumstances indicated that the carrying amount of an asset might not be recoverable. In the fourth quarter of 2001, we recorded an impairment charge against goodwill of $816.2 million as a result of future cash flow projections being insufficient to demonstrate recoverability of the carrying value of our fixed and intangible assets. Effective January 1, 2002, we adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed for impairment annually or whenever there are indicators that such assets may be impaired. Separable intangible

II-8

Table of Contents

assets that are not deemed to have indefinite lives continue to be amortized over their useful lives. The adoption of SFAS 142 as of January 1, 2002, resulted in a transitional impairment charge for goodwill of $129.9 million, which was recorded as cumulative effect of change in accounting principle in the first quarter of 2002. In addition, we recorded an additional impairment charge of $514.5 million in the third quarter of 2002.

We account for long-lived assets under SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” which requires us to review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. When such an event occurs, we estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the undiscounted expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between the asset’s fair value and its carrying value. SFAS 144 superseded SFAS 121.

Restructurings

We monitor our organizational structure and associated operating expenses periodically. Depending upon events and circumstances, actions may be taken to restructure the business, including terminating employees, abandoning excess lease space and incurring other exit costs. Restructuring costs are recorded in accordance with EITF No. 94-3, “Liability Recognition of Certain Employee Termination Benefits and Other Costs Incurred in a Restructuring.” Any resulting restructuring accrual includes numerous estimates made by management, which are developed based on management’s knowledge of the activity being affected and the cost to exit existing commitments. These estimates could differ from actual results. We monitor the initial estimates periodically and record an adjustment for any significant changes in estimates.

Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between SFAS 146 and EITF 94-3 relates to SFAS 146’s timing for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as generally defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect that the adoption of SFAS 146 will have a material impact on our financial position, results of operations, and cash flows, except that it may impact the timing of recognition of exit costs.

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. We adopted the disclosure provisions of FIN 45 during the fourth quarter of fiscal 2002 and such adoption did not have a material impact on our consolidated financial statements. We are currently evaluating the recognition provisions of FIN 45, but expect that they will not have a material impact on our financial position, results of operations, and cash flows upon adoption.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS 148 amends SFAS 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for share-based employee compensation. We have elected to continue to apply Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to

II-9

Table of Contents

Employees,” in accounting for our share-based compensation plans. SFAS 148 also amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decision with respect to share-based employee compensation, and requires disclosure about those effects in both annual and interim financial statements. These disclosure provisions are effective for our fiscal year ended December 31, 2002.

In January 2003, the EITF published EITF No. 00-21 “Revenue Arrangements with Multiple Deliverables,” which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. This issue is effective for revenue arrangements entered into for fiscal periods beginning after June 15, 2003. We are currently evaluating the impact the adoption of this issue will have on our financial position, results of operations, and cash flows.

Years Ended December 31, 2002, 2001, and 2000

Revenues

Revenues for the year ended December 31, 2002 declined by $27.2 million, or 31%, from $86.9 million in 2001 to $59.7 million in 2002. Revenues for the year ended December 31, 2001 increased by $23.8 million, or 38%, from $63.1 million in 2000 to $86.9 million in 2001. Revenues by line item were as follows (in millions):

Royalties.    We derive royalties from the sale of set-top boxes that incorporate our software to manufacturers and network operators around the world. Royalty revenues are dependent on continued deployment of set-top boxes by existing customers, upgrades to newer versions of our software by existing customers and new customers launching our technologies in their systems. Should set-top box deployments and software upgrades by existing customers slow or the acquisition of new customers not occur, our royalty revenues would be negatively impacted in future years. As there are a limited number of network operators capable of deploying interactive television on a large-scale basis, we expect that our ability to achieve incremental royalty revenues will diminish in future years.

We recognize royalties upon notification of unit shipments from set-top box manufacturers or network operators. Royalty reports are generally received one quarter in arrears. For non-refundable prepaid royalties we recognize revenues upon delivery of the software.

Cumulative set-top box deployments increased from 13.9 million as of December 31, 2000 to 23.5 million as of December 31, 2001 and to 32.1 million as of December 31, 2002. The shipments reported and the revenues recognized during these periods were as follows:

II-10

Table of Contents

As a result of the adoption of the EITF No. 01-09 in 2002, the comparative royalties for 2001 have been reduced from $42.2 million to $33.8 million due to the reclassification of a one-time payment of $8.4 million for marketing the BSkyB hard-drive set-top box.

Royalties for the year ended December 31, 2002 declined by $13.7 million, or 41%, from $33.8 million in 2001 to $20.1 million in 2002. Beginning in 2002, we experienced a significant decline in the number of shipments of set-top boxes enabled with our middleware. The decline was especially acute in Europe, where unit volume declined 51% in 2002 compared to 2001. Total royalty revenues in Europe were $10.3 million in 2002 compared to $18.8 million after the application of EITF 01-09 in 2001 and in Asia Pacific royalty revenues were $1.8 million in 2002 compared to $7.2 million in 2001. In the Americas total royalty revenues were $7.9 million in 2002 compared to $7.8 million in 2001, due primarily to increased shipments by EchoStar, offset by declines in the flash downloads of software by two other major customers.

Royalties for the year ended December 31, 2001 increased by $3.9 million, or 13%, from $29.9 million in 2000 to $33.8 million in 2001. During the year ended December 31, 2001, we began providing middleware with enhanced features. For the year ended December 31, 2001, royalties associated with set-top boxes enabled with our enhanced middleware were $22.2 million, of which $5.2 million represented prepaid royalties. Royalties associated with set-top boxes enabled with previous versions of our middleware decreased by $9.9 million for the year ended December 31, 2001 from the year ended December 31, 2000 and in 2001 there was a reduction of $8.4 million relating to the reclassification of the one-time marketing payment for the BSkyB hard-drive set-top box as a result of the application of EITF 01-09. Royalties attributable to BSkyB decreased by $18.1 million, including the reduction of $8.4 million from the application of EITF 01-09 during the year, royalties attributable to EchoStar increased by $1.2 million and royalties attributable to other customers decreased by $1.4 million.

Royalties from set-top boxes with enhanced middleware features accounted for 42% of total royalties in 2002 compared with 66% of total royalties in 2001.

Five of our customers sell set-top boxes to BSkyB, which accounted for $4.4 million, or 21%, of royalties in 2002, $(1.7 million), due to the adoption of EITF 01-09, in 2001 and $16.4 million, or 55%, in 2000. The decline between 2000 and 2001 was due to a lower unit volume and a decrease in unit pricing due to volume discounts. The decline in unit volume continued in 2002.

Our former controlling shareholder, MIH Limited, through its subsidiaries, purchased set-top boxes from two of our customers. Effective April 1, 2001, all royalties were paid directly to us by the MIH entities. MIH entities, directly and indirectly, accounted for zero royalties in 2002, $4.6 million in 2001 and $2.2 million in 2000.

Unit shipments by EchoStar were 4.7 million units in 2002, 3.4 million units in 2001 and 0.9 million units in 2000. Since EchoStar has a right to receive unspecified future applications when they are made available, the royalty revenue is being amortized over the seven-year term of the agreements. As such, the royalties recognized from EchoStar were $3.3 million in 2002, $1.9 million in 2001 and $0.7 million in 2000.

Services, support and other.    Services, support and other revenue consist primarily of professional services consulting engagements for set-top box manufacturers, network operators and system integrators and maintenance, support and training for set-top box manufacturers and network operators. As a result of a general slowdown in interactive television-related spending by our customers in 2002, revenues in this category declined by $12.3 million, or 34%, from $36.5 million in 2001 to $24.2 million in 2002. We expect that service, support and other revenues will continue to be negatively impacted by the general slowdown in spending in 2003.

Services, support and other revenues for the year ended December 31, 2001 increased by $16.7 million from $19.8 million in 2000 to $36.5 million in 2001. Professional services accounted for $12.1 million of the increase due to the inclusion of the results of Spyglass, which was acquired in 2000, for the full year in 2001 compared

II-11

Table of Contents

with only five months in 2000. Increased maintenance and support, due largely to an increase in our network operator customer base, accounted for $3.7 million of the increase.

One of our strategic investors, General Instrument Corporation, and its parent company, Motorola Inc., accounted for $6.8 million in services, support and other revenue in 2002, $6.6 million in 2001 and $3.9 million in 2000. In November 2000, we entered into a seven-year services agreement whereby Motorola guaranteed a minimum level of business over the first four years of the agreement. It is the intent of the agreement that Motorola or their referred customers would purchase products from us or contract services with us up to at least the minimum guaranteed level of business through December 31, 2004. Motorola may terminate the agreement on sixty days’ notice at any time after January 1, 2004, but will remain responsible to us for the minimum guaranteed level of business for 2004 in the event it terminates the agreement prior to December 31, 2004.

MIH Limited and its related entities accounted for $1.2 million of services, support and other revenue in 2002, $1.0 million in 2001 and $0.3 million in 2000. EchoStar accounted for $0.4 million of services, support and other revenue in 2002, $0.2 million in 2001 and $0.2 million in 2000.

Channel fees.    In July 2001, we acquired Static, which operates the PlayJam interactive games channel in the United Kingdom, France and the United States. We receive revenue primarily from premium rate telephone calls that are placed by consumers, using the telephone or the remote control, for membership registration, game score registration for the chance to win prizes, and for access to pay-per-play content. Following the development of new and more popular games and the introduction of an interactive payment mechanism, channel fees experienced strong growth in 2002. Total revenues were $10.9 million for the year ended December 31, 2002, compared with $3.3 million for the last six months of 2001.

License fees.    We derive license fees from the sale of products such as Device Mosaic, OpenTV Streamer, OpenTV Software Developers Kit and various applications, including OpenTV Publisher. These fees can vary greatly from quarter to quarter depending on whether any large size agreements occur.

Due to the general slowdown in interactive television-related spending by our customers, we experienced a significant decline in license fees in 2002. License fees for the year ended December 31, 2002 declined by $8.8 million, or 66%, from $13.3 million in 2001 to $4.5 million in 2002. OpenTV Streamer license fees accounted for approximately one-third of the total in both years.

License fees for the year ended December 31, 2001 decreased by $0.1 million from $13.4 million in 2000 to $13.3 million in 2001. Sales of products, including OpenTV Streamer and new applications such as OpenTV Publisher, offset a decrease in Device Mosaic sales in 2001 as compared to 2000.

Motorola accounted for zero license fees in 2002, $2.0 million in 2001 and $5.1 million in 2000. MIH and its related entities accounted for $0.2 million of license fees in 2002, $0.9 million in 2001 and $0.5 million in 2000. EchoStar accounted for zero license fees in 2002, $1.4 million in 2001 and $0.2 million in 2000.

Operating Expenses

Our total operating expenses decreased by $650.5 million from $1,368.8 million in 2001 to $718.3 million in 2002. Our total operating expenses increased by $1,062.5 million from $306.3 million in 2000 to $1,368.8 million in 2001. The results for 2002 include the results of Wink Communications for four months and the results of Static for the full twelve months compared with only six months for Static in 2001. The results for 2001 include six months of Static and twelve months of Spyglass compared with only five months of Spyglass in 2000.

II-12

Table of Contents

Operating expenses by line item were as follows (in millions):

Cost of revenues.    Cost of revenues consist primarily of compensation-related expenses and related overhead costs associated with professional services engagements, the costs, including network infrastructure and bandwidth, of operating the PlayJam interactive games channel, and amortization of developed technology.

Cost of revenues for the year ended December 31, 2002 increased by $9.5 million from $37.8 million in 2001 to $47.3 million in 2002. The primary reason for the increase was $11.7 million of costs related to the growth of the Static business and the inclusion of Static for twelve months in 2002 compared with only six months in 2001 and $1.0 million of additional amortization of developed technology in 2002 as compared to 2001. In addition, 2002 results include $3.8 million of cost of revenues associated with products of Wink Communications, which was acquired in 2002 and $2.8 million for contract termination costs with BSkyB relating to the YoYo channel of our Static subsidiary in the United Kingdom. These increases were offset by a decrease of $6.4 million due to reduced staffing, consultants, travel and overhead costs for the professional services group as a result of the reduced volume of engagements coupled with a decrease of $1.1 million in bonus compensation in 2002 and a decrease of $2.3 million in share-based compensation for certain options which were cancelled or became fully-vested during 2002.

Cost of revenues for the year ended December 31, 2001 increased by $17.4 million from $20.4 million in 2000 to $37.8 million in 2001. The largest component of this increase was $9.0 million attributable to the inclusion of Spyglass professional services personnel for the full year in 2001 compared with only five months in 2000. There was also an increase of $2.3 million due to the growth in headcount and related overhead costs due to a higher volume of business in 2001 as compared to 2000. Our acquisition of Static in July 2001 accounted for an increase of $3.2 million due to the addition of headcount, bandwidth, telephony and other costs associated with the operations of the PlayJam interactive games channel. Amortization of developed technology accounted for an increase of $2.0 million in 2001 as compared to 2000. Share-based compensation accounted for an increase of $0.9 million due to the inclusion of Spyglass for the full year in 2001 as compared to 2000.

Research and development.    Research and development expenses consist primarily of compensation-related expenses and related overhead costs incurred for both new product development and enhancements to our range of software and application products.

Research and development expenses for the year ended December 31, 2002 decreased by $8.3 million from $43.5 million in 2001 to $35.2 million in 2002, primarily as a result of reduced staffing, travel and overhead costs of $7.9 million coupled with a decrease of $1.6 million in bonus compensation in 2002 and a decrease of $0.8 million due to lower share-based compensation for certain options which were cancelled or became fully-vested. The results for 2001 included a provision of $2.1 million for in-process research and development associated with the acquisition of Spyglass. These decreases were offset by an increase of $2.8 million, including

II-13

Table of Contents

$1.0 million of in-process research and development costs resulting from the acquisition of Wink Communications and an increase of $1.3 million resulting from Static being included in the 2002 results for the entire year.

Research and development expenses for the year ended December 31, 2001 decreased by $17.0 million from $60.5 million in 2000 to $43.5 million in 2001. This resulted from decreases of $24.9 million attributable to non-cash warrant expenses and $2.3 million attributable to a non-cash development fee, offset by an increase of $10.2 million from several other factors as discussed below. The largest increase was $5.5 million attributable to an increase in personnel and overhead costs related to ongoing development activities associated with our middleware and new applications. The inclusion of Spyglass engineering personnel for the full year in 2001, compared with only five months in 2000, accounted for an increase of $2.2 million. The acquisition of Static in July 2001 accounted for an increase of $1.8 million. In-process research and development costs increased by $1.1 million to $2.1 million for the year ended December 31, 2001 due to our acquisition of Static, compared with only $1.0 million of in-process research and development costs in 2000 associated with the acquisition of Spyglass. Share-based compensation accounted for a decrease of $0.4 million due to the cancellation of vesting of stock options granted to engineering personnel.

Sales and marketing.    Sales and marketing expenses consist primarily of advertising and other marketing-related expenses, compensation-related expenses and related overhead costs, sales commissions and travel costs.

Sales and marketing expenses for the year ended December 31, 2002 decreased by $4.8 million from $37.7 million in 2001 to $32.9 million in 2002. Expenses attributable to our advertising, trade show, branding and other discretionary marketing programs decreased by $3.3 million in 2002 due to a concerted attempt to reduce expenses in response to the significant decrease in total revenues. Furthermore, expenses decreased by $3.5 million due to reduced staffing, overhead and travel; $1.7 million due to lower sales commissions and bonus compensation; and $1.4 million due to lower share-based compensation for certain options which were cancelled or became fully vested in 2002 as compared to 2001. These decreases were offset by an increase of $3.9 million attributable to the acquisition of Wink Communications and $1.2 million resulting from Static being included in the operating results for a full year in 2002.

Sales and marketing expenses for the year ended December 31, 2001 increased by $9.2 million from $28.5 million in 2000 to $37.7 million in 2001. There was an increase of $4.6 million attributable to increased personnel and related overhead costs and an increase in worldwide sales and marketing activities. The inclusion of Spyglass sales and marketing personnel for the full year in 2001, compared with only five months in 2000, accounted for an increase of $2.7 million. The acquisition of Static in July 2001 accounted for an increase of $2.4 million. Share-based compensation accounted for a decrease of $0.5 million due to the cancellation of vesting of stock options granted to sales and marketing personnel.

General and administrative.    General and administrative expenses consist primarily of compensation-related expenses and related overhead costs, provision for doubtful accounts and fees for professional services.

General and administrative expenses for the year ended December 31, 2002 increased by $1.2 million from $19.9 million in 2001 to $21.1 million in 2002 due primarily to the inclusion of four months of operating results of Wink Communications, which accounted for $0.6 million of the increase, and an increase of $1.1 million resulting from the inclusion of Static’s operating results for a full year in 2002. In addition, the 2002 results include $1.1 million for retention payments to certain key management personnel with no comparable expense in 2001 and an increase of $0.5 million in the provision for doubtful accounts in 2002 as compared to 2001. These increases were offset by a decrease of $2.1 million due to lower share-based compensation for certain options which were cancelled or became fully vested and lower bonus compensation.

General and administrative expenses for the year ended December 31, 2001 decreased by $2.4 million from $22.3 million in 2000 to $19.9 million in 2001. Share-based compensation accounted for a decrease of

II-14

Table of Contents

$5.0 million due to the cancellation of vesting of stock options granted to general and administrative personnel. This was offset by an increase of $2.6 million from several other factors as discussed below. There was an increase of $0.5 million in the provision for doubtful accounts and finance-related expenses accounted for an increase of $0.2 million. The inclusion of Spyglass general and administrative personnel for the full year in 2001, compared with only five months in 2000, accounted for an increase of $1.2 million. The acquisition of Static accounted in July 2001 for an increase of $0.7 million.

Restructuring costs.    During 2002 we took several initiatives to reduce operating expenses around the world. These initiatives resulted in total restructuring costs of $29.4 million. In the first quarter we recorded a restructuring provision of $9.6 million for the termination of approximately 50 employees in offices in the United States and Korea and the write-down of assets and excess facilities in the United States, France and Korea. In the third quarter we recorded a restructuring provision of $1.6 million which included $4.6 million for the termination of approximately 60 employees in the Naperville, Illinois office and the write-down of assets and excess facilities, partially offset by a credit of $3.0 million for a favorable lease settlement in France. In the fourth quarter we recorded a restructuring provision of $18.2 million for the termination of approximately 150 employees in offices in the United States and other countries and the write-down of assets and excess facilities. An additional restructuring provision will be recorded in the first quarter of 2003 when the staff and office space in France is reduced significantly. There were no restructuring charges in 2001 or 2000.

Impairment and amortization of goodwill and intangible assets.    At December 31, 2001, we recorded an impairment of $816.2 million against the carrying value of goodwill as a result of our cash flow projections which indicated that the future cash flows were not sufficient to result in the recovery of the carrying value of our fixed and intangible assets. In accordance with the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, we reevaluated the amount recorded as goodwill as of January 1, 2002 and determined that a transitional impairment of $129.9 million had occurred. This amount has been shown as a cumulative effect of an accounting change in the consolidated statements of operations. In the third quarter of 2002, due to reductions by cable and satellite providers in their capital spending and rollout of interactive television-related products and similar reductions by other customers, we revised our cash flow projections for the remainder of calendar year 2002 and future years. Based on these cash flow projections and other factors, including the decline in the market price of our Class A ordinary shares, we determined that the remaining goodwill was impaired, and accordingly, wrote off the balance of $514.5 million. As a result of the new accounting rules for goodwill, there was no amortization required in 2002, whereas the amortization of goodwill was $394.5 million for the year ended December 31, 2001 and $170.7 million for the year ended December 31, 2000.

In the third quarter of 2002, due to the shift in strategic direction resulting from the change in our controlling shareholder, we determined that an impairment of $24.8 million had occurred in the value of the patents related to our OpenStar joint venture with EchoStar due to the absence of any current or future expected cash flow generated by the joint venture.

Intangible assets are amortized on a straight-line basis over the estimated benefit periods of 1.5 to 5 years. Amortization of developed technologies was $5.2 million for the year ended December 31, 2002, $4.2 million for the year ended December 31, 2001 and $2.3 million for the year ended December 31, 2000. These amounts have been included in the consolidated statements of operations as cost of revenues. Amortization of other intangible assets was $13.1 million for the year ended December 31, 2002, $19.2 million for the year ended December 31, 2001 and $3.9 million for the year ended December 31, 2000. The decrease of $6.1 million in amortization expense from 2001 to 2002 was due primarily to the impairment of the patents related to the OpenStar joint venture and certain Spyglass intangibles which had an amortization period of 1.5 years becoming fully amortized. Amortization for the year ended December 31, 2001 increased by $15.3 million compared to 2000 due to a full year of amortization for Spyglass and CableSoft plus the intangibles associated with the acquisition of Static.

II-15

Table of Contents

Interest Income

As a result of declining interest rates in the United States coupled with decreases in our investment portfolio resulting from the sale of investment securities both to support our operations and to finance our acquisition of Wink Communications, interest income for the year ended December 31, 2002 was $5.2 million compared with $10.5 million for the year ended December 31, 2001.

As a result of our initial public offering in November 1999, interest income from our investment portfolio was $12.2 million for the year ended December 31, 2000. The value of our investment portfolio decreased in 2001, largely due to working capital needs, capital expenditures, and cash paid in connection with our acquisition of Static, and the average interest rate on the portfolio also decreased. This resulted in a decline in interest income of $1.7 million to $10.5 million for the year ended December 31, 2001.

Other Income and Expense Items

During the past three years, we made various equity investments in, and loans to, certain privately-held companies. Most of these companies subsequently experienced severe cash flow problems and we found it necessary to write down the value of our private equity investments and notes receivable.

For the year ended December 31, 2002, we wrote down $10.9 million of such private equity investments and notes receivables and our share of losses of private equity investee was $7.3 million. For the year ended December 31, 2001 there was a write-down of private equity investments and notes receivable of $14.9 million. During the year ended December 31, 2000, two investments were determined to have no value and an impairment loss of $10.0 million was recorded.

As a result of the acquisition of Spyglass in July 2000, we acquired certain marketable equity securities that were valued at $48.0 million. These securities were sold for realized losses of $24.0 million for the year ended December 31, 2001 and $1.7 million for the year ended December 31, 2000.

Minority Interest

In November 2000, we established Spyglass Integration, a co-owned venture with Motorola. Due to the losses of this venture, we recorded minority interest income of $0.5 million for the year ended December 31, 2002, $0.2 million for the year ended December 31, 2001 and a nominal amount for the year ended December 31, 2000.

Income Taxes

We have significant United States Federal tax loss carryforwards. However, we are subject to income taxes in certain state and foreign jurisdictions and we have foreign taxes withheld from certain royalty payments. Income tax expense was $1.5 million for the year ended December 31, 2002. For the year ended December 31, 2001 there was a net income tax benefit of $5.9 million, which was comprised of a current tax provision of $1.4 million offset by a deferred tax credit of $7.3 million resulting from the fair value calculations for the aforementioned marketable equity securities acquired in connection with our acquisition of Spyglass and which were subsequently sold. There was a net income tax benefit of $0.5 million for the year ended December 31, 2000.

Liquidity and Capital Resources

We invest a portion of our cash in debt instruments that are highly liquid, high-quality investment grade securities and that predominantly have maturities of less than two years. As of December 31, 2002, we had cash and cash equivalents of $38.6 million, which was a decrease of $30.7 million from the prior year. Cash and cash equivalents as of December 31, 2001 and 2000 were $69.2 million and $94.0 million, respectively. Taking into

II-16

Table of Contents

account short-term and long-term marketable debt securities of $49.1 million, our cash, cash equivalents and marketable debt securities were $87.7 million as of December 31, 2002 compared to $189.5 million as of December 31, 2001 and $225.0 million as of December 31, 2000, computed on a similar basis.

Cash used in operating activities was $46.2 million for the year ended December, 31, 2002 compared with $33.8 million for 2001 and $7.4 million for 2000. The increases in cash uses were due primarily to our continuing operating losses.

Cash provided from investing activities was $7.7 million for the year ended December 31, 2002, primarily due to the sale of short-term and long-term marketable debt securities to finance the acquisition of Wink Communications coupled with cash acquired as part of the acquisition of Wink, offset by the acquisition of Wink for $101 million and $7.7 million for capital expenditures. For the year ended December 31, 2001, net cash used in investing activities was $3.4 million. Uses of cash included $14.2 million for the acquisition of Static and $14.2 million for capital expenditures, offset by $16.5 million from the sale of marketable equity securities and $8.6 million net from a decrease in marketable debt securities and other items. For the year ended December 31, 2000, net cash provided from investing activities was $81.6 million. This amount included $74.7 million of cash received as part of the acquisition of Spyglass, $5.8 million from the sale of marketable equity securities and $11.8 million net from a decrease in marketable debt securities and other items; which was offset by $10.7 million of capital expenditures.

Cash provided from financing activities was $7.4 million for the year ended December 31, 2002, due to proceeds from the issuance of ordinary shares and a capital contribution from the former controlling shareholder, MIH Limited. Cash provided from financing activities was $12.7 million for the year ended December 31, 2001 and $14.1 million for the year ended December 31, 2000. These amounts were primarily from the exercise of warrants and stock options and issuance of shares under our employee stock purchase plan.

As a result of the restructuring initiatives which were announced in September and October 2002, we expect that upon completion, which is targeted by the end of the first quarter of 2003, cash used in operations can be reduced by a significant amount in future periods. However, as a result of restructuring payments required in 2003 and the acquisition of Wink Communications in late 2002, it is expected that the cash used in operating activities for the year ending December 31, 2003 will be in the range of $30 to $40 million, similar to the last two years. Our future capital requirements will depend on a variety of factors, including market acceptance of interactive television, the resources we devote to developing, marketing, selling and supporting our products, and other factors.

Pursuant to exchangeable share arrangements under our 2000 Exchange Plan, 55,469, 236,057 and 386,103 shares of OpenTV, Inc. common stock were converted into our Class A ordinary shares for the years ended December 31, 2002, 2001 and 2000, respectively. There was no effect on cash.

Two customers accounted for 15% and 17% of net accounts receivable, respectively, as of December 31, 2002.

II-17

Table of Contents

Operating Leases

As of December 31, 2002, we had the following commitments for operating leases (in millions):

In March 2003, we signed a lease agreement for 60,458 square feet of office space in San Francisco for a new headquarters location. The lease provides for an initial nominal rent period with total aggregate lease payments of $9.0 million plus operating expenses over the seven-year term of the lease.

Other Commitments

In the ordinary course of business we and certain of our subsidiaries enter into various arrangements with vendors and other business partners for marketing, minimum revenue guarantees, bandwidth, consulting and other services. Minimum commitments under these arrangements as of December 31, 2002 were $9.1 million for the year ending December 31, 2003, $4.3 million for the year ending December 31, 2004 and $2.4 million for the year ending December 31, 2005.

At December 31, 2002, we had two standby letters of credit aggregating approximately $2.0 million that were issued to landlords at two of our leased properties and $10.0 million of marketable debt securities pledged with a bank for foreign exchange facilities. Subsequent to year-end, in connection with the execution of the lease for our new San Francisco facility, we issued an additional standby letter of credit to the landlord for $1.0 million. In addition, one previously outstanding standby letter of credit for $1.0 million was cancelled as part of the restructuring of our French operations.

In March 1998, we entered into a licensing and distribution agreement with Sun Microsystems, Inc. under which Sun Microsystems granted us a non-exclusive, non-transferable license to develop and distribute products based upon Sun Microsystems’s Java technology. Subsequent amendments extended the license through December 2006. As amended, the agreement requires us to make a payment of $4.0 million to Sun Microsystems in February 2007, less any amounts previously paid for support and royalty fees, which have been nominal to date.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks. This exposure relates to our holdings of fixed income investment securities, investments in privately-held companies and assets and liabilities denominated in foreign currencies.

Fixed Income Investment Risk

We own a fixed income investment portfolio with various holdings, types and maturities. These investments are generally classified as available-for-sale. Available-for-sale securities are recorded on the balance sheet at fair value with unrealized gains or losses, net of tax, included as a separate component of the balance sheet line item titled “accumulated other comprehensive income (loss).”

II-18

Table of Contents

Most of these investments consist of a diversified portfolio of highly liquid United States dollar-denominated debt securities classified by maturity as cash equivalents, short-term investments or long-term investments. These debt securities are not leveraged and are held for purposes other than trading. Our investment policy limits the maximum maturity of securities in this portfolio to three years and weighted-average maturity to 15 months. Although we expect that market value fluctuations of our investments in short-term debt obligations will not be significant, a sharp rise in interest rates could have a material adverse effect on the value of securities with longer maturities in the portfolio. Alternatively, a sharp decline in interest rates could have a material positive effect on the value of securities with longer maturities in the portfolio. We do not currently hedge interest rate exposures.

Our investment policy limits investment concentration in any one issuer (other than with respect to United States treasury and agency securities) and also restricts this part of our portfolio to investment grade obligations based on the assessments of rating agencies. There have been instances in the past where the assessments of rating agencies have failed to anticipate significant defaults by issuers. It is possible that we could lose most or all of the value in an individual debt obligation as a result of a default. A loss through a default may have a material impact on our earnings even though our policy limits investments in the obligations of a single issuer to no more than five percent of the value of our portfolio.

The following table presents the hypothetical changes in fair values in our portfolio of investment securities with original maturities greater than 90 days as of December 31, 2002 using a model that assumes immediate sustained parallel changes in interest rates across the range of maturities (in thousands):