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

FORM 10-K

Commission file number: 000-25755

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

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ý

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

        The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $46.7 million as of June 30, 2004, based on the closing sale price of $2.10 per share of common stock, as reported on the NASDAQ Small Cap Market.

        The number of shares of the registrant's common stock outstanding as of March 4, 2005 was 31,705,489.

DOCUMENTS INCORPORATED BY REFERENCE

[None]

WORLDGATE COMMUNICATIONS, INC.

ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2004

TABLE OF CONTENTS

WORLDGATE COMMUNICATIONS, INC.

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

PART I

Item 1. Business

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

Overview

        Since our formation in 1995 and until recently, we were in the business of developing and selling interactive television, or ITV, technology, products and services for use in conjunction with cable TV broadband networks (the "ITV Business"). Using our solutions, cable TV operators branded, marketed, and offered a wide variety of ITV packages to consumers. These packages included walled gardens of information, communications solutions complete with Internet-based e-mail and chat, and Web surfing, all presented and engaged on the TV set.

        During the third quarter of 2003, we completed a sale of significant assets, including our ITV intellectual property rights and our membership interest in TVGateway, LLC, for $3 million in cash to TVGateway, LLC, an ITV oriented company we were instrumental in forming. Our transaction with TVGateway, LLC marked a shift in our business away from the ITV Business and toward a new video phone product and associated business. Although we continued to support our current ITV Business into the first quarter of 2004, the development of our video phone product became a primary business focus. The funds we received from the sale of assets to TVGateway, LLC, as well as the funds we subsequently received as a result of several private placements of our securities have permitted us to fund the development of our new business.

        During 2004, we continued development of a video phone, designed specifically for personal video communication over high speed data, or HSD or broadband networks, that we believe is differentiated, both from competitors and from previous efforts at personal video telephony, by providing: true to life communication, ease of deployment by HSD operators, ease of use by residential and business end users, a highly styled ergonomic design, and interoperation with the public switched telephone network, or PSTN. The design of our first video phone product was substantially completed in late 2004 and field trials were commenced. Commercial distribution of this product is expected to commence in the spring 2005 time frame.

        On April 28, 2004, we entered into a multi-year agreement with General Instrument Corporation d/b/a the Broadband Communication Sector of Motorola, Inc. for the worldwide development and distribution of the Ojo personal video phone. Under the terms of the agreement, our video phone will be co-branded with our trademark, Ojo™, and Motorola will market the Ojo personal video phone as

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part of its "connected home" portfolio of consumer HSD solutions. Motorola plans to distribute Ojo worldwide through HSD service providers, retailers, and distributors of telecommunications products.

        HSD service users provide a large, and we believe conducive, target market for a quality video phone offering. We believe that Motorola, as a worldwide market leader in the HSD market is well-positioned to assist us with our video phone offering. Initial video phone sales are expected to be derived from new technology adopters and regular long distance communicators such as families and close friends. We also expect that the business-to-business opportunity will be attractive as a video phone provides means to improve interpersonal communication and multi-location productivity. Furthermore we expect that the growth in the voice over Internet protocol market (or "VoIP") will also help to drive sales of our video phone since it can also serve as a VoIP endpoint.

        Our business model is based on the sale of video phones and related products. We expect that our products will be marketed to HSD operators as well as to consumers through traditional consumer electronics distribution channels. We believe that HSD operators could realize significant recurring revenue streams associated with offering our product to end users. We have also developed this product to require very minimal capital investment or incremental costs by such operators. Our marketing objective is to have our video phones supplement and hopefully replace ordinary home and business phones worldwide.

General Product Description

        We have developed a video phone, ergonomically designed specifically for in-home and business, personal video communication. We have identified several issues that have interfered with commercial success and consumer acceptance of video phones and sought to address each of these issues within the Ojo video phone. The Ojo video phone was designed for use on the existing HSD infrastructure. The Ojo phone will, however, also connect to the analog phone line for interoperability with the voice only communications offered by the existing PSTN networks. Ojo, therefore, can be used for video calls, for ordinary voice only calls as well as for voice over Internet protocol, or VoIP calls. We believe that Ojo is differentiated, both from competitors and from previous efforts at personal video telephony, by providing: true to life communication, interoperation with the PSTN, ease of deployment by HSD operators, ease of use by consumers, and a highly styled ergonomic design. We believe Ojo is further differentiated by the development of a state of the art connectivity infrastructure, which leverages the convergence of the latest compression technology, processing power and increased bandwidth availability, to help ensure, enable and maintain dedicated high quality end-to-end connections.

        The Ojo solution consists of two primary components:

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A display unit includes the camera, video screen and external interface ports. The video screen is used to display menus and provide a user interface as well as to view the images of the local and remote parties. Considerable effort has been expended in the ergonomic and stylistic design of the display unit. For example, it is taller than most conventional phones to ensure that the user is looking into the unit and not down at the unit. Similarly the camera of the unit is looking at the user at face level, instead of "up the user's nose." The display unit can be used as a standard speaker phone to receive both audio and audio/video calls. The display unit is designed to be aesthetically usable in any room. Particular attention was given to the user interface to ensure that Ojo was installable and usable without the need to refer constantly to a manual. The display contains two RJ-45 jacks, one for connection to the cable or DSL modem and the other for connection to an external device such as a PC, and an RJ-11 jack for connection to the PSTN or VoIP network. The consumer simply plugs the display unit into the high-speed modem or router and into the standard house power outlet to facilitate access to the necessary data network. In addition to a connection to the high-speed modem or router, the display unit also connects to the standard phone line. This connection,

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while not required for a video phone call, allows the Ojo video phone to also be used as a standard telephone.

2.

The Ojo PVP also has a wireless handset that functions as a typical cordless phone. It includes a cordless telephone with internal speaker and microphone, a monochrome graphical display and most of the user controls for the device (numeric keypad, navigation device, talk, mute and end buttons). Although the handset is discussed as a separate component, it will generally be seated in the lower portion of the display unit where it will serve as the navigation device while its batteries are being charged. The handset fits into a cradle on the display unit. It is designed to be used both as part of a video call, or alone for standard PSTN phone calls. Since the Ojo unit is designed to receive and make audio calls as well as video calls, the handset functions as a typical cordless phone and has the features a user typically expects for a cordless phone. Although video calls can be received at the display unit even when the handset is not present, the handset is intended to be the primary component used to operate the video phone (in a manner similar to a television remote control).

Material Developments for WorldGate since December 31, 2003

        The following is a summary of material developments for us that have occurred since December 31, 2003:

        In January 2004, during the Consumer Electronics Show we successfully demonstrated the capability of delivering high quality video telephone over the Internet. Using our Ojo PVP, we demonstrated repeated quality calls between our headquarters in suburban Philadelphia and Las Vegas. Using a data rate of 150 kbps, we made video calls with full motion video displayed at 30 frames per second, similar to that of broadcast television. The calls provided consistent, true-to-life, synchronized, voice and video communications during peak Internet usage time periods. We believe this was the first successful demonstration of H. 264-based signal processing technology in a personal video phone.

        On January 21, 2004, we completed a private placement resulting in an issuance of 1,000,000 shares of our common stock at a sale price of $1.50 per share, five-year warrants to purchase up to 300,000 shares of our common stock at an exercise price of $1.875 per share, and additional investment rights to purchase, for a limited period of time, up to 200,000 shares of our common stock at an exercise price of $1.50 per share. In addition, we agreed to issue warrants to purchase up to an additional 10,000 shares of our common stock at an exercise price of $1.875 per share upon the exercise of the additional investment rights. The January 2004 private placement resulted in gross proceeds to us of approximately $1.5 million.

        On April 23, 2004, we completed a private placement of 666,666 shares of our common stock with Mototech Inc., at a sale price of $1.50 per share. The private placement resulted in gross proceeds to us of $1 million.

        On May 3, 2004, we announced that we had entered into a multi-year agreement with Motorola, Inc. for the worldwide development and distribution of the Ojo PVP. Under the terms of the agreement, Motorola will market the Ojo personal video phone as part of its "connected home" portfolio of consumer HSD solutions. Motorola will distribute Ojo worldwide through HSD service providers, retailers, and distributors of telecommunications products. Additionally, Motorola and WorldGate will jointly develop future HSD video telephony solutions.

        On June 24, 2004, we completed another private placement that resulted in the issuance of 7,550 shares of Series A preferred stock at a sale price of $1000 per share (which preferred stock is convertible into our common stock at a conversion price of $2.35 per share,) five-year warrants to purchase up to 803,190 shares of our common stock at an exercise price of $2.69 per share, and five-year warrants to purchase up to 803,190 shares of our common stock at an exercise price of $3.14

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per share. The investors also received an additional investment right, for a limited period of time, to purchase 1,606,383 additional shares of common stock shares at $3.14 a share. The June 2004 private placement resulted in gross proceeds to our Company of $7,550,000.

        On November 10, 2004 we announced that the Ojo PVP was awarded a 2005 Consumer Electronics Show (CES) Best of Innovations Award from the Consumer Electronics Association (CEA).

        At the 2005 CES Show, held in Las Vegas on January 6 - 9, we formally introduced our Ojo PVP. The International Consumer Electronics Show (CES) is one of the world's largest annual consumer technology shows. We conducted live demonstrations to attendees and the press of the Ojo phone transmitting full-motion video with synchronized audio over a HSD internet connection.

        During December 2004, and through January 2005, we received cash proceeds of $7,565,000 from the exercise of outstanding warrants issued pursuant to the private placements discussed above, by the exercise of non-executive employees' and prior employees' stock options, and by a private placement of an additional 208,333 shares of our common stock. In connection with this placement, we granted warrants to Mr. K.Y. Chou to purchase up to 62,500 shares of our common stock at an exercise price of $2.88 per share.

Business Strategy

        General.    Our business model, as is typical of a consumer electronics product, is based upon the sale of Ojo PVPs and does not rely upon any service fees or other recurring revenue stream for WorldGate, although such recurring streams may materialize. It is our plan for Ojo PVP to be distributed through and in partnership with HSD service providers, as well as through traditional electronics distribution channels. Video phone service, using the Ojo PVP, is expected to be offered by HSD service providers as a means of attracting new HSD subscribers as well as maintaining existing subscribers. We believe that HSD service operators could realize potentially significant recurring revenue streams associated with offering products such as our Ojo PVP, and accordingly we believe they will embrace the concept and business model. The suggested consumer offering for a video phone service follows the traditional HSD model. We anticipate that video phone service subscribers will be able to either purchase Ojo or lease a unit from the HSD service provider.

        Manufacturing.    Ojo PVPs will be manufactured in Asia, to take advantage of the base of lower labor, tooling and component costing. A formal relationship with Mototech Inc. has already been established for the volume manufacture of Ojo. Mototech, along with U.S. Robotics and SMC Networks, are affiliates of the Accton Technology Group. Mototech's responsibilities in this role include:

Product design finalization for manufacturing;
Component selection and procurement;
Tool sourcing and management;
Coordination of Ojo manufacturing;
Implementation and monitoring of Ojo's Quality Plan; and
Product cost reduction.

        As part of our agreement with Mototech we retain formal sign-off control over any product, specification, or component changes proposed by Mototech. We also maintain all rights to the Ojo technology and intellectual property, as well as the right to second source the Ojo product.

        Product Sales and Distribution.    We have partnered with an experienced distribution partner, Motorola, Inc. to market and distribute the Ojo PVP. Such partnership is intended to reduce our working capital requirements by minimizing our sales and inventory costs, and provide an entree to more extensive and accelerated coverage than would be permitted by an internal organization. The name recognition, "shelf-space" potential and technology/product validation provided by Motorola are

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also expected to provide a significant advantage. In addition we believe we will further benefit from the Motorola relationship as a result of their access to broadband and telephony technology as well as their sourcing expertise. Through Motorola, Ojo will be marketed domestically and internationally to both the residential and business sectors through the standard consumer and business electronics channels, as well as through HSD providers in a manner similar to broadband modems. Under this relationship, Motorola is our exclusive distribution partner and as such is responsible for the worldwide marketing and distribution of the Ojo PVP. If they are not successful our operating results could be adversely affected.

Competition

        Many of the current video phone manufacturers have focused on two applications—business video phones and video conferencing. Business video phones are designed to be located on an executive's desk and used to communicate with colleagues, employees and customers. Video conferencing units are designed for conference rooms where multiple people on one end engage with multiple people on the other end. The following is a brief description of the potential competitors and their impact on the market.

        Business Phone Products.    Most of these products are targeted for corporate use and are priced at $650.00 and up per unit. Generally, the ergonomic design of these units emulates that of a traditional office telephone with the addition of a camera and display. The products use standard corporate gray or black material colors, familiar button shapes and designs, traditional style handsets for non-speakerphone conversation and often have business feature sets. For connectivity these products use VoIP, PSTN or ISDN. The main competitors in this sector include Viseon Inc., 8x8 Inc., Motion Media PLC, and Leadtek Research Inc.

        Video Conference Products.    D-Link Systems, Inc. produces a TV-based video phone product that is targeted to consumers and promotes its compatibility with DSL and cable modem technologies. D-Link uses the home television as the display device and utilizes either the TV's speaker or connection to a standard analog phone for the audio portion of the call. The main disadvantages of this product are convenience and non-personal video. The D-Link requires a television to send and receive calls. In many cases, this would obstruct the ability to watch television while a call is in progress thereby disrupting family television watching for the length of the call. Numerous video conferencing products exist for the business market. Typically these devices cost $2000 or more and involve complex installations of one or more cameras, monitors, microphones and speakers within a conference room setting. The videoconference nature of these products eliminates the ability to communicate on a private, one-on-one level. The main competitors in this sector include Sony, D-Link Systems, Inc., Sorenson Media and Polycom Inc.

        Telephone Products.    Vialta, Inc. produces the "Beamer", an H.324 (POTS) video phone that is designed for connection to a standard telephone. The product utilizes a standard analog telephone for connection to the PSTN and as the listening device. Because the unit uses traditional telephone lines for connectivity it cannot take advantage of the high-speed data systems available through cable and DSL modems.

        Web Cam Products.    Web cams are different from other competitive products in that they did not arise from either business video phones or video conferencing. Rather, they began in the early days of the Internet when "techies" were expanding the capabilities of PC-based content and applications with low-cost attachments to the computer. Currently, web cams are often used to display visual information rather than as a means for personal communication. Many popular web sites use web cams to show traffic, weather, adult activities and other visually interesting subjects. Software such as Net Meeting, Instant Messenger and MSN messenger are being supported in web cams to enable a video chat option

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to these Internet-based services. Competitors in this category include Logitech, Inc., Intel Corporation, 3Com Corporation, and Creative Technology, Ltd.

        Hybrid Web Cam-Business Phone Products.    In recent months, Cisco Systems, Inc. introduced a hybrid video phone product that is designed for the business phone market. The Cisco product consists of a web cam device and host software that enables video phone functionality when used in conjunction with an IP phone and call processing hardware. We believe this product requires a significant capital investment for implementing the call processing hardware and IP phones.

Intellectual Property

        We plan to rely on patent, trade secret, trademark and copyright law to protect our video phone intellectual property. Although we have filed multiple patent applications for our technology, our patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope and enforceability of a particular patent. Accordingly, there can be no assurance that any patents will be issued pursuant to our current or future patent applications or that patents issued pursuant to such applications will not be invalidated, circumvented or challenged. Moreover, there can be no assurance that the rights granted under any such patents will provide competitive advantages to us or be adequate to safeguard and maintain our proprietary rights. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain foreign countries.

Government Regulation

        Our Ojo PVP will be required to comply with various laws and government regulations, including Parts 15 and 68 of the FCC's regulations, which relate to radio frequency devices and to terminal equipment that is connected to the telephone network. The legal and regulatory environment that pertains to our business is uncertain and changing rapidly. New legislation or regulation could be introduced that could substantially impact our ability to launch and promote the Ojo video phone. For example, in the United States, the FCC and state regulatory commissions could undertake an examination of whether to impose surcharges or additional regulations upon certain providers of Internet protocol, or IP, based communication services. The imposition of regulations on IP communications services may negatively impact our business.

Research and Development

        To date, our engineering and product development has been a significant focus. The principal focus of our current engineering and development activities is the continued development and enhancement of our Ojo PVP. Development of the Ojo PVP has required combining technical experience and knowledge from two historically separate industries, cable and telephony. Our engineering and development expenditures in connection with our Ojo video phone were approximately $0, $3,000 and $4,001 for the years ended December 31, 2002, 2003 and 2004, respectively.

Employees

        As of December 31, 2004, on a consolidated basis, we had approximately 50 full-time employees. All of our employees are located in Trevose, Pennsylvania. None of our employees are represented by a labor union, and we have no collective bargaining agreement. We consider our employee relations to be good.

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Financial Information Relating to Foreign and Domestic Operations and Export Sales from Continuing Operations

Item 2. Properties.

        Our corporate headquarters is located in Trevose, Pennsylvania in a leased facility consisting of approximately 16,000 square feet. Both we and the landlord, however, have the right to terminate this lease at any time on 90 days prior written notice to the other party. In March 2005, the property was sold and our lease was transferred to the new owner. We are currently negotiating a long term lease with the new owner and we anticipate that this facility will be suitable for our needs for the immediate future.

Item 3. Legal Proceedings.

        Although from time to time we may be involved in litigation as a routine matter in conducting its business, we are not currently involved in any litigation which we believe is material to our operations or balance sheet. We comply with the requirements of currently prevailing accounting standards and provides for accruals where a liability is probable and a reasonable estimate can be made as to the probable amount of such liability.

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

        At our annual meeting of stockholders held on October 13, 2004, our stockholders elected six members to our Board of Directors. Those elected to the Board were Hal M. Krisbergh, Steven C. Davidson, Clarence L. Irving, Jr., Martin Jaffe, Jeff Morris and Lemuel Tarshis. Stockholders also approved the issuance of shares pursuant to a private placement made during the year, an amendment in the Company's Articles of Incorporation to increase the number of authorized shares, and the WorldGate Communications, Inc. 2003 Equity Incentive Plan.

(1)

Election of Directors:

(2)

Ratification and approval of our issuance of common stock in accordance with June, 2004 Private Placement.

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(3)

Amendment of Certificate of Incorporation to increase authorized common shares to 80 million.

(4)

Ratification and approval of WorldGate Communications, Inc. 2003 Equity Incentive Plan.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.

        Our common stock, $0.01 par value, commenced trading on the NASDAQ National Market under the symbol "WGAT" since our initial public offering in April 15, 1999. We applied for and received permission, effective January 9, 2003 to transfer the listing of our common stock to the NASDAQ Small Cap Market. The following table shows the high and low sales price as reported by the NASDAQ National Market and the NASDAQ Small Cap Market, as is applicable, for each quarter of 2003 and 2004.

        On March 4, 2005, the last reported sale price of our common stock as reported on the NASDAQ Small Cap Market was $3.81 per share.

        As of March 4, 2005, we had 342 holders of record of our common stock.

Dividends

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

Sale of Unregistered Securities

(1)

In December 2003 we completed a private placement of 2,000,000 shares (the "December 2003 Shares") of our common stock to certain institutional investors. The shares were sold for $0.80 per share, resulting in gross proceeds from the offering of $1.6 million. The investors also received a right, for a limited period of time, to purchase additional shares of up to 20% of the common stock purchased by the investors in the placement at $0.80 a

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share. During the first quarter of 2004 these additional investment rights were exercised resulting in an additional purchase of 400,000 shares and an additional $320,000 in gross proceeds. The investors were also issued warrants (the "December 2003 Warrants") to purchase in the aggregate up to 720,000 additional shares (including shares available only as a result of the exercise of the above additional investment rights) of common stock at a per share exercise price of $1.00. In December 2004 one of our investors exercised its warrants resulting in an additional purchase of 168,750 shares and an additional $168,750 in gross proceeds. In January 2005 one of the investors exercised its warrants resulting in an additional purchase of 382,500 shares and an additional $382,500 in gross proceeds.

The December 2003 Shares and the December 2003 Warrants were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933 afforded to transactions not involving a public offering by Section 4(2) of that Act and Rule 506 thereunder. The December 2003 Shares and the December 2003 Warrants issued in the offering were subsequently registered for resale by the investors on January 9, 2004.

(2)

In January 2004 we completed a private placement of 1,000,000 shares (the "January 2004 Shares") of our common stock to certain institutional investors. The shares were sold for $1.50 per share, resulting in gross proceeds from the offering of $1.5 million. The investors also received a right, for a limited period of time, to purchase additional shares of up to 20% of the common stock purchased by the investors in the placement at $1.50 a share. During the second quarter of 2004 these additional investment rights were exercised resulting in an additional purchase of 200,000 shares and an additional $300,000 in gross proceeds. The investors were also issued warrants (the "January 2004 Warrants") to purchase in the aggregate up to 310,000 additional shares (including shares available only as a result of the exercise of the above additional investment rights) of common stock at a per share exercise price of $1.875. In December 2004, one of our investors exercised its warrants resulting in an additional purchase of 60,000 shares and an additional $112,500 in gross proceeds. In January 2005 one of the investors exercised its warrants resulting in an additional purchase of 139,500 shares and an additional $261,527 in gross proceeds.

The January 2004 Shares and the January 2004 Warrants were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933 afforded to transactions not involving a public offering by Section 4(2) of that Act and Rule 506 thereunder. The January 2004 Shares and the January 2004 Warrants issued in the offering were subsequently registered for resale by the investors on April 19, 2004.

(3)

In June 2004 we completed a private placement of 7,550 shares (the "June 2004 Shares") of Series A Convertible Preferred stock to certain institutional investors. The shares were sold for $1000 per share, resulting in gross proceeds from the offering of $7.55 million. The preferred stock issued pursuant to this placement is convertible into WorldGate common stock at a conversion price of $2.35 per share. WorldGate has the right to require conversion of the preferred stock into common stock upon achieving certain price targets with respect to its common stock and the satisfaction of certain other conditions. Between November 2004 and January 2005 one of the investors has fully converted its preferred shares resulting in the issuance of 372,340 of our common shares. The preferred stock has a dividend rate of 5% per annum, payable quarterly, which may be paid either by cash or through the issuance of common stock at WorldGate's option (with stock payments being made at a 10% discount to the then current market price). For the first two quarters for which dividend payments were due, WorldGate exercised its right to make these dividend payments in stock, resulting in the issuance of an additional 87,137 shares of our common stock. The preferred stock has a staged maturity over three years with scheduled payments of one third due after 18 months, one half of the remainder due after 24 months and the balance due after 36 months. The

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preferred stock may be redeemed at maturity in cash or through the issuance of common stock, at WorldGate's option (subject to certain conditions). All dividend and maturity payments made in stock are subject to the satisfaction of certain conditions including the listing and availability of an effective registration statement. As part of the transaction, WorldGate issued five-year warrants to purchase a total of 1,606,380 shares of WorldGate common stock, with one-half of the warrants having an exercise price of $2.69 per share and the remaining half having an exercise price of $3.14 per share. In January 2005 one of the investors has fully exercised its warrants resulting in the issuance of an addition 63,830 of our common shares and an additional $186,064 in gross proceeds. The investors also received an additional investment right, for a limited period of time, to purchase 1,606,380 additional common stock shares at $3.14 a share. During December 2004 all but one of the investors exercised their additional investment rights resulting in the issuance of an additional 1,499,998 shares and an additional $4,709,994 in gross proceeds. During the first quarter of 2005, the remaining investor exercised their additional investment right resulting in the issuance of an additional 106,383 shares and an additional $334,043 in gross proceeds.

The June 2004 Shares and the June 2004 Warrants were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933 afforded to transactions not involving a public offering by Section 4(2) of that Act and Rule 506 thereunder. The June 2004 Shares and the June 2004 Warrants issued in the offering were subsequently registered for resale by the investors on July 30, 2004.

In December 2004, WorldGate completed a private placement of 208,333 shares of our common stock to K.Y. Chou, president of Mototech, at a sales price of $2.40 per share, which resulted in additional gross proceeds to the Company of $500,000. In connection with this placement, the Company granted warrants to Mr. Chou to purchase up to 62,500 shares of our common stock at an exercise price of $2.88 per share.

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Item 6. Selected Financial Data.

        The following table represents selected consolidated financial information for the five-year period ended December 31, 2004. This data should be read in conjunction with our financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.

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(1)

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

(2)

"As adjusted net loss available to common stockholders" and "As adjusted basic and diluted net loss per common share" amounts reflect the exclusion of amortization of goodwill of approximately $241 and $361 for the years ended December 31, 2000 and 2001, respectively. These amounts are presented to comply with SFAS 142 as if this standard had been adopted at the beginning of the respective periods.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollar amounts contained in this Item 7 are in thousands, except for share and per share amounts)

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

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

Results of Operations:

Critical Accounting Policies and Estimates

        Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and

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liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates.

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

        Discontinued Operations.    During the first quarter of 2004, we transitioned from the business of developing and selling interactive television, or ITV, technology, products and services for use in conjunction with cable TV broadband networks (the "ITV business") to the development of our video phone products as our primary business focus. During the twelve months ended December 31, 2003 and 2004, the Company had revenues from discontinued operations of $3,886 and $82, respectively. Cost of revenues for the twelve months ended December 31, 2003 and 2004 were $5,849 and $43, respectively. Concurrently, operating expenses, consisting of Research and Development, Marketing, General and Administration, and Depreciation and Amortization costs were also reduced as a result of the transition from the ITV business. These expenses for discontinued operations were $3,497 and $16 for the twelve months ended December 31, 2003 and 2004, respectively. For the twelve months ended December 31, 2003 and 2004, other income and other expense relating to discontinued operations were $2,552 and $13, respectively. Included in 2003 were $484 of losses incurred on the sale of certain property and equipment, and $3,000 from the sale of intellectual property and other assets to TV Gateway LLC (refer to footnote 13. to our consolidated financial statements).

        Revenue Recognition.    Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, the collectibility is reasonably assured, and either the delivery and the acceptance of the equipment has occurred or services have been rendered.

        Inventories.    Our inventory consists primarily of finished goods equipment to be sold to our customers. The cost is determined on an average cost basis. A periodic review of inventory quantities on hand is performed in order to determine and record a provision for excess and obsolete inventories. Factors related to current inventories such as technological obsolescence and market conditions are analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values. Any significant unanticipated changes in the factors noted above could have an impact on the value of our inventories and our reported operating results. With the current shift in focus to our new video phone business, our inventory balance of $1,668 consisted of $1,622 relating solely to our ITV business, which was fully reserved for at December 31, 2004, and $46 related solely to our new video phone business.

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

        Accounting for Income Taxes.    As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we

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

        We have a full valuation allowance against the net deferred tax asset of $79,290 as of December 31, 2004, due to our lack of earnings history and the uncertainty as to the reliability of the asset. In the future, if sufficient evidence of our ability to generate sufficient future taxable income becomes apparent, we would be required to reduce our valuation allowance, resulting in a benefit from income tax in the consolidated statement of operations.

        Accounting for Contractual Obligation related to Equity Financing.    In July 2000, four cable operators purchased our shares. As part of the financing arrangement, we agreed to provide the four cable operators with a credit to be used to purchase products that pertain to the development and deployment of our service equal to 25% of the amount they invested. We recorded a liability to satisfy this obligation based on our best estimate of what it would cost to satisfy the credit. Our policy has been not to adjust the liability after it had been established. When equipment credits are utilized by the cable operators, the value of the equipment is reflected in its entirety in the cost of revenues and a portion of the recorded contractual obligation is adjusted against additional paid in capital. The equipment credit expired on August 24, 2003. In August 2003, the unused credit balance of $3,283 was reclassified from the recorded liability to additional paid in capital.

        Stock-Based Compensation.    The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations and has presented the required SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure. At December 31, 2004, the Company had stock-based compensation plans, which are described separately in Note 8. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans, and accordingly, no compensation cost has been recognized for the Company's fixed stock-based compensation.

        Accounting for Preferred Shares.    The Company accounts for preferred stock in accordance with EITF topic D-98 "Classification and Measurement of Redeemable Securities", the Redeemable Preferred Stock was recorded in the financial statements as temporary equity. Additionally, the fair value of warrants and preferred stock conversion options were recorded into the financial statements as liabilities as a result of their features that require accounting under FAS 133 "Accounting for Derivative Instruments and Hedging Activities, as amended." At each reporting balance sheet date, an evaluation is made of these valuations and marked to market.

2004 versus 2003

Revenues

        Revenues.    Revenues from continuing operations of $231 were realized during the twelve months ended December 31, 2004. These revenues represent the initial deliveries of video phones for pre-market testing. There were no revenues from continuing operations for the twelve months ended December 31, 2003. Revenue from the sale of equipment is recognized by the Company when the products are shipped.

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Costs and Expenses

        Cost of revenues.    The cost of revenues from continuing operations relating to the initial deliveries of video phones was $103 for the twelve months ended December 31, 2004. There were no cost of revenues from continuing operations for the twelve months ended December 31, 2003.

        Engineering and Development.    Engineering and development expenses primarily consist of compensation, and the cost of design, programming, testing, documentation and support of the Company's video phone product. Engineering and development costs were $4,001 for the twelve months ended December 31, 2004, compared with $3,000 for the twelve months ended December 31, 2003. This increase in 2004 over 2003 of $1,001 or 33%, reflects our increased shift of efforts of our engineering staff, and related costs, from our ITV business (discontinued operations) to the continuing development of its video phone product.

        Sales and Marketing.    Sales and marketing expenses consist primarily of compensation, attendance at conferences and trade shows, travel costs, promotions and other marketing programs related to the introduction of our video phone product. Sales and marketing costs were $1,362 for the twelve months ended December 31, 2004, compared with $466 for the twelve months ended December 31, 2003. This increase of $896, or 192%, reflects the increased marketing and promotional expenditures, trade shows attendance, as well as a shift in efforts from our ITV business to our video phone product.

        General and Administrative.    General and administrative expenses consist primarily of expenditures for administration, office and facility operations, finance and general management activities, including legal, accounting and professional fees. General and administrative expenses were $5,399 for the twelve months ended December 31, 2004, compared with $3,031 for the twelve months ended December 31, 2003. The increase of $2,368, or 78%, is attributable primarily to our transition of nearly all of our administrative management compensation, facility, legal, finance and professional consulting fees toward the further development of the video phone business, and a non cash charge of $1,332 during the twelve months ended December 31, 2004, reflecting a Black Scholes estimate of the value of the warrants issued as part of the private placement of our stock to certain investors in January, June and December 2004, and warrants issued to Motorola in September 2004 in conformity with the terms of the agreement signed in April 2004. For the twelve months ended December 31, 2003, video phone related costs were $3,031, or 66% of total General and Administrative expense of $4,589 (including $1,558 in discontinued operations).

        Interest and Other Income and Interest Expense.    Interest and other income and interest expense from continuing operations consisted of interest earned on cash and cash equivalents, and interest expense on short-term debt. Total interest and other income increased to $1,023 for the twelve months ended December 31, 2004 from $0 for the twelve months ended December 31, 2003. During the twelve months ended December 31, 2004, we earned interest income of $86 on average cash balances of approximately $6,601, and incurred interest expense of $6 related to insurance financing. In comparison, during the twelve months ended December 31, 2003, we earned interest on average cash balances that are consolidated with discontinued operations of approximately $2,222, and incurred interest expense of $6 related to our insurance financing. Included in total interest and other income is $928 which represents deferred rent credits of $143 and cancelled unpaid rent of $785 relating to the amendment of our facility lease in June 2004. For more details, refer to Note 11 to our consolidated financial statements.

        Non Cash Change in Fair Value of Warrants and Conversion Options.    For the twelve months ended December 31, 2004, the non cash change in fair value of warrants and conversion option was an expense of $10,091. This expense was the result of a marked to market adjustment as of December 31, 2004 related to our June 23, 2004 private placement of our Series A Convertible Preferred Stock and

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Warrants. Over the life of the instruments, these marked to market adjustment of gains and losses will offset and net to $0.

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

2003 versus 2002

        Since our formation in 1995 and into January 2004, our company had been in the business of developing and selling interactive television ("ITV") technology, products and services for use in conjunction with cable TV broadband networks (the "ITV" Business"). Using our solutions, cable TV operators branded, marketed, and offered a wide variety of ITV packages to consumers. These packages included walled gardens of information, communications solutions complete with Internet-based e-mail and chat, and Web surfing, all presented and engaged on the TV set.

        During the third quarter of 2003, we completed a sale of certain assets, including our ITV intellectual property rights and our membership interest in TVGateway, LLC, for $3 million in cash to TVGateway, LLC, a company we were instrumental in forming. Our transaction with TVGateway, LLC marked a shift in our business away from the ITV Business and toward a new video phone product and associated business. Although we continued to support our current ITV Business during the first quarter of 2004, our new video phone product became our primary product focus. We advised our ITV customers of our de-emphasis of ITV going forward. We informed them that we were willing to continue our efforts into 2004 as long as we could do so on a profitable basis. In January, with all our customers having taken steps to terminate their ITV service in their markets, we decided to formally end our ITV business and began to account for our ITV business as a discontinued operation. The funds we received from the sale of assets to TVGateway, LLC, as well as the funds we received as a result of private placements of our securities on December 1, 2003 and December 4, 2003, have permitted us to fund the development of our new video phone business and our continuing operations in 2004.

Revenues

        Revenues.    For the years ended December 31, 2003 and December 2002, our revenues from continuing operations were $0. Revenues from discontinued operations for the year 2003 were primarily the result of first quarter products sales and consulting fees to TVGateway, LLC, a then unconsolidated entity, subscriber fees from cable operators providing our interactive television products and services, and certain excess inventory and equipment sold during the year. Revenues for the twelve months ended December 31, 2003 related to the discontinued operations were $3,886, compared to $13,878 for the same period in 2002. This revenue decrease of $9,992 from 2002 to 2003 is primarily attributable to reduced consulting fees with TVGateway. For the twelve months ended December 31, 2003, TVGateway consulting fees were $794, compared to $11,484 for the twelve months ended December 31, 2002. During the fourth quarter of 2003, we also sold approximately $300 of excess inventory at auction that was related to the discontinued operations.

Costs and Expenses

        Cost of Revenues.    Cost of revenues from continuing operations were $0 for the twelve months ended December 31, 2003 and 2002. Cost of revenues for the year 2003 related to discontinued operations consisted of primarily equipment product costs related to commercial deployments, the sale of excess inventory and equipment, and service fee revenue costs related primarily to the provision of engineering and administrative services. Such discontinued operations costs of equipment product revenues for the twelve months ended December 31, 2003 were $5,849, or approximately 261% of equipment product revenues, compared to the discontinued operations product costs of revenues of

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$4,537, or approximately 479% of equipment product revenues, for the twelve months ended December 31, 2002. The decrease in the cost of equipment product revenues as a percent of total equipment product revenues for the twelve months ended December 31, 2003, as compared to the twelve months ended December 31, 2002, was primarily the result of increased level of equipment revenues, partially offset by an increase in inventory provisions recorded against the carrying amount of inventory products to adjust them to their net realizable value. For the twelve months ended December 31, 2003, discontinued operations inventory adjustments were $3,037. For the twelve months ended December 31, 2002, such inventory adjustments were $2,209. Service fee costs of revenues from discontinued operations for the twelve months ended December 31, 2003 were $807, or approximately 49% of service fee revenues. Comparable service fee costs of revenues were $11,284 or approximately 87% of service fee revenues for the twelve months ended December 31, 2002. The decrease in service fee cost of revenues of $10,477 for the twelve months ended December 31, 2003, when compared to the same period in 2002, is primarily attributable to decreased costs related to consulting fees with TVGateway and the additional support costs relating to a decreased subscriber base.

        Engineering and Development.    Engineering and development expenses from continuing operations primarily consisted of compensation, the cost of design, programming, testing, documentation, and support of the Company's video phone product. For the twelve months ended December 31, 2003 and 2002, such expenses were $3,000 and $0, respectively. This increase in 2003 over 2002 reflected our increased shift of efforts of our engineering staff, and related costs from our discontinued ITV business to the continuing development of our video phone product. Engineering and development expenses related to discontinued operations primarily consisted of the cost of design, programming, testing, documentation and support of our ITV related hardware, software and services. For the twelve months ended December 31, 2003, discontinued operation engineering and development costs were $792, a decrease of approximately 90% when compared to $7,705 for the twelve months ended December 31, 2002. This decrease in expenses of $6,913 is primarily attributable to the shift of efforts and related costs from the discontinued ITV business to the continuing video phone business.

        Sales and Marketing.    Sales and marketing expenses from continuing operations consisted primarily of compensation, attendance at conferences, trade shows, travel costs, promotions and other marketing programs related to the introduction of the Company's video phone product. For the twelve months ended December 31, 2003 and 2002, such expenses were $466 and $0, respectively. This increase in 2003 over 2002 reflected our marketing and promotional expenditures, trade show attendance, as well as a shift in efforts from our ITV business to the continuing marketing of our video phone product. Sales and marketing costs from discontinued operations consisted primarily of compensation, attendance at conferences and trade shows, travel costs necessary to cover a domestic and international customer market base, promotions and other marketing programs substantially related to ITV trial installations and commercial deployments. For the twelve months ended December 31, 2003 sales and marketing expenses from the discontinued ITV business were $405. This represents a decrease of approximately 84% when compared to such sales and marketing expenses of $2,585 for the twelve months ended December 31, 2002. This decrease in expenses is primarily attributable to our shift in efforts to Ojo video phone marketing and promotional expenditures, trade show attendance as well as a shift in efforts from our ITV business to the continuing video phone business.

        General and Administrative.    General and administrative expenses from continuing operations were $3,031 and $0 for the twelve months ended December 31, 2003 and 2002, respectively. This increase in 2003 over 2002 reflects our transition of our administrative management compensation, facility, legal, finance and professional consulting fees toward the further development of the video phone business. General and administrative expenses from discontinued operations consisted primarily of expenditures for administration, office and facility operations, finance and general management activities, including legal, accounting, insurance and other professional fees. General and administrative expenses from discontinued operations were $1,558 for the twelve months ended December 31, 2003, a decrease of

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49% when compared to expenses of $3,069 for the same period in 2002. This decrease in expenses is primarily attributable to our transition of our management compensation, facility costs, and professional fees from our ITV business to the video phone business.

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

        Interest and Other Income and Interest Expense.    Interest and other income and interest expense were from discontinued operations and consisted of interest earned on cash and cash equivalents and short-term investments, and interest expense on equipment financing and short-term debt. Interest and other income decreased from $462 for the twelve months ended December 31, 2002 to $75 for the twelve months ended December 31, 2003, primarily due to declining average cash and short term investment balances and to declining interest rates. During the twelve months ended December 31, 2002, we earned interest on average cash balances solely from discontinued operations of approximately $8,311 and incurred interest expense related to our equipment financing facility in the amount of $7. In comparison, during the twelve months ended December 31, 2003 we earned interest on average cash balances that are consolidated with discontinued operations, of approximately $2,222 and incurred interest expense related to our insurance financing in the amount of $6.

        Gain on sale of intellectual property and investment in TVGateway.    On September 30, 2003, we sold certain intellectual property rights and certain software and equipment related to our discontinued ITV operations to TVGateway, LLC, for $2.4 million in cash, pursuant to an Asset Purchase Agreement (the "Purchase Agreement"), which we executed with TVGateway in August 2003. Pursuant to the Purchase Agreement we retained a royalty-free license to the intellectual property rights that were sold, enabling us to use the intellectual property rights to continue to conduct our business as then being conducted. Concurrently with the execution of the Purchase Agreement, we and TVGateway also entered into a redemption agreement pursuant to which we redeemed our equity interest in TVGateway for $600,000 in cash, paid concurrently with the execution of the redemption agreement. The intellectual property rights had previously been expensed as incurred. Similarly, we did not carry an equity balance for our interest in TVGateway. The aggregate effect of these transactions was a gain of $3 million, which is reported in the loss from discontinued operations in 2003.

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

Liquidity and Capital Resources

        As of December 31, 2004, our primary source of liquidity consisted of cash and cash equivalents that are highly liquid, are of high quality investment grade and have original maturities of less than three months.

        At December 31, 2004, we had cash and cash equivalents of $11,840 (and no short-term investments) as compared to cash and equivalents of $3,365 (and no short-term investments) at December 31, 2003. Net cash used in continuing operations was $7,084 for the twelve months ended December 31, 2004, as compared to $3,644 used for the same period in 2003. This increase in net cash used for continuing operations was primarily attributable to our increase in expenditures during the twelve months ended December 31, 2004, related to the video phone business. We recorded bad debt

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expense in the amount of $16 from discontinued operations in 2004 to reflect our current assessment of the collectability of certain receivables.

        Cash provided by financing activities from continuing operations during the twelve months ended December 31, 2004, totaled $16,349 compared to $1,490 provided during the same period in 2003. Pursuant to the Purchase Agreement we retained a royalty-free license to the intellectual property rights that were sold, enabling us to use the intellectual property rights to continue to conduct our business as then being conducted. Concurrently with the execution of the Purchase Agreement, we and TVGateway also entered into a redemption agreement pursuant to which we redeemed our equity interest in TVGateway for $600,000 in cash, paid concurrently with the execution of the redemption agreement. The intellectual property rights had previously been expensed as incurred. Similarly, we did not carry an equity balance for our interest in TVGateway. The aggregate effect of these transactions was a gain of $3 million, which is reported in the loss from discontinued operations in 2003.

Operations and Liquidity.

        To date, we have funded operations primarily through private sales of equity securities and through an initial public offering of common stock in April 1999. As of December 31, 2004 the Company had cash and cash equivalents of $11,840. The operating cash usage from continuing operations for the twelve months ended December 31, 2004 and 2003 was $7,084 and $3,644, respectively. As of December 31, 2004 we have $37 of outstanding debt and our assets are not pledged as collateral. We continue to evaluate the possibilities to obtain additional financing through public or private equity or debt offerings, bank debt financing, asset securitizations, or from other sources. Such additional financing would be subject to the risk of availability, may be dilutive to our shareholders, or could impose restrictions on operating activities. There can be no assurance that this additional financing will be available on terms acceptable to us, if at all.

        With the private placement of our common stock, together with additional rights and warrants, aggregate gross proceeds received of $1.5 million in January 2004, the private placement of our common stock in April 2004 providing proceeds of $1.0 million, the June 2004 private placement of our redeemable preferred stock aggregating proceeds received of $7.55 million, the December 2004 private placement of common stock of $500, the exercise of additional investment rights and warrants of $6.2 million in December 2004, January and February 2005, and the exercise by employees and former employees of options throughout 2004, January and February 2005 aggregating gross proceeds of $900; we project we will have sufficient funding to continue operations through 2005, assuming no additional funding is received and assuming no impact from sales. Depending on the timing and magnitude of the ramp up of video phone sales, it is possible that our current cash may be sufficient to get us to a cash break even position. We do however have an obligation to pay individuals on, as well as to redeem our outstanding Series A Preferred Stock (see Part II, Item 5, Sale of Unregistered Securities (3) for additional information) upon maturity, or at the earlier option of a holder of these securities. Under certain limited circumstances, however, we may be forced to make such payments and redemptions with cash instead of shares of our common stock. In such event our ability to fund continuing operations would be negatively impacted. No assurances can be given that sufficient sales, if any, will materialize, or that a funding transaction can be consummated prior to the depletion of our available cash. We however remain hopeful that sales will materialize and/or that sufficient funding can be developed through funding or ongoing operations to continue our operations.

Quantitative and Qualitative Disclosures About Market Risk.

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

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        As of December 31, 2004, our cash and cash equivalents were $11,840, most of which were securities having a maturity of less than three months. Due to the average maturity and conservative nature of our investment portfolio, management believes a sudden change in interest rates would not have a material effect on the value of the portfolio. Management estimates that had the average yield of our investments decreased by 100 basis points, our interest income for the twelve months ended December 31, 2004 would have decreased by approximately $95. This estimate assumes that the decrease occurred on the first day of 2004 and reduced the yield of each investment instrument by 100 basis points. The impact on our future interest income of future changes in investment yields will depend largely on our total investments.

        Foreign Currency Exchange Risk.    Although we transact business in various foreign countries, the principal portion of our business is in the United States and substantially all of our revenues and costs to date have been denominated in U.S. dollars. Although our agreement with Mototech, our contract manufacturer in Taiwan, is denominated in U.S. dollars, their material acquisition costs are subject to exchange rate changes that could impact our product costs.

Disclosure of Contractual Obligations

Recent Accounting Pronouncements

        In January 2003, the FASB issued Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities. FIN 46 addresses consolidation by business enterprises of variable interest entities, which are entities that either (a) do not have equity investors with vesting rights or (b) have equity investors that do not provide sufficient financial resources for the entity to support its activities. The interpretation is effective immediately for variable interest entities created after February 1, 2003. In December 2003, the FASB published FASB FIN 46(R), Consolidation of Variable Interest Entities. FIN 46(R), among other things, defers the effective date of implementation for certain entities. The revised interpretation is effective for the first interim or annual reporting period ending after March 15, 2004, with the exception of structures that are commonly referred to as special-purpose entities, for which the statement is effective for periods ending after December 15, 2003. The adoption of FIN 46 did not have a material impact on WorldGate's results of operations or financial position.

        In November 2004, the FASB issued SFAS No. 151 "Inventory Costs" which amends the guidance in ARB No. 43, Chapter 4 "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges." SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after the date SFAS No. 151 was issued. SFAS No. 151 shall be applied prospectively. The Company does not expect the adoption of SFAS No. 151 to have a material effect on its consolidated financial statements.

        In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets" which amends APB Opinion No. 29, "Accounting for Nonmonetary Transactions." APB No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle.

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SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date SFAS No. 153 was issued. SFAS No. 153 shall be applied prospectively. The Company does not expect the adoption of SFAS No. 153 to have a material effect on its consolidated financial statements.

        In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" that focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." Beginning with our quarterly period that begins after June 15, 2005, we will be required to expense the fair value of employee stock options and similar awards. As a public company, we are allowed to select from two alternative transition methods, each having different reporting implications. The impact of SFAS No. 123R has not been determined at this time.

FACTORS AFFECTING OUR BUSINESS CONDITION

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

Our ITV Business has accounted for most of our revenues to date; we cannot reliably project our continued revenues, and we expect to incur significant losses for an indefinite period of time.

        The ITV Business, including the assets we sold in the TVGateway transaction, has historically accounted for substantially all of our revenue. Since we have discontinued the ITV Business and transitioned to become a developer, manufacturer and seller of video phone products we cannot reliably predict our future revenues, and no assurances can be provided as to the amount of ongoing revenues, if any, or to the periods in which any such revenues may be received. Our video phone business involves the development of a new product line with no market penetration in an undeveloped market sector. We do not expect our video phone business to produce any significant revenues in the near term, and we plan to operate at a loss for at least the near term. We cannot predict to what extent our video phone product will begin to produce revenues, or whether we will ever reach profitability. If we are unable to achieve significant levels of recurring revenue from our video phone business, our losses will likely continue indefinitely. If this occurs, the market price of our common stock and our viability as a going concern could suffer.

21

We expect to be increasingly dependent on a single line of business that currently has no history of revenues. We cannot predict our future results because our video phone business has no operating history.

        Our primary line of business has become the development of video phone products and technology. We are still in the process of launching our first product based on this technology and consequently there are currently no substantial revenues from this line of business. Given the lack of operating history in the video phone business, it is difficult to predict our future results. Investors should consider the risks and uncertainties that we may encounter as a pre-revenue-stage company in a new and unproven market. These uncertainties include:

•

our ability to design and engineer products having the technological features planned for the video phone product line in a cost efficient manner;



•

consumer demand for, and acceptance of, the video phone business products;



•

our ability to enter into appropriate distribution relationships for the product;



•

our ability to demonstrate the benefits of our products and services to end users;



•

our unproven and evolving business model;



•

unfavorable economic conditions in the technology industry;



•

decreased capital spending on technology due to adverse economic conditions; and



•

global economic conditions.

Our video phone technology and products remain subject to significant uncertainty.

        Our video phone technology and products are in the early commercialization stage and have not been fully proven. The market for products related to video telephony is characterized by uncertain user and customer requirements, and the emergence of new communications standards and practices. Each of these characteristics could impact our video phone products, intellectual property and system designs. The successful development of our products is subject to the risks that:

•

our proposed product is found to be ineffective for the intended purposes;



•

the proposed product is uneconomical to manufacture or market or does not achieve broad market acceptance; and



•

third parties hold proprietary rights that preclude us from marketing the product.

        Significant undetected errors or delays in new products or releases may affect market acceptance of our product. There can be no assurance that, despite our testing, errors will not be found in the initial product or subsequent releases after the commencement of commercial shipments, resulting in loss of customers or failure to achieve market acceptance.

        In addition, our video phone technology and product will need to be compatible with a broad array of disparate technologies in order to be interoperable with other products routinely used in HSD operations such as routers, switches, operating systems and billing systems software. Without compatibility, we may not achieve market acceptance or demand for our products within our target base of customers because our products will not operate with many of the applications the target customers currently use.

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We will rely on third parties to provide certain components and services for our video phone products. If our vendors fail to deliver their products in a reliable, timely and cost-efficient manner, our business will suffer.

        We expect to depend on relationships with third parties such as contract manufacturing companies, chip design companies and others who may be sole source providers of key components and services critical for the product we are developing in our video phone business. A formal relationship with Mototech, Inc. has been established for the volume manufacture of Ojo. If Mototech, Inc. or other providers of components and/or manufacturing services do not produce these components or provide their services on a timely basis, if the components or services do not meet our specifications and quality control standards, or if the components or services are otherwise flawed, we may have to delay product delivery, or recall or replace unacceptable products. In addition, such failures could damage our reputation and could adversely affect our operating results. As a result, we could lose potential customers and any revenues that we may have at that time may decline dramatically.

We will rely on third parties to provide certain marketing and distribution services for our video phone products. If our vendors fail to deliver their services in a reliable, timely and cost-efficient manner, our business will suffer.

        We have a formal distribution agreement with Motorola, Inc. for the marketing and distribution of our Ojo video phone. Under this agreement, Motorola and its distribution partners are responsible for the worldwide marketing and distribution of the Ojo video phone. If they are not successful, our operating results will be adversely affected, our revenue could be significantly reduced and we could lose potential customers.

We may not be able to meet our product development objectives or market expectations.

        Our video phone product development efforts are inherently difficult to manage and keep on schedule and there can be no assurance that we will be able to meet our development objectives or to meet market expectations. In addition to development delays, we may experience substantial cost overruns in completing development of our product. The technological feasibility for some aspects of the product that we envision is not completely established. The product being developed by us may contain undetected flaws when introduced. There can be no assurance that, despite testing by us and by potential customers, flaws will not be found in the product, resulting in loss of or delay in market acceptance. We may be unable, for technological or other reasons, to develop and introduce the product in a timely manner in response to changing customer requirements. Further, there can be no assurance that while we are attempting to finish development of our product, a competitor will not introduce a similar product. The introduction by a competitor of either a similar product before we introduce our product, or a superior alternative to our product, may diminish our technological advantage, render our product and technologies partially or wholly obsolete, or require substantial re-engineering of our product in order to become commercially acceptable. Our failure to maintain our product development schedules, avoid cost overruns and undetected errors or introduce a product that is superior to competing products would have a materially adverse effect on our business, financial condition and results of operations.

We may not be able to achieve competitive pricing in the marketplace.

        Because video phone products are relatively new to the marketplace there is no established market pricing. Our pricing for the Ojo video phone may be considered high for a consumer product offering. Although we anticipate cost reductions and volume manufacturing will reduce the price of our products we cannot be assured that reductions in our pricing will occur or if such reductions are achieved whether the extent of such reductions will provide competitive market pricing.

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We are highly dependent on our key personnel to manage our business, and because of competition for qualified personnel we may not be able to recruit or retain necessary personnel.

        Our continued growth and success depend to a significant degree on the continued services of our senior management and other key employees and our ability to attract and retain highly skilled and experienced technical, managerial, sales and marketing personnel. We have historically been a developer of products related to ITV. Our video phone business represents an expansion into the development of HSD communications hardware and software products in which we have limited experience. As we enter this new line of business, we also expect to encounter new product development challenges, new customer requirements, new competitors and other new business challenges, with which our existing management may be unfamiliar. There can be no assurance that we will be successful in recruiting new personnel or in retaining existing personnel. None of our employees is subject to a long-term employment agreement. The loss of one or more key employees or our inability to attract additional qualified employees could have a material adverse effect on our business, results of operations and financial condition. In addition, we may experience increased compensation costs in order to attract and retain skilled employees.

We may not be successful in developing or maintaining strong distribution channels for our video phone products.

        The success of the video phone business depends on developing strong relationships with cable operators and other HSD communications providers and distribution channel partners who are selling services to end-users. We plan to rely primarily on Motorola and our HSD operator and electronics distribution channel relationships to market our video phone products. If we are not successful in creating a strong distribution channel in a timely manner, we may not gain significant sales.

We may not be able to compete successfully in the highly competitive and rapidly evolving HSD communications market.

        The market for products that utilize HSD communications is still developing and there can be no assurance that our product will ever achieve market acceptance. Since we have no existing customers for our video phone business, cable operators and other HSD network providers must be convinced to buy our video phone product. To the extent we do not achieve growth, it will be difficult for us to generate meaningful revenue or to achieve profitability.

We may not be able to protect intellectual property of our video phone business against third-party infringements or claims of infringement.

        Failure to protect our intellectual property rights may result in a loss of our exclusivity or the right to use our video phone technology. We plan to rely on patent, trade secret, trademark and copyright law to protect our video phone intellectual property. Although we have filed multiple patent applications for our technology, our patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope and enforceability of a particular patent. Accordingly, there can be no assurance that any patents will be issued pursuant to our current or future patent applications or that patents issued pursuant to such applications will not be invalidated, circumvented or challenged. Moreover, there can be no assurance that the rights granted under any such patents will provide competitive advantages to us or be adequate to safeguard and maintain our proprietary rights. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain foreign countries.

        We also seek to protect our proprietary intellectual property, including intellectual property that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventor's rights agreements with our current and future strategic partners and employees. We cannot assure you

24

that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of these relationships.

        Some of our video phone intellectual property includes technologies and processes that may be similar to the patented technologies and processes of third parties. If we do not adequately secure our freedom to use our video phone technology, we may have to pay others for rights to use their intellectual property, pay damages for infringement or misappropriation or be enjoined from using such intellectual property. If we are found to be infringing third-party patents, we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all. While we are not currently engaged in any material intellectual property disputes or litigation, we could become subject to lawsuits in which it is alleged that we have infringed the intellectual property rights of others or commence lawsuits against others who we believe are infringing upon our rights. Our involvement in intellectual property litigation could result in significant expense to us, adversely affecting the development of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not such litigation concludes favorably for our company.

Legal and regulatory developments could have adverse consequences for our business.

        The legal and regulatory environment that pertains to our business is uncertain and changing rapidly. New legislation or regulations could be introduced that could substantially impact our ability to launch and promote the Ojo video phone. For example, in the United States, the Federal Communications Commission (FCC) could undertake an examination of whether to impose surcharges or additional regulations upon certain providers of Internet protocol, or IP, based communication services. The imposition of regulations on IP communications services may negatively impact our business.

The use of the high speed data infrastructure as a commercial marketplace is at an early stage of development.

        Demand and market acceptance for recently introduced products and services over the high speed data, or HSD, infrastructure are still uncertain. We cannot predict whether customers will be willing to shift their traditional telephone activities online. The HSD infrastructure may not prove to be a viable commercial marketplace for a number of reasons, including:

•

concerns about security;



•

Internet congestion;



•

quality of service issues;



•

inconsistent service; and



•

lack of cost-effective, high-speed access.

        If the use of the HSD infrastructure as a commercial marketplace does not continue to grow, we may not be able to grow our customer base, which may prevent us from achieving profitability.

We may not have sufficient working capital to fund our continuing video phone business, and we may be unable to obtain additional capital. If we obtain additional financing, you may suffer significant dilution.

        Despite the receipt of proceeds from the TVGateway transaction and several private placements of our securities, we may need to seek additional third party investment during 2005 in order to provide additional working capital for our video phone business. We cannot be certain that financing from third

25

parties will be available on acceptable terms to us or at all. The extent and timing of our future capital requirements will depend upon several factors, including the rate of market acceptance of our products, the degree of competition for our products, and our level of expenditures, including those for product development, sales and marketing. If our capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. The levels of funding of pre-revenue-stage companies generally by both venture funds and strategic investors have fallen dramatically in the past few years. If we cannot raise funds on acceptable terms, we may not be able to develop our products and services, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, any of which could have a material adverse effect on our ability to grow our business. If we are unable to secure such additional financing, we will have to curtail or suspend our business activities and may have to seek protection of the bankruptcy courts. If that happens, you could lose your entire investment. If we cannot raise additional financing on acceptable terms, we may not be able to continue to operate our business as a going concern. Further, if we issue equity securities, our shareholders may experience severe dilution of their ownership percentage, and the new equity securities may have rights, preferences or privileges senior to those of our common stock. If our common stock is listed on The NASDAQ National Market or The NASDAQ SmallCap Market at the time of the proposed equity financing resulting in the sale and issuance of twenty percent or more of the outstanding shares of our capital stock, we may be required to obtain stockholder approval of such issuance. There can be no assurance that we will be able to obtain any necessary stockholder approval, and the failure to obtain such approval could limit our ability to obtain needed capital. Due to the factors mentioned herein, our accountants have stated in their audit report that there is substantial doubt about our ability to continue as a going concern.

In the event that our common stock is delisted from NASDAQ SmallCap Market, it may be subject to the requirements of the rules relating to "penny stocks."

        Our common stock is currently listed on the NASDAQ SmallCap Market, which has requirements for the continued listing of stock. If we fail to continue to meet these listing requirements we will become subject to delisting. For example, if our common stock trades below $1.00 for 30 consecutive trading days, or if we fail to meet any of the other listing requirements including the market capitalization and minimum stockholders equity requirements, our common stock may be delisted from the NASDAQ SmallCap Market. If our shares are delisted from the NASDAQ SmallCap Market, they are likely to become subject to the SEC penny stock rules, which could adversely affect the market liquidity of our common stock. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors; and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our common stock might decline, and you could find it more difficult to sell your stock.

Our stock price is volatile.

        The trading price for our common stock has been volatile, ranging from a sales price of $0.22 in April 2003, to a sales price of over $6.00 per share in December 2004. The price has changed dramatically over short periods with changes of over 60% percent in a single day. An investment in our stock is subject to such volatility and, consequently, is subject to significant risk.

Prior offerings of our common stock may have an adverse impact on the market value of our stock.

        During 2003 and 2004 we issued shares of our common stock as part of various private placements to certain institutional investors and as part of that transaction filed three registration statements, which provided for the sale or distribution of these shares by these institutional investors. When these investors sell their shares we will not receive any proceeds from the sales. The sale of these blocks of

26

stock, or even the possibility of its sale, may adversely affect the trading market for our common stock and reduce the price available in that market.

        In connection with these private placements, we also issued warrants and additional investment rights to purchase shares of common stock. The existence of such rights to acquire common stock at fixed prices may prove a hindrance to our efforts to raise future equity and debt funding, and the exercise of such rights will dilute the percentage ownership interest of our stockholders and may dilute the value of their ownership. The possible future sale of shares issuable on the exercise of outstanding warrants and additional investment rights could adversely affect the prevailing market price of our common stock. Further, the holders of the outstanding warrants and additional investment rights may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.

Our board of directors' right to authorize additional shares of preferred stock could adversely impact the rights of holders of our common stock.

        Our board of directors currently has the right to designate and authorize the issuance of one or more series of our preferred stock with such voting, dividend and other rights as our directors may determine. The board of directors can designate new series of preferred stock without the approval of the holders of our common stock. The rights of holders of our common stock may be adversely affected by the rights of any holders of shares of preferred stock that may be issued in the future, including without limitation dilution of the equity ownership percentage of our holders of common stock and their voting power if we issue preferred stock with voting rights. Additionally, the issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock.

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

        Refer to Interest Rate Risk and Foreign Currency Exchange Risk on page 19 for a discussion of this item.

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Item 8. Financial Statements and Supplementary Data.

WORLDGATE COMMUNICATIONS, INC.

INDEX TO FINANCIAL STATEMENTS

*

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

F-1

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
WorldGate Communications, Inc. and Subsidiaries

        We have audited the accompanying consolidated balance sheets of WorldGate Communications, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WorldGate Communications, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

        Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

        The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net accumulated deficiency of $220 million that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
February 24, 2005

F-2

Report of Independent Registered Public Accounting Firm

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

        In our opinion, the consolidated statements of operations, stockholders' (deficiency) equity and of cash flows for the year ended December 31, 2002 listed in the accompanying index present fairly, in all material respects, the results of operations and cash flows of WorldGate Communications, Inc. and its Subsidiaries for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index for the year ending December 31, 2002 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States), which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, which appears in the financial statements included in the Company's Form 10-K for the year ended December 31, 2002 and not presented herein, the Company has incurred recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2, which appears in the financial statements included in the Company's Form 10-K for the year ended December 31, 2002 and not presented herein. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ PricewaterhouseCoopers LLP

Philadelphia, PA
February 14, 2003, except as to the discontinued operations described in Note 18 as to which the date is March 21, 2005.

F-3

WORLDGATE COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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

F-4

WORLDGATE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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

F-5

WORLDGATE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY

(DOLLARS AND SHARES IN THOUSANDS)

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

F-6

WORLDGATE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)