** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**ANNUAL REPORTPURSUANT TO SECTION 13 OR 15 () OF THE**

**SECURITIES EXCHANGEACT OF 1934**

 

**For the fiscal year ended December 31, 2001**

** **

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**ACTV, Inc.**

 

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                         |   | **94-2907258**                              |
|----------------------------------------------------------------------|--------|---------------------------------------------|
|  (State  or other jurisdiction ofincorporation or organization) |   |  (I.R.S.  Employer Identification No.) |
|                                                                 |   |                                        |
| **233 Park  Avenue South****New York, New York**                     |   | **10003**                                   |
| (Address of principal executive offices)                             |   | (Zip Code)                                  |

 

**(212) 497-7000**(Registrant’s telephone number, including area code)

 

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

 

## **Common Stock, par value $0.10 per share**(Title of Class)

                

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                Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Sections13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes ý  No o

 

                Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to thisForm 10-K. o

 

                As of April 11, 2002, theaggregate market value of the voting stock held by non-affiliates of theregistrant (based on The Nasdaq Stock Market closing price of  $1.37 on April 11, 2002) was $62,625,017.

 

                As of April 11, 2002, there were55,887,327 shares of the registrant’s common stock outstanding.

 

 

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**SPECIALNOTE REGARDING FORWARD LOOKING STATEMENTS**

 

                This annual report onForm 10-K contains forward–looking statements as defined by thePrivate Securities Litigation Reform Act of 1995. Forward–lookingstatements include statements concerning plans, objectives, goals, strategies,future events or performance and underlying assumptions and other statementsthat are other than statements of historical facts. These statements aresubject to uncertainties and risks including, but not limited to, product andservice demand and acceptance, changes in technology, economic conditions, theimpact of competition and pricing, government regulation, and other risksdefined in this document and in statements filed from time to time with theSecurities and Exchange Commission. All such forward–looking statementsare expressly qualified by these cautionary statements and any other cautionarystatements that may accompany the forward-looking statements. ACTV, Inc.disclaims any obligations to update any forward–looking statements toreflect events or circumstances after the date hereof.

 

### **                INTRODUCTORY NOTE**

 

                The terms “we,” “our,” and“ACTV” used herein refer to ACTV, Inc. and its subsidiaries.

 

## **PART I**

 

**Item 1.  Business**

 

**Overview**

 

                We are a digital media companythat provides proprietarytechnologies, tools, and technical and creative services for interactive TVadvertising, programming, and enhanced media applications. We have two operating business segments, whichwe call Digital TV and Enhanced Media.

 

                We believe that our Digital TVtechnologies are unique in providing targeting, interactivity andaccountability for television commercials, and in giving viewers the ability toinstantly customize their viewing experiences for a wide variety of programmingapplications. Our Enhanced Media technologies allow both for the enhancement ofvideo and audio content, including standard TV programming, with Web-basedinformation and interactivity.

 

                We believe the expansion ofdigital TV transmission systems and the emergence of platforms providing thesimultaneous delivery of video and Internet content (convergence programming),will allow television distributors, advertisers and programmers to bringinteractivity to a mass audience. We believe that our proprietary technologies,tools, and technical and creative services capabilities position us to capitalizeon this growth.

 

                We have received strategicinvestments from Liberty Media Corporation, our largest shareholder, andMotorola Broadband Communications Sector.

 

                ACTV, Inc. was incorporatedunder the laws of the State of Delaware in July 1989. It is the successor, bymerger effective November 1, 1989, to ACTV, Inc., a Californiacorporation organized in July 1983. Our executive offices are located at233 Park Avenue South, New York, New York 10003, telephone number(212) 497-7000.

 

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**Industry Environment/ACTV Restructuring Program**

 

Our industry sector experienced a difficult marketenvironment in calendar 2001. Cable and satellite operators, TV infrastructuresuppliers, and content providers scaled back many of their Digital TV andEnhanced Media initiatives. As a result, our businesses recorded revenues wellbelow our internal projections in 2001. We believe that the current marketenvironment and the shrinking pool of ad dollars extended the timeframe fordeployment of certain of our products and services.

 

                InJuly 2001, we initiated a restructuring program, under which we realigned ourbusiness in response to the current market environment, and as part of aninitiative to rationalize our operations. Some of the specific actions we tookunder the restructuring program include:

 
| • |   | Reducing our workforce from over 300 employees to  approximately 140 employees.                                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                     |
| • |   | Closing and relocating office facilities to reduce  our square footage under lease from 110,000 to 55,000 and our annual lease  costs from $2.6 million to $1.0 million. |
|   |   |                                                                                                                                                                     |
| • |   | Eliminating low-margin lines of business, e.g.,  content creation, that have a high fixed-cost base.                                                                     |
|   |   |                                                                                                                                                                     |
| • |   | Refocusing our HyperTV business from that of a  turn-key supplier of applications and services to a licensor of patented  technology.                                    |

 

                Therestructuring program represents our effort to conserve resources whileresponding to current industry conditions. We expect it to reduce our costs byapproximately $15 million annually after its full implementation, which shouldbe completed in fiscal 2002. We believe that the measures taken under theprogram will provide us the flexibility to meet our customers’ currentoperating needs without sacrificing our ability to expand our business inresponse to future increases in demand for our products and services.

 

*RestructuringCharges*

 

                Werecorded restructuring charges in the third and fourth quarters of 2001totaling $6.6 million. Please refer to Management’s Discussion and Analysis ofFinancial Condition and Results of Operations for further details regarding thenature of these charges.

 

                Thedownturn in our industry and its effect on our businesses and strategicinvestments caused us to reassess the carrying value of certain long-livedassets. As a result of this valuation analysis, in the fourth quarter of 2001we recorded a charge of $11.2 million to write down the value of goodwillassociated with the acquisition of Intellocity to $12 million. In addition, werecorded charges totaling $1 million to reduce the carried asset value of ourstrategic investments to $7.4 million.

 

### **IndustryBackground**

 

* Digital TV*

 

                Our digital TV applications require the digitaltransmission of television signals, either through direct broadcast satellite,or DBS, which is a digital medium, or through a cable system that has beenupgraded from

 

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analog to digital.  Historically, the shortage of channelcapacity in a typical cable system, and the lack of digital technologyavailable to provide such services have limited the development of programmingfeaturing our technology.  However,advances in digital transmission and set-top box technology have begun toeliminate these barriers to providing interactive programming.

 

                The development of compressiontechnology and the digital transmission of television signals allow for thedelivery of a greater number of channels with better audio and video qualityover the same cable system. The resulting expansion of channel capacity permitsa cable operator to offer a wider variety of programming choices. Traditionalanalog cable systems typically offer a maximum of less than one hundredprogramming channels. Current digital compression technology, however, enablesas many as twelve digital channels of programming using the same bandwidthrequired for one analog channel.

 

                The platform required fordelivery of our Digital TV applications is expanding rapidly as DBS subscribersand digital cable subscriber households increase in the U.S. Kagan World Mediaforecasts that at the end of 2001, there were over 14 million U.S. digitalcable subscribers. Kagan further projects the number to grow nearly 40%, to 20million, by the end of 2002, and to approximately 44 million in 2007. Kaganestimates that there were approximately 17.6 million DBS subscriberhouseholds in the U.S. at the end of 2001, and forecasts an increase in thisnumber to over 26 million by 2007. In Kagan’s estimation, the total digitalpenetration in the U.S. will reach over 56% of total television households by2007.

 

                Advertising represents animportant application of our Digital TV technologies. According to UniversalMcCann’s December 2001 Insider’s Report, total TV advertising expenditures in2000 were $41.2 billion for broadcast and $15.1 billion for cable andsatellite. Traditional television broadcasting, cable and DBS systems do notprovide an integrated means either to deliver targeted advertising or forviewers to respond to programs and advertisements. In principle, commercialsthat can target an audience through the use of demographic and other relevantviewer information promises to make advertising more cost efficient. Moreover,many advertisers use television commercials to generate requests for productinformation, which in turn serve as sales leads for their products andservices. Today, most direct response television purchases and requests forinformation require a telephone call, causing advertisers to incur asignificant cost per transaction. We believe that television viewers,advertisers and merchants will respond favorably to a simple, immediate,inexpensive and automated method enabling them to participate in commercethrough the television itself.

 

#### * Enhanced Media*

 

                The Internet has grown rapidlyover the past several years and is now a medium used by millions of people forentertainment, education, e-commerce and multimedia content. Nielsen / NetRatings estimates that in January 2002 there were 166.1 million Americanswith Internet access. Commerce over the Internet has grown rapidly in recentyears, with annual percentage increases of over 100% for 1999 and 2000,according to The Forrester Group. Although e-commerce growth slowed to 12% forthe 2001, its total volume exceeded $47 billion, according to Forrester.

 

                The growth in Internet usage hascreated opportunities for television content providers and their advertisingcustomers to reach and interact with millions of Internet users. Due to itsinteractive nature, the Internet is a medium that has certain advantages overtraditional television: it can provide customized, targeted programming andadvertising to consumers and to generate cost-effective results foradvertisers. To combat a loss of audience to the Internet and to gain onlinemarket share, certain broadcasters and cable programmers are now producing andpromoting companion online programming to traditional TV shows. Despite therecent decline in Internet advertising, we believe that the opportunities fortelevision programmers to generate additional ad revenues are growing asadvertisers increasingly recognize the potential advantages of Internet–basedadvertising that complements television programming. We believe that we arewell positioned to take advantage of this shift from

 

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singlemedia source content to a convergence of television and Internet content.

 

### **Digital TV**

 

                Our Digital TV technologies arepatented processes for creating interactive customized television content andadvertising in response to viewer remote control entries or to informationstored locally in a viewer’s set-top box. Our software-only application, whichcan reside in a digital set-top box or other local device, such as a personalvideo recorder (PVR) or video on demand system (VOD), remembers a viewer’sinputs throughout a program and can later deliver tailored content to theviewer based on those inputs. Our digital TV technology allows us to send theviewer multiple television signals, related in time and content, and for theswitching among those signals without a visually perceptible delay. The viewerexperiences the video, audio and graphics of a single fluid programming stream,while the programming on the other signals remains transparent.

 

                The first commercialapplications of our Digital TV technologies will be for advertising and sportsentertainment programming. We have branded our Digital TV applications foradvertising and entertainment as SpotOn and One To One TV, respectively. OurDigital TV technologies allow, for example, neighbors to watch the same television program whileseeing entirely different advertisements based upon demographic information, ora sporting event featuring a different viewof the action, highlight packages, statistics or instant replays.

 

                We are initially targetingSpotOn and One To One TV for distribution through cable operators that havedeployed digital transmission systems and through DBS operators. We expecteventually to offer our Digital TV applications through other programmingdistribution systems, including terrestrial digital. To receive SpotOn and OneTo One TV, all a viewer needs is a digital set-top box with our softwaredownload. We have agreements with leading manufacturers of digital set-topterminals including Motorola Broadband Communications Sector and  Scientific–Atlanta for the integrationof our software into their systems.

 

#### * SpotOn and One To One TV*

 

                We created a company withMotorola Broadband, called Digital ADCO, Inc., which developed the SpotOnapplications and services. OpenTV later joined Motorola and ACTV as ashareholder of Digital ADCO, Inc. SpotOn is a comprehensive end-to-endsystem that allows digital cable, satellite and broadcast systems to offertargeting, interactivity and accountability for television commercials. Webelieve that SpotOn will improve the effectiveness of television advertising.

 

                Based on proprietarytechnologies contributed by Motorola, OpenTV and ACTV, SpotOn provides an arrayof functionalities that we believe are unique. For example, our software caninstantaneously choose the most appropriate commercial for each viewer from anumber of alternatives received by the viewer’s set-top. SpotOn’s logicfunction makes this choice based either on demographic information that the TVdistributor, e.g., cable operator, has downloaded to the set-top box or onremote control responses keyed in by the viewer. SpotOn can  discern that a viewer is watching a programwith subtitles in a second language, and deliver commercials in that language.

 

                With SpotOn, an advertiser cangive viewers a choice of commercials, allowing them to select those of mostrelevance. Ads can contain program branches that allow the commercial itself tochange course in response to viewer selections.

 

                In addition, SpotOn provides themeans for advertisers to receive aggregate viewer data for each commercial.This information might include the actual number of homes, by geographic area,where a given commercial was displayed as well as the percentage of viewers whochanged channels or muted the sound during the commercial.

 

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                SpotOn allows forpermission-based marketing. A subscriber might request additional informationon a product or make merchandise purchases through the set-top box, enabledwith SpotOn software.

 

                The deployment of SpotOn in acable system involves principally the installation of software at the headendand a separate software download to subscriber set-top boxes. Depending on howthe headend is equipped, a minimal investment in hardware may also be required.SpotOn, which is compatible with a majority of digital cable set-tops currentlydeployed in the United States, is not dependent on the roll-out of the nextgeneration of digital boxes. To capitalize fully on the capabilities of SpotOn,the operator may also choose to upgrade its trafficking and billing system.

 

                In a typical configuration,SpotOn’s software application is resident in the set-top box, where it monitorsprogramming streams coming into the box as well as viewer remote controlselections. Commercials that are intended for a targeted audience are markedwith our proprietary digital codes that identify them as SpotOn-enabled. Oursoftware in the set-top box reads the codes as the commercials are receivedand, in real time, determines the most appropriate one. SpotOn is then able toinsert this ad into the TV programming stream without any visually perceptibledelay. The viewer is unaware that such a switch has occurred.

 

                We expect SpotOn to generaterevenues from multiple sources. We intend to charge a license fee to the TVdistributors that deploy the system, as well as upstream license fees toprogrammers and advertising interconnects. We expect to receive fees fromadvertisers for encoding targeted commercials, for the storage and transit ofthe ads, and for creative services. We believe that we will be able to charge atolling fee for enabling television commerce transactions and that we cangenerate revenues from programmers and advertisers for data reporting andanalysis.

 

                We introduced SpotOn in late2001 through a trial at the AT&T Broadband cable system in Aurora,Colorado, which has approximately 40,000 digital subscribers. SpotOn isavailable on AT&T Broadband’s currently deployed DCT-2000 digital set-topboxes. We have successfully completed the technical phase of the trial and willconduct the research phase of the trial during 2002.

 

                We intend to offer One To One TVentertainment programming on a pay-per-view and subscription basis. We believethat the first entertainment applications of One To One TV, whether distributedon a pay-per-view or subscription basis, will be for sports. We believe thatsports programming represents a compelling application of One To One TV. OurDigital TV technologies allow sports fans to completely individualize their TVviewing experience using a standard remote control.

 

*Advision, LLC*

 

                In December 2000 weacquired a controlling interest in the assets of VisionTel, Inc., fromnCUBE Corporation, which retains a minority interest. We formed a newpartnership entity, Advision LLC, to hold these assets. Advision LLC’sprincipal product is the Advision® software suite for advertising salesmanagement in cable, broadband, broadcast, satellite, and Internetservices.  We believe that Advision is acomplement to SpotOn, since it provides software for the trafficking andbilling of commercials delivered through advanced digital cable and DBSheadends.

 

#### *Digital TelevisionServices*

 

                We provide technical servicesfor digital interactive television, or iTV, primarily through our Intellocitydivision. Intellocity, Inc., which we acquired in March 2001 through anexchange of stock, is a leader in the design, development and integration ofiTV infrastructure and content. Clients for our technical services includebroadband operators, content providers and platform and infrastructureproviders. Services for broadband network operators

 

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include:

 

                •               Systemarchitecture design, implementation, and integration for broadband

 

                •               Content developer’s kit

 

                •               Navigator/portal strategy and implementation

 

Servicesfor infrastructure suppliers include:

 

                •               Platform integration and development

 

                •               Enterprise architecture and integration

 

                •               Operating system extensions and enhancements

 

Servicesfor content providers include:

 

                                                •               Content design and development,encompassing enhanced TV content, navigation shells and portals

 

                                                •               Web content re-purposing, andinteractive advertising

 

                •               System architecture for content delivery andmanagement

 

                •               Integration of content onto multiple iTV platforms

 

Onecustomer, nCube Corporation, in our digital television segment constituted 16%of total company revenue for 2001 and represented 33% of the Company's accountsreceivable balance at December 31, 2001. For further discussion regarding segment information, see Note 13 to theconsolidated financial statements.

 

### **Enhanced Media**

 

* Overview*

 

                Our Enhanced Media businesssegment serves the market for interactive convergence programming, whichcombines video and or audio programming with Web content. We market EnhancedMedia applications and services through the brand names of HyperTV withLivewire, and eSchool Online. HyperTV with Livewire and eSchool Online provideconvergence software and services to the entertainment and education markets,respectively.

 

                Our Enhanced Media businessderives revenues from a number of sources, including software licensing,technical and content services, data management, online advertising sales, ande-commerce.

 

                We believe that our EnhancedMedia technologies have potential applications for most forms of television andradio programming and advertising. For instance:

 

                                                •               whilewatching a sports show on television, viewers can compete with other fans—usinga Web-enabled box, a computer connected to the Internet, or even a wirelesshand-held device;

 

                                                •               viewersof a rock concert being streamed through the Internet can receive synchronizedWeb pushes with song lyrics, information about the band, and special offers topurchase CDs of the band or

 

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other merchandise;

 

                                                •               aTV car commercial can automatically deliver more detailed information throughthe Internet and let viewers link to local dealer Websites where viewers canschedule test drives.

 

#### * HyperTV*

 

                HyperTV is a suite of patentedprocesses that enhance a television program or advertisement with related andsynchronized content delivered through the Internet. HyperTV works by embeddinga stream of Web page addresses into a video or audio signal or by transmittingthe addresses directly over the Internet to a user’s computer or wirelessdevice. The Web content is synchronized to programming being shown on aparticular television channel, streamed through the Internet, or played througha local storage device, such as a DVD player.

 

                In April 2000, we enteredinto an agreement with Liberty Livewire to jointly market HyperTV with Livewire.Liberty Livewire is the U.S. leader in audio and video post-production andlocation services. The agreement gives Liberty Livewire, a unit of LibertyMedia, the right to provide content creation services and, through itsaffiliate AT&T IP Services, a scaleable hosting infrastructure for HyperTVwith Livewire. Pursuant to the agreement creating HyperTV with Livewire, wereceived warrants to purchase 2.5 million shares of Liberty Livewirecommon stock.

 

                HyperTV with Livewire’s clientshave included TV networks and producers of traditional media content. HyperTVwith Livewire provides a turnkey system consisting of user software, Webcontent creation software and creative services, database management andanalysis and program hosting.

 

                We were one of the firstcompanies to provide convergence software and services. During the years 2000and 2001, we enabled hundreds of hours of HyperTV with Livewire programming formusic, movies, sports, games and live programming.  During 2001, after initiating a patent infringement lawsuitagainst The Walt Disney Company and certain subsidiaries (see Item 3. LegalProceedings), our HyperTV with Livewire business began to decline. We believethe decline can be attributed to a number of factors:

 

                                                *              reluctance of certain potentialclients to employ our technology pending resolution of the lawsuit with Disney;

                                                *              strong price competition fromcompetitors;

                                                *              contraction of overall ad spendingin the U.S.;

                                                *              sluggish growth in the demand forso-called “two box” convergence.

 

Toreceive “two box” convergent programming, a viewer must have a television andseparate computer connected to the Internet in the same room.

 

                In response to the slowdown inHyperTV with Livewire, we have chosen to restructure the business by renewingour focus on technology licensing. We were able to achieve significantpersonnel cost savings as a result of this restructuring.

 

#### * Education*

 

                eSchool Online was the firstcommercial application of our Enhanced Media technologies. eSchool integrateseducational video with relevant Web content, interactivity and chatfunctionality on a student’s computer screen. In addition, eSchool providesteachers and administrators with an application that allows for onlineassessment of a student performance.

 

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                We have provided eSchoolsoftware and content and technical services to state departments of education,school districts, and schools throughout the United States. Over the pastseveral years, we began to focus eSchool on the professional developmentmarket. During 2000, we had major projects in California, Texas and Alabama forteacher training in Remedial Reading, Algebra, and Internet skills.

 

                Traditionally, we have providedeSchool Online applications and services on a custom development basis toindividual education clients. Starting in the year 2000, we began to marketcompleted eSchool programs to third parties, under licensing agreements withthe clients for whom the programs were originally produced. We are currentlybuilding a library of licensed eSchool content that is available for nationwidedistribution.

 

#### * Enhanced Media Platforms*

 

                Our goal is to extend ourEnhanced Media technologies to all relevant platforms for convergenceprogramming, including Internet-enabled handheld devices (such as cellularphones and personal digital assistants), and media streamed through theInternet.

 

For the years ended December 31, 2001, 2000 and 1999,certain individual customers accounted for more than 10% of the Company’srevenues as follows:

 
| **Customer**                          |   | **2001** |   | **2000** |   | **1999** |   |
|---------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| The State of  Alabama                 |   | 11       | %      | 23       | %      |     |   |
| San Diego County  Office of Education |   |     |   |     |   | 11       | %      |
| NYC School  Construction Authority    |   |     |   |     |   | 12       | %      |

 

As of December 31, 2000, one customer, The State ofAlabama, represented 32% of the Company’s accounts receivable balance.

 

Forfurther discussion regarding segment information, see Note 13 to theconsolidated financial statements.

 

### **EquipmentSuppliers**

 

                We do not intend to manufactureset-top converters, terminals, video servers or other devices in connectionwith any of our applications or services.

 

                We have non-exclusive,royalty-free agreements with Motorola Broadband and Scientific–Atlanta,the dominant suppliers of set-top terminals in the United States, for theintegration of our Digital TV technologies into their digital set-top boxes.

 

                In addition, we have agreementswith the leading providers of set-top box middleware, including OpenTV,Liberate and MicrosoftTV, to ensure the compatibility of our Digital TV technologieswith their platforms. Middleware is set-top box software that acts as anoperating system for the terminal.

 

                We may grant licenses similar tothose granted to Motorola Broadband, Scientific–Atlanta and Pioneer toother manufacturers that are selected by the future distributors of Spot On andOne To One TV.

 

#### *Patents and OtherIntellectual Property*

 

                We have sought to protect theproprietary features of our individualized programming technologies and

 

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EnhancedMedia technologies through patents, copyrights, confidentiality agreements andtrade secrets both in the United States and overseas. As of the present time,the United States Patent and Trademark Office has issued 25 patents to us thatare currently in force. We also have additional patents pending. The patentsexpire at various dates from 2003 to 2018. Corresponding patents for some ofthe above U.S. patents have been granted by or are pending in the PatentOffices of Canada, Japan, South Korea, China, Singapore, India, Australia andEurope. We believe such patents will strengthen our competitive position inthese countries.

 

                There can be no assurance that our patents areenforceable, or, if challenged, that we can successfully defend them,particularly in view of the high cost of patent litigation, nor can there beany assurance that we will derive any competitive advantages from them. To theextent that patents are not issued for any other products developed by us, wewould be subject to more competition. The issuance of patents may beinsufficient to prevent competitors from essentially duplicating our productsby designing around the patented aspects. In addition, we cannot assure youthat our products will not infringe on patents owned by others, licenses towhich may not be available to us, nor that competitors will not developfunctionally similar products outside the protection of any patents we have ormay obtain.

 

                The inventors named on all ofour issued patents have assigned to us all right, title and interest in and tothe above U.S. patents and any corresponding foreign patents or applicationsbased thereon. We require that each of our full time employees, consultants andadvisors execute a confidentiality and assignment of proprietary rightsagreement upon the commencement of employment or a consulting relationship.These arrangements generally provide that all inventions, ideas andimprovements made or conceived by the individual arising out of the employmentor consulting relationship are our exclusive property. These agreementsgenerally also require all such information be kept confidential and notdisclosed to third parties, except with our consent or in specifiedcircumstances. We cannot assure, however, that these agreements will provideeffective protection for our proprietary information in the event ofunauthorized use or disclosure of such information.

 

#### *Competition*

 

                The markets for digitaltelevision and enhanced media applications and services are extremelycompetitive, and we expect competition to intensify in the future. Thesemarkets are new, quickly evolving and characterized by untested consumer demandand a lack of industry standards. They are, therefore, subject to significantchanges in the products and services offered by existing market participantsand the emergence of new market participants. As a result, it is difficult todetermine which companies and technologies are competing with us or may competewith us in the future in one or more of our businesses.

 

                We believe our competitors inEnhanced Media services markets include Gold Pocket, Spiderdance, Merlin TV,Digeo, Wink and Worldgate Communications, Inc. We also face competitionfrom traditional television and cable broadcasters such as ABC, CBS, FOX, andNBC. Some of these broadcasters have in the past, and may in the future,develop and broadcast their own television/Internet convergence programming.(See Item 3. LEGAL PROCEEDINGS—Action against the Walt Disney Co., ABC, Inc.,and ESPN, Inc.) In addition, we may face future competition with companies suchas Microsoft, RealNetworks, Inc., and Veon that provide applicationsallowing video content to be “streamed” over the Internet. Many of theseapplications could be extended to compete with some or all of our existing orproposed enhanced media offerings.

 

                We believe our competitors inthe targeted TV advertising market, include Visible World, NAVIC andAd-Exact.  We do not believe that thereare currently any competitors offering products comparable to One To One TV,but there are a number of companies, including NDS Group plc, that marketproducts and services outside the U.S. that have limited functionalities incommon with this product. Finally, our Digital TV products compete in a sensefor limited “shelf space” within a digital set-top box with other dissimilarapplications, such as video on demand, high definition television, andtelephony. For the interactive TV technical services market, our competitorsinclude Spyglass (a division of OpenTV), Concero Inc., Rachis,  MetaTV, and Digeo.

 

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### **GovernmentRegulation**

 

                We believe that neither ourpresent nor future implementation of One To One TV or SpotOn is subject to anydirect substantial government regulation. However, the broadcast industry ingeneral, and cable television, DBS and wireless communication in particular,are subject to substantial government regulation.

 

                *Cable Television*.  Pursuant to federal legislation enacted in1992, which we call the 1992 Cable Act, and amended by the TelecommunicationsAct of 1996, the Federal Communications Commission substantially re-regulatedthe cable television industry in various areas, including rate regulation,competitive access to programming, and “must carry” and retransmission consentfor broadcast stations. These rules, among other things, restrict the extent towhich a cable system may profit from, or recover costs associated with, addingnew program channels, impose certain carriage requirements with respect totelevision broadcast stations, limit exclusivity provisions in programmingcontracts, and require prior notice for channel additions, deletions andchanges. The Cable Act also regulates the collection and use of subscriberinformation over cable systems by cable operators and their affiliates. TheUnited States Congress and the FCC also have under consideration, and may inthe future adopt, new laws, regulations and policies regarding a wide varietyof matters which could, directly or indirectly, materially adversely affect ouroperations. In particular, the FCC recently initiated an inquiry to determinewhether the cable industry’s future provision of interactive services should besubject to regulations ensuring equal access and competition among servicevendors.

 

                *Internet*.  Increased regulation of the Internet mightslow the growth in use of the Internet, which could decrease demand for ourservices, increase our cost of doing business or otherwise have a materialadverse effect on our business, financial condition and results of operations.Congress has  passed legislationregulating certain aspects regarding the use of the Internet, includingchildren’s protection, copyright infringement, user privacy, taxation, accesscharges and liability for third-party activities. The Federal Trade Commissionhas adopted regulations enacting the Children’s Online Privacy Protection Act,which govern collection and use of information over the Internet regardingchildren. In addition, federal, state and local governmental organizations aswell as foreign governments are considering other legislative and regulatoryproposals that would regulate the Internet. Areas of potential regulationinclude libel, pricing, quality of products and services, intellectual propertyownership and personal privacy. Storage and use of personal  information is subject to state and federalregulation. Storage and use of such information may also subject us to privacyclaims relating to our use and dissemination of personal information. We do notknow how courts will interpret laws governing the Internet or the extent towhich they will apply existing laws regulating issues such as propertyownership, libel and personal privacy to the Internet. Therefore, we are notcertain how new laws governing the Internet or other existing laws will affectour business.

 

                We are unable to predict theoutcome of future federal legislation or regulatory proposals or the impact ofany current or future laws or regulations on our operations. There can be noassurance that we will be able to comply with any future laws or regulationsthat may be imposed on our operations.

 

### **Employees**

 

                As of January 3, 2002, weemployed 143 full-time employees. We are not subject to any collectivebargaining agreements; we believe that our relationships with our employees aregenerally satisfactory.

 

### **Item 2.  Property—Offices and Facilities**

 

                We maintain our principal andexecutive offices at 233 Park Avenue South, New York, New York, where we leaseapproximately 12,000 square feet.  Ourlease for these facilities extends through 2016. We also lease office andtechnical space totaling approximately 43,000 square feet in five otherfacilities, including  Branchburg, NewJersey,  and Denver, Colorado. Theseleases expire at various dates through 2005.

 

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### **Item 3.  Legal Proceedings**

 

ACTV,Inc. and its wholly-owned subsidiary HyperTV Networks, Inc. are co-plaintiffsin a civil action filed against The Walt Disney Co., ABC, Inc. and ESPN, Inc.in December, 2000, which action alleges that the defendants’ “Enhanced TV”system synchronizing a web site application to, amongst others, ESPN SundayNight and ABC Monday Night Football telecasts has infringed and is continuingto infringe certain of the plaintiffs’ patents. That action is continuing inthe U.S. District Court, Southern District of New York.

 

### **Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

                On August 24, 2001 we held ourAnnual Meeting of Shareholders for which we solicited votes by proxy. Thefollowing is a brief description of the matters voted upon at the meeting and astatement of the number of votes cast for and against, and the number ofabstentions as to each matter.

 

1.             Election of directors

 
|            |   | **For**    |   | **Withheld** |   |
|-----------------|--------|------------|--------|--------------|--------|
| David Reese     |   | 45,578,778 |   | 1,610,683    |   |
| Michael J. Pohl |   | 45,952,844 |   | 1,236,617    |   |

 

 2.            To approve the adoption of theACTV’s 2001 Stock Incentive Plan.

 

| **For**    |   | **Against** |   | **Abstain** |
|------------|--------|-------------|--------|-------------|
| 42,840,111 |   | 4,247,436   |   | 101,914     |

 

 3.            To ratify the appointment of Deloitte &Touche, LLP as independent auditors.

 

| **For**    |   | **Against** |   | **Abstain** |
|------------|--------|-------------|--------|-------------|
| 46,815,956 |   | 331,257     |   | 42,248      |

 

12

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## **PART II**

 

**Item5.  Market for the Registrant’s CommonEquity and Related Stockholder Matters**

 

                ACTV’s common stock is traded onThe Nasdaq Stock Market under the symbols “IATV”. The following table setsforth the high and low bid prices for ACTV common stock as reported by Nasdaq.
|             |   | **Common Stock** |   |
|------------------|--------|------------------|--------|
| **2001 Quarter** |   | **High**         |   | **Low** |   |
| First            |   | 7.875            |   | 3.250 |   |
| Second           |   | 4.125            |   | 2.220 |   |
| Third            |   | 3.280            |   | 1.340 |   |
| Fourth           |   | 2.260            |   | 1.260 |   |

 
| **2000 Quarter** |   | **High** |   | **Low** |   |
|------------------|--------|----------|--------|---------|--------|
| First            |   | 46.125   |   | 20.000  |   |
| Second           |   | 34.750   |   | 9.688   |   |
| Third            |   | 19.375   |   | 10.750  |   |
| Fourth           |   | 14.313   |   | 3.000   |   |

 

 

                On April 11, 2002, there wereapproximately 570 holders of record of our 55,887,327 outstanding shares ofcommon stock. On April 11, 2002 the high and low bid prices of our common stockas reported by Nasdaq were $1.46 and $1.33, respectively. We have not paid cashdividends since our organization. We plan to use earnings, if any, to fundgrowth and do not anticipate the declaration of the payment of cash dividendsin the foreseeable future.

 

13

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**Item6.  Selected Financial Data**
|                                                                                                              |   | **Years Ended December 31,**                      |   |
|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                                                              |   | **2001**                                          |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                                                                                              |   | **($000’s except share and per share data)** |   |
| Statement of Operations Data:                                                                                     |   |                                              |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                                          |   | $                                                 | 13,689 |   | $ | 8,016 |   | $ | 2,910 |   | $ | 1,625 |   | $ | 1,948 |   |
|                                                                                                              |   |                                              |   |   |   |   |   |   |   |   |   |
| Net (loss)income before preferred stock dividends,  extraordinary item and cumulative effect of accounting change |   | (42,658                                           | )      | 153,504 |   | (234,875 | ) | (23,342 | ) | (8,394 | ) |
| Cumulative transition effect of adapting SFAS No 133                                                              |   | (58,732                                           | )      | — |   | — |   | — |   | — |   |
|                                                                                                              |   |                                              |   |   |   |   |   |   |   |   |   |
| Net (loss)income                                                                                                  |   | (101,390                                          | )      | 152,093 |   | (235,875 | ) | (23,342 | ) | (8,394 | ) |
|                                                                                                              |   |                                              |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                             |   |                                              |   |   |   |   |   |   |   |   |   |
| (Loss)/income per share before extraordinary item and  cumulative effect of accounting change                     |   | $                                                 | (0.77  | ) | $ | 3.10 |   | $ | (6.11 | ) | $ | (1.10 | ) | $ | (0.64 | ) |
| Extraordinary item                                                                                                |   | —                                            |   | (0.03 | ) | — |   | — |   | — |   |
| Cumulative transition effect of adopting SFAS No. 133                                                             |   | (1.07                                             | )      |   |   |   |   |   |   |   |   |
| Basic (loss)/income per share applicable to common  shareholders                                                  |   | $                                                 | (1.84  | ) | $ | 3.07 |   | $ | (6.11 | ) | $ | (1.10 | ) | $ | (0.64 | ) |
|                                                                                                              |   |                                              |   |   |   |   |   |   |   |   |   |
| Diluted                                                                                                           |   |                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss)/income per common share before extraordinary  item and cumulative effect of accounting change              |   | $                                                 | (0.77  | ) | $ | 2.53 |   | $ | (6.11 | ) | $ | (1.10 | ) | $ | (0.64 | ) |
| Extraordinary item                                                                                                |   | —                                            |   | (0.02 | ) | — |   | — |   | — |   |
| Cumulative transition effect of adopting SFAS No. 133                                                             |   | (1.07                                             | )      | — |   | — |   | — |   | — |   |
| Diluted (loss)/income per share applicable to common  shareholders                                                |   | $                                                 | (1.84  | ) | $ | 2.51 |   | $ | (6.11 | ) | $ | (1.10 | ) | $ | (0.64 | ) |
|                                                                                                              |   |                                              |   |   |   |   |   |   |   |   |   |
| Balance Sheet Data:                                                                                               |   |                                              |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                         |   | $                                                 | 69,036 |   | $ | 122,488 |   | $ | 9,413 |   | $ | 5,198 |   | $ | 658 |   |
| Working capital (deficiency)                                                                                      |   | 71,271                                            |   | 115,684 |   | 9,151 |   | 3,007 |   | (1,062 | ) |
| Total assets                                                                                                      |   | 139,587                                           |   | 235,509 |   | 28,984 |   | 13,616 |   | 7,902 |   |
| Long-term debt (including current portion)                                                                        |   | —                                            |   | — |   | 4,804 |   | 4,315 |   | — |   |

##  

##                 The historical financialinformation has been restated to include the accounts and results of operationsof Bottle Rocket Inc., which was acquired on August 17, 2000, in atransaction accounted for under the pooling of interests method, as describedin Note 3 in the consolidated financial statements.

##  

14

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## **Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

##  

## *                Youshould read the following discussion together with our consolidated financialstatements and related notes included elsewhere and incorporated by reference.The results discussed below are not necessarily indicative of the results to beexpected in any future periods. To the extent that the information presented inthis discussion addresses financial projections, information or expectationsabout our products or markets or otherwise makes statements about futureevents, such statements are forward-looking and are subject to a number ofrisks and uncertainties that could cause actual results to differ materiallyfrom the statements made. See “Special Note Regarding Forward–LookingStatements” for further information about forward-looking statements.*

##  

##                 We are a digital media companythat provides proprietary technologies, tools, and technical and creativeservices for interactive TV advertising, programming, and enhanced mediaapplications. We have two operating business segments, which we call Digital TVand Enhanced Media.

##  

##                 We believe that our Digital TVtechnologies are unique in providing targeting, interactivity andaccountability for television commercials, and in giving viewers the ability toinstantly customize their viewing experiences for a wide variety of programmingapplications. Our Enhanced Media technologies allow both for the enhancement ofvideo and audio content, including standard TV programming, with Web-basedinformation and interactivity.

##  

## **RESULTSOF OPERATIONS**

## ** **

## **Comparisonof Fiscal Year Ended December 31, 2001 and December 31, 2000**

##  

## *                Revenues*.  Revenues increased 71% to $13.7 millionfor the year ended December 31, 2001, from $8.0 million for the yearended December 31, 2000. The increase is the result of the inclusion inthe more recent year of revenues from our Digital TV segment, which accountedfor approximately 30% of total revenues. For the year ended December 31, 2000,all of our revenue was derived from Enhanced Media licensing and services.Digital television revenues for 2001 were principally from professional andtechnical services delivered through Intellocity, which we acquired in March2001, and software licensing and services revenue through Advision, which weacquired January 1, 2001.

##  

##                 *Goodwill Impairment Charge.*During the fourth quarter of 2001, we recorded a non-cash impairment charge of$11.2 million related to the goodwill associated with the Intellocityacquisition.  As a result ofIntellocity’s inability to achieve the operating results specified in its 2001budget, it operated at a loss for fiscal 2001, triggering an impairment reviewin the fourth quarter of its long-lived assets. We developed a revisedoperating plan to restructure and stabilize the business. The revisedprojections by service line provided the basis for measurement of the assetimpairment charge. We calculated the present value of expected future cashflows of Intellocity’s service lines to determine the fair value of the assets.Accordingly, in the fourth quarter of 2001, we recorded an impairment charge of$11.2 million.

##  

## *                RestructuringCharge*. For the year ended December 31, 2001, we recorded anexpense of $6.6 million, the

##  

15

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## majorityof which was non-cash, related to restructuring initiatives. This expenseincludes charges for the surrender of real estate leases and employee severancecosts. Pursuant to the surrender—agreed to in September 2001—of certain of ourNew York City leases, we received cash and cash equivalents of approximately$9.3 million in the fourth quarter of 2001. This change in cash and equivalentswas a result of payments from third parties and a release of restricted cashformerly used to guarantee the leases. At December 31, 2001 we had $0.8 million remaining in accruedrestructuring charges to be paid out over the first two quarters of 2002.

##  

## *                Stock-BasedCompensation.* Stock-based compensation resulted in a credit for the year endedDecember 31, 2001 of $12.1 million, compared with a credit of $186.7million for the year ended December 31, 2000. The reduction in expense was theresult of a continued lower market price of our common stock at December 2001.We recorded stock-based compensation expense based on increases and decreasesin the market price of our common stock above the exercise price of certainemployee options, which were subject to variable option accounting treatment.To the extent that we had a stock-based compensation obligation at thebeginning of a given reporting period, we recognized a reduction in expenserelated to the unexercised vested variable options for that period based on areduction of the market price for our stock at the end of the period.

##  

## *                TotalSelling, General and Administrative Expenses*.  Total selling, general and administrativeexpenses for year ended December 31, 2001 were $47.6 million, comparedwith $46.5 million for the year ended December 31, 2000, an increase of2.4%. The increase in costs was attributable to the inclusion in the morerecent year of the operations of Intellocity and Advision, both of which weacquired during 2001. Excluding the effect of Intellocity and Advision, ourtotal selling, general and administrative expenses declined $3.7 million, or8.0% in the more recent year. This decrease is the result of cost cuttingmeasures we adopted in the third and fourth quarters of 2001, including asignificant reduction in personnel and occupancy costs. Selling andadministrative expenses for 2001 and 2000 include $2.3 million and $6.9million, respectively, of deferred compensation expense, of which $1.5 and$4.5 million, respectively, was non-cash.

##  

## *                OtherIncome/(Expense*). Other income(expense) is the changes in fair value of an investment inwarrant which is now accounted for as a derivative instrument after adoption ofSFAS No. 133 and the application of its requirements. Prior to the adoption ofSFAS 133 these warrants were carried at cost. With the adoption of SFAS 133,the Livewire investment is now recorded at fair value. The Company recorded anet decrease in the value of the investment in warrant of $1.0 million for theyear ended December 31, 2001.

##  

## *                Depreciationand Amortization*. Depreciation and amortization expense increased $5.5 million forthe year ended December 31, 2001, to $9.4 million, from$3.9 million during the same period of 2000, due primarily to ourincreasing investment in patents, software development, and equipment andadditional goodwill recorded in connection with our purchase of Intellocity,Inc. in March 2001.

##  

## *                Interest(Expense)/Income*. Interest income, net of interest expense, for the year endedDecember 31, 2001 was $4.2 million, compared with net interest income of$7.4 million for the year ended December 31, 2000. The decrease wasthe result of lower cash balances in 2001. We incurred interest expense for2000 of $0.3 million, compared to $0 for 2001. Interest expense for 2000relates to the $5 million original face value notes issued by a subsidiaryof ours in January 1998; the notes were retired on April 3, 2000.

##  

## *                MinorityInterest*.  Theminority interest benefit for the year ended December 31, 2001 was $3.2million, compared with a benefit of $1.7 million in 2000. The benefit isprimarily attributable to the minority interest held by others in Digital ADCO.

##  

## *                ExtraordinaryItem*.  We recorded anextraordinary change in 2000 of $1.4 million, resulting from the earlyextinguishment of $5.0 million notes issued in January 1998.

##  

## *                CumulativeTransition Effect of Change in Accounting Principle.*  Effective January 1, 2001, ACTV adopted FASBStatement No. 133, “Accounting for Derivative Instruments and HedgingActivities” (“SFAS 133”), as amended by SFAS 137 and 138. SFAS 133 requiresthat all derivative financial instruments be recorded in the balance sheet atfair value. The provisions of SFAS 133 affected the Company’s accounting forits investment of 2.5 million restricted warrants for Livewire.  Prior to the adoption of SFAS 133, thesewarrants were carried at cost.  With theadoption of SFAS 133, the Livewire investment is now

## ** **

16

----

 

## recordedat fair value.  This resulted in theCompany recording a cumulative effect transition adjustment loss ofapproximately $58.7 million at January 1, 2001.  There may be periods with significant non-cash increases ordecreases to the Company’s net income/loss as a result of the changes in fairvalue of the Livewire investment.

##  

## *                NetLoss Applicable to Common Shareholders*.  For the year ended December 31, 2001,our net loss applicable to common stockholders after extraordinary loss andcumulative effect of accounting change was $101.4 million, or $1.84 per basicand diluted share, compared with net income of $152.1 million, or $3.07 perbasic share and $2.51 per diluted share, for 2000. The significant differencebetween the two years was the result of predominately non-cash items, includinga reduced expense reduction from stock-based compensation, a goodwillimpairment charge, restructuring expense, and the cumulative effect ofaccounting change relating to the adoption of SFAS 133 incurred during the morerecent year.

##  

## **Comparison of Fiscal Year Ended December 31,2000 and December 31, 1999**

## * *

##                 *Revenues*.  Revenues increased 176% to $8.0 millionfor the year ended December 31, 2000, from $2.9 million for the yearended December 31, 1999, due to an increase in Enhanced Media sales. Themajority of our revenues in 1999 were derived from sales of HyperTV and BottleRocket software, services and related computer hardware.

##  

##                 *Selling, General and AdministrativeExpenses*.  Selling, generaland administrative expenses increased 87% to $46.5 million for the yearended December 31, 2000, from $24.8 million for the year endedDecember 31, 1999. The increase was principally the result of higherpersonnel costs both from increased headcount and from non-cash, executiveincentive compensation, which was paid in the form of common stock. The morerecent period also included selling and administrative expenses associated ourDigital ADCO subsidiary, which had only minimal activity in 1999, the year ofits formation.

##  

##                 *Depreciation and Amortization*.Our depreciation and amortization expense increased approximately $1.8 million,or 84%, principally due to an increase in software development and intellectualproperty assets.

##  

## *                Stock-BasedCompensation.* Stock-based compensation resulted in a creditfor the year ended December 31, 2000 of $186.7 million, as compared with an expenseof $208.3 million for the year ended December 31, 1999. We recorded a charge ora credit to stock-based compensation expense based on increases and decreasesin the market value of our common stock in excess of the exercise price ofcertain employee options, which were subject to variable option accountingtreatment. We recorded a credit in stock-based compensation for the year endedDecember 31, 2000 as the market price of our common stock declined in 2000 ascompared to its value as of December 31, 1999. Conversely, we recorded a chargeto stock-based compensation for the year ended December 31, 1999 as the marketprice of our common stock increased in 1999 as compared to its value as ofDecember 31, 1998.

##  

## *                Interest(Expense) Income-Net*. Interest expense decreased 70% to $0.3 million for the year endedDecember 31, 2000, from $1.0 million for the year endedDecember 31, 1999. Interest expense is related to the $5.0 millionnotes issued in January 1998 by one of our subsidiaries. Interest incomeincreased 1,559% to $7.7 million for the year ended December 31, 2000,from $0.5 million for the year ended December 31, 1999. The increasewas due to higher average cash balances in 2000.

##  

##                 *MinorityInterest* — The minority interest benefit for the year ended December31, 2000 was $1.7 million compared with expense of $588 in 1999.  The benefit is attributable to the minorityinterest held by others in Digital ADCO, which was formed in November 1999.

##  

                *Extraordinary Item* — We recorded anextraordinary change in 2000 of $1.4 million, resulting from the earlyextinguishment of $5.0 million notes issued in January 1998.

 

##                 *Preferred Stock Dividend and Accretion*.  For the year ended December 31, 1999,we paid $0.5 million in preferred stock dividends, related to ourSeries B preferred stock. The Series B preferred stock was issued inNovember 1998 and was redeemed in full in May 1999.

##  

17

----

 

## *                Net Income/(Loss) Applicable toCommon Stockholders*.  Net income applicable to common stockholderswas $152.1 million, or $3.07 per basic share and $2.51 per diluted share,for the year ended December 31, 2000, compared to a net loss of$235.4 million, or $6.11 per basic per basic and diluted share, for theyear ended December 31, 1999. The difference was principally the result ofsignificant non-cash compensation expense recorded in 1999 and a reduction inthis expense recorded in 2000.

##  

## **Liquidity and Capital Resources**

##  

##                 Sinceour inception, we have not generated revenues sufficient to fund ouroperations, and have incurred operating losses. Through December 31, 2001,we had an accumulated deficit of $263.1 million. Our cash position(including short-term investments) on December 31, 2001 was$77.9 million, compared with $122.5 million on December 31,2000.

##  

##                 *Net CashUsed In Operating Activities*. During the year ended December 31, 2001, we used cash of$30.4 million for operations, compared with $29.0 million for theyear ended December 31, 2000. The increase in net cash used by operatingactivities relates principally to increased working capital uses.

##  

##                  *Net Cash Used In Investing Activities and CapitalExpenditures*.  For the yearended December 31, 2001, we used cash for investing activities of$26.0 million, compared with $17.1 million, for year endedDecember 31, 2000. The increase in cash used in investing activities wasdue principally to a $9.0 million investment in short-term securities in 2001,compared to no investment in such securities during 2000. In addition, we increasedour investment in patents, software development and strategic investments,which was offset by a decrease in purchases of property and equipment.

##  

##                 *Net CashProvided By Financing Activities*. We have and continue to fund our cash requirements from the net proceedsof a public, follow-on offering completed on February 3, 2000. Through agroup of underwriters, we sold a total of 4.6 million common shares,resulting in net proceeds of $129.7 million. In addition, onMarch 27, 2000, Liberty Digital, Inc. invested an additional$20 million in us by exercising a warrant granted in March 1999, andOpenTV invested $10 million in our Digital ADCO subsidiary.

##  

## **Critical Accounting Policies**

##  

##                 Thecost of patents which represent patent acquisition costs and legal costsrelating to patents pending, is being amortized on a straight-line basis overthe estimated economic lives of the respective patents (averaging10 years), which is less than the statutory life of each patent.

##  

##                 Wecapitalize costs incurred for the development of software products wheneconomic and technological feasibility of such products has been established.Capitalized software costs are amortized on a straight-line basis over theestimated useful lives of the respective products

##  

##                 We recorded a charge or a creditto stock-based compensation expense for increases or decreases, in the marketvalue of the our common stock in excess of the exercise price of certainemployee options, which were subject to variable option accounting treatment.  We recorded a credit in stock-basedcompensation for the year ended December 31, 2001 as the market price of ourcommon stock declined in 2001 as compared to its value as of December 31,2000.  We recorded a credit in stock-basedcompensation for the year ended December 31, 2000 as the market price of ourcommon stock declined in 2000 as compared to its value as of December 31, 1999.

 

                The preparation offinancial statements in conformity with generally accepted accountingprinciples requires us to make estimates and assumptions that affect thereported amount of assets and liabilities and disclosures of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Our actual resultscould differ from these estimates.

 

18

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## **Impact of Inflation**

##  

##                 Inflation has not had anysignificant effect on the our operating costs.

## ** **

## **NewAccounting Pronouncements**

##  

## **               **Statement ofFinancial Accounting Standards (“SFAS”) No. 133 “Accounting for DerivativeInstruments and Hedging Activities” is effective for all fiscal years beginningafter June 15, 2000. SFAS 133 as amended, establishes accounting and reportingstandards for derivative instruments. Under SFAS 133, certain contracts thatwere not formerly considered derivatives may now meet the definition of aderivative. We have adopted SFAS 133 as of January 1, 2001. ACTV’s investmentin warrants of Livewire, a publicly traded company, was accounted for at fairvalue, resulting in a non-cash, cumulative effect of a change in accountingprinciple of approximately $58.7 million in 2001. This investment will bemarked to market prospectively on a quarterly basis and such changes in thefair value of the Livewire investment will be recorded in the results of ouroperations, which may cause volatility in earnings in future years.

##  

##                 The Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standard No.141, Business Combinations, (“SFAS 141”), which is effective for businesscombinations initiated after June 30, 2001 established accounting and reportingform business combinations by requiring that all business combinations beaccounted for under the purchase method. Use of the pooling-of-interests method is no longer permitted.  SFAS 141 also provides guidance on purchaseaccounting related to the recognition of intangible assets and accounting fornegative goodwill.  The Company willadopt SFAS 141 for any future business combinations that are consummated.

##  

##                 In June 2001, the FASB issuedStatement of Financial Accounting Standard No. 142 (“SFAS 142”), Goodwill andOther Intangible Assets, effective for fiscal years beginning after December15, 2001. Under SFAS 142, goodwill and intangible assets deemed to haveindefinite lives will no longer be amortized but will be subject to annualimpairment tests.  Other intangibleassets will continue to be amortized over their useful lives. The Corporationwill apply the provisions of SFAS 142 beginning on January 1, 2002.  Application of the non-amortizationprovisions of SFAS 142 would have been expected to result in an decrease inunaudited pro forma net loss before extraordinary items of approximately $3.6million per year had the provisions of the new standards been applied during2001.  During 2002, the Company willperform the first of the required impairment tests of goodwill using themethodology prescribed by SFAS 142.  TheCompany anticipates the adoption of SFAS 142 as of the beginning of 2002.  The Company has not yet determined the finalexpected effect the adoption of SFAS 142 will have on its statement offinancial condition, but does not believe it will be material.

##  

##                 As of August 2001, the FASBissued Statement of Financial Accounting Standard No. 143 (“SFAS 143”),Accounting for Obligations Associated with the Retirement of Long-Lived Assets(“SFAS 143”), which is effective for financial statements issued for fiscalyears beginning after June 15, 2002. The objective of SFAS 143 is to provide accounting guidance for legalobligations associated with retirement of long-lived assets.  The retirement obligations included withinthe scope of this pronouncement are those that an entity cannot avoid as aresult of the acquisition, construction or normal operation of a long-livedasset.  Components of larger systemsalso fall under this pronouncement, as well as tangible long-lived assets withindeterminable lives.  The Company doesnot believe that that the adoption of SFAS 143 will impact the Company’sfinancial condition, cash flows and results of operations.  The Company plans to adopt SFAS 143 duringthe first quarter of 2003.

##  

##                 In October 2001, the FASB issuedStatement of Financial Accounting Standard No. 144,

##  

19

----

 

Accounting for the Impairment of Disposal of Long-Lived Assets, (“SFAS144”), which is effective for financial statements issued for fiscal yearsbeginning after December 15, 2001.  Theobjectives of SFAS 144 are to address significant issues relating to theimplementation of Statement of Financial Accounting Standard No. 121, (“SFAS121”), Accounting for the Disposal of Long-Lived Assets to be Disposed of, andto develop a single accounting model, based on the framework established inSFAS 121, for long-lived assets to be disposed of by sale, whether previouslyheld and used or newly acquired.  TheCompany has not yet assessed if the adoption of SFAS 144 will have an impact onthe Company's financial condition and results of operations.  The Company will adopt SFAS 144 during thefirst quarter of 2002.

##  

## **Item7A.  Quantitative and QualitativeDisclosures About Market Risk**

## ** **

##                 The Company’s interest income isaffected by changes in the general level of U.S. interest rates. Changes inU.S. interest rates could affect the interest earned on the Company’s cashequivalents and investments. Currently, changes in U.S. interest rates wouldnot have a material effect on the interest earned on the Company’s cashequivalents and investments. A majority of these cash equivalents andinvestments earn a fixed rate of interest while the remaining portion earnsinterest at a variable rate. The Company does not anticipate that exposure tointerest rate market risk will have a material impact on the Company due to thenature of the Company’s investments.

##  

##                 During April 2000, theCompany received a warrant to acquire 2,500,000 shares of Liberty LivewireCorporation (“Livewire”), a publicly traded company. The warrant becomesexercisable at the rate of 500,000 shares per year, commencing onApril 13, 2001, includes certain registration rights and may be exerciseduntil March 31, 2015. The warrant is not transferable, except in certaincircumstances. The Company estimated the value of the warrant to be $76,016,175at the date it was received, using the Black–Scholes pricing model, witha risk free rate of 6.5%, a volatility of 80% and assuming no cash dividends.The estimated value of the warrant at December 31, 2000 was $17.3 million,using the same assumptions. As of January 1, 2001, changes in fair value in theinvestment in warrant were recorded to the statement of operations as theCompany adopted SFAS No. 133. The Company expects the value of the warrant tofluctuate based on the underlying stock price of Livewire. The Company does notcurrently expect to exercise or register shares in the coming year.

##  

##                 The Company recorded stock-basedcompensation expense based on increases and decreases in the market price ofthe Company’s common stock above the exercise price of certain employeeoptions, which were subject to variable option accounting treatment. To theextent that the Company had a stock-based compensation obligation at thebeginning of a given reporting period, the Company recognized a reduction instock-based compensation expense related to unexercised variable options forthat period based on a reduction of the market price for the Company’s stock atthe end of the period.  The obligationwould increase as the market price for the Company’s common stock increases atthe end of a reporting period.

##  

## **Item8.  Financial Statements andSupplementary Data**

## ** **

## **               **The FinancialStatements are listed under Item 14 in this report.

##  

## **Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

## ** **

##                 None.

##  

20

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## **PART III**

## ** **

## **Item10.  Directors and Executive Officers ofthe Registrant**

## ** **

## **ExecutiveOfficers and Directors**

## ** **

##                 We intend to file with theSecurities and Exchange Commission, within 120 days after December 31, 2001, adefinitive proxy statement pertaining to our annual meeting of stockholders tobe held in June 2002. Information regarding our directors and executiveofficers will appear under the caption “Election of Directors” in the proxystatement and is incorporated in this report by reference.

## ** **

## **Item11.  Executive Compensation**

## ** **

##                 Information regarding executivecompensation will appear under the caption “Executive Compensation” in theproxy statement and is incorporated in this report by reference.

## ** **

## **Item12.  Security Ownership of CertainBeneficial Owners and Management**

## ** **

##                 Information regarding securityownership of certain beneficial owners and management will appear under thecaption “Ownership of Securities” in the proxy statement and is incorporated inthis report by reference.

## ** **

## **Item13.  Certain Transactions**

## ** **

##                 Information regarding certaintransactions will appear under the caption “Certain Transactions” in the proxystatement and is incorporated in this report by reference.

## ** **

## **PART IV**

## ** **

## **Item14.  Financial Statements, Schedules,Exhibits and Reports on Form 8-K:**

## ** **

##                 (a)1.  FINANCIAL STATEMENTS:

## ** **

##                 See the Consolidated FinancialStatements beginning on Page F-1 hereafter, which is incorporated by reference.

##  

21

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## **INDEPENDENT AUDITORS’ REPORT**

## ** **

## To theBoard of Directors and Stockholders of ACTV, Inc.:

##  

##                 We have audited the accompanyingconsolidated balance sheets of ACTV, Inc. and subsidiaries (“the Company”)as of December 31, 2001 and 2000 and the related consolidated statementsof operations, stockholders’ equity and cash flows for each of the three yearsin the period ended December 31, 2001. Our audits also included thefinancial statement schedule listed in the index at Item 14 (a)(2). Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits.

##  

##                 We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

##  

##                 In our opinion, suchconsolidated financial statements present fairly, in all material respects, theconsolidated financial position of the Company as of December 31, 2001 and2000 and the results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2001 in conformity with accountingprinciples generally accepted in the United States of America. Also, in ouropinion, the financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

##  

                As discussed inNote 2 to the consolidated financial statements, the Company adopted Statementof Financial Accounting Standards No. 133, ("SFAS"), "Accountingfor Derivative Instruments and Hedging Activities", as amended by SFAS 137and 138, effective on January 1, 2001.

 

## DELOITTE &TOUCHE LLP

##  

## April 1,2002New York, New York

##  

F-1

----

**ACTV, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**
|                                                                                                                                                    |   | **December 31,** |        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                                                                                                    |   | **2001**         |        | **2000** |   |
| **ASSETS**                                                                                                                                              |   |             | ** **  |   | ** ** |
| Current assets:                                                                                                                                         |   |             |        |   |   |
| Cash and cash equivalents                                                                                                                               |   | $                | 69,035,707  |   | $ | 122,488,041 |   |
| Short-term investments                                                                                                                                  |   | 8,951,695        |        | — |   |
| Accounts receivable — net                                                                                                                          |   | 1,319,805        |        | 1,182,376 |   |
| Other                                                                                                                                                   |   | 1,696,617        |        | 3,758,935 |   |
| Total current assets                                                                                                                                    |   | 81,003,824       |        | 127,429,352 |   |
|                                                                                                                                                    |   |             |        |   |   |
| Property and equipment-net                                                                                                                              |   | 6,344,631        |        | 12,628,232 |   |
|                                                                                                                                                    |   |             |        |   |   |
| Other assets:                                                                                                                                           |   |             |        |   |   |
| Restricted cash                                                                                                                                         |   | 484,913          |        | 3,165,368 |   |
| Investment in warrant                                                                                                                                   |   | 16,255,355       |        | 76,016,175 |   |
| Investments-other                                                                                                                                       |   | 7,397,776        |        | 3,250,000 |   |
| Patents and patents pending                                                                                                                             |   | 8,425,889        |        | 8,053,642 |   |
| Software development costs                                                                                                                              |   | 5,310,100        |        | 3,328,101 |   |
| Goodwill                                                                                                                                                |   | 12,935,701       |        | 1,362,072 |   |
| Other                                                                                                                                                   |   | 1,429,132        |        | 275,638 |   |
| Total other assets                                                                                                                                      |   | 52,238,866       |        | 95,450,996 |   |
|                                                                                                                                                    |   |             |        |   |   |
| Total                                                                                                                                                   |   | $                | 139,587,321 |   | $ | 235,508,580 |   |
|                                                                                                                                                    |   |             |        |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                           |   |             | ** **  |   | ** ** |
| Current liabilities:                                                                                                                                    |   |             |        |   |   |
| Accounts payable and accrued expenses                                                                                                                   |   | $                | 5,664,088   |   | $ | 7,712,857 |   |
| Deferred revenue                                                                                                                                        |   | 4,068,450        |        | 4,032,776 |   |
|                                                                                                                                                    |   |             |        |   |   |
| Total current liabilities                                                                                                                               |   | 9,732,538        |        | 11,745,633 |   |
|                                                                                                                                                    |   |             |        |   |   |
| Deferred revenue                                                                                                                                        |   | 66,966,638       |        | 70,586,450 |   |
| Minority interest                                                                                                                                       |   | 10,100,654       |        | 13,307,131 |   |
| Stockholders’ equity:                                                                                                                              |   |             |        |   |   |
| Common stock, $0.10 par value, 200,000,000 shares  authorized: issued and outstanding 55,881,938 at December 31, 2001,  51,228,154 at December 31, 2000 |   | 5,588,194        |        | 5,122,816 |   |
| Notes receivable from stock sales                                                                                                                       |   | (339,035         | )           | (643,606 | ) |
| Additional paid-in capital                                                                                                                              |   | 310,611,698      |        | 297,073,713 |   |
| Accumulated deficit                                                                                                                                     |   | (263,073,366     | )           | (161,683,557 | ) |
|                                                                                                                                                    |   |             |        |   |   |
| Total stockholders’ equity                                                                                                                         |   | 52,787,491       |        | 139,869,366 |   |
|                                                                                                                                                    |   |             |        |   |   |
| Total liabilities and stockholders’ equity                                                                                                         |   | $                | 139,587,321 |   | $ | 235,508,580 |   |

*See notes to consolidatedfinancial statements*

 

F-2

----

 

**ACTV, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF OPERATIONS**
|                                                                                                                                             |   | **Years ended December 31,** |         |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------------|
|                                                                                                                                             |   | **2001**                     |         | **2000** |   | **1999** |   |
| Revenue                                                                                                                                          |   | $                            | 13,688,615   |   | $ | 8,016,453 |   | $ | 2,909,642 |   |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Costs and expenses:                                                                                                                              |   |                         |         |   |   |   |   |
| Selling, general and administrative                                                                                                              |   | 47,580,939                   |         | 46,464,082 |   | 24,794,126 |   |
| Depreciation and amortization                                                                                                                    |   | 5,865,671                    |         | 3,481,259 |   | 1,691,724 |   |
| Amortization of goodwill                                                                                                                         |   | 3,567,955                    |         | 426,372 |   | 426,372 |   |
| Loss on write-down of goodwill                                                                                                                   |   | 11,247,725                   |         | — |   | — |   |
| Restructuring charge                                                                                                                             |   | 6,591,223                    |         | — |   | — |   |
| Stock appreciation rights                                                                                                                        |   | —                       |         | — |   | 1,950,330 |   |
| Stock-based compensation (income)/expense                                                                                                        |   | (12,148,504                  | )            | (186,673,365 | ) | 208,343,386 |   |
| Total costs and expenses                                                                                                                         |   | 62,705,009                   |         | (136,301,652 | ) | 237,205,938 |   |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| (Loss)/income from operations                                                                                                                    |   | (49,016,394                  | )            | 144,318,105 |   | (234,296,296 | ) |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Interest income                                                                                                                                  |   | 4,180,923                    |         | 7,726,929 |   | 465,840 |   |
| Interest expense                                                                                                                                 |   | —                       |         | (284,619 | ) | (1,044,227 | ) |
| Interest-net                                                                                                                                     |   | 4,180,923                    |         | 7,442,310 |   | (578,387 | ) |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Other expense                                                                                                                                    |   | (1,028,623                   | )            | — |   | — |   |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| (Loss)/income before minority interest, preferred  stock dividends and accretion, extraordinary item and cumulative effect of  accounting change |   | (45,864,094                  | )            | 151,760,415 |   | (234,874,683 | ) |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Minority interest-subsidiary                                                                                                                     |   | 3,206,482                    |         | 1,743,357 |   | (588 | ) |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| (Loss)/income before preferred stock dividends and  accretion, extraordinary item and cumulative effect of accounting change                     |   |                         | (42,657,612  | ) |   | 153,503,772 |   |   | (234,875,271 | ) |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Extraordinary loss on early extinguishment of debt                                                                                               |   | —                       |         |   | (1,411,139 | ) | — |   |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Cumulative transition effect of adopting SFAS No. 133                                                                                            |   | (58,732,197                  | )            | — |   | — |   |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| (Loss)/income before preferred stock dividends and  accretion                                                                                    |   |                         | (101,389,809 | ) |   | 152,092,633 |   |   | (234,875,271 | ) |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Preferred stock dividends and accretion                                                                                                          |   | —                       |         | — |   | (494,431 | ) |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Net (loss)/income applicable to common stockholders                                                                                              |   | $                            | (101,389,809 | ) | $ | 152,092,633 |   | $ | (235,369,702 | ) |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| (Loss)/income per share                                                                                                                          |   |                         |         |   |   |   |   |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Basic                                                                                                                                            |   |                         |         |   |   |   |   |
| Before extraordinary item and cumulative effect of  accounting change                                                                            |   | $                            | (0.77        | ) | $ | 3.10 |   | $ | (6.11 | ) |
| Extraordinary item                                                                                                                               |   | —                       |         | (0.03 | ) | — |   |
| Cumulative effect of accounting change                                                                                                           |   | (1.07                        | )            | — |   | — |   |
| Basic net (loss)/income per share applicable to common  stockholders                                                                             |   | $                            | (1.84        | ) | $ | 3.07 |   | $ | (6.11 | ) |
|                                                                                                                                             |   |                         |         |   |   |   |   |   |   |   |
| Diluted                                                                                                                                          |   |                         |         |   |   |   |   |
| Before extraordinary item and cumulative effect of  accounting change                                                                            |   | $                            | (0.77        | ) | $ | 2.53 |   | $ | (6.11 | ) |
| Extraordinary item                                                                                                                               |   | —                       |         | (0.02 | ) | — |   |
| Cumulative effect of accounting change                                                                                                           |   | (1.07                        | )            | — |   | — |   |
| Diluted net (loss)/income per share applicable to  common stockholders                                                                           |   | $                            | (1.84        | ) | $ | 2.51 |   | $ | (6.11 | ) |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Shares used in basic calculations                                                                                                                |   | 55,014,772                   |         | 49,501,885 |   | 38,491,044 |   |
|                                                                                                                                             |   |                         |         |   |   |   |   |
| Shares used in diluted calculations                                                                                                              |   | 55,014,772                   |         | 60,719,648 |   | 38,491,044 |   |
|                                                                                                                                                  |        |                              |              |  |  |  |  |  |  |  |  |

*See notes to consolidatedfinancial statements*

 

F-3

----

 

 **ACTV, INC.AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS**
|                                                               |   | **Years ended December 31,** |         |
|--------------------------------------------------------------------|--------|------------------------------|--------------|
|                                                               |   | **2001**                     |         | **2000** |   | **1999** |   |
| Cash flows from operating activities:                              |   |                         |         |   |   |   |   |
| Net (loss)/income:                                                 |   | $                            | (101,389,809 | ) | $ | 152,092,633 |   | $ | (234,875,271 | ) |
|                                                               |   |                         |         |   |   |   |   |
| Adjustments to reconcile net loss to net cash used in  operations: |   |                         |         |   |   |   |   |
| Cumulative effect of adopting SFAS No. 133                         |   | 58,732,197                   |         | — |   | — |   |
| Change in fair value of warrant                                    |   | 1,028,623                    |         | — |   | — |   |
| Depreciation and amortization                                      |   | 9,433,626                    |         | 3,907,631 |   | 2,118,096 |   |
| Stock-based compensation                                           |   | (12,148,504                  | )            | (186,673,365 | ) | 208,343,386 |   |
| Deferred compensation — other                                 |   | 75,000                       |         | 306,000 |   | 1,950,330 |   |
| Amortization of deferred expenses related to debt  financing  |   | —                       |         | — |   | 864,147 |   |
| Amortization of deferred revenue                                   |   | (3,619,812                   | )            | (1,809,907 | ) | — |   |
| Write-down of investment                                           |   | 1,000,000                    |         | 750,000 |   | — |   |
| Common stock issued in lieu of cash payment                        |   | 1,767,275                    |         | 4,560,000 |   | 6,383,560 |   |
| Non-cash portion of restructuring charge                           |   | 10,601,674                   |         | — |   | — |   |
| Write-down of goodwill                                             |   | 11,247,725                   |         | — |   | — |   |
| Minority interest                                                  |   | (3,206,482                   | )            | (1,743,357 | ) | 588 |   |
| Changes in assets and liabilities:                                 |   |                         |         |   |   |   |   |
| Accounts receivable                                                |   | 968,978                      |         | 286,788 |   | (933,501 | ) |
| Other assets                                                       |   | (2,168,111                   | )            | (2,798,883 | ) | (615,789 | ) |
| Accounts payable and accrued expenses                              |   | (2,739,242                   | )            | 5,745,693 |   | 537,249 |   |
| Deferred revenue                                                   |   | 35,674                       |         | (485,032 | ) | 825,788 |   |
| Net cash used in operating activities                              |   | (30,381,188                  | )            | (25,861,799 | ) | (15,401,417 | ) |
| Cash flows from investing activities:                              |   |                         |         |   |   |   |   |
| Investment in short-term investments                               |   | (8,951,695                   | )            | — |   | — |   |
| Investments in patents                                             |   | (1,005,380                   | )            | (500,726 | ) | (7,515,343 | ) |
| Purchases of property and equipment                                |   | (8,005,909                   | )            | (10,938,456 | ) | (2,366,917 | ) |
| Investment in software development costs                           |   | (2,776,001                   | )            | (1,954,979 | ) | (1,438,654 | ) |
| Strategic investments                                              |   | (5,266,239                   | )            | (3,750,000 | ) | — |   |
| Net cash used in investing activities                              |   | (26,005,224                  | )            | (17,144,161 | ) | (11,320,914 | ) |
| Cash flows from financing activities:                              |   |                         |         |   |   |   |   |
| (Receipt) payment of letters of credit                             |   | 2,680,455                    |         | (3,165,368 | ) | — |   |
| Retirement of debt— net                                       |   | —                       |         | (4,567,095 | ) | (174,732 | ) |
| Redemption of preferred stock                                      |   | —                       |         | — |   | (5,198,342 | ) |
| Net proceeds from subsidiary equity transactions                   |   | —                       |         | 13,049,895 |   | 2,000,593 |   |
| Net proceeds from equity financing                                 |   | 143,625                      |         | 150,763,399 |   | 34,309,731 |   |
| Repayment of stockholders loan                                     |   | 109,998                      |         | — |   | — |   |
| Net cash provided by financing activities                          |   | 2,934,078                    |         | 156,080,831 |   | 30,937,250 |   |
| Net (decrease) increase in cash and cash equivalents               |   | (53,452,334                  | )            | 113,074,871 |   | 4,214,919 |   |
| Cash and cash equivalents, beginning of period                     |   | 122,488,041                  |         | 9,413,170 |   | 5,198,251 |   |
| Cash and cash equivalents, end of period                           |   | $                            | 69,035,707   |   | $ | 122,488,041 |   | $ | 9,413,170 |   |

 
| Supplemental  Disclosure to the Consolidated Statements of Cash Flows | **For the Year  Ended  December 31, 2001** |       |   | ** ** |   | ** ** |
|-----------------------------------------------------------------------|--------------------------------------------|------------|--------|------------|--------|------------|
|                                                                  |                                       | ** ** |   | ** ** |
| Retirement of common stock                                            |                                       | $2,464,123 |   |       |   |       |   |
| Purchase Acquisitions:                                                |                                       |       |   |       |   |       |   |
| Assets acquired (excluding cash)                                      |                                       | 1,948,392  |   |       |   |       |   |
| Liabilities assumed                                                   |                                       | 2,744,148  |   |       |   |       |   |
| Market value of shares issued                                         |                                       | 27,475,090 |   |       |   |       |   |

*See notes to consolidatedfinancial statements*

 

F-4

----

 

**ACTV, INC.AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**
|                                                                                                      |   | **Common Stock** |       | **Preferred Series A** |       | **Preferred Series B** |       |       |       |       |       |       |       |                  |       |
|-----------------------------------------------------------------------------------------------------------|--------|------------------|------------|-----------------------------|------------|-----------------------------|------------|------------|------------|------------|------------|------------|------------|-----------------------|------------|
|                                                                                                      |   | **Shares**       | ** ** | **Amount**                  | ** ** | **Shares**                  | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Stockholder  Loan** | ** ** | **Additional  Paid-in-  Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                                                                                      |   |             |       |                        |       |                        |       |       |       |       |       |       |       |                  |       |   |   |   |   |   |   |
| Balance at December 31, 1998                                                                              |   | 30,031,494       |       | $                           | 3,003,151  |                        | 56,300     |       | $          | 5,630      |       | 5,018      |       | $                     | 2,805,961  |   | $ | (199,900 | ) | $ | 74,514,275 |   | $ | (75,693,834 | ) | $ | 4,435,283 |   |
|                                                                                                      |   |             |       |                        |       |                        |       |       |       |       |       |       |       |                  |       |   |   |   |   |   |   |
| Issuance of common shares in  connection with financing                                                   |   | 4,059,783        |       | 405,978                     |       |                        |       |       |       |       |       |       |       |                  |       | 22,611,560 |   |   |   | 23,017,538 |   |
| Issuance of shares for  services provided                                                                 |   | 931,294          |       | 93,129                      |       |                        |       |       |       |       |       |       |       |                  |       | 10,696,587 |   |   |   | 10,789,716 |   |
| Issuance of shares in  connection with exchange of preferred stock                                        |   | 1,061,690        |       | 106,169                     |       | (56,300                     | )          | (5,630     | )          |       |       |       |       |                  |       |   |   |   |   | 100,539 |   |
| Issuance of shares in  connection with exercise of stock options, stock appreciation rights and  warrants |   | 6,355,771        |       | 635,577                     |       |                        |       |       |       |       |       |       |       |                  |       | 12,816,409 |   |   |   | 13,451,986 |   |
| Adjustment to deferred stock  compensation                                                                |   |             |       |                        |       |                        |       |       |       |       |       |       |       |                  |       | 208,343,386 |   |   |   | 208,343,386 |   |
| Preferred stock redemption                                                                                |   |             |       |                        |       |                        |       |       |       | (5,018     | )          | (2,805,961 | )          |                  |       | (2,392,380 | ) |   |   | (5,198,341 | ) |
| Repayment of stockholder  loans                                                                           |   |             |       |                        |       |                        |       |       |       |       |       |       |       | 199,900               |       |   |   |   |   | 199,900 |   |
| Issuance of stockholder  loans                                                                            |   |             |       |                        |       |                        |       |       |       |       |       |       |       | (456,016              | )          |   |   |   |   | (456,016 | ) |
| Net loss                                                                                                  |   |             |       |                        |       |                        |       |       |       |       |       |       |       |                  |       |   |   | (234,875,271 | ) | (234,875,271 | ) |
| Preferred stock dividends  and accretion                                                                  |   |             |       |                        |       |                        |       |       |       |       |       |       |       |                  |       |   |   | (494,431 | ) | (494,431 | ) |
| Balances December 31, 1999                                                                                |   | 42,440,032       |       | $                           | 4,244,004  |                        | —     |       | $          | —     |       | —     |       | $                     | —     |   | $ | (456,016 | ) | $ | 326,589,837 |   | $ | (311,063,536 | ) | $ | 19,314,289 |   |
| Issuance of shares in  connection with public offering                                                    |   | 4,600,000        |       | 460,000                     |       |                        |       |       |       |       |       |       |       |                  |       | 128,909,468 |   |   |   | 129,369,468 |   |
| Issuance of shares for  services                                                                          |   | 947,000          |       | 94,700                      |       |                        |       |       |       |       |       |       |       |                  |       | 7,617,788 |   |   |   | 7,712,488 |   |
| Issuance of shares in  connection with exercise of stock options & warrants                           |   | 3,299,598        |       | 329,960                     |       |                        |       |       |       |       |       |       |       |                  |       | 20,937,621 |   |   |   | 21,267,581 |   |
| Adjustment to deferred stock  compensation                                                                |   |             |       |                        |       |                        |       |       |       |       |       |       |       |                  |       | (186,673,365 | ) |   |   | (186,673,365 | ) |
| Issuance of stockholder  loans                                                                            |   |             |       |                        |       |                        |       |       |       |       |       |       |       | (187,590              | )          |   |   |   |   | (187,590 | ) |
| Retirement of common stock                                                                                |   | (58,476          | )          | (5,848                      | )          |                        |       |       |       |       |       |       |       |                  |       | (307,636 | ) | (2,712,654 | ) | (3,026,138 | ) |
| Net income                                                                                                |   |             |       |                        |       |                        |       |       |       |       |       |       |       |                  |       |   |   | 152,092,633 |   | 152,092,633 |   |
| Balance at December 31, 2000                                                                              |   | 51,228,154       |       | $                           | 5,122,816  |                        | —     |       | $          | —     |       | —     |       | $                     | —     |   | $ | (643,606 | ) | $ | 297,073,713 |   | $ | (161,683,557 | ) | $ | 139,869,366 |   |
| Issuance of shares in  connection with exercise of stock options & warrants                           |   | 1,281,164        |       | 128,116                     |       |                        |       |       |       |       |       |       |       |                  |       | 15,509 |   |   |   | 143,625 |   |
| Adjustment to deferred stock  compensation                                                                |   |             |       |                        |       |                        |       |       |       |       |       |       |       |                  |       | (12,148,504 | ) |   |   | (12,148,504 | ) |
| Issuance of common stock for  401(k) plan                                                                 |   | 92,960           |       | 9,296                       |       |                        |       |       |       |       |       |       |       |                  |       | 237,979 |   |   |   | 247,275 |   |
| Issuance of shares in  connection with acquisition                                                        |   | 4,007,889        |       | 400,789                     |       |                        |       |       |       |       |       |       |       |                  |       | 27,074,301 |   |   |   | 27,475,090 |   |
| Recission and repayment of  stockholder loans                                                             |   |             |       |                        |       |                        |       |       |       |       |       |       |       | 304,571               |       |   |   |   |   | 304,571 |   |
| Retirement of common stock                                                                                |   | (728,229         | )          | (72,823                     | )          |                        |       |       |       |       |       |       |       |                  |       | (1,641,300 | ) |   |   | (1,714,123 | ) |
| Net loss                                                                                                  |   |             |       |                        |       |                        |       |       |       |       |       |       |       |                  |       |   |   | (101,389,809 | ) | (101,389,809 | ) |
| Balance at December 31, 2001                                                                              |   | 55,881,938       |       | $                           | 5,588,194  |                        | —     |       | $          | —     |       | —     |       | $                     | —     |   | $ | (339,035 | ) | $ | 310,611,698 |   | $ | (263,073,366 | ) | $ | 52,787,491 |   |

*See notes to consolidatedfinancial statements*

 

F-5

----

** ACTV, INC. AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999**

** **

**1. Nature ofOperations**

** **

                We are a digital media companythat provides proprietarytechnologies, tools, and technical and creative services for interactive TVadvertising, programming, and enhanced media applications. We have two operating business segments, whichwe call Digital TV and Enhanced Media.

 

                We believe that our Digital TVtechnologies are unique in providing targeting, interactivity andaccountability for television commercials, and in giving viewers the ability toinstantly customize their viewing experiences for a wide variety of programmingapplications. Our Enhanced Media technologies allow both for the enhancement ofvideo and audio content, including standard TV programming, with Web-basedinformation and interactivity.

 

**2. Organizationand Significant Accounting Policies**

** **

                *Principles of Consolidation*—TheCompany’s consolidated financial statements include the balances of itsoperating subsidiaries that are more than 50% owned and controlled along withDigital ADCO (“ADCO”), which is a 45.9% subsidiary controlled by the Company.All significant intercompany transactions and account balances are eliminated.

 

                *Property and Equipment*—Propertyand equipment is recorded at cost and depreciated on the straight-line methodover its estimated useful lives (generally 3 to 5 years). Depreciationexpense for the years ended December 31, 2001, 2000 and 1999 aggregated$4,309,285, $2,080,420, and $929,765, respectively.

 

                *Patents and Patents Pending*—Thecost of patents, representing patent acquisition costs and legal costs relatingto patents pending, is being amortized on a straight-line basis over theestimated economic lives of the respective patents (averaging 10 years),which is less than the statutory life of each patent. The balances atDecember 31, 2001 and 2000, are net of accumulated amortization of$1,607,268 and $981,248, respectively.

 

                *Software Development Costs*—TheCompany capitalizes costs incurred for the development of software productswhen economic and technological feasibility of such products has beenestablished. Capitalized software costs are amortized on a straight-line basisover the estimated useful lives of the respective products (3 years). Theunamortized balance at December 31, 2001 and 2000 is net of accumulatedamortization of $2,254,842 and $1,567,435, respectively.

 

                *Cash Equivalents and Short-TermInvestments*—The Company considers all highly liquid debt instrumentspurchased with an original maturity of three months or less to be cashequivalents.  Commercial paperinvestments with a maturity greater than three months, but less than one year,at the time of purchase are considered to be short-term investments.  The carrying amount of the investmentsapproximates fair value due to their short maturity.

 

                *Revenue Recognition*—Inbusinesses where the Company is delivering specific services and products,revenue is recognized from sales when a product is shipped and when servicesare performed.

 

                Revenue and anticipated profitsunder long-term contracts are recorded on a percentage-of-completion basis,generally using the cost-to-cost method of accounting where sales and profitsare recorded based on the ratio of costs incurred to estimated total costs atcompletion.

 

                The Company recognizes therevenue allocable to indefinite software licenses upon delivery andinstallation of the software product, unless the fee is not fixed ordeterminable or collectibility is not probable.  If the fee is not fixed or determinable, revenue is recognized aspayments become due from the customer. If collectibility is not considered probable, revenue is recognized whenthe fee is collected.

 

                Arrangements that includesoftware services, such as training or installation, are evaluated to determinewhether those services are essential to the functionality of other elements ofthe arrangement.  When software servicesare considered essential, revenue under the entire arrangement is recognized asthe services are performed using the percentage-of-completion contractaccounting method.  When softwareservices are not considered essential, the fee allocable to the service elementis recognized as revenue as the services are performed.

 

                Where software licenses aregranted for a specific period of time, with related content and maintenance contracts,revenue is aggregated and amortized on a straight-line basis over the life ofthe license.

 

                Deferred revenue consistsprimarily of payments received in advance of revenue being earned undersoftware licensing, software installation, support and mainenance contracts.

 

                *AccountsReceivable*—Customer accounts receivable include an amount for onecustomer representing 33% of the Company's balance in 2001, and one customerrepresenting 32% of the Company's balance in 2000.  The allowance for uncollectable accounts totaled $185,337 and$20,000 at December 31, 2001 and 2000, respectively.

 

F-6

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**ACTV, INC.AND SUBSIDIARIESNotes to the Consolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

                *Financial Instruments*—Effective January 1, 2001, ACTV adopted FASB Statement No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 requiresthat all derivative financial instruments be recorded in the balance sheet atfair value. The provisions of SFAS 133 affected the Company’s accounting forits investment of 2.5 million restricted warrants for Liberty LivewireCorporation (“Livewire”).  Prior to theadoption of SFAS 133, these warrants were carried at cost.  With the adoption of SFAS 133, the Livewireinvestment is recorded at fair value. This resulted in the Company recording a cumulative effect transitionadjustment loss of $58.7 million at January 1, 2001.  Beginning in the first quarter of 2001, the Company recordssubsequent changes in the fair value of this investment in the statement ofoperations.

 

                There may be periods with significant non-cashincreases or decreases to the Company’s net income/loss pertaining to theLivewire investment.  The carrying valueof the Company’s derivative instrument approximates fair value. The fair valueof the Livewire investment is determined by reference to underlying marketvalues resulting from trading of Livewire on a national securities exchange andon estimates using the Black-Scholes valuation model.

 

*                EarningsPer Share*—Basic income (loss) per common share equals net lossdivided by the weighted average number of shares of the Company’s common stockoutstanding during the period. Diluted income per share gives effect to thepotential dilution of outstanding stock options for the year ended December 31,2000. The Company did not consider the effect of stock options or convertiblepreferred stock upon the calculation of the loss per common share for the yearsended December 31, 2001 and 1999, respectively, as it would be anti-dilutive.

 

                *Long-Lived Assets and Intangibles*—Inaccordance with SFAS No. 121, Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed of, which requires thatlong-lived assets be reviewed for impairment whenever events or changes incircumstances indicate that the book value of the asset may not be recoverable,the Company reviews the carrying values of its long-lived assets andidentifiable intangibles for possible impairment. 

 

                *Goodwill*—The excess of thepurchase cost over the fair value of net assets acquired in an acquisition(goodwill) is being amortized on a straight-line basis over a period of7-10 years. At December 31, 2001 and 2000, goodwill amounted to $12.9 and$1.4 million, net of accumulated amortization of $6.5 and $2.9 million,respectively.  Amortization of goodwilltotaled $3.6, $0.4, and $0.4 million in 2001, 2000, and 1999.  The Company evaluates the realizability ofgoodwill based upon the expected undiscounted cash flows of the acquiredbusiness.  As a result of Intellocity’sinability to achieve the operating results specified in its 2001 budget, itoperated at a loss for fiscal 2001, triggering an impairment review of itslong-lived assets in the fourth quarter. We developed a revised operating planto restructure and stabilize the business. The revised projections by serviceline provided the basis for measurement of the asset impairment charge. Wecalculated the present value of expected future cash flows of Intellocity’sservice lines to determine the fair value of the assets. Accordingly, in thefourth quarter of 2001, we recorded an impairment charge of $11.2 million.  Future impairments, if any, will berecognized through a charge to operations, in the period in which theimpairment is deemed to exist.

 

*                FairValue of Financial Instruments* —The carrying amounts of cashand cash equivalents, receivables, accounts payable, and accrued liabilitiesapproximate fair value because of the short maturity of

 

F-7

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theseinstruments. The carrying amounts of long-term receivables approximates fairvalue as the effective rates for these instruments are comparable to marketrates at year-end. The carrying amount of investments approximates fair marketvalue.

 

*                Stock—Based Compensatio*n—The Company applies the intrinsic–valuebased method of accounting prescribed by APB Opinion No. 25, *Accounting for Stock Issued to Employe*e*”,*(“APB 25”) and presents disclosure ofpro forma information required under Statement of Financial AccountingStandards No. 123 (“SFAS 123), *Accountingfor Stock Based Compensation.*Certain of the Company’s options aresubject to variable plan accounting under APB 25 which results in the recordingof charges or credits to compensation expense for increases or decreases in themarket value of the stock in excess of the price of certain options and anoffsetting entry is recorded to additional paid in capital. The Companyamortizes stock based compensation arising from certain employee stock option grantsover the vesting periods of the related options, generally three years.

 

*                Useof Estimates*—The preparation of financial statements in conformitywith generally accepted accounting principles requires Management to makeestimates and assumptions that effect the reported amount of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from these estimates.

 

                *Reclassifications*—Certainreclassifications have been made to the prior years financial statements toconform to the current year presentation.

 

                *Recent Accounting Pronouncements*—TheFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard No. 141, Business Combinations, (“SFAS 141”), which iseffective for business combinations initiated after June 30, 2001 establishedaccounting and reporting form business combinations by requiring that all businesscombinations be accounted for under the purchase method.  Use of the pooling-of-interests method is nolonger permitted.  SFAS 141 alsoprovides guidance on purchase accounting related to the recognition ofintangible assets and accounting for negative goodwill.  The Company will adopt SFAS 141 for anyfuture business combinations that are consummated.

 

                In July 2001, the FASB issued Statement of FinancialAccounting Standard No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets,effective for fiscal years beginning after December 15, 2001. Under SFAS 142,goodwill and intangible assets deemed to have indefinite lives will no longerbe amortized but will be subject to annual impairment tests.  Other intangible assets will continue to beamortized over their useful lives. The Corporation will apply the provisions ofSFAS 142 beginning on January 1, 2002. Application of the non-amortization provisions of SFAS 142 would havebeen expected to result in a decrease in net loss before extraordinary items ofapproximately $3.6 million per year. During 2002, the Company will perform the first of the requiredimpairment tests of goodwill using the methodology prescribed by SFAS 142.  The Company anticipates the adoption of SFAS142 as of the beginning of 2002.  TheCompany has not yet determined the final expected effect the adoption of SFAS142 will have on its statement of financial condition, but does not believe itwill be material.

 

                As of August 2001, the FASBissued Statement of Financial Accounting Standard No. 143 (“SFAS 143”),Accounting for Obligations Associated with the Retirement of Long-Lived Assets(“SFAS 143”), which is effective for financial statements issued for fiscalyears beginning after June 15, 2002. The objective of SFAS 143 is to provide accounting guidance for legalobligations associated with retirement of long-lived assets.  The retirement obligations included withinthe scope of this pronouncement are those that an entity cannot avoid as a resultof the acquisition, construction or normal operation of a long-livedasset.  Components of larger systemsalso fall under this pronouncement, as well as tangible long-lived assets with

 

F-8

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**ACTV, INC.AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

indeterminablelives.  The Company does not believethat that the adoption of SFAS 143 will impact the Company’s financialcondition, cash flows and results of operations.  The Company plans to adopt SFAS 143 during the first quarter of2003.

 

                In October 2001, the FASB issuedStatement of Financial Accounting Standard No. 144, Accounting for theImpairment of Disposal of Long-Lived Assets, (“SFAS 144”), which is effectivefor financial statements issued for fiscal years beginning after December 15,2001. The objectives of SFAS 144 are to address significant issues relating tothe implementation of Statement of Financial Accounting Standard No.121,(“SFAS 121”), Accounting for the Disposal of Long-Lived Assets to be Disposedof, and to develop a single accounting model, based on the frameworkestablished in SFAS 121, for long-lived assets to be disposed of by sale,whether previously held and used or newly acquired. The Company does notbelieve that the adoption of SFAS 144 will have an impact on the Company’sfinancial condition and results of operations. The Company will adopt SFAS 144 during the first quarter of 2002.

 

**3. Merger and Acquisition Activity**

** **

Acquisition

 

                On March 7, 2001, the Companyacquired all of the assets and business of Intellocity, Inc.,(“Intellocity”) a technology and engineering solutions provider focusing on theinteractive television market. The Company acquired Intellocity for 4,007,890shares of the Company’s common stock, aggregating $23.2 million, andissued options to purchase 762,665 shares of the Company’s common stock valuedat $4.3 million, for an aggregate purchase price of $27.5 million.The Company was obligated to make an additional payment of up to 1.5 millionshares and options contingent upon Intellocity’s achieving certain performancetargets for the year ended December 31, 2001. Intellocity did not meetthose targets. Intellocity shareholders are subject to provisions restrictingthe sale of the ACTV stock; these restrictions range over 4 years. Theacquisition was accounted for under the purchase method of accounting in thefirst quarter of 2001.

 

                The fair value ofassets acquired and liabilities assumed in the acquisition of Intellocityamounted to approximately $1.5 million. Goodwill, representing the excess cost over the fair value of net assetsacquired, was calculated to be $26.4 million and is being amortized over 7years. As a result of the Company’s year-end review of the realizability of thefull goodwill value attributed to Intellocity, the Company recorded animpairment charge to goodwill of $11.2 million during the fourth quarter of2001, adjusting the asset value of such goodwill from $23.2 million to $12.0million. The results of Intellocity's operations are included in the Company'sconsolidated results from the date of acquisition.

 

                On August 17, 2000, the Companyacquired all of the outstanding capital stock of Bottle Rocket, Inc., abusiness engaged in the creation and marketing of online, games-based entertainment.  The Company acquired Bottle Rocket inexchange for 272,035 shares of the Company’s common stock.  The acquisition of Bottle Rocket has beenaccounted for under the pooling of interests method of accounting and,accordingly, the Company’s historical consolidated financial statements havebeen restated to include the accounts and results of operations of BottleRocket.

 

 

F-9

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**ACTV, INC.AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

                The following table representsthe results of operations on a pro forma basis, as if the acquisition of BottleRocket and Intellocity had been completed on January 1, 2000.  These pro forma results include estimatesand assumptions that management believes are reasonable.
|                                                                                                        |   | **For the Year Ended**December 31, |       |
|-------------------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                                        |   | **2001**                           |       | **2000** |   |
| **Revenues**                                                                                                |   | $15,350,452                        |       | $16,340,236 |   |
|                                                                                                        |   |                               |       |   |   |
| **(Loss) Income before Minority  Interest, Extraordinary Item, and Cumulative effect of accounting change** |   | (46,711,798                        | )          | 148,642,434 |   |
|                                                                                                        |   |                               |       |   |   |
| **(Loss) Income before Extraordinary  Item and Cumulative effect of accounting change**                     |   | (43,505,316                        | )          | 150,385,791 |   |
|                                                                                                        |   |                               |       |   |   |
| **Net (Loss) Income**                                                                                       |   | (102,237,513                       | )          | 148,974,652 |   |
|                                                                                                        |   |                               |       |   |   |
| Basic                                                                                                       |   |                               |       |   |   |
| (Loss)/income per share before extraordinary item and cumulative effect  of accounting change               |   | $                                  | (0.78      | ) | $ | 3.04 |   |
| Extraordinary item                                                                                          |   | —                             |       | (0.03 | ) |
| Cumulative effect of  accounting  change                                                               |   | (1.05                              | )          | — |   |
| Basic (loss)/income per share                                                                               |   | $                                  | (1.83      | ) | $ | 3.01 |   |
|                                                                                                        |   |                               | ** ** |   | ** ** |
| Diluted                                                                                                     |   |                               |       |   |   |
| (Loss)/income per share before extraordinary item and cumulative effect  of accounting change               |   | $                                  | (0.78      | ) | $ | 2.48 |   |
| Extraordinary item                                                                                          |   | —                             |       | (0.03 | ) |
| Cumulative effect of  accounting  change                                                               |   | (1.05                              | )          | — |   |
| Diluted (loss)/income per share                                                                             |   | $                                  | (1.83      | ) | $ | 2.45 |   |

 

F-10

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**ACTV, INC.AND SUBSIDIARIES****Notes to the Consolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

 **4. Property and Equipment**

 

                Property and equipment—net atDecember 31, 2001 and 2000 consisted of the following (at cost): 

 
|                                           |   | **2001**   |       | **2000**   |   |
|------------------------------------------------|--------|------------|------------|------------|--------|
| Machinery and equipment                        |   | $          | 11,981,141 |       | $      | 8,138,082 |   |
| Office furniture and fixtures                  |   | 1,023,691  |       | 3,253,895  |   |
| Leasehold improvements                         |   | 868,633    |       | 5,992,172  |   |
|                                           |   |       | 13,873,465 |       |   | 17,384,149 |   |
|                                           |   |       |       |       |   |
| Less accumulated depreciation and amortization |   | (7,528,835 | )          | (4,755,917 | )      |
|                                           |   |       |       |       |   |
|                                           |   | $          | 6,344,630  |       | $      | 12,628,232 |   |

** **

**5. FinancingActivities**

** **

*Common StockFinancing*

* *

                During the years endedDecember 31, 2001, 2000 and 1999, the Company raised approximately $0,$129.4 and $23.0 million, respectively, from sales of common stock tooutside investors and $0.1, $21.3 and $13.5 million, respectively, fromthe exercise of stock options and warrants.

 

                On February 3, 2000, wecompleted a follow-on offering of 4.6 million common shares, including0.6 million common shares to cover the over-allotments of ourunderwriters, Credit Suisse First Boston, Bear Stearns &Co. Inc., Lehman Brothers, and Salomon Smith Barney. The 4.6 milliontotal common shares were priced to the public at $30 per share, for total grossproceeds of $138 million. We paid underwriting discounts and commissionsof $1.80 per share or $8.28 million, resulting in net proceeds of $28.20per share, or $129.4 million.

 

                On March 27, 2000 LibertyDigital, Inc. invested an additional $20 million in the Company,increasing its investment to 16% by exercising a warrant granted inMarch 1999.

 

*PreferredStock Financing*

 

                In November 1998, ACTVissued Series B convertible preferred stock (“Series B Stock”),common stock, and warrants to purchase approximately 1.95 million sharesof common stock at $2.00 per share as a partial exchange for approximately179,000 shares of the subsidiary exchangeable preferred stock. The excess ofthe fair value of this consideration over the carrying value of the exchangeablepreferred stock for which the Series B Stock was issued is included inminority interest subsidiary preferred stock

 

F-11

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**ACTV, INC. AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

dividendand accretion in the accompanying statement of operations. The Series BStock was fully redeemable by ACTV at any time at a 10% premium above facevalue plus accrued dividends. The holders of the Series B Stock wereprohibited from converting any shares into common stock throughNovember 13, 1999. Beginning November 13, 1999, the number of sharesissued upon conversion was to be determined by dividing the liquidation valueof $1,000 plus accrued dividends by the conversion price of $2.00 per commonshare. Beginning February 13, 2000, the number of shares issued uponconversion was to be determined by dividing the liquidation value of $1,000plus accrued dividends by the conversion price of $1.33 per common share. Thebeneficial conversion feature related to the possible conversion of theSeries B Stock at $1.33 per share, which equaled $2,527,723 at theissuance date, was attributed to additional paid-in-capital and was beingaccounted for as a charge to net loss applicable to common stockholders overthe period from issuance through February 13, 2000. During May 1999,ACTV redeemed all of the outstanding Series B Stock for a total ofapproximately $5.2 million. The Series B Stock had been convertibleinto common stock at $2.00 per share beginning in November 1998. ACTVeffectively redeemed the Series B Stock at an equivalent of $2.20 percommon stock share, a price significantly less than the market price at thetime of the redemption. The redemption avoided the possible future issuance ofmore than 2.8 million shares of common stock.

 

*DebtFinancing*

 

                In January 1998, theCompany issued $5.0 million aggregate principal amount notes. The noteshad an interest rate of 13.0% per annum, payable semi-annually, with principalrepayment in one installment on June 30, 2003. The Company had the optionto pay any four semi-annual interest payments in kind rather than in cash, withan increase in the rate applicable to such payments in kind to 13.75% perannum. The Company chose to make the first two semi-annual interest payments(June 30, 1998 and December 31, 1998) in kind. In connection with thenote, the holders received on January 14, 1998 a common stock purchasewarrant (The “Warrant”) of Texas Network that granted the holders either the rightto purchase up to 17.5% of the fully-diluted shares of common stock of TexasNetwork or, through July 14, 1999, to exchange the Warrant for such numberof shares of the Company’s common stock, at the time of and giving effect tosuch exchange, that were equal to 5.5% of the fully diluted number of shares ofcommon stock outstanding.

 

                For accounting purposes, theCompany allocated approximately $1.4 million to the value of the Warrant,based on the market value of the Company’s common stock into which the Warrantwas convertible at issuance. The Warrant was included outside of ConsolidatedStockholders’ Equity due to its cash put feature and the notes were recorded ata value of proceeds received less the value attributed to the Warrant. Thedifference between the recorded value of the notes and their principal valuewas being amortized as additional interest expense over the life of the notes.The Warrant was exchanged and exercised for the Company’s common stock duringthe first quarter of 1999.

 

                On April 3, 2000, theCompany repaid certain notes in full, thereby incurring a loss onextinguishment of debt that was recorded as an extraordinary item in thequarter ended June 30, 2000. The extraordinary loss includes a prepaymentpremium of $369,632, and the unamortized original issue discount and deferredissue costs of $819,294 and $222,213, respectively, for a total loss of$1,411,139, or $0.03 per share.

 

*ConvertiblePreferred Stock*

* *

                At December 31, 1999, theCompany was authorized to issue 1,000,000 shares of blank check preferredstock, par value $0.10 per share, of which 120,000 shares were designatedSeries A Convertible Preferred Stock and 6,110 shares were designated

 

F-12

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**ACTV, INC. AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

Series BStock. There were 86,200 and 56,300 shares of Series A Preferredoutstanding at December 31, 1997 and 1998, respectively. Prior toDecember 31, 1999, the holders converted all of the outstanding shares ofSeries A preferred stock and the Company cancelled the Series Adesignation. There were 0 and 5,018 shares of Series B Stock issued andoutstanding as of December 31, 1997 and 1998, respectively. The Companyredeemed all of the Series B Stock in May 1999 and cancelled theSeries B Stock designation.

 

*PreferredStock Rights Agreement*

 

                Our policy is and has been tolicense our technology and arrange joint ventures for its use in a number ofdifferent industries. In August 2000, our Board of Directors adopted aPreferred Stock Rights Agreement, which gives our Board of Directors certainalternative courses of action if a potential acquirer of 15% or more of ourcommon stock is deemed unlikely to further such policy or if such potentialacquirer is deemed likely to actinconsistentlywith the best interests of our stockholders. Pursuant to the Preferred StockRights Agreement, wecoulddistribute certain preferred stock purchase rights to our current stockholders.These rights would become exercisable if an outside party became the beneficialowner of 15% or more of our issued and outstanding commonstock, unless our Board of Directors determinesto defer the exercise of, or redeem, such rights. The potential acquirer’srights under the Preferred Stock Rights Agreement will be null and void. Onceexercisable, each preferred stock purchase right would entitle the holderthereof to purchase .001 of a share of our Series C Preferred Stock at anexercise price of $0.00001 per share. Each share of our Series C PreferredStock shall entitle the holder thereof to 1,000 votes on all matters submittedto a vote of our stockholders. Once issued our Board of Directors could vote toexchange the preferred stock purchase rights for shares of our common stock. Apotential acquirer may be discouraged from completing an acquisition if itcould not be assured of having control of us.

 

                Our Bylaws provide that only amajority of the Board of Directors or the Chairman of the Board may call aspecial meeting of the stockholders. In addition, our certificate ofincorporation permits our Board of Directors to have us designate and issue,without stockholder approval, preferred stock with voting, conversion and otherrights and preferences that could differentially and adversely affect thevoting power or other rights of the holders of our common stock. Our issuanceof preferred stock or of rights to purchase preferred stock could also be usedto discourage an unsolicited acquisition proposal.

 

                ACTV Entertainment, Inc.(“Entertainment”) and HyperTV Networks, Inc. are subsidiaries ofACTV, Inc. In part as an anti-takeover defense, in 1997 and 1998Entertainment and HyperTV granted stock options for their respectiveClass B common shares to a limited number of their officers and employees,which Class B stock options—as amended in December, 1999—were to becomeexercisable only upon a “change of control” of ACTV, Inc., as the term“change of control” was defined in those options. Effective October 2,2000, all of those Class B stock options were terminated, with the resultthat there are no options outstanding at this date with respect to any of theClass B shares of either Entertainment or HyperTV.

 

F-13

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**ACTV, INC.AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

**6. Stock Options and Warrants**

 

                At December 31,2001, the Company had reserved shares of Common Stock for issuance as follows: 

 
|                                                      |   | **Authorized** |   | **Granted (net of  cancellations)** |   | **Exercised** |   | **Outstanding** |   |
|-----------------------------------------------------------|--------|----------------|--------|-------------------------------------|--------|---------------|--------|-----------------|--------|
| 1989 Non-Qualified Stock Option Plan                      |   | 100,000        |   | 85,000                              |   | (82,000       | )      | 3,000           |   |
| 1996 Qualified Stock Option Plan                          |   | 500,000        |   | 493,484                             |   | (377,879      | )      | 115,605         |   |
| 1998 Qualified Stock Option Plan                          |   | 900,000        |   | 761,998                             |   | (190,995      | )      | 571,003         |   |
| 1999 Qualified Stock Option Plan                          |   | 1,500,000      |   | 1,222,500                           |   | (164,047      | )      | 1,058,453       |   |
| 2000 Qualified Stock Option Plan                          |   | 4,000,000      |   | 2,905,116                           |   | (30,107       | )      | 2,875,009       |   |
| Options and warrants granted outsideof  formal plans |   |           |   | 19,335,215                          |   | (10,620,803   | )      | 8,714,412       |   |
|                                                      |   |           |   |                                |   |          |   |            |   |
| Total                                                     |   |           |   | 24,803,313                          |   | (11,465,831   | )      | 13,337,482      |   |

 

                During the years 2001, 2000,1999, 1998, 1996 and 1989 the Board of Directors approved stock option plansproviding for stock option grants to employees and others who provide significantservices to the Company.

 

                At December 31, 2001, theCompany also had outstanding options and warrants not issued pursuant to aformal plan that were issued to directors, certain employees, and consultantsand pursuant to financing transactions for the purchase of common stock. Theprices of these options and warrants range from $0.24 to $90.19 per share; theyhave expiration dates in the years 2001 through 2010. The options and warrantsgranted are not part of the stock option plans discussed above.

 

                As a result of certain cashlessexercise features, options totaling 6.9 million outstanding at December 31,2001, are subject to variable option accounting treatment.  A reduction in deferred stock-basedcompensation expense of $12.1 million and $186.7 million related to thesevariable options was recorded in the year ended December 31, 2001 and 2000,respectively. Deferred stock-based compensation expense of $208.3 millionrelated to these options was recorded for the year ended December 31, 1999.  We recorded stock-based compensation expensein relation to increases in the market price of our common stock above theexercise price of certain employee options, which were subject to variableoption accounting treatment.  To theextent that we had a stock-based compensation expense liability at thebeginning of a given reporting period, we recognized a reduction in expenserelated to the unexercised vested variable options for that period based on areduction of the market price for our common stock at the end of the period.

 

                In the first quarter of 2002, werescinded the applicable option exercise provisions that resulted in thevariable option accounting treatment in our financial statements.

 

 

F-14

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**ACTV, INC. AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

                Asummary of the status of the Company’s stock options as of December 31,2001, 2000 and 1999 is as follows:

 
|                                              |   | **2001**** Shares** |   | **2001  Wtd.  Avg.  Exer.  Price** |   | **2000  Shares** |   | **2000  Wtd.  Avg.  Exer.  Price** |   | **1999  Shares** |       | **1999  Wtd.  Avg.  Exer.  Price** |   |
|---------------------------------------------------|--------|--------------------------|--------|------------------------------------|--------|------------------|--------|------------------------------------|--------|------------------|------------|------------------------------------|--------|
| Outstanding at beginning of period                |   | 18,696,202               |   |                               |   | 16,736,838       |   |                               |   | 7,850,007        |       |                               |   |
| Options and warrants granted                      |   | 2,385,837                |   | 1.72                               |   | 4,698,976        |   | $                                  | 8.87   |             | 14,863,501 |                               | $      | 8.20 |   |
| Options and warrants exercised                    |   | (404,442                 | )      | 2.15                               |   | (2,622,196       | )      | $                                  | 6.74   |             | (5,801,670 | )                                  | $      | 1.98 |   |
| Options and warrants forfeited/expired            |   | (7,340,115               | )      | 12.31                              |   | (117,416         | )      | $                                  | 11.75  |             | (175,000   | )                                  | $      | 4.00 |   |
|                                              |   |                     |   |                               |   |             |   |                               |   |             |       |                               |   |
| Outstanding at end of period                      |   | 13,337,482               |   | 4.21                               |   | 18,696,202       |   | $                                  | 7.66   |             | 16,736,838 |                               | $      | 7.44 |   |
|                                              |   |                     |   |                               |   |             |   |                               |   |             |       |                               |   |
| Options and warrants exercisable at end of period |   | 7,827,291                |   | 3.12                               |   | 10,061,021       |   | $                                  | 8.28   |             | 9,369,330  |                               | $      | 9.08 |   |

 

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

 
| **Range of****Exercise Prices** |            | **Number  Outstanding  at  12/31/2001** |      | **Weighted****AverageRemaining  ContractualLife** |      | **Weighted  Average****ExercisePrice** |   | **Number  Exercisable at  12/31/2001** |   | **Weighted  Average  Exercise  Price** |
|---------------------------------|-----------------|-----------------------------------------|-----------|---------------------------------------------------|-----------|----------------------------------------|--------|----------------------------------------|--------|----------------------------------------|
| $                               | 0.00 to 4.00    |                                    | 8,413,295 |                                              | 4.0 Years |                                   | $      | 1.56                                   |   | 6,181,596                              |   | $ | 1.44 |
| $                               | 4.01 to 8.00    |                                    | 2,687,086 |                                              | 3.6 Years |                                   | $      | 6.83                                   |   | 399,753                                |   | $ | 6.50 |
| $                               | 8.01 to 12.00   |                                    | 1,516,000 |                                              | 1.5 Years |                                   | $      | 9.88                                   |   | 1,149,838                              |   | $ | 10.11 |
| $                               | 12.01 to 16.00  |                                    | 720,500   |                                              | 2.2 Years |                                   | $      | 13.49                                  |   | 95,503                                 |   | $ | 13.50 |
| $                               | 16.01 to 100.00 |                                    | 601       |                                              | 3.6Years  |                                   | $      | 81.85                                  |   | 601                                    |   | $ | 81.85 |
|                            |            |                                    |      |                                              |      |                                   |   |                                   |   |                                   |
| Total Number Outstanding        |            | 13,337,482                              |      |                                              |      |                                   |   | 7,827,291                              |   |                                   |

 

F-15

----

**ACTV, INC.AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

                The weighted average exerciseprice of options granted during 2001, 2000 and 1999 was $1.72, $8.87, and $8.20per share, respectively, excluding the value of options granted and terminatedwithin the year. In the case of each issuance, options were issued at anexercise price that was higher than the fair market value of the Company’scommon stock on the date of grant. The Company applies APB No. 25 andrelated Interpretations in accounting for its stock option and purchase plans.Had compensation cost for the Company’s option issuances been determined basedon the fair value at the grant dates consistent with the method of FASBStatement 123, the Company’s net income (loss) and income (loss) per basic anddiluted share for the years ended December 31, 2001, 2000, and 1999 wouldhave been changed to the pro forma amounts indicated below:
|                                      |   |     |         |     |   |        |
|-------------------------------------------|--------|----------|--------------|----------|--------|-------------|
|                                      |   | **2001** |         | **2000** |   | **1999**    |
| Net (loss)/income to common  stockholders |   |     |         |     |   |        |   |
| As reported                               |   | $        | (101,389,809 | )        | $      | 152,092,633 |   | $ | (235,369,702 | ) |
| Pro forma                                 |   | $        | (103,947,008 | )        | $      | 129,426,485 |   | $ | (237,772,519 | ) |
|                                      |   |     |         |     |   |        |
| Basic                                     |   |     |         |     |   |        |
| Net (loss)/income  per share              |   |     |         |     |   |        |
| As reported                               |   |     |         |     |   |        |
| Before extraordinary item                 |   | $        | (0.77        | )        | $      | 3.10        |   | $ | (6.11 | ) |
| Extraordinary item                        |   | —   |         | (0.03    | )      | —      |   |
| Cumulative effect of accounting change    |   | (1.07    | )            | —   |   | —      |   |
| Basic net (loss)/income per share         |   | $        | (1.84        | )        | $      | 3.07        |   | $ | (6.11 | ) |
|                                      |   |     |         |     |   |        |
| Pro forma                                 |   |     |         |     |   |        |
| Before extraordinary item                 |   | $        | (0.82        | )        | $      | 2.63        |   | $ | (6.18 | ) |
| Extraordinary item                        |   | —   |         | (0.03    | )      | —      |   |
| Cumulative effect of accounting change    |   | (1.07    | )            | —   |   | —      |   |
| Basic net(loss)/income per share          |   | $        | (1.89        | )        | $      | 2.60        |   | $ | (6.18 | ) |
|                                      |   |     |         |     |   |        |   |   |   |   |
| Diluted                                   |   |     |         |     |   |        |
| Net (loss)/income  per share              |   |     |         |     |   |        |
| As reported                               |   |     |         |     |   |        |
| Before extraordinary item                 |   | $        | (0.77        | )        | $      | 2.53        |   | $ | (6.11 | ) |
| Extraordinary item                        |   | —   |         | (0.02    | )      | —      |   |
| Cumulative effect of accounting change    |   | (1.07    | )            | —   |   | —      |   |
| Diluted net (loss)/income per share       |   | $        | (1.84        | )        | $      | 2.51        |   | $ | (6.11 | ) |
|                                      |   |     |         |     |   |        |
| Pro forma                                 |   |     |         |     |   |        |
| Before extraordinary item                 |   | $        | (0.82        | )        | $      | 2.16        |   | $ | (6.18 | ) |
| Extraordinary item                        |   | —   |         | (0.02    | )      | —      |   |
| Cumulative effect of accounting change    |   | (1.07    | )            | —   |   | —      |   |
| Diluted net(loss)/income per share        |   | $        | (1.89        | )        | $      | 2.14        |   | $ | (6.18 | ) |
|                                           |        |          |              |          |        |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

                The Company estimated the fairvalue of options issued during 2001, 2000, and 1999 on the date of each grantusing the Black–Scholes option–pricing model with the followingweighted–average assumptions: no dividend yield, expected volatility for2001, 2000, and 1999 of 128%, 122%, and 94%, respectively, and a risk freeinterest rate of 5% for 2001 and 6% for 2000 and 1999.

 

F-16

----

 

**ACTV, INC. AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

**7. StockAppreciation Rights Plans**

** **

                As of December 31, 1998,the Company had granted 896,000 outstanding Stock Appreciation Rights (“SARs”)(with an exercise price of $1.50 per share). The SARs expired between 2001 and2006. In May 1999, three directors agreed to retroactively exercise theirvested SARs for unregistered shares of common stock, baseduponthe closing market price of $3 15/16 on January 4, 1999. As a result, theSARs expense for the first quarter of 1999 was approximately $3.2 millionless than it would have been otherwise. In September 1999, all remainingSARs were converted into options that became part of the Company’s 1999 OptionPlan. In 1999, this conversion resulted in expense of $1.3 million with anadditional charge of $381,000 to future periods when the corresponding optionsvest. In September 1999, the Company exchanged all of the outstanding SARsfor stock options with the same exercise prices and vesting dates and cancelledits SAR plans. To account for this exchange, for the year endedDecember 31, 1999, the Company simultaneously incurred non-cashcompensation expense of $1,254,000 as a component of selling and administrativeexpense and non-cash income of $2.6 million from the elimination of therelated SAR liability. Additionally, the Company incurred a $381,000 non-cashcharge to deferred expenses for rights that had not vested as ofDecember 31, 1999.

 

                The stock appreciation rights expense for the yearended December 31, 1999 was $1,950,330. In September 1999, allremaining SARs were converted into options under our 1999 option plan. Deferredexpenses were recorded related to SARs that had not yet vested. InMay 2001 and May 2000, we recognized $75,000 and $306,000, respectively,of those deferred expenses as period costs.

 

F-17

----

**ACTV, INC. AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

**8. Income Taxes**

** **

                TheCompany accounts for income taxes in accordance with the provisions of SFASNo. 109, *Accounting for Income Taxes.*

 

                Deferred income taxes reflectthe net tax effects at an effective tax rate of 40% of (a) temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes, and(b) operating loss and tax credit carryforwards. The tax effects ofsignificant items comprising the Company’s net deferred tax asset as of December 31,1999, 2000 and 2001 are as follows (amounts in 000's):

 
|                                               |   | **1999** |   | **2000** | ** ** | **2001** | ** ** |
|----------------------------------------------------|--------|----------|--------|----------|------------|----------|------------|
| Deferred tax assets:                               |   |     |   |     |       |     |       |
| Operating loss carryforwards                       |   | $        | 27,388 |     | $          | 40,684   |       | $ | 64,199 |   |
| Differences between book and tax basis of property |   | 1,561    |   | 635      |       | 2,409    |       |
| Capital loss                                       |   | —   |   | —   |       | 300      |       |
| Warrant                                            |   | —   |   | —   |       | 23,180   |       |
| Deferred compensation                              |   | 83,678   |   | 5,980    |       | 1,121    |       |
| Other                                              |   | —   |   | —   |       | 142      |       |
| Total                                              |   | 112,927  |   | 47,299   |       | 91,351   |       |
| Deferred tax liabilities:                          |   |     |   |     |       |     |       |
| Differences between book and tax basis of property |   | (305     | )      | (477     | )          | —   |       |
|                                               |   |     |   |     |       |     |       |
| Net deferred tax asset before valuation allowance  |   | 112,322  |   | 46,822   |       | 91,351   |       |
| Valuation allowance                                |   | (112,322 | )      | (46,822  | )          | (91,351  | )          |
|                                               |   |     |   |     |       |     |       |
| Net deferred tax asset                             |   | $        | — |     | $          | —   |       | $ | — |   |

 

                The increase in the valuationallowance for the year ended December 31, 2001 was approximately $44.5million, and the decrease in the valuation allowance for the year endedDecember 31, 2000 was approximately $65.5 million.  The increase in the valuation allowance for the year endedDecember 31, 1999 was approximately $91.5 million.  There was no provision or benefit for federal income taxes as aresult of the net operating loss in the current year.

 

                Section 382 of the Internal Revenue Code of 1986, asamended, limits the ability of a corporation that undergoes an “ownershipchange” to use its net operating losses to reduce its tax liability. In theevent of an ownership change, we would not be able use our pre-ownership—changenet operating losses in excess of the limitation imposed by Section 382. Thislimitation generally would be calculated by multiplying the value of our stockimmediately before the ownership change by the long-term federal rate.

 

                At December 31, 2001 and2000, the Company had Federal net operating loss (“NOL”) carryovers of approximately$160.5 and $115.2 million, respectively. These carryovers will expire betweenthe years 2002 and 2022. There may be some limitation on the use of these netoperating loss carryforwards under the Internal Revenue Code Section 382ownership change rules.

 

F-18

----

 

**ACTV, INC. AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

During 2000, the Companyentered into an investment that created a foreign subsidiary called DigitalADCO International. Although there are currently no material tax implications,the investment may result in an income tax liability that is not limited by theCompany’s existing NOL.

 

**9.  Retirement Plan**

** **

                The Company sponsors a 401(k)savings plan for employees who have completed at least one full year ofservice. The Company has a policy of matching employee 401(k) deferrals, dollarfor dollar, up to the first 5% of the participating employee’s annualcompensation. Percentage vesting of the matching contributions is based on anemployee’s term of service with the Company, starting at 20% for employees withmore than two years of service, and increasing ratably to 100% for employeeswith more than six years of service. To date, the Company has made all suchcontributions in the form of its common stock. In 2001, 2000 and 1999, theCompany contributed the common stock equivalent of $247,275, $154,565, and$132,162, respectively.

 

**10.  Commitments**

** **

                At December 31, 2001,future aggregate minimum lease commitments under non-cancelable operatingleases, were as follows:

 

| **Year**   |   | **Commitment** |      |
|------------|--------|----------------|-----------|
|       |   |           |      |
| 2002       |   | $              | 961,438   |   |
| 2003       |   | 909,271        |      |
| 2004       |   | 791,602        |      |
| 2005       |   | 557,403        |      |
| 2006       |   | 427,595        |      |
| Thereafter |   | 4,175,160      |      |
| Total      |   | $              | 7,822,469 |   |

 

Theleases contain customary escalation clauses, based principally on real estatetaxes. Rent expense related to these leases for the years endedDecember 31, 2001, 2000 and 1999 aggregated $2,711,375, $1,240,625 and$577,956, respectively.

 

**11.  Concentration of Credit Risk**

** **

                Financial instruments thatpotentially subject the Company to concentrations of credit risk consistprincipally of temporary cash investments and receivables. Concentrations ofrisk with respect to trade receivables exist because of the relatively fewcompanies or other organizations with which the Company currently doesbusiness. The Company attempts to limit these risks by closely monitoring thecredit of those to whom it is contemplating providing its products, andcontinuing such credit monitoring activities and other collection activitiesthroughout the payment period. In certain instances, the Company will furtherminimize concentrations of credit risks by requiring partial advance paymentsfor the products provided. The Company’s temporary cash investments consist ofinvestments with high quality financial institutions.

 

F-19

----

 

**ACTV, INC. AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

                Individualcustomers accounted for more than 10% of the Company’s revenues during theyears ended 2001, 2000 and 1999. For the year ended December 31, 2001, twoindividual customers accounted for the following percentages of sales: 11% and16%.  For the year endedDecember 31, 2000, an individual customer accounted for 23% of sales. Forthe year ended December 31, 1999, four individual customers accounted forthe following percentages of sales: 10%, 10%, 11%, and 12%.

 

                Included in accounts receivableat December 31, 2001 were receivables from one customer that accounted for 33%of such balance.  Included in accountsreceivable at December 31, 2000 were receivables from one customer thataccounted for 32% of such balance.

 

**12.  Fair Value of Financial Instruments**

** **

                The Company acquired a warrantto purchase common shares of Liberty Livewire LLC as described in Note 14.The carrying amounts of other financial instruments, including cash and cashequivalents, accounts receivable, accounts payable and accrued expenses,approximated fair value because of their short maturity.

 

**13.  Segment Reporting**

** **

                We have two principal businesssegments: The Digital Television segment provides technologies, applicationsand technical services for interactive television, targeted advertising,and  advertising sales management.

 

                The Enhanced Media segment,which develops, markets and licenses technologies, applications and servicesfor the convergence of the Internet with television and other videoprogramming.

 

F-20

----

 

**ACTV, INC. AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

                Informationconcerning the Company’s business segments in 2001, 2000 and 1999 is asfollows:

 
|                                                                  |   | **2001**    |         | **2000**    |       | **1999**     |       |
|-----------------------------------------------------------------------|--------|-------------|--------------|-------------|------------|--------------|------------|
| **Revenues**                                                          |   |        |         |        |       |         |       |
| Digital Television                                                    |   | $           | 4,074,434    |        | $          | —       |       | $ | — |   |
| Enhanced Media                                                        |   | 9,614,181   |         | 8,016,453   |       | 2,909,642    |       |
| Total                                                                 |   | $           | 13,688,615   |        | $          | 8,016,453    |       | $ | 2,909,642 |   |
|                                                                  |   |        |         |        |       |         |       |
| **Depreciation & Amortization**                                   |   |        | ** **   |        | ** ** |         | ** ** |
| Digital Television                                                    |   | $           | 2,870,503    |        | $          | 1,675,434    |       | $ | 891,729 |   |
| Enhanced Media                                                        |   | 1,631,521   |         | 1,183,473   |       | 565,466      |       |
| Unallocated Corporate                                                 |   | 4,931,602   |         | 1,048,724   |       | 660,901      |       |
| Total                                                                 |   | $           | 9,433,626    |        | $          | 3,907,631    |       | $ | 2,118,096 |   |
|                                                                  |   |        |         |        |       |         |       |
| **Interest Income (Expense)**                                         |   |        | ** **   |        | ** ** |         | ** ** |
| Digital Television                                                    |   | $           | 246,454      |        | $          | (29,229      | )          | $ | (1,014,617 | ) |
| Enhanced Media                                                        |   | 10,875      |         | 4,709       |       | 15,872       |       |
| Unallocated Corporate                                                 |   | 3,923,594   |         | 7,466,830   |       | 420,358      |       |
| Total                                                                 |   | $           | 4,180,923    |        | $          | 7,442,310    |       | $ | (578,387 | ) |
|                                                                  |   |        |         |        |       |         |       |
| **Net (Loss)/Income Before  Preferred Stock Dividends and Accretion** |   |        | ** **   |        | ** ** |         | ** ** |
| Digital Television                                                    |   | $           | (8,060,807   | )           | $          | (8,864,572   | )          | $ | (6,203,020 | ) |
| Enhanced Media                                                        |   | (67,259,636 | )            | (14,146,874 | )          | (8,069,935   | )          |
| Unallocated Corporate                                                 |   | (26,069,366 | )            | 175,104,079 |       | (220,601,316 | )          |
| Total                                                                 |   | $           | (101,389,809 | )           | $          | 152,092,633  |       | $ | (234,875,271 | ) |
|                                                                  |   |        |         |        |       |         |       |
| **Capital Expenditures**                                              |   |        | ** **   |        | ** ** |         | ** ** |
| Digital Television                                                    |   | $           | 1,815,830    |        | $          | 2,722,138    |       | $ | 591,819 |   |
| Enhanced Media                                                        |   | 96,430      |         | 2,249,498   |       | 1,669,750    |       |
| Unallocated Corporate                                                 |   | 6,093,649   |         | 5,966,820   |       | 105,348      |       |
| Total                                                                 |   | $           | 8,005,909    |        | $          | 10,938,456   |       | $ | 2,366,917 |   |
|                                                                  |   |        |         |        |       |         |       |
| **Current Assets**                                                    |   |        | ** **   |        | ** ** |         | ** ** |
| Digital Television                                                    |   | $           | 4,061,843    |        | $          | 10,290,068   |       | $ | 1,857,449 |   |
| Enhanced Media                                                        |   | 4,735,475   |         | 2,382,673   |       | 2,240,564    |       |
| Unallocated Corporate                                                 |   | 72,206,506  |         | 114,756,611 |       | 7,917,735    |       |
| Total                                                                 |   | $           | 81,003,824   |        | $          | 127,429,352  |       | $ | 12,015,748 |   |
|                                                                  |   |        | ** **   |        | ** ** |         | ** ** |
| **Total Assets**                                                      |   |        | ** **   |        | ** ** |         | ** ** |
| Digital Television                                                    |   | $           | 12,022,462   |        | $          | 17,010,470   |       | $ | 6,244,009 |   |
| Enhanced Media                                                        |   | 24,471,782  |         | 83,127,887  |       | 6,000,980    |       |
| Unallocated Corporate                                                 |   | 103,093,077 |         | 135,370,223 |       | 16,739,389   |       |
| Total                                                                 |   | $           | 139,587,321  |        | $          | 235,508,580  |       | $ | 28,984,378 |   |

 

F-21

----

**ACTV, INC.AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

**14.  Investments**

** **

                In2000, the Company entered into various strategic equity investments inprivately held companies that operate in its industry. The Company does notexercise effective control or significant influence over operations for any ofthese strategic equity investments. At December 31, 2000, the investmentswere stated at cost, aggregating $3.3 million. During 2000, the Companywrote-off an investment for $750,000; the charge was recorded in selling andadministrative expenses. During 2001, the Company increased its grossinvestment assets by $5.3 million.

 

                Forthe year ended December 31, 2001, the Company recorded a writedown, reflectedin selling, general and administrative expenses, of $1.0 million related tocertain of its strategic investments that the Company deemed to be other thantemporarily impaired.  The balance ofthe Company’s total strategic cost investments is $7.4 million at December 31,2001.

 

                The Company andLiberty Livewire LLC, a unit of Liberty Livewire Corporation (“Livewire”) inApril 2000 entered into a joint marketing venture, “HyperTV with Livewire.”HyperTV with Livewire received various rights to use certain patented ACTVtechnologies in providing turnkey convergence services, including applicationhosting, web authoring services, data management, e-commerce and other value–addedservices for advertisers, television programmers, studios and networks.

 

                In connection withentering into the joint marketing agreement, the Company received a warrant toacquire 2,500,000 shares of Livewire common stock at an exercise price of $30per share. The warrant, which expires in June 2015 and includes registrationrights, vests ratably over five years, beginning April 13, 2001. Withcertain exceptions, the warrant is not transferable. The Company recorded aninvestment and deferred revenue in the amount of approximately $76.0 million,the estimated value of the warrant (using the Black–Scholes pricingmodel) at the time the agreement was executed. As of January 1, 2001 changes infair value in the investment in warrant will be recorded to the statement ofoperations as the Company adopted SFAS No. 133. The Company expects the valueof the warrant to fluctuate based on the underlying stock price of Livewire.The Company does not currently expect to exercise or register shares in thecoming year.

 

                The deferredrevenues recorded by the Company are being amortized into revenue over a periodof 21 years, the contractual term of the joint marketing venture.

 

**15.  ExecutiveCompensation**

** **

                Forthe years ended December 31, 2001 and 2000, and 1999, we incurredexecutive incentive compensation expense of $2.3 million $6.9 million, and $3.1million respectively.  This expense,which related to an executive incentive compensation provision thatsubsequently was cancelled, was based on changes in the market value of ourcommon stock and paid in unregistered securities.  The compensation recognized was contingent on continuedemployment of the executive and subject to forfeiture.

 

F-22

----

 

**ACTV, INC.AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

**16.  CorporateRestructuring**

** **

                Duringthe third and fourth quarter 2001, the Company completed certain restructuringinitiatives.  The restructuring chargetotaled $6.6 million and related to the surrender of real estate leases andemployee severance expenses.  Therestructuring charge includes a non-cash expense totaling $10.6 million, whichis the net effect of the write-off of property and equipment for abandonedleased office space in excess of a reversal of rent liability for the leasedspace. Also included is approximately $2.3 million for employee severanceexpenses, of which $1.5 million was paid in cash during the year ended December31, 2001.  At December 31, 2001 theCompany had $0.8 million remaining in accrued restructuring charges to be paidout over the first two quarters of 2002.

 

**17.  SupplementalDisclosure of Cash Flow Information**

** **

                Forthe years ended December, 2001 and 2000 we recorded deferred expense of $1.5million and $4.6 million, respectively, for stock–based compensation.

 

                Wealso recorded revenue of $3.3 million and $1.8 million during the years endedDecember 31, 2001 and 2000, respectively, relating to amortization of thedeferred revenue recorded in connection with the Liberty Livewire warrant (SeeNote 14).

 

                TheCompany made no cash payments of interest or income taxes during the year endedDecember 31, 2001. During the years ended December 31, 2000 and 1999,the Company made cash interest payments of $204,976 and $739,263, respectively,primarily related to the $5.0 million original fair value note, and nocash payments of income tax.

 

**18.  Digital ADCO**

** **

                Werecord minority interest related to Digital ADCO, in which our ownershipinterest was 45.9% at December 31, 2001. Digital ADCO was formed inNovember 1999 and co-founded by ACTV, Inc. and Motorola Broadband.Digital ADCO develops and markets applications for the delivery of addressableadvertising. Under the terms of our agreement with Motorola Broadband, welicensed five of our patents to Digital ADCO, and Motorola Broadband licensedsix of its patents and made a capital commitment to Digital ADCO. InAugust 2000, Digital ADCO, Inc. received. a direct minorityinvestment by OpenTV Corp. OpenTV also contributed patents on a non-exclusivebasis to Digital ADCO.  Concurrently,Digital ADCO, Inc. and OpenTV together created a new subsidiary, namedSpotOn International Ltd, to license and exploit Digital ADCO’s technologyoutside the U.S., Canada and Mexico. Digital ADCO, Inc.’s issued andoutstanding shares of capital stock presently consist of Class A commonstock, having one vote per share and Class B common stock, having 25 votesper share. All of Digital ADCO’s issued and outstanding shares are presentlyheld by three investors. OpenTV currently owns the issued and outstandingClass A common shares. ACTV, Inc. and Motorola Broadband, theco-founders of Digital ADCO, own the issued and outstanding Class B commonshares. ACTV, Inc. currently exercises voting control of Digital ADCO.

 

                Forthe periods ended December 31, 2001, 2000 and 1999, we allocated losses inthe amount of $2,890,505, $1,622,957 and $588, respectively, from Digital ADCOand SpotOn International, Ltd. to Motorola Broadband and OpenTV.

 

F-23

----

 

 

**ACTV, INC.AND SUBSIDIARIES****Notes to theConsolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

** **

**19.  Quarterly Results(Unaudited)**

** **

The following is a summary of the unauditedquarterly financial information; all adjustments necessary for a fairpresentation of each period were included.
|                                                                                |   |                                             |       |                |   |               |   |                |       |
|-------------------------------------------------------------------------------------|--------|--------------------------------------------------|------------|---------------------|--------|--------------------|--------|---------------------|------------|
| **Year Ended December 31, 2001**                                                    |   | **First  Quarter**                               |       | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** | ** ** |
|                                                                                |   | **(Dollars in Thousands Except Per Share Data)** |       |
| Revenues                                                                            |   | $                                                | 3,273      |                | $      | 4,226              |   | $                   | 3,259      |   | $ | 2,929 |   |
| Operating loss                                                                      |   | (13,956                                          | )          | (6,818              | )      | (6,055             | )      | (22,187             | )          |
|                                                                                |   |                                             |       |                |   |               |   |                |       |
| Net (loss)/income                                                                   |   | (79,109                                          | )          | 8,128               |   | (9,610             | )      | (20,799             | )          |
|                                                                                |   |                                             |       |                |   |               |   |                |       |
| Net  (loss)/income per share                                                        |   |                                             |       |                |   |               |   |                |       |
| Basic                                                                               |   |                                             |       |                |   |               |   |                |       |
| (Loss) Income  before extraordinary item and cumulative effect of accounting change |   | $                                                | (0.39      | )                   | $      | 0.15               |   | $                   | (0.17      | ) | $ | (0.39 | ) |
| Extraordinary  item                                                                 |   | —                                           |       | —              |   | —             |   | —              |       |
| Cumulative  transition effect of adopting SFAS No. 133                              |   | (1.12                                            | )          | —              |   | —             |   | —              |       |
| Basic net (loss)  income per share                                                  |   | $                                                | (1.51      | )                   | 0.15   |               | $      | (0.17               | )          | $ | (0.39 | ) |
|                                                                                |   |                                             |       |                |   |               |   |                |       |
| Diluted                                                                             |   |                                             |       |                |   |               |   |                |       |
| (Loss) income  before extraordinary item and cumulative effect of accounting change |   | $                                                | (0.39      | )                   | $      | 0.14               |   | $                   | (0.17      | ) | $ | (0.39 | ) |
| Extraordinary  item                                                                 |   | —                                           |       | —              |   | —             |   | —              |       |
| Cumulative  transition effect of adopting SFAS No. 133                              |   | (1.12                                            | )          | —              |   | —             |   | —              |       |
| Diluted net (loss)/income                                                           |   | $                                                | (1.51      | )                   | $      | 0.14               |   | $                   | (0.17      | ) | $ | (0.39 | ) |
|                                                                                |   |                                             |       |                |   |               |   |                |       |
|                                                                                |   |                                             |       |                |   |               |   |                |       |
| **Year Ended December 31, 2000**                                                    |   | **First  Quarter**                               | ** ** | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |       |
| Revenues                                                                            |   | $                                                | 1,393      |                | $      | 1,655              |   | $                   | 2,794      |   | $ | 2,174 |   |
| Operating income (loss)                                                             |   | 33,269                                           |       | 84,899              |   | (6,534             | )      | 32,683              |       |
| Net income (loss) before extraordinary item                                         |   | 34,176                                           |       | 87,405              |   | (3,715             | )      | 35,466              |       |
| Extraordinary item                                                                  |   | —                                           |       | (1,411              | )      | —             |   | —              |       |
|                                                                                |   |                                             |       |                |   |               |   |                |       |
| Net income (loss)                                                                   |   | 34,346                                           |       | 85,994              |   | (3,715             | )      | 35,466              |       |
|                                                                                |   |                                             |       |                |   |               |   |                |       |
| Net (loss)/income per share                                                         |   |                                             |       |                |   |               |   |                |       |
| Basic                                                                               |   |                                             |       |                |   |               |   |                |       |
| Income/(loss)  before extraordinary item                                            |   | $                                                | 0.76       |                | $      | 1.73               |   | ($0.07              | )          | $ | 0.72 |   |
| Extraordinary item                                                                  |   | —                                           |       | (0.03               | )      | —             |   | —              |       |
| Basic net income/(loss) per share applicable to common  shareholders                |   | $                                                | 0.76       |                | $      | 1.70               |   | ($0.07              | )          | $ | 0.72 |   |
|                                                                                |   |                                             |       |                |   |               |   |                |       |
| Diluted                                                                             |   |                                             |       |                |   |               |   |                |       |
| Income/(loss) before  extraordinary item                                            |   | $                                                | 0.58       |                | $      | 1.48               |   | ($0.07              | )          | $ | 0.58 |   |
| Extraordinary item                                                                  |   | —                                           |       | (0.02               | )      | —             |   | —              |       |
| Diluted net income/(loss) per share applicable to common  shareholders              |   | $                                                | 0.58       |                | $      | 1.46               |   | ($0.07              | )          | $ | 0.58 |   |

 

F-24

----

 

**ACTV, INC.AND SUBSIDIARIESNotes to the Consolidated Financial Statements for theYears Ended December 31, 2001, 2000, and 1999 (Continued)**

 

                Earnings percommon share are computed independently for each of the quarters presented.  Therefore the sum of the quarters may not beequal to the full year earnings or per share amounts.  Additionally, quarterly amounts for 2000 have been restated toreflect the business combination, which was accounted for under the poolingmethod and took place on August 18, 2000. 

 

Results for the first quarter of 2001 include additional depreciationand amortization expense in the amount of $1.8 million due to the relocation toa new facility and the amortization of goodwill related to the purchase ofIntellocity, Inc. Additionally, executive incentive compensation expense wasrecorded in the amount of $2.3 million. 

 

                Results for thethird quarter of 2001 included a write-down of an investment in warrant in theamount of  $59.6 million and a restructuringcharge of $5.6 million. Results for the fourth quarter 2001 included additionalrestructuring charges of $1.0 million.  

 

                Results for thesecond quarter of 2000 included a loss on extinguishment of debt which wasrecorded as an extraordinary item.  Theextraordinary loss included a prepayment premium of $0.4 and the unamortizedoriginal issue discount of and deferred issue costs of $1.0 million or $0.03per share.  

** **

**20. Net (Loss)/Income Per Share**  

 

The following table sets forth the computation of basic and diluted(loss)/income per share: 

 
|                                                                                          |   | **Years ended December 31,** |         |
|-----------------------------------------------------------------------------------------------|--------|------------------------------|--------------|
|                                                                                          |   | **2001**                     |         | **2000** |   | **1999** |   |
| Numerator:                                                                                    |   |                         |         |   |   |   |   |
| (Loss)/income before extraordinary item and cumulative effect of  accounting change           |   | $                            | (41,628,989  | ) | $ | 153,503,772 |   | $ | (235,369,702 | ) |
| Extraordinary loss on early extinguishment of debt                                            |   | —                       |         | (1,411,139 | ) | — |   |
| Cumulative transition effect of adopting SFAS No. 133                                         |   | (58,732,197                  | )       | — |   | — |   |
| Net (loss)income applicable to common stockholders                                            |   | $                            | (101,389,809 | ) | $ | 152,092,633 |   | $ | (235,369,702 | ) |
|                                                                                          |   |                         |         |   |   |   |   |
| Denominator:                                                                                  |   |                         |         |   |   |   |   |
| Basic weighted-average shares outstanding                                                     |   | 55,014,772                   |         | 49,501,885 |   | 38,491,044 |   |
| Weighted-average options outstanding                                                          |   | —                       |         | 11,217,763 |   | — |   |
| Diluted weighted average shares outstanding                                                   |   | 55,014,772                   |         | 60,719,648 |   | 38,491,044 |   |
|                                                                                          |   |                         |         |   |   |   |   |
| Basic                                                                                         |   |                         |         |   |   |   |   |
| (Loss)/income per share before extraordinary item and cumulative  effect of accounting change |   | $                            | (0.77        | ) | $ | 3.10 |   | $ | (6.11 | ) |
| Extraordinary item                                                                            |   | —                       |         | (0.03 | ) | — |   |
| Cumulative transition effect of adopting SFAS No. 133                                         |   | (1.07                        | )            | — |   | — |   |
| Basic (loss)/income per share                                                                 |   | $                            |  (1.84  | ) | $ |  3.07 |   | $ |  (6.11 | ) |
|                                                                                          |   |                         |         |   |   |   |   |
| Diluted                                                                                       |   |                         |         |   |   |   |   |
| (Loss)/income per share before extraordinary item and cumulative  effect of accounting change |   | $                            | (0.77        | ) | $ | 2.53 |   | $ | (6.11 | ) |
| Extraordinary item                                                                            |   | —                       |         | (0.02 | ) | — |   |
| Cumulative transition effect of adopting SFAS No. 133                                         |   | (1.07                        | )            | — |   | — |   |
| Diluted (loss)/income per share                                                               |   | $                            | (1.84        | ) | $ | 2.51 |   | $ | (6.11 | ) |

 

F-25

----

 

                14.(a)2.  Financial Statement Schedule  

 

                The following FinancialStatement Schedule for the years ended December 31, 2001,December 31, 2000 and December 31, 1999 is filed as part of thisAnnual Report.  

 

                Schedule II—Valuation andQualifying Accounts and Reserves

 
|                                                |   | **Column B**                         |   | **Column C**                        |   | **Column D**                    |   | **Column E**   |   |
|-----------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|---------------------------------|--------|----------------|--------|
| **Description**                                     |   | **Balance at****Beginningof Period** |   | **Charged to****Costs andExpenses** |   | **Charged to****OtherAccounts** |   | **Deductions** |   | **Balance at****Endof Period** |   |
| Year ended 12/31/99:                                |   |                                 |   |                                |   |                            |   |           |   |   |   |
| Accounts receivable allowance for doubtful accounts |   | —                               |   | —                              |   | —                          |   | —         |   | — |   |
| Year ended 12/31/00:                                |   |                                 |   |                                |   |                            |   |           |   |   |   |
| Accounts receivable allowance for doubtful accounts |   | —                               |   | $                                   | 68,600 |                            | — |           | $      | 48,600 |   | $ | 20,000 |   |
| Year ended 12/31/01:                                |   |                                 |   |                                |   |                            |   |           |   |   |   |
| Accounts receivable allowance for doubtful accounts |   | $                                    | 20,000 |                                | $      | 187,480                         |   | —         |   | $ | 22,143 |   | $ | 185,337 |   |
|                                                     |        |                                      |        |                                     |        |                                 |        |                |        |  |  |  |  |  |  |

 

                In1999 there was no accounts receivable allowance.

 

F-26

----

 

**                SIGNATURES**

 

                Pursuant to the requirements ofSection 13 or 15 (d) of the Securities and Exchange Act of 1934, theRegistrant has duly caused this Report to be signed on its behalf by theundersigned thereunto duly authorized in the City of New York and State of NewYork on the 12th day of April 2002.

 
|   | **A****CTV, INC.**                         |
|--------|-------------------------------------------------|
|   | Registrant                                      |
|   |                                            |
|   | /s/  David Reese                                |
|   | David  Reese                                    |
|   | Chairman,  Chief Executive Officer and Director |

 

                Pursuant to the requirements ofthe Securities and Exchange Act of 1934, this Report has been signed below bythe following persons in the capacities and on the date indicated.

 
| **Signature**            |   | **Title**                                                |   | **Date**        |
|--------------------------|--------|----------------------------------------------------------|--------|-----------------|
|                     |   |                                                     |   |            |
| /s/ David Reese          |   | Chairman,  Chief Executive Officer and Director          |   | April  12, 2002 |
| David Reese              |   |                                                     |   |            |
|                     |   |                                                     |   |            |
| /s/ Christopher C. Cline |   | Senior  Vice President and Chief Financial Officer       |   | April  12, 2002 |
| Christopher C. Cline     |   |                                                     |   |            |
|                     |   |                                                     |   |            |
| /s/ Day L. Patterson     |   | Executive  Vice President, General Counsel and Secretary |   | April  12, 2002 |
| Day L. Patterson         |   |                                                     |   |            |
|                     |   |                                                     |   |            |
| /s/ William C. Samuels   |   | Director                                                 |   | April  12, 2002 |
| William C. Samuels       |   |                                                     |   |            |
|                     |   |                                                     |   |            |
| /s/ John C. Wilcox       |   | Director                                                 |   | April  12, 2002 |
| John C. Wilcox           |   |                                                     |   |            |
|                     |   |                                                     |   |            |
| /s/ Michael J. Pohl      |   | Director                                                 |   | April  12, 2002 |
| Michael J. Pohl          |   |                                                     |   |            |
|                     |   |                                                     |   |            |

 

22

----

 

                INDEX TO EXHIBITS

 

                (a)           3. EXHIBITS (inapplicable items omitted):

 
| Exhibits |   |                                                                                                                                               |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                               |
| 2.1      |   | Agreement  and Plan of Merger dated March 7, 2001, between ACTV, Inc. and Intellocity,  Inc. ####                                                  |
| 3.1(a)   |   | Restated  Certificate of Incorporation of ACTV, Inc. *                                                                                             |
| 3.1(b)   |   | Amendment  to Certificate of Incorporation of ACTV, Inc. **                                                                                        |
| 3.1(c)   |   | Deleted.                                                                                                                                           |
| 3.1(d)   |   | Amendment  to Certificate of Incorporation of ACTV, Inc. ##                                                                                        |
| 3.1(e)   |   | Amended  and Restated Certificate of Incorporation of ACTV, Inc. ####                                                                              |
| 3.2      |   | By-Laws  of ACTV, Inc. *                                                                                                                           |
| 3.2(a)   |   | Amended  By-Laws of ACTV, Inc. ####                                                                                                                |
| 9.1      |   | Deleted.                                                                                                                                           |
| 9.2      |   | Deleted.                                                                                                                                           |
| 10.1     |   | Deleted.                                                                                                                                           |
| 10.2     |   | Form  of 1989 Employee Incentive Stock Option Plan. *                                                                                              |
| 10.3     |   | Form  of Amendment No. 1 to 1989 Employee Incentive Stock Option Plan. *                                                                           |
| 10.4     |   | Form  of 1989 Employee Non-qualified Stock Option Plan. *                                                                                          |
| 10.5     |   | Form  of Amendment No. 1 to 1989 Employee Non-qualified Stock Option Plan. *                                                                       |
| 10.8     |   | 1996  Non-qualified Stock Option Plan. ****                                                                                                        |
| 10.9     |   | 1992  Stock Appreciation Rights Plan. ****                                                                                                         |
| 10.10    |   | 1996  Stock Appreciation Rights Plan. ****                                                                                                         |
| 10.11    |   | Deleted  — replaced by 10.40                                                                                                                  |
| 10.12    |   | Deleted  — replaced by 10.41                                                                                                                  |
| 10.13    |   | Deleted  — replaced by 10.42                                                                                                                  |
| 10.14    |   | Master  Programming License Agreement dated December 2, 1996, by and between ACTV,  Inc. and Liberty/Fox Sports, LLC. ****                         |
| 10.15    |   | Enhancement  License Agreement dated December 4, 1996, by and between ACTV, Inc. and Prime  Ticket Networks, L.P., d/b/a Fox Sports West. ++, **** |
| 10.16    |   | Enhancement  License Agreement dated February 28, 1997, by and between ACTV, Inc. and ARC  Holding, Ltd., d/b/a Fox Sports Southwest. ++, ****     |
| 10.17    |   | Agreement  dated March 30, 1995 between General Instrument Corporation and ACTV, Inc.***                                                           |
| 10.18    |   | Deleted.                                                                                                                                           |
| 10.19    |   | Deleted.                                                                                                                                           |
| 10.21(a) |   | Deleted.                                                                                                                                           |
| 10.21(b) |   | Deleted.                                                                                                                                           |
| 10.21(c) |   | Option  Agreement dated September 29, 1995 between ACTV, Inc. and Richard H. Bennett.  ***                                                         |
| 10.21(d) |   | Assignment  dated September 29, 1995 between ACTV, Inc. and Richard H. Bennett. ***                                                                |
| 10.21(e) |   | Deleted  — replaced by 10.44(a).                                                                                                              |
| 10.21(f) |   | Deleted.                                                                                                                                           |
| 10.21(h) |   | Deleted  — replaced by 10.44(b).                                                                                                              |
| 10.21(j) |   | Deleted  — replaced by 10.44(c).                                                                                                              |
| 10.22    |   | Deleted  — expired.                                                                                                                           |
| 10.23(a) |   | Deleted  — replaced by 10.43(a).                                                                                                              |
| 10.23(b) |   | Deleted  — replaced by 10.43(b).                                                                                                              |
| 10.23(c) |   | Deleted  — replaced by 10.43(c).                                                                                                              |

 

23

----

 
| 10.23(d)  |   | Deleted.                                                                                                                |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------|
| 10.23(e)  |   | Deleted.                                                                                                                |
| 10.23(f)  |   | Deleted.                                                                                                                |
| 10.23(g)  |   | Deleted.                                                                                                                |
| 10.24(a)  |   | Deleted.                                                                                                                |
| 10.24(b)  |   | Deleted.                                                                                                                |
| 10.24(c)  |   | Deleted.                                                                                                                |
| 10.24(d)  |   | Deleted.                                                                                                                |
| 10.24(e)  |   | Deleted.                                                                                                                |
| 10.25(a)  |   | Deleted.                                                                                                                |
| 10.25(b)  |   | Deleted.                                                                                                                |
| 10.25(c)  |   | Deleted.                                                                                                                |
| 10.26(a)  |   | Deleted.                                                                                                                |
| 10.26(b)  |   | Deleted.                                                                                                                |
| 10.26(c)  |   | Deleted.                                                                                                                |
| 10.26(d)  |   | Deleted.                                                                                                                |
| 10.26(e)  |   | Deleted.                                                                                                                |
| 10.26(f)  |   | Deleted.                                                                                                                |
| 10.26(f)1 |   | Deleted.                                                                                                                |
| 10.26(g)  |   | Deleted.                                                                                                                |
| 10.26(h)  |   | Deleted.                                                                                                                |
| 10.26(i)  |   | Deleted.                                                                                                                |
| 10.26(j)  |   | Deleted.                                                                                                                |
| 10.26(k)  |   | Deleted.                                                                                                                |
| 10.26(l)  |   | Deleted.                                                                                                                |
| 10.26(l)1 |   | Deleted.                                                                                                                |
| 10.27     |   | Deleted.                                                                                                                |
| 10.28     |   | Deleted.                                                                                                                |
| 10.29     |   | Deleted.                                                                                                                |
| 10.30     |   | Deleted  — replaced by 10.45                                                                                       |
| 10.31     |   | Deleted  — replaced by 10.46                                                                                       |
| 10.32     |   | Deleted.                                                                                                                |
| 10.33     |   | Deleted.                                                                                                                |
| 10.34     |   | Deleted.                                                                                                                |
| 10.35     |   | Deleted.                                                                                                                |
| 10.36     |   | Deleted.                                                                                                                |
| 10.37     |   | Deleted.                                                                                                                |
| 10.38     |   | Deleted.                                                                                                                |
| 10.39     |   | Deleted.                                                                                                                |
| 10.40     |   | Deleted  — superseded by 10.40.2                                                                                   |
| 10.41.1   |   | Deleted  — superseded by 10.40.2.                                                                                  |
| 10.40.2   |   | Deleted.                                                                                                                |
| 10.41     |   | Deleted  — superseded by 10.41.1.                                                                                  |
| 10.41.1   |   | Employment  agreement dated as of August 1, 1995, as amended October 6, 1999, between  ACTV, Inc. and David Reese. ++++ |
| 10.42     |   | Deleted  — superseded by 10.42.2.                                                                                  |

 

24

----

 
| 10.42.1   |   | Deleted  — superseded by 10.42.2.                                                                                                                                    |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.42.2   |   | Employment  agreement dated as of August 1, 1995, as amended January 18, 2001, between  ACTV, Inc. and Bruce Crowley. ####                                                |
| 10.43(a)  |   | Deleted  — superseded by 10.51.                                                                                                                                      |
| 10.43(b)  |   | Deleted  — superseded by 10.52.                                                                                                                                      |
| 10.43(c)  |   | Deleted  — superseded by 10.53.                                                                                                                                      |
| 10.44(a)  |   | Deleted  — superseded by 10.44(a)1.                                                                                                                                  |
| 10.44(a)1 |   | Amended  stock option agreement dated December 1, 1995 between ACTV, Inc. and William  Samuels. ++++                                                                      |
| 10.44(b)  |   | Deleted  — superseded by 10.44(b)1.                                                                                                                                  |
| 10.44(b)1 |   | Amended  stock option agreement dated December 1, 1995 between ACTV, Inc. and David  Reese. ++++                                                                          |
| 10.44(c)  |   | Deleted  — superseded by 10.44(c)1.                                                                                                                                  |
| 10.44(c)1 |   | Amended  stock option agreement dated December 1, 1995 between ACTV, Inc. and Bruce  Crowley. ++++                                                                        |
| 10.45     |   | Amended  license agreement dated March 8, 1999, between ACTV, Inc. and ACTV  Entertainment, Inc., amending and restating in full the agreement dated March  14, 1997. +++ |
| 10.46     |   | Amended  license agreement dated March 8, 1999, between ACTV, Inc. and HyperTV Networks,  Inc., amending and restating in full the agreement dated March 13, 1997. +++    |
| 10.47     |   | Patent  assignment and license agreement between ACTV, Inc. and Earthweb, Inc. dated  December 1, 1997. +++                                                               |
| 10.48     |   | Deleted                                                                                                                                                                   |
| 10.48.1   |   | Deleted.                                                                                                                                                                  |
| 10.49     |   | Deleted.                                                                                                                                                                  |
| 10.50     |   | Deleted.                                                                                                                                                                  |
| 10.51     |   | Deleted  — superseded by 10.51.1                                                                                                                                     |
| 10.51.1   |   | Stock  option agreement dated February 21, 1998, as amended January 10, 2001,  between ACTV, Inc. and William C. Samuels. ####                                            |
| 10.52     |   | Deleted  — superseded by 10.52.1                                                                                                                                     |
| 10.52.1   |   | Stock  option agreement dated February 21, 1998, as amended January 10, 2001,  between ACTV, Inc. and Bruce Crowley. ####                                                 |
| 10.53     |   | Deleted  — superseded by 10.53.1                                                                                                                                     |
| 10.53.1   |   | Stock  option agreement dated February 21, 1998, as amended January 10, 2001,  between ACTV, Inc. and David Reese. ####                                                   |
| 10.54     |   | Lease  dated as of December 1, 1999 between 225 Fourth, LLC, as landlord, and ACTV,  Inc., as tenant. ++++                                                                |
| 10.54.1   |   | Lease  dated as of December 1, 1999, as amended May 23, 2000, between 225 Fourth,  LLC, as landlord, and ACTV, Inc., as tenant. ####                                      |
| 10.54.2   |   | Fourth  amendment to lease as of October 5, 2001, between 225 Fourth, LLC, as  landlord, and ACTV, Inc., as tenant.@                                                      |
| 10.55     |   | 2000  Stock Incentive Plan ##                                                                                                                                             |
| 10.56     |   | Cooperative  Venture Agreement dated April 13, 2000 by and among HyperTV Networks, Inc.,  Liberty Livewire LLC, and HyperTV with Livewire, LLC. ###                       |
| 10.57     |   | Employment  agreement dated as of October 1, 2000 between ACTV, Inc. and Kevin M. Liga.  ####                                                                             |
| 10.58     |   | Deleted.                                                                                                                                                                  |

 

25

----

 
| 10.59 |   | 2001  Stock Incentive Plan. #        |
|-------|--------|--------------------------------------|
| 21    |   | Subsidiaries  of the Registrant #### |

 

----

 
| *      |   | Incorporated  by reference from Form S-1 Registration Statement (File No. 33-34618)                                                                                                                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **     |   | Incorporated  by reference to ACTV, Inc.’s Form 10-K for the year ended December 31, 1993.                                                                                                                                          |
| ***    |   | Incorporated  by reference from Form S-1 Registration Statement (File No. 33-63879) which  became effective on February 12, 1996.                                                                                                        |
| ****   |   | Incorporated  by reference to ACTV, Inc.’s Form 10-K for the year ended December 31, 1996.                                                                                                                                          |
| *****  |   | Incorporated  by reference from the Exhibits to Schedule 13D filed by Value Partners, Ltd.  on January 23, 1998.                                                                                                                         |
| ****** |   | Incorporated  by reference from Form S-3 Registration Statement filed on December 30, 1998.                                                                                                                                              |
| +      |   | Incorporated  by reference to ACTV, Inc.’s Form 10-K for the year ended December 31, 1997.                                                                                                                                          |
| ++     |   | Certain  information contained in this exhibit has been omitted and filed separately  with the Commission along with an application for non-disclosure of  information pursuant to Rule 24b-2 of the Securities Act of 1933, as amended. |
| +++    |   | Incorporated  by reference to ACTV, Inc.’s Form 10-K for the year ended December 31, 1998.                                                                                                                                          |
| ++++   |   | Incorporated  by reference to ACTV, Inc.’s Form 10-K for the year ended December 31, 1999.                                                                                                                                          |
| #      |   | Incorporated  by reference to ACTV, Inc.’s Definitive Proxy Statement on Schedule 14A filed  with the Commission on August 3, 2001.                                                                                                 |
| ##     |   | Incorporated  by reference to ACTV, Inc.’s Definitive Proxy Statement on Schedule 14A filed  with the Commission on April 17, 2000.                                                                                                 |
| ###    |   | Incorporated  by reference to ACTV, Inc.’s amended quarterly report on Form 10Q/A for the  quarter ended June 30, 2000                                                                                                              |
| ####   |   | Incorporated  by reference to ACTV, Inc.’s Form 10-K for the year ended December 31, 2000.                                                                                                                                          |
| @      |   | Filed  herewith                                                                                                                                                                                                                          |

 

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