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

                                    FORM 10-K

        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1996

                                   ACTV, Inc.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

Delaware                                                    94-2907258
--------------------------------------------------------------------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)

1270 Avenue of the Americas
New York, New York                                                    10020
--------------------------------------------------------------------------------
(Address of principal executive offices)                        (Zip Code)

(212) 262-2570 (Registrant's telephone number, including area code)
--------------
Securities registered pursuant to Section 12 (g) of the Act:

Title of each class                         Name of exchange on which registered
-------------------                         ------------------------------------
Common Stock, Par Value $0.10               Boston Stock Exchange

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

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

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

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

As of March 24,  1997,  the  aggregate  market value of the voting stock held by
non-affiliates of the registrant (based on the NASDAQ Stock Market closing price
on March 24, 1997) was $20,128,518.

As of March 24, 1997, there were 11,838,734  shares of the  registrant's  common
stock outstanding.


                                       1
<PAGE>


PART I

Item 1.     BUSINESS

General

         The corporate structure of ACTV, Inc. ("Company") is as follows:  ACTV,
Inc. owns 100% of the common shares of ACTV Holdings,  Inc. ("Holdings"),  which
wholly owns (i) The Individualized  Regional Sports Network, Inc. ("In Sports"),
(ii) ACTV Entertainment,  Inc., (iii) ACTV Net, Inc., and (iv) four subsidiaries
that are  currently  inactive.  In  Sports,  in  turn,  wholly  owns  The  Texas
Individualized  Television  Network,  Inc.  and The Los  Angeles  Individualized
Television Network, Inc.

         The  Company  and  Holdings  have  granted  the  appropriate  operating
subsidiaries  exclusive,  perpetual  licenses to use the  Company's  proprietary
technologies  that   individualize   television   programming   ("Individualized
Programming")  within the business area being  operated by such  subsidiary  and
have given the subsidiaries the right to sublicense it. Under the licenses, each
subsidiary  will pay the Company a 5% royalty on net revenues if the  subsidiary
is no longer majority owned by the Company, and a royalty of 5% of the net sales
of any sublicensee.

         Unless  otherwise  indicated,  all  references in this Form 10-K to the
Company or ACTV include ACTV, Inc. and all of its subsidiaries.

         This document  includes  certain forward looking  statements  about the
Company and its industry that are based on  management's  current  expectations.
Actual results may differ materially as a result of any one or more of the risks
identified in the Company's  filings  under the  Securities  and Exchange Act of
1934.

Certain Relationships with Subsidiaries

  Consolidation of Educational Partnership into ACTV

      In July 1992,  ACTV Net, Inc.  (formerly  ACTV  Interactive,  Inc.) ("ACTV
Net") entered into a partnership agreement with Post-Newsweek Education, Inc., a
wholly-owned subsidiary of the Post Company,  pursuant to which ACTV Interactive
("Partnership") was formed as a Delaware general partnership, for the purpose of
selling  products  and  services  incorporating  the  Company's   Individualized
Programming to the education market.  The Post Company and ACTV Net received 51%
and 49%  interests,  respectively,  in the  Partnership.  On March 11, 1994, the
Company  purchased the Post Company's 51% interest in the  Partnership  for $4.5
million.  The  Company  and  the  Post  Company  agreed  to the  amount  of such
consideration after arms-length  negotiations without receiving a valuation from
a disinterested third party.

  Reorganization of ACTV Entertainment and the LGV Agreements

      In  March  1988,  the  Company  formed  ACTV  Entertainment,  Inc.  ("ACTV
Entertainment")  as  an  equal  stockholder  with  a  subsidiary  of  Le  Groupe
Videotron,  Ltee. of Montreal,  Canada ("LGV"),  Videotron Technologies Ltd. The
Company granted to ACTV  Entertainment  the exclusive right to use the Company's
Individualized  Programming  in the  United  States  cable,  DBS  and  broadcast
television markets.

      In June 1993, LGV withdrew from its ownership in ACTV  Entertainment,  and
the Company became the sole shareholder of ACTV Entertainment under the terms of
an agreement  with the  subsidiary  of LGV,  which also settled all  outstanding
legal disputes between the companies.

      In connection  with the  settlement,  LGV ceased  paying  royalties to the
Company. Simultaneously with the change in ownership of ACTV Entertainment,  the
1987 LGV exclusive  foreign license for Canada,  Europe and the Soviet Union was
changed  to a  non-exclusive,  royalty-free  license  to  manufacture  a set-top
terminal  with  compatible  ACTV  Programming  functionality  for  its  Videoway
service.


                                       2
<PAGE>


      The modified  license also allows LGV to produce ACTV  Programming for its
own Videoway  subscribers.  The license is subject to the condition that neither
LGV nor its  sub-licensees  receive  any  royalty or other fees with  respect to
Individualized Programming,  except for promotion and direct production expenses
paid by LGV. Any royalties  from third parties will be paid to the Company.  LGV
is not currently  producing  Individualized  Programming,  except in the London,
England cable systems that it recently sold.

  Board Policy and Corporate Structure of Subsidiaries

      The policy of the Company is and has been, as set forth in the  prospectus
relating to its initial public offering in May 1990, "to license [the Company's]
technology  and  arrange  joint  ventures  for its use in a number of  different
industries."  The Board of  Directors  has  adopted a plan to take effect in the
event  that an  entity  deemed  not  likely  to  further  such  policy or to act
inconsistently  with the best interests of all the Company's  shareholders seeks
to acquire or has  acquired  20% or more of the  Company.  The text of the Board
resolution relating to this issue is as follows:

      Resolved,  that it being in the best interests of the  Corporation and the
shareholders  of the  Corporation,  the Board of Directors  hereby  approves and
adopts a plan that, in the event that the Board of Directors  determines that an
acquirer has acquired,  or seeks to acquire,  20% or more of the Corporation and
that such  acquirer  is not a suitable  acquirer  since such  acquirer  will not
further  the  Corporation's  policy of acting  as a broad  licensor  of the ACTV
Individualized  Programming,  or is otherwise likely to act inconsistently  with
the  best  interests  of  all  the  Corporation's  shareholders,  the  Board  is
authorized to take all necessary  action  (including the hiring of an investment
banking  firm),  to offer,  by  invitation,  non-exclusive  licenses  to use and
exploit ACTV Individualized Programming.  The terms of such licenses may include
the payment of royalties  consisting of a significant  initial advance,  minimum
annual payments and/or a percentage of annual net sales, and shall be consistent
with, and no less favorable than, the terms of existing  licenses.  The Board is
authorized,  in its discretion, to employ an independent investment banking firm
for the purpose of evaluating the terms of such  licenses.  In the event that an
acquirer is identified and an auction is commenced, the Board reserves the right
to terminate  the auction at any time prior to the  Corporation's  entering into
the non-exclusive license agreement."

      The Board has  authorized  that each of the Company's  direct and indirect
subsidiaries (except Holdings) have two classes of common stock and one class of
preferred  stock.  The second class of common stock,  which is equivalent in the
number  authorized  to  20%  of  the  total  common  stock  authorized,  carries
"super-voting"  powers. It is the Board's policy that up to 20% of the equity of
the  Company's  direct  and  indirect  subsidiaries  (except  Holdings)  may  be
allocated to executive officers,  directors and employees of the Company and its
subsidiaries in  consideration  of services  rendered and to reward and motivate
executives.

      The  foregoing  may have  anti-takeover  effect  and may be used to delay,
discourage or prevent a change in control of the Company.

      Pursuant to such policy  Messrs.  Samuels,  Reese,  Crowley and Cline have
been  granted  options  to  purchase  Class B  Common  Stock of  certain  of the
Company's subsidiaries;  such common stock, if issued, will have majority voting
rights in such subsidiaries.

The Company

      The  Company's  Individualized   Programming  significantly  enhances  the
quality of most genres of television  programming by allowing the viewer to make
instant  and  seamless  changes  within  the  live  or  pre-recorded  television
programming  he or she is viewing.  Individualized  Programming  appears to be a
standard TV program,  but in fact is a multi-path  broadcast of several elements
of programming



                                       3
<PAGE>

material,  such as instant  replay,  isolation  cameras,  statistical  data,  or
alternative  story  lines.  There is no limit to the number of  viewers  who can
interact simultaneously with the Company's Individualized Programming. The chief
markets presently targeted by the Company for its Individualized Programming are
in-home entertainment,  particularly, sports programming, and education, with an
emphasis in the education market on distance learning and Internet applications.

      Individualized  Programming  is  achieved by the  viewer's  using a remote
control that is similar to a standard  remote  control,  but which contains four
extra  function  keys.  These keys allow  access to the  appropriate  path to be
selected.  For  example,  in sports  programming,  a viewer could use the remote
control  to select a display of  statistical  data,  to isolate  the camera on a
particular  player or to see an instant replay.  In game shows, the viewer could
use the remote control to answer the question being posed to the contestants; or
in a news broadcast, to select an in depth report on the news story. In the case
of live broadcasts,  the Company's producer is actually determining which player
should be covered by the  isolation  camera and an  announcer  can be  providing
commentary  related  to such  player  that is  different  than the  live  action
commentary. In prerecorded broadcasts, the various alternatives are pre-recorded
as part of the broadcast itself.

      The  Company's  Individualized  Programming  is designed to work with both
single and multiple  channels of 6 MHz band-width  and with  different  modes of
transmission,  including cable,  direct broadcast  satellite  ("DBS"),  wireless
cable,  broadcast systems and distance learning networks.  The Company's initial
emphasis  is to deploy  its  programming  over the  digital  cable and  wireless
systems that have upgraded their signal origination  facilities  (referred to in
the industry as "headends"). The Company's Individualized Programming is able to
be broadcast over the cable operator's  system and be received by the viewer who
has a digital set-top box into which the Company's  software  applications  have
been downloaded.

      The Company, working with the David Sarnoff Research Center ("Sarnoff"), a
world leader in the development of digital platforms,  has developed an approach
to integrating the Company's Individualized  Programming into digital television
set-top  terminals,  without  an  increase  in the  manufacturing  costs  of the
terminals. The Company is currently incorporating its Individualized Programming
into General Instrument Corporation's ("GI") MPEG-2 digital set-top terminal.

      The Company is seeking to exploit the entertainment market, principally in
the  U.S.,  through  the  launch  of  regionally  based  entertainment  networks
("Regional  Networks").   The  Company's  ability  to  develop   differentiated,
high-quality  branded  programming  in a digital  entertainment  environment  is
initially  based on its key  strategic  alliance with FOX Sports Net. FOX Sports
Net owns and operates  eight  regional  sports  affiliates in the United States,
which together provide more than 3,000 hours of live  programming  covering more
than 1,500  events  each year.  The Company has the rights to license FOX Sports
Net programming from each of FOX Sports Net's regional sports  affiliates and to
offer enhanced FOX Sports Net  programming to any  distributor  that carries the
corresponding  regional FOX Sports Net channel. The Company intends initially to
enhance FOX Sports  Net's  professional  and college  sports  programs  with its
Individualized  Programming  in the West and  Southwest  regions  of the  United
States. The Fox Sports Net agreement extends through June 2003.

      In the  education  market,  the Company has  developed  analog and digital
Individualized  Programming  for distance  learning  that  features  return path
capabilities.  The Company's distance learning system is a  point-to-multi-point
broadcast system that can deliver pre-recorded individualized lessons as well as
integrate  individualized  lessons  into  live  distance  learning  lessons.  In
addition,  the Company has begun  development  of the first  application  of its
planned  Java-based  software  suite,  "eSchool,"  that the Company expects will
permit an instructor to use the Internet as an accompanying  instructional  tool
during a live or pre-recorded video distance learning session.

      The Company operates directly and through wholly-owned  subsidiaries.  The
principal   subsidiaries  are  ACTV  Entertainment,   which  will  be  primarily
responsible  for  the  Company's  focus  in

                                       4
<PAGE>

the entertainment  market,  two subsidiaries that will operate regional networks
within FOX  Sports  Net  regions  in Texas and  Southern  California,  featuring
individualized  FOX  Sports Net  regional  programming,  and ACTV Net,  which is
responsible for the Company's education business.

      The  Company was  incorporated  under the laws of the State of Delaware on
July 24, 1989. The Company is the  successor,  by merger  effective  November 1,
1989, to ACTV, Inc., a California  corporation,  organized on July 11, 1983. The
Company's  executive  offices are located at 1270  Avenue of the  Americas,  New
York, New York 10020, telephone number (212) 262-2570.

Overview of the Cable and Wireless Cable Television Industries

      Cable television was introduced in the early 1950's to provide  television
signals to small or rural  towns  with few or no  available  off-air  television
signals  and to  communities  with  reception  difficulties  caused  by  terrain
problems. Since that time, the cable television industry has added non-broadcast
programming,  utilized  improved  technology  to increase  channel  capacity and
expanded its service  markets to include more densely  populated areas and those
communities  in which off-air  reception is not  problematic.  Enhanced  channel
capacity has increased the potential number of programming  offerings  available
to the subscriber and,  consequently,  increased the potential revenue available
per subscriber.  State-of-the-art  analog cable television systems are currently
capable of providing approximately 36 to 108 channels of programming.

      Cable  television  systems offer customers  various levels (or "tiers") of
basic cable service  consisting of off-air television signals of local networks,
independent and  educational  stations,  a limited number of television  signals
from    "superstations"     originating    from    distant    cities,    various
satellite-delivered,  non-broadcast  channels and certain programming originated
locally by the cable systems.  For an extra monthly  charge,  cable systems also
typically offer premium  television  services to their customers,  consisting of
satellite-delivered  channels  generally  providing  feature films,  live sports
events, concerts and other special entertainment features.

      A cable televisions system consists of two principal operating components:
one or more signal  origination  points  (headends),  which receive  television,
radio  and data  signals  that are  transmitted  by means of  off-air  antennas,
microwave relay systems and satellite earth stations,  and a signal distribution
system. Each headend includes a tower,  antennae or other receiving equipment at
a location  favorable  for  receiving  broadcast  signals  and one or more earth
stations that receives  signals  transmitted by satellite.  The headend facility
also houses the electronic equipment that amplifies,  modifies and modulates the
signals,  preparing them for passage over the system's network of cables.  Cable
television   systems  may  also  originate   their  own  programming  and  other
information services for distribution through the systems.

      The signal  distribution  system  consists of amplifiers  and trunk lines,
which  originate  at the  headend  and carry the signal to various  parts of the
system, smaller distribution cables and distribution amplifiers, which carry the
signal to the immediate  vicinity of the subscriber and drop lines,  which carry
the signal in to the  subscriber's  home. In the past several years,  many cable
operators  have used fiber  optic (in place of  co-axial  cable)  technology  to
transmit signals through the primary trunk lines.

      Cable  television is currently  available for purchase by more than 90% of
the approximately 98 million U.S.  television  households.  The cable television
industry  is  an  established   provider  of  multichannel   programming,   with
approximately 65% of total U.S. television households subscribing. Cable systems
typically  offer  up  to 80  channels  of  programming  at  an  average  monthly
subscription price of $33.

      The development of digital  transmission  and  compression  technology has
resulted in both  opportunities  and additional  competition for the traditional
cable television industry,  allowing for the


                                       5
<PAGE>

transmission  of a greater number of channels with better audio and video but at
the same time  facilitating  different modes of transmission,  such as satellite
and wireless transmission.

      In  response  to these  developments,  over  the past several years, cable
operators,  with access to sufficient financial resources,  have begun upgrading
their headends and other facilities to the digital platform. At the same time as
the cable  operators have begun the migration to the digital  platform,  DBS and
wireless  cable were being  developed.  Once digital  delivery is available to a
cable home it needs only an appropriately configured digital set-top terminal to
receive Individualized  Programming. GI has announced orders for approximately 4
million digital set-tops to date.

      Digital satellite  television  services use  communications  satellites to
transmit multichannel video programming directly to consumers,  who receive such
signals on home satellite dishes ("HSD").  With digital compression  technology,
each  frequency  channel can be  converted  on average  into five or more analog
channels  of  programming,   thereby  enabling  the  digital  satellite  service
operation  to  offer a  broader  variety  of  programming  choices  than  analog
satellite  systems and enabling  subscribers  of digital  satellite  services to
receive laser disc-quality picture and CD-quality sound from the satellite.

      The operator of a digital  satellite  television  service typically enters
into agreements with programmers,  who deliver their programming  content to the
digital  satellite  service operator via commercial  satellite,  fiber optics or
microwave  transmissions.  The  digital  satellite  service  operator  generally
monitors  such signals for quality,  and may add  promotional  messages,  public
service  programming  or other  system-specific  content.  The  signals are then
digitized,  compressed,  encrypted  and  combined  with  other  programming  and
necessary data streams (such as  conditional  access  information)  that share a
given transponder.  Each transponder's signal is then uplinked,  or transmitted,
to the  transponder  owned by the service  operator on the service's  satellite,
which receives and transmits the signal to HSDs configured to receive it.

      In order to receive  programming,  a  subscriber  requires  (i) a properly
installed HSD and related equipment, (ii) an integrated  receiver/decoder (known
as the "set-top box" or  "terminal"),  which  receives the data stream from each
broadcasting  transponder,   separates  it  into  separate  digital  programming
signals,  decrypts  and  decompresses  those  signals  that  the  subscriber  is
authorized  to receive and  converts  such  digital  signals  into analog  radio
frequency  signals,  and  (iii) a  television  set,  to view and  listen  to the
programming contained in such analog signals.




                                       6
<PAGE>


      Wireless cable operators include  multichannel,  multi-point  distribution
systems ("MMDS"),  which deliver programming services over microwave channels to
subscribers with special antennas, and other so-called "wireless cable" systems.
The number of wireless cable systems is likely to grow, as virtually all markets
have  been  licensed  or  tentatively  licensed,  and  developments  in  digital
compression  technology will significantly  increase the number of channels,  as
well as the  video  and audio  quality  of  wireless  cable  systems.  Moreover,
wireless  cable systems may provide their  customers with local  programming,  a
potential advantage over existing digital satellite television systems. In 1995,
several large telephone  companies  acquired  significant  ownership in numerous
wireless  cable  companies.  This  infusion  of money  into the  wireless  cable
industry can be expected to accelerate  its growth and its  competitive  impact.
However,  while it is anticipated  that most large wireless  operators backed by
local  telephone  companies  will  upgrade to digital  technology  over the next
several  years,  such  upgrades  will  require the  installation  of new digital
decoders in customers' homes and modifications to transmission facilities,  at a
potentially significant cost. Wireless cable also generally requires direct line
of sight from the receiver to the transmitter tower,  creating the potential for
substantial interference from terrain, buildings and foliage.

Business Strategies

For the in-home entertainment market, the Company's strategies are as follows:

Target  regions where the  operation's  headends are being  upgraded to digital.
Given its initial emphasis on digital  deployment,  the Company has specifically
targeted the West and  Southwest  regions of the United States for marketing and
providing its  Individualized  Programming;  many significant cable operators in
these regions have upgraded  their headends and have indicated that they will be
offering digital converter boxes to their subscribers.

Negotiate  and sign  affiliate  agreements  with cable  operators to provide the
Individualized  Programming to their subscribers.  The Company is in preliminary
discussions  with a number of cable operators with cable systems in the West and
Southwest  to sign  affiliate  agreements  to market and  provide to their cable
subscribers the option of receiving the Individualized Programming.  The Company
believes  that  its  programming   offerings  will  provide   operators  with  a
potentially  significant  source  of new  revenues  from a  completely  new  and
differentiated product offering to its subscribers.

Through a focused marketing  effort,  educate both cable operators and potential
subscribers  about the  benefits  of  Individualized  Programming.  The  Company
believes that, as cable  operators  become better educated about the benefits of
Individualized  Programming  and understand the additional  revenues that can be
earned by providing these offerings to their subscribers, the Company's revenues
and penetration rates will increase. As consumers and cable operators understand
how the  Company can  provide a  significantly  better way of viewing a sporting
event or news program, the Company believes its penetration rates will grow. Key
marketing  efforts  will  include:  (1) offering  the  Company's  Individualized
Programming  free of charge  for one month to  potential  new  subscribers;  (2)
cross-promotional  activities with other  programming  content providers such as
FOX Sports Net ; (3)  cross-promotional  activities with cable operators and (4)
traditional print media, television advertising, and other marketing strategies.

Keep programming costs low during the Company's first few years of operation and
expand  its  penetration  primarily  through  sports and news  programming.  The
Company believes that its enhanced sports and news  programming  content will be
the  primary  elements  in  attracting  new  subscribers  to its  Individualized
Programming.  As such, it is the Company's  intention to keep programming  costs
low by primarily focusing on just sports and news programming until cash flow is
sufficient to allow for

                                       7
<PAGE>


additional  programming such as music,  game shows, and other subjects to appeal
to potential  subscribers  who may be  interested in such program types and less
interested in sports and news programming.

In the  education  market,  the  Company  intends  to  implement  the  following
strategies:

Emphasize the  collaborative  development of program content.  The target market
for the Company's education products includes schools, state and local agencies,
universities  and private  business.  In addition to authoring  the software and
hardware necessary to implement the Company's  intranet and television  product,
the Company  provides content  development  services and services related to the
implementation of distance learning.

Create joint ventures with  customers to market the customer's  content to other
users.  The  education  programs  developed  by  customers  using the  Company's
Individualized  Programming in many instances have  application for others.  The
Company  intends to jointly  market such  programming to other  potential  users
along with the customer who has developed the Individualized Programming.

Develop  proprietary  content  programming.  The  Company  believes  that it can
develop  programming content that will have application for and marketability to
many potential customers.  The Company intends to create such programming either
in its  entirety,  or by  acquiring  rights to  existing  education  content and
adapting it to Individualized Programming.

Individualized Programming

      General

            The  Company's   process  of  creating   individualized   television
programming    involves   viewer   selection   from   a   multiple   number   of
frame-synchronized  video, graphics, and/or audio signals delivered at one time.
Viewers see and/or hear only one of the  signals at a given  moment;  the others
remain transparent.  Each viewer interacts with the programming  individually by
making selections or decisions using a traditional  remote control.  In response
to these keyed inputs, the Individualized  Programming  seamlessly switches from
one signal to another,  giving each viewer his or her appropriate response.  The
viewer cannot detect when such a switch takes place because it occurs with frame
accuracy.

      The  results  appear  seamless  and  uninterrupted  - for the  viewer  the
programming is completely individualized. Although an individualized program and
its associated branches are taped in a normal linear fashion, the program,  when
shown,  has  thousands  of  possible  variations  available  for each  viewer to
experience.  The particular version seen is based on each viewer's  individually
selected  preferences and inputs. An unlimited number of independent viewers can
interact with a program simultaneously.

      To develop Individualized  Programming the Company generally seeks to form
joint ventures or licensing  agreements  with producers of standard linear shows
or with networks that have rights to such shows.  Individualized Programming can
be  created  in a number of ways:  enhancing  existing  programs  that have been
produced in a standard linear format,  adding  "piggy-back"  branch alternatives
during the shooting of ongoing shows, or creating entirely original  productions
solely for use by the Company.

      The cost of the  Company  original  productions  is  higher  than a linear
version of the same program of comparative length. However, production costs are
significantly  lower than regular linear television shows when existing material
can be enhanced,  or when productions are "piggy-backed."  Production costs vary
significantly  based upon the nature and type of programming to be produced.  An
advantage of Individualized Programming is its higher repeatability, as compared
to standard


                                       8
<PAGE>

programming,  since an  individualized  program's  cost can be amortized  over a
greater number of showings.


      Entertainment Programming

      The Company's  business plan is to develop regional  television  networks,
offered by traditional distributors of television programming, that will feature
traditional   genres   of   programming.   The   differentiation   afforded   by
Individualized  Programming will allow distributors to offer their customers the
Company's  program's  on  a  subscription  basis.  The  regional  individualized
television networks will provide  distributors with the potential of significant
additional  revenue,  as well as an opportunity to  differentiate  their service
offerings and accelerate the deployment of digital set-tops.

      Examples of the Company's entertainment programming are:

      Sports.  Individualized sports will enable viewers to access elements that
enhance  each  game's  regular  coverage  during a live  event.  In hockey,  for
example,  the  Company's  Individualized  Programming  allows a viewer to select
features  like "Hit  Parade,"  a recap of the  game's  hardest  checks;  "Saving
Grace," a compilation  of the game's best saves;  "Star Cam," which  provides an
isolated view of a featured player;  "Goals-On-Demand," a compilation of all the
scores in the contest; plus in-depth Statistics and instant replay at anytime.

      News.  Individualized  Programming allows the viewer to go deeper into the
news  presented by the linear  program.  In the first section of an evening news
program,  viewers can access more information about the story they are watching,
calling up "datapoints" or additional facts about the story presented.  They can
also access maps, graphs,  charts, or other enhancements to the linear story. As
the program  continues,  viewers can choose among the linear  program,  expanded
coverage  of the  day's  top  stories,  or other  kinds of news  (international,
financial, etc.) in which they may have a particular interest.

      Game  Shows.  Individualized  Programming  allows  each viewer to actively
participate  in the game.  The viewer can  decide  which team to play on,  enter
answers and receive individualized responses to his or her choices. The system's
memory keeps viewers  informed of their  performance  throughout the program and
provides  final  results at the end of the show.  Advertisers  and  sponsors can
offer promotional premiums to the viewers with the best scores.

      Advertising.   Individualized  Programming  gives  television  advertisers
unique  opportunities  to target their  message  demographically.  By asking the
viewer  basic  questions  at  the  beginning  of  the  program,   Individualized
Programming can recall this  information  during a commercial break and send the
viewer the appropriate advertisement.  A second advantage for advertisers is the
concept of individualized commercials. For example, before a commercial break in
a sporting  event,  viewers  are asked which type of car they would like to see:
sedan,   pick-up   truck,   sport  utility  or  luxury   sedan.   The  Company's
Individualized  Programming  records  this  choice,  then  sends  the  requested
commercial  to  each  viewer.  This  same  choice  can be  recalled  at a  later
commercial break to provide additional information.  Individualized  Programming
stores the responses in the system memory and can trigger  branches based on the
accumulated  responses  at the end of the  program.  Advertisers  can  use  this
functionality of  Individualized  Programming to offer  promotional  premiums to
viewers based on their performance.


  Education

      The Company has  developed,  and is  continuing  the  development  of, new
two-way analog and digital programming  technologies for distance learning.  The
Company  offers  a   point-to-multipoint


                                       9
<PAGE>

broadcast  system that can deliver  pre-recorded  individualized  lessons or can
integrate  individualized segments into live distance learning lessons. By using
a simple remote  control,  the student is able to alter program  content to suit
specific needs and interests. Students receive individualized responses to their
input.  Moreover,  at the end of the lesson,  the system's memory  component can
recall each  student's  performance  and give the local  facilitator  a detailed
progress report.

      Distance learning ("DL") networks typically involve a teacher at a central
broadcasting  site  distributing a lesson to multiple  remote  classroom  sites.
Individualized  Programming tools allow the teacher to create questions or offer
choices  relating  to the lesson and  pre-record  individualized  responses.  At
selected  points in the lesson,  the DL teacher can initiate the  questions  and
interactions,  with each  student  across the network  receiving  individualized
responses. In addition,  Individualized  Programming gives the teacher immediate
feedback  on the  classes'  responses,  allowing  the teacher to pace the lesson
accordingly.  Additionally,  the Company's  planned  Java-based  software suite,
"eSchool,"  (described  below) will permit the  integration of the Internet with
video distance learning.

      The Company's distance learning system was commercially introduced with an
installation  in Georgia  beginning in late 1995.  The  Company's  contract with
Georgia was recently  extended and expanded for a second year.  In addition,  in
late 1996 the Company launched its first distance  learning project in the state
of Texas. The Company will deliver its  individualized  educational  programming
functionality  to 37  Texas  Workforce  Commission  ("TWC")  sites,  along  with
proprietary   software  and  training  that  will  facilitate  the  creation  of
Individualized Programming by TWC educators themselves.

      In 1995, the Company  signed an agreement with GI to allow  Individualized
Programming  for  distance  learning to be  integrated  with GI's  DigiCipher(R)
system.  The new  digital  system  will allow  programming  networks  to develop
Individualized Programming and distribute it digitally to their customers.

      In 1997, the Company began the  development of the first  applications  of
its planned Java-based software suite, "eSchool," which permits an instructor to
use the  Internet  as an  accompanying  instructional  tool  during a live video
distance learning  session.  (Java is a programming  language  developed for the
Internet  by  Sun  Microsystems.)  eSchool  functionality,   together  with  the
Company's  distance  learning  technology,  will  work  to  create  a  "virtual"
classroom.  eSchool  software  can be  used  for  pre-recorded  as  well as live
programming;  the video can come from any source. The Company expects to release
the first version of eSchool software to the market during the second quarter of
1997.

      The  Company  has  enhanced  127  educational  television  titles with its
Individualized  Programming and has distributed the programs in the kindergarten
to 12th grade  market.  The  programs  focus on reading,  math,  and  vocational
education.  Sales of these  products  represented  a majority  of the  Company's
revenue prior to the commercial  introduction of the distance  learning  system.
Education  products are marketed  through  both a direct and  distributor  sales
force.  The Company produced the educational  television  titles jointly through
license  agreements with Phoenix  Learning Group,  Bergwall  Productions,  Inc.,
Agency for Instructional  Technology,  AIMS Media, The Hasty Pudding Puppet Co.,
TakeOff, Video Educational Excellence and Turner Educational Services, Inc.

Programming Relationship with FOX Sports Net

      Recently,  the Company  completed a  successful,  18-month  Individualized
Programming  trial  in  greater  Los  Angeles.   The  Company's   Individualized
Programming  was  delivered  to 1,000  cable  subscribers  of the TCI of Ventura
County cable system.  FOX Sports West supplied sports programming to the Company
for the trial. Viewers participating in the trial were able to individualize FOX
Sports West offerings such as L.A.  Lakers  basketball,  L.A. Kings hockey,  and
California Angels baseball.


                                       10
<PAGE>


      FOX Sports Net is the domestic  telecasting  arm of the  worldwide  sports
alliance   recently   formed  between  News   Corporation,   Liberty  Media  and
TeleCommunications  Inc.  The  network  consists  of eight  owned  and  operated
regional  sports  affiliates  from coast to coast.  Combined,  FOX Sports  Net's
regional sports networks  provide more than 3,000 hours of live programming each
year,  covering  more than 1,500  events.  The FOX Sports Net regional  networks
offer their  programming for  distribution as a basic service - all homes served
by the distributor receive the service as part of the basic distributor fee.

      In December  1996 the  Company  and FOX Sports Net  entered  into a master
programming  agreement  that  extends  through  June 30, 2003 and covers all FOX
Sports Net  programming.  The agreement  grants the Company the right to license
FOX Sports Net programming  from each FOX Sports Net regional sports network and
rebroadcast  an  Individualized  Programming  version  of  the  program  in  the
respective FOX Sports Net regional territory. The Company intends to enhance FOX
Sports Net's  professional  and college sports programs with its  Individualized
Programming.  Under terms of the  agreement,  the Company has the right to offer
enhanced  FOX  Sports  Net  programming  to any  distributor  that  carries  the
corresponding  regional  FOX Sports Net  channel.  FOX Sports Net will receive a
share of  subscriber  fee and  advertising  revenue  generated by the  Company's
future individualized television networks located within FOX Sports Net regions.

      Based on the  success  of the  Individualized  Programming  trial in TCI's
Ventura  County  System,  as well as the  relationship  with FOX Sports Net, the
Company plans to launch the Regional  Networks  within the regions served by FOX
Sports  Southwest  and FOX Sports West.  Current plans are for the launch of the
Southwest  Regional  Network as early as the fourth quarter of 1997 and the West
Regional  Network  shortly   thereafter.   FOX  Sports   Southwest   distributes
programming to 5.1 million households in Texas,  Louisiana,  Arkansas,  Oklahoma
and nine  New  Mexico  counties,  while  FOX  Sports  West  serves  4.5  million
households in Southern California,  Hawaii and Clark County, Nevada. The planned
Regional  Networks,  like the recently  completed trial, will feature FOX Sports
Net regional programming enhanced by the Company's  Individualized  Programming.
Over time,  the Company will produce other  national  programming  and make such
programming available to the Regional Networks.  The Company will be responsible
for the  incremental  content,  transmission,  delivery and master control costs
incurred in connection with the enhancement of the Individualized Programming to
be presented through its Regional Networks.

      The Company has chosen the regions served by FOX Sports  Southwest and FOX
Sports West  because  the Company  believes  these  regions  will be among those
targeted  for the  initial  distribution  of  digital  set-top  boxes  by  cable
operators and wireless program providers.  Furthermore,  the Company will direct
initial  marketing of the Regional Networks toward those cable operators in each
respective FOX Sports Net regional market who are upgrading  their  distribution
facilities to digital and who buy digital set-top boxes.  Expansion could follow
either in additional FOX Sports Net regions or in other regional sports markets.

Production

        Entertainment

      The Company's entertainment programs are distributed to each region from a
master control facility,  which includes the necessary equipment to both produce
and  distribute  Individualized  Programming.  The master  control  facility for
Southern  California  was  constructed  in 1995 at the offices of TCI of Ventura
County in Westlake  Village,  California.  The Company has selected the facility
used by FOX Sports Southwest in Irving,  Texas as the site of the master control
in that region.  The Company  expects  this  facility to be  operational  by the
fourth quarter of 1997.




                                       11
<PAGE>


        Education

      The major  components of the Company's  intranet DL products are authoring
software,  which customers use to develop their own individualized programs, and
hardware  installed at the receiving site that connects  students to the system.
The  authoring  software is designed to enable a teacher to produce  lessons for
broadcast using a personal  computer,  video camera and other standard ancillary
hardware.  The Company provides training and support in the use of the authoring
software,  allowing the customer to produce individualized  education content in
its own facilities..

Product Development

  Current Development

      The  Company's  current  research  and  development  efforts  are  focused
primarily  on  digital   application  of  its  Individualized   Programming  and
Java-based  Internet software for the education market. The Company entered into
a  collaborative  agreement  in August  1995 with  Sarnoff  to  investigate  and
potentially  develop  digital  applications of its  Individualized  Programming.
Currently, the Company,  Sarnoff, and GI are working together to incorporate the
Company's  Individualized  Programming into GIs new MPEG-2 digital set-top cable
box ("DCT  1000").  The Company is also in the process of expanding  and further
refining   its    Individualized    Programming   to   incorporate    additional
functionalities  that can be used in the digital  cable  platform.  Research and
development of the Company's eSchool Java-based  software suite for the Internet
is expected to be on-going throughout 1997 and beyond.

  Functionality

      The set-top terminal receives  information from codes either embedded into
the video  program  material or delivered in a data  packet.  It thus  maintains
"memory" on the  progress of the viewer and  provides  automatic  branching.  At
appropriate  times  during  the  program,  the CPU  will  make  branch  switches
automatically,  accumulate  data,  recall  information,  create  graphics and/or
implement a pre-programmed set of instructions.

      In   single   channel   analog   (6  MHz  of   band-width)   applications,
Individualized  Programming can  individualize  audio and/or graphics,  based on
multiple  signals.  When additional analog channels of band-width are available,
video can be individualized as well.

      In  digital   systems,   multiple   video,   audio  and  graphics  can  be
individualized  in 6 MHz of  band-width.  Sarnoff has  developed  the  Company's
digital  applications  that will  enable the  implementation  of  Individualized
Programming   into  the   various   developing   digital   television   systems.
Individualized Programming can be delivered through any digital video system and
received  by a standard  digital  set-top  terminal  such as GI's DCT 1000.  The
Company's  software  application can be downloaded  into each set-top  terminal.
There is no  additional  memory or hardware  necessary  for  upgrading a digital
set-top terminal to allow it to deliver the Company's Individualized Programming
to subscribers.

      Individualized   Programming  can  be  transmitted   through  any  service
provider's  channel,  and can even be broadcast under the new digital television
standard recently approved by the FCC. Individualized Programming uses one 6 MHz
channel with 64 QAM, or 8VSB modulation techniques providing adequate data rates
to support  the  Company's  programming.  It is channel  independent  and can be
transmitted over any 6 MHz channel using any practical  modulation  scheme.  The
Company will create entertainment  content at its regional production facilities
and then  distribute  throughout  each  region  by means  of  several  different
delivery options,  including land lines and satellite.  The distribution  method
will be  determined  by the  geographical  nature of the region and the economic
viability of the different  delivery  techniques  available in each region.  The
Company  will  deliver to the


                                       12
<PAGE>

service provider a complete MPEG-2 compatible transport stream containing all of
the necessary information for the application to run properly in its system.

      The  Company's  signal is  received at the cable  operator's  distribution
facility by an appropriate  receiver.  The service  provider will simply have to
pass the signal through its CA  (Conditional  Access) system and send the signal
out to the customers.  Using  standard  MPEG-2  compression  techniques at a 4:1
compression  ratio,  the Company will provide its service through a single 6 MHz
channel. The Company does not require any back channel capability to support the
programming.  Individualized Programming creates an individualized look and feel
by using relational data base management and a very small amount of local memory
in order to create millions of possible combinations.

      The Company's  application  software  requires  approximately 25K bytes of
code space, either ROM (Read Only Memory),  PROM (programmable read only memory)
or EEPROM (Electrical Erasable PROM). The application requires a small amount of
scratch  pad  memory,  up to 2 KB of  RAM  (Random  Access  Memory).  While  the
Company's  software  does not require  NVRAM  (Non-volatile  RAM), up to 1 KB of
NVRAM might be necessary for any future back channel applications.

      Individualized  Programming  seamlessly switches the user through multiple
channels of video and audio in response to user inputs  throughout  the program.
The  switch  may be  delayed  as long as the  script  writer  chooses.  Seamless
switching is  accomplished  by using a subset of the MPEG-2 syntax for splicing.
With Individualized  Programming,  switching is simpler than creating a seamless
splice between two unrelated  video streams,  because it takes  advantage of the
fact that the video and audio encoders are co-located.

      The Company's  Individualized  Programming incorporates a command language
that is used to configure the set-top converter and control the information that
the user sees under specific  conditions.  The command language requires a small
amount of additional  bandwidth in the channel and approximately 2K bytes/sec of
additional data must be sent in a digital system.  When commands are received by
the application software running in the set-top converter, they are processed by
the software and the correct information is presented.

      The Company first introduced its Individualized  Programming  applications
for  entertainment  outside the United  States  through a 1987  license  with Le
Groupe  Videotron,  Ltd.  ("LGV"),  the second largest Canadian  cable/broadcast
television  company.  The license was modified in June 1993.  See "The  Company"
Certain Relationships with Subsidiaries Reorganization of ACTV Entertainment and
LGV Agreements."

Government Regulation.

      The Company believes that neither its present or future  implementation of
its  Individualized   Programming  is  subject  to  any  substantial  government
regulation.  However,  the broadcast industry in general,  and cable television,
DBS  and  wireless  communication  in  particular  are  subject  to  substantial
government regulation.

      Pursuant to an Act of  Congress  passed in 1992 (" 1992 Cable  Act"),  the
Federal Communications  Commission ("FCC") substantially  re-regulated the cable
television  industry in various areas  including  rate  regulation,  competitive
access to programming,  "must carry," and  retransmission  consent for broadcast
stations.  These rules, among other things, restrict the extent to which a cable
system may profit from, or recover  costs  associated  with,  adding new program
channels,  impose  certain  carriage  requirements  with  respect to  television
broadcast stations,  limit exclusivity  provisions in programming  contracts and
require prior notice for channel  additions,  deletions and changes.  The United
States Congress and the FCC also have under consideration, and may in the future
adopt new laws,  regulations  and  policies  regarding a wide variety of matters
which could, directly or indirectly,  materially adversely affect the operations
of the Company.




                                       13
<PAGE>


Set-Top Converters, Terminals, and Other Interactive Devices

      The Company does not intend to manufacture set-top converters,  terminals,
video servers, or other interactive devices.  This equipment will be supplied to
the Company pursuant to agreements between the Company and equipment suppliers.

      In April 1996,  the Company  and GI signed a  non-exclusive,  royalty-free
manufacturing  agreement for GI's MPEG-2  digital  terminal.  Sarnoff is working
with GI to integrate Individualized  Programming with this digital terminal. The
project is scheduled for completion in the second half of 1997. The Company also
has a non-exclusive, royalty-free manufacturing license with LGV that allows the
latter to incorporate the Company's  Individualized  Programming into its analog
set-top cable boxes.  The Company  intends to grant  licensees  similar to those
granted to GI and LGV to other  manufacturers  that are  selected  by the future
distributors of Individualized Programming.

      In the education market,  the Company has entered into an arrangement with
GI pursuant to which  Individualized  Programming for distance  learning will be
integrated with GI's DigiCipher system.  The new digital system,  which combines
the Company's Individualized  Programming and GI's DigiCipher System, will allow
programming  networks to develop the Company's  Individualized  Programming  and
distribute it digitally to their  customers.  The development of the new digital
distance  learning  system is scheduled for  completion in the second quarter of
1997.

      The Company has a  non-exclusive  agreement  with KDI Precision  Products,
Inc.  ("KDI") to  manufacture  the  Company's  classroom  and distance  learning
systems that incorporate  Individualized  Programming.  KDI sells the systems to
the Company at prices and in  accordance  with a delivery  schedule  agreed upon
from time to time.  KDI also is a distributor  of components  such as television
monitors, VCRs, remote controls,  printers and cabinets used in conjunction with
the systems.  The agreement renews  automatically for successive  one-year terms
unless terminated by either party on six-months' written notice.

      KDI is  currently  the only  manufacturer  of the  classroom  and distance
learning systems.  The Company believes that KDI can produce  sufficient systems
to meet the anticipated  needs of the Company in the education  marketplace.  In
the event that KDI were unable to supply the systems,  there can be no assurance
that the Company could produce  sufficient  systems or obtain sufficient systems
from another  manufacturer at an acceptable  price. The inability of the Company
to obtain  systems would have a material  adverse  affect on the business of the
Company.

      There  can  be no  assurance  that  the  Company  will  be  successful  in
developing additional manufacturing licenses.

Patents and Other Intellectual Property

      The  Company  has  sought  to  protect  the  proprietary  features  of its
Individualized    Programming   it   employs   through   patents,    copyrights,
confidentiality  agreements,  and trade  secrets  both in the United  States and
overseas.  As of the present time, the United States Patent and Trademark Office
has issued twelve patents,  with six additional  patents  pending.  The patents,
which deal with  different  aspects  of  Individualized  Programming,  expire at
various dates from 1998 to 2014.

      Corresponding patents for some of the above U.S. patents have been granted
or are pending in Canada, Japan,  Australia and the European Patent Office. When
a patent is  granted  by the  European  Patent  Office,  and upon the  filing of
appropriate  translations,  protection  will  be  available  in  the  designated
European  countries.  The Company  believes  such  patents will  strengthen  its
competitive position in the aforementioned countries.


                                       14
<PAGE>


      The  inventors  named on all of the patents  issued  have  assigned to the
Company all right,  title, and interest in and to the above U.S. patents and any
corresponding  foreign patents or applications based thereon.  In addition,  Dr.
Michael  Freeman,  the principal  inventor of  Individualized  Programming and a
current employee of the Company,  has agreed to assign to the Company the rights
and title in and to all future patents and  applications,  and any corresponding
foreign patents or application relating to the Individualized Programming.

      There  can be no  assurance  that  the  patents  held by the  Company  are
enforceable, particularly in view of the high cost of patent litigation, nor can
there be any assurance that the Company will derive any  competitive  advantages
therefrom.  To the extent  that  patents  are not issued for any other  products
developed by the Company, the Company would be subject to more competition.  The
issuance of patents may be insufficient to prevent  competitors from essentially
duplicating the Company's products by designing around the patented aspects.  In
addition,  there  can be no  assurance  that  the  Company's  products  will not
infringe on patents  owned by others,  licenses to which may not be available to
the Company, nor that competitors will not develop functionally similar products
outside the protection of any patents the Company has or may obtain.

      The Company  requires each of its employees,  consultants  and advisors to
execute a  confidentiality  and assignment of proprietary  rights agreement upon
the  commencement of employment or a consulting  relationship  with the Company.
These   arrangements   generally   provide  that  all  inventions,   ideas,  and
improvements  made or conceived by the individual  arising out of the employment
or consulting  relationship shall be the exclusive property of the Company. This
information  shall be kept  confidential  and not  disclosed  to third  parties,
except by consent of the Company or in other specified circumstances.  There can
be  no  assurance,   however,  that  these  agreements  will  provide  effective
protection   for  the  Company's   proprietary   information  in  the  event  of
unauthorized use or disclosure of such information.

Competition

      The business of providing  subscription and pay television  programming is
highly competitive.  The Company faces competition from numerous other companies
offering video, audio and data products and services. The Company's existing and
potential   competitors   comprise  a  broad  range  of  companies   engaged  in
communications and entertainment,  including cable programming providers,  cable
premium pay programming providers (such as HBO, Cinema, etc.), premier multiplex
pay channels  under the digital  format,  pay per view movies and special  event
offering,  television  networks,  home  video  products  companies,  as  well as
companies  developing new  technologies  and programming  concepts.  Many of the
Company's   competitors  have  greater  financial,   marketing  and  programming
resources  than the Company.  The Company  expects that quality,  uniqueness and
variety of programming,  quality of picture and service and cost will be the key
bases of competition, along with competition from other programming alternatives
that may provide new sources of revenue to cable operators.

      At the  present  time,  there are a number  of  different  new  television
technologies,  often labeled as interactive television, that have been developed
or are under development by others that might be considered competitive with the
Company's Individualized  Programming.  These new technologies,  in general, are
delivered via cable television,  or through play-along devices that are attached
to the  television  set.  To the best of the  Company's  knowledge,  none of the
point-to-multi-point  systems based on these  technologies  allows the viewer to
affect  what is seen on the  television  in the same  manner or to the extent of
Individualized Programming, which is unique in its approach and function.





                                       15
<PAGE>


EMPLOYEES

At December 31, 1996, the Company employed 26 full-time  employees.  The Company
believes that its relationships with its employees are generally satisfactory.

Item 2.     PROPERTY - OFFICES AND FACILITIES

      The Company  (including  its  subsidiaries)  maintains  its  principal and
executive offices at Rockefeller Center, 1270 Avenue of the Americas,  New York,
New  York,  where  it  leases  approximately  8,000  square  feet  at a rent  of
approximately  $22,200  per month  pursuant  to a lease that  expires in January
2001. The Company  maintains an engineering  staff and an editing studio at 1600
Broadway, New York, New York, where it leases approximately 2,500 square feet at
a rent of $3,450 per month,  pursuant to a lease that expires in December  1999.
The lease  agreement  provides for  cancellation by either party with no penalty
after  December 31, 1996.  In addition,  the Company  maintains  offices at 9454
Wilshire  Boulevard,   Beverly  Hills,   California,   which  are  leased  on  a
month-to-month  basis for  approximately  $1,350  per  month by The Los  Angeles
Individualized  Television Network, Inc. The Company believes it will require an
office in Texas and  greater  office  space in Southern  California,  as well as
television master control facilities in each of these areas to effect the launch
and operation of its planned regional  individualized networks in the respective
markets.  The Company believes its current facilities are suitable and adequate,
and that they provide the productive  capacity  necessary for the performance of
the operations of the Company.  None of the Company's  properties is leased from
affiliated persons.

Item 3.     LEGAL PROCEEDINGS

      There are no pending material legal  proceedings to which the Company is a
party.

Item 4.     SUBMISSION OF MATTERS TO A
            VOTE OF SECURITY HOLDERS

      On July 17, 1996 the Company held an Annual  Meeting of  Shareholders  for
which it solicited votes by proxy.  The following is a brief  description of the
matters  voted upon at the meeting  and a statement  of the number of votes cast
for and against, and the number of abstentions as to each matter.

1.    To approve an amendment to the Company's By-Laws to provide for the
election of directors to staggered terms.

        For          Against        Abstain
     6,142,468       339,897        96,700

2.    Election of directors:
                             For       Withheld

     William C. Samuels  10,970,518     92,385
     William A. Frank    10,976,918     85,985
     David Reese         10,983,118     79,785
     Steven W. Schuster  10,983,718     79,185
     Bruce Crowley       10,983,118     79,785
     Richard Hyman       10,983,718     79,185




                                       16
<PAGE>


3.  To  approve  an  amendment  to  the  Company's   Restated   Certificate   of
Incorporation  that would increase the authorized shares of the Company's Common
Stock to 35,000.

        For          Against        Abstain
     9,995,974       276,794        109,035

4.    To adopt the Company's 1996 Stock Appreciation Rights Plan.

        For          Against        Abstain
     5,337,077       687,706        497,265

5.    To adopt the Company's 1996 Stock Option Plan.

        For          Against        Abstain
     5,596,137       803,256        503,655

6.    To ratify appointment of Deloitte & Touche LLP as independent  auditors of
the Company.

        For          Against        Abstain
    10,524,583        28,735         85,585


PART II

Item 5.     MARKET FOR THE REGISTRANT'S COMMON
            EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's Common Stock is traded on the Automated  Quotation System of
the National  Association of Securities Dealers,  Inc. ("NASDAQ") and the Boston
Stock Exchange under the symbols "IATV" and "IAT",  respectively.  The following
table sets forth the high and low sale  prices for Common  Stock as  reported by
NASDAQ.

                           Common Stock

1996 Quarter               High       Low
                         --------------------

  First                     5 1/8     3 11/16
  Second                    4 9/16    3 1/2
  Third                     4 5/16    3 1/16
  Fourth                    3 27/32   2 11/16

1995 Quarter               High       Low
                         --------------------

  First                     6 5/8     3 3/8
  Second                    5 1/4     4
  Third                     5 3/4     3 7/16
  Fourth                    5 13/16   3 1/8

On March  24,  1997,  there  were  approximately  280  holders  of record of the
Company's 11,838,734 outstanding shares of Common Stock.

On March 24,  1997,  the  closing  bid and asked  prices of the Common  Stock as
reported by NASDAQ were $2 5/32 and $2 3/8, respectively.



                                       17
<PAGE>

The  Company has not paid cash  dividends  since its  organization.  The Company
plans to use  earnings,  if any,  to fund  growth  and does not  anticipate  the
declaration or the payment of cash dividends in the foreseeable future.

Item 6. SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>

                                                              Years Ended December 31,
                                         --------------------------------------------------------------------
                                           1992           1993          1994           1995           1996
                                           ----           ----          ----           ----           ----
<S>                                      <C>           <C>            <C>          <C>              <C>
Statement of Operations:

Revenues (1)                              $532,596      $164,602       $938,416     $1,311,860     $1,476,329
Operating Expenses (1)                   2,798,847     3,443,513      5,734,132      8,272,884     10,240,158
Equity in Net Loss of
ACTV Interactive (2)                       187,781       506,303        143,500             --             --
Loss Before Extraordinary
Item (3)                                 2,778,085     4,156,955      5,122,010      6,920,906      8,800,481
Net Loss (3)                             2,778,085     4,156,955      4,465,240      6,826,789      8,800,481
Weighted Average Shares
Outstanding                              4,665,686     5,800,134      7,897,278     10,162,128     11,739,768
Loss Per Common Share Before
Extraordinary Item (3)                        0.59          0.72           0.65           0.68           0.75
Net Loss Per Common
Share  (3)                                    0.59          0.72           0.57           0.67           0.75

Balance Sheet Data:                       12/31/92      12/31/93       12/31/94       12/31/95       12/31/96
                                          --------      --------       --------       --------       --------

Working Capital                           (104,486)    2,263,225      1,503,703      2,397,027      5,093,859
Total Assets                             3,146,503     5,920,720      7,733,314      8,551,128     11,692,624
Long Term Obligations                    1,792,794     2,220,794      2,325,061            --           --
Stockholders' Equity (4)                 1,006,314     1,910,603      3,972,543      6,893,853      9,201,068
Total Capitalization                     2,799,108     4,131,397      6,297,604      6,893,853      9,201,068

</TABLE>


(1)   For the period  between July 15, 1992,  and March 11, 1994,  all education
      sales  and  expenses  were  reported   separately  by  the  Company's  49%
      affiliate, ACTV Interactive,  and were not consolidated with the Company's
      statements of operations.  For the remainder of 1994,  operational results
      related to education were included with those of the Company,  as a result
      of the  Company's  March  11,  1994  purchase  of the Post  Company's  51%
      interest in ACTV Interactive.
(2)   The results of ACTV  Interactive are accounted for under the equity method
      of  accounting  for the years 1992 and 1993 and for the period  January 1,
      1994 to March 11, 1994.
(3)   Includes for the year ended  12/31/94 an  extraordinary  gain of $656,770,
      ($.08 per share) related to the extinguishment of debt and equipment lease
      obligations. Includes for the year ended 12/31/95 an extraordinary gain of
      $94,117  ($.01  per  share)   related  to  the   extinguishment   of  debt
      obligations.
(4)   No cash or  non-cash  dividends  have been paid or granted and the Company
      does not  anticipate  the  declaration  or  payment  of  dividends  in the
      foreseeable future.





                                       18
<PAGE>


Item 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS
                   OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE COMPANY

      To the extent that the  information  presented in this Form 10-K discusses
financial projections,  information or expectations about the Company's products
or markets,  or otherwise makes statements about future events,  such statements
are  forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ  materially from the statements made. These
include,  among others,  the successful and timely development and acceptance of
new products and markets and the  availability  of sufficient  funding to effect
such product and/or market development.

      ACTV,  Inc.  (the  "Company")  was  organized to develop and market ACTV's
Individualized   Programming,   which  permits  each  viewer  to  simultaneously
experience  individualized  television  programming.  Since its  inception,  the
Company has  incurred  operating  losses  approximating  $39.2  million  related
directly  to  the  development  and  marketing  of  the  ACTV's   Individualized
Programming.

      ACTV's Individualized Programming is designed to work with both single and
multiple  channels of 6 MHz band-width and with different modes of transmission:
cable, direct broadcast satellite ("DBS"), wireless cable, broadcast systems and
distance learning networks.  While it is compatible with one-way analog systems,
the Company's  emphasis is on the newer digital systems that have recently begun
to be deployed.

      ACTV's strategy is to generate  revenues from the sale of ACTV Programming
that it either  owns,  has  licensed  or that has been  created by a third party
under a license from ACTV,  including  fees paid by subscribers to premium cable
networks in which the Company has an ownership interest.

      The  chief   markets   presently   targeted  by  the  Company  for  ACTV's
Individualized  Programming  are  in-home  entertainment,   education  (with  an
emphasis  on  distance  learning  and  Internet   applications)  and  site-based
entertainment.  The Company seeks to exploit these  markets,  principally in the
U.S.,  through  licensing  its  Individualized  Programming,  by creating  joint
venture relationships, and by direct sales.

      In December  1996 the  Company  and Fox Sports Net  entered  into a master
programming  agreement  that  extends  through  June 30, 2003 and covers all Fox
Sports Net  programming.  The agreement  grants the Company the right to license
Fox Sports Net programming from each Fox Sports Net regional sports network. The
Company  intends to enhance Fox Sports  Net's  professional  and college  sports
programs with its Individualized Programming.

      Under terms of the agreement,  the Company has the right to offer enhanced
Fox Sports Net  programming to any  distributor  that carries the  corresponding
regional Fox Sports Net channel.  In each region, the Company and Fox Sports Net
will work together to develop innovative sports  programming,  which will be the
basis for differentiated programming services offered by the Company. Fox Sports
Net will receive a share of subscriber fee and advertising  revenue generated by
future ACTV  individualized  television  networks  located within Fox Sports Net
regions.

      Fox Sports Net is the domestic  telecasting  arm of the  worldwide  sports
alliance   recently   formed  between  News   Corporation,   Liberty  Media  and
TeleCommunications  Inc.  The  network  consists  of seven  owned  and  operated
regional sports affiliates from coast to coast.  Combined,  Fox Sports' regional
cable  networks  provide  more than 3,000 hours of live  programming  each year,
covering more than 1,200 events.

      The Company  recently  completed  a  successful,  18-month  individualized
regional  network  trial,  which began in the Los Angeles area in May 1995.  The
trial,  which  ran  through  the  end  of  1996,


                                       19

<PAGE>


provided ACTV  individualized  programming to 1,000 cable subscribers in Ventura
and Los  Angeles  Counties.  Sports  and news  programming  for the  trial  were
supplied  to ACTV by Fox  Sports  West and Cable  News  Network,  Inc.  ("CNN"),
respectively.  The  cable  operator  for the trial  was TCI of  Ventura  County.
Viewers  participating in the trial were able to  individualize  CNN's PrimeNews
program,  as well as Fox Sports-West  offerings such as L.A. Lakers  basketball,
L.A. Kings hockey, and California Angels baseball.

      Based  on the  success  of the Los  Angeles  trial,  the  Company  plans a
commercial launch of two individualized  networks (the "Regional Networks") over
the  next  twelve  months  within  Fox  Sports  regions  in Texas  and  Southern
California.  Fox Sports  Southwest  has 5.1 million  homes in Texas,  Louisiana,
Arkansas,  Oklahoma and nine New Mexico counties,  while Fox Sports West reaches
4.5 million subscribers in the region from Los Angeles to San Diego and Phoenix.
The planned Regional  Networks,  like the recently completed trial, will feature
individualized Fox Sports regional  programming.  The Company will produce other
national  programming,  such as news, and make such programming available to the
Regional Networks.  The Company will be responsible for the incremental content,
transmission,  delivery and master control costs incurred in connection with the
enhancement  of the  ACTV  Programming  to be  presented  through  its  Regional
Networks.

      In  March  1995,  the  Company  formed  The  Los  Angeles   Individualized
Television Network,  Inc., one of its wholly-owned  operating  subsidiaries,  to
operate  the  Company's  Southern  California  trial.  This  subsidiary  will be
responsible  for the launch and  operation  of planned the  Southern  California
regional network.  Similarly, the Texas Individualized Television Network, Inc.,
another  wholly-owned  operating  subsidiary  of the  Company,  will  launch and
operate the network  projected  for the Fox Sports  Southwest  region within the
same time frame.

      The Company  anticipates  that its Regional  Networks  will offer  premium
cable  programming   services  that  are   advertiser-supported,   with  monthly
subscription  prices  comparable to other U.S.  premium  channels.  Although the
Company's   intention  is  to  launch  the  Regional   Networks  over  the  next
twelve-month  period,  there is no  assurance  that it will  secure the  funding
necessary  to effect such  launches,  or that other  factors  might not delay or
prohibit the successful implementation of the plan.

      The Company will direct initial  marketing of the Regional Networks toward
the cable  operators in each  respective Fox Sports Net regional  market who are
buying digital set-top boxes.  Expansion  could follow in either  additional Fox
Sports  Net  regions  or in other  regional  sports  markets.  The  Company  has
established four new wholly-owned  subsidiaries that would serve as operators of
additional regional individualized networks covering the San Francisco, Chicago,
New York,  and Atlanta  regions in the event that the Company  decides to expand
and provide the  individualized  television  programming to other regions across
the U.S. To date, the four new wholly-owned subsidiaries have not engaged in any
business  activities.  The recently  complete trial, and the projected  Regional
Network  expansion,  is part of the Company's plan to develop the  entertainment
division of its business,  which to date,  does not generate any revenue for the
Company. There can be no assurance that the Regional Networks, even if launched,
will generate significant revenues for the Company.

      In January  1995,  the Company  granted an exclusive  license to Greenwich
Entertainment  Group ("The Greenwich  Group") for the use of its  Individualized
Programming in the theater environment,  specifically in shopping malls, museums
and entertainment  centers. ACTV owns approximately 15% of The Greenwich Group's
common stock.

      In  March  1988,  the  Company  formed  ACTV   Entertainment  Inc.  ("ACTV
Entertainment")  as an equal  shareholder  with Le Groupe  Videotron  ("LGV") of
Canada. The Company granted to ACTV Entertainment the exclusive right to use the
Company's  Individualized  Programming  in the United  States  DBS,  cable,  and
broadcast television markets.


                                       20
<PAGE>


      In June 1993, LGV withdrew from its ownership in ACTV  Entertainment,  and
the Company became the sole shareholder of ACTV Entertainment under the terms of
an agreement  with a subsidiary  of LGV.  While ACTV gained full  ownership  and
control of ACTV  Entertainment  in the  settlement,  it did agree to give up the
royalty  income it was receiving  from the analog set-top cable license with LGV
($3.00 per user per year).  Simultaneously  with the change in ownership of ACTV
Entertainment, the 1987 LGV exclusive foreign license for Canada, Europe and the
Soviet Union was changed to a non-exclusive, royalty-free license to manufacture
an analog set-top  terminal with compatible ACTV Programming  functionality  for
its Videoway service.

      The modified  license also allows LGV to produce ACTV  Programming  itself
for its own Videoway  subscribers.  The license is subject to the condition that
neither LGV nor its sub-licensees receive any royalty or other fees with respect
to ACTV Programming, except for promotion and direct production expenses paid by
LGV. Any royalties  from third parties will be paid  exclusively to ACTV. LGV is
not currently  producing ACTV Programming,  except in the London,  England cable
systems that it recently sold.

      The Company  continues to seek other licensees and joint venture  partners
both in and outside the United  States.  The Company is and will  continue to be
dependent  upon the ability of  licensees  and joint  venture  partners to offer
products and services that are commercially  viable, and to actively promote and
distribute its Individualized Programming.

      There can be no assurance  that the Company will be successful in reaching
agreements  with  licensees  and  joint  venture  partners,  that the  Company's
strategy of marketing its Individualized  Programming  through its licensees and
joint  venture  partners  will be  successful,  or that  the  methods  that  its
licensees  and  joint  venture  partners  choose to  market  the  Individualized
Programming will be successful.  Further,  the Company may be adversely affected
by the financial and business  considerations of its licensees and joint venture
partners.  Future  joint  venture and license  agreements  may provide  that the
licensees and joint venture partners will receive equity interest in the Company
and/or its subsidiaries.

      In July 1992,  the Company  entered into an agreement with a subsidiary of
the Washington  Post Company (the "Post  Company") to form ACTV  Interactive,  a
partnership  organized  for the  purpose  of  marketing  products  and  services
incorporating  Individualized  Programming  to the  education  marketplace.  The
subsidiary of the Post Company owned a 51% share.

      On March 11,  1994,  the Company  purchased  the Post  Company's  full 51%
interest in ACTV Interactive for consideration of $4.5 million.  The Company and
the Post Company agreed to the amount of such  consideration  after  arms-length
negotiations without receiving a valuation from a disinterested third party.

      For purposes of discussing  the combined  statements  of the Company,  its
subsidiaries, and ACTV Interactive, all intercompany items have been eliminated.




                                       21
<PAGE>


RESULTS OF OPERATIONS

Comparison of the Years Ended December 31, 1995 and December 31, 1996

      During the year ended  December 31, 1996  ("Fiscal  1996"),  the Company's
revenues  increased  13%,  to  $1,476,329,  from  $1,311,860  for the year ended
December 31, 1995 ("Fiscal 1995").  The increase was the result of significantly
higher  education  revenues  from  distance  learning  and  the  recognition  of
production  revenues  in the  more  recent  period  (compared  to no  production
revenues  in 1995),  which  more than  offset a small  decline  in  non-distance
learning education sales.

      Cost of sales increased 94% in Fiscal 1996, to $647,488 , from $334,136 in
Fiscal 1995, and cost of sales as a percentage of sales revenue increased to 44%
in the more recent year,  from 25% in 1995. The relatively  higher cost of sales
in Fiscal 1996 was due to a greater  proportion of total revenues generated from
lower margin equipment products and production  services,  as compared to Fiscal
1995's sales mix.

      Total expenses excluding cost of sales and interest expense in Fiscal 1996
increased 21%, to $9,592,670,  from $7,938,748 in the comparable period in 1995.
The  increase  was  attributable  to  higher  operating  expenses   (principally
resulting from the Company's regional  individualized  network trial in Southern
California),  greater research and development expenditures,  higher selling and
administrative  expenses,  and a valuation  allowance  of $274,325  for the full
amount of the Company's  investment in The  Greenwich  Group.  As a component of
Fiscal 1996  selling and  administrative  expenses  the  Company  also  reserved
$82,746  against  license  fee  and  production  service  receivables  from  The
Greenwich  Group.  The  Greenwich  Group has  experienced  difficulty in raising
sufficient  capital to fund its operations and growth and has been unable to pay
the Company for its services and license.

      In Fiscal 1996, direct expenses related to the entertainment and education
markets were approximately $2.5 million and $2.6 million, respectively.

      Depreciation and amortization  expense for Fiscal 1996,  decreased 24%, to
$846,351,  from  $1,113,278 for Fiscal 1995.  This decrease was due primarily to
the relatively higher depreciation  expense incurred in Fiscal 1995 that related
to set-top converters purchased for the California trial.

      The  Company's  interest  expense  for  Fiscal  1996,  decreased  to zero,
compared to $98,392 in the prior year.  The decrease was due to the repayment of
in full of the  Company's  debt  obligations  during 1995.  Interest  income for
Fiscal 1996 increased  15%, to $158,732,  compared with $138,510 in Fiscal 1995.
The increase  resulted from higher  available  average cash balances in the more
recent year.

      For the year ended December 31, 1996, the Company accrued $195,384 for the
payment of dividends to holders of convertible  preferred stock issued in August
1996 by one of its wholly-owned subsidiaries.

      For Fiscal 1996, the Company's net loss applicable to common  shareholders
was  $8,800,481  or $.75  per  share,  an  increase  of 29% over the net loss of
$6,826,789  or $.67 per share,  incurred in Fiscal 1995.  Included in the Fiscal
1995 net loss is an  extraordinary  gain of  $94,117,  or $.01 per  share as the
result of the extinguishment of certain obligations for value that was less than
the amounts recorded on the Company's books for such  obligations.  The increase
in net loss was due to increased operating,  selling and administrative expenses
and lower operating margins during the more recent year, as noted above.




                                       22
<PAGE>


Comparison of the Years Ended December 31, 1994 and December 31, 1995

      During the year ended December 31, 1995, the Company's  revenues increased
40%, to  $1,311,860,  from  $938,416 in the year ended  December 31,  1994.  The
increase  was the  result of higher  sales to the  education  market  and to the
Company's  recognition  in the more recent  period of the sales of its education
subsidiary,  ACTV Net, during the full year. Prior to the Company's  purchase on
March 11, 1994 of the  Washington  Post's 51%  interest in this  subsidiary,  in
which the Company  previously  owned the remaining 49% interest,  the results of
ACTV Interactive were accounted for under the equity method of accounting.  As a
result, the sales of ACTV Interactive during the period from January 1, 1994, to
March 11, 1994, were not included in the reported revenues of the Company.

      Cost of sales in the year ended December 31, 1995, was $334,136,  compared
to  $296,839 in the year ended  December  31,  1994.  All cost of sales for both
years were related to education  product sales. The Company's cost of sales as a
percentage  of sales  revenue  decreased  to 25% in 1995,  as compared to 31% in
1994.   The  decrease   during  the  more  recent   period  was  the  result  of
proportionately  greater sales of  programming,  which carries a higher  margin,
versus equipment.

      Total expenses  excluding  cost of sales and interest  expense in the year
ended December 31, 1995,  increased 46%, to $7,938,748,  from  $5,437,293 in the
comparable  period in 1994.  A  significant  factor  was the  increase  in stock
appreciation  rights  expense of over $1 million  during the year ended December
31, 1995,  due to a higher price of the Company's  stock at year end, as well as
to certain  exercises  during 1995. The increase was due also to higher research
and  development  expenses,  and  to  greater  selling  and  administrative  and
operating  costs  associated  with the May 1995 launch of the Company's  network
trial  in Los  Angeles.  A third  reason  for  the  increase  was the  Company's
recognition in the more recent period,  as explained  above,  of the expenses of
ACTV Interactive, which during a portion of 1994 were reported separately.

      Direct expenses  related to the  entertainment  market for the fiscal year
ended December 31, 1995 were  approximately  $1.4 million,  and direct  expenses
related to the education market for the fiscal year ended December 31, 1995 were
approximately $1.9 million.

      Depreciation  and  amortization  expense for the year ended  December  31,
1995,  increased 54%, to  $1,113,278,  from $798,559 for the year ended December
31, 1994.  This increase was the result of the greater  depreciation  expense in
the more recent period  relating to equipment  used in the Los Angeles trial and
to patents. In addition, the Company's amortization of goodwill arising from the
purchase of the Washington  Post's  interest in ACTV  Interactive  was higher in
1995 due to its  recognition  for the full  yearly  period,  as  compared to its
recognition in 1994 for the period from March 11, 1994 to December 31, 1994.

      The  Company's  interest  expense for the year ended  December  31,  1995,
decreased 57%, to $98,392,  compared to $226,671 in the prior year's  comparable
period.  The decrease was due to the repayment of in full of the Company's  debt
obligations  during 1995.  Interest  income in the year ended December 31, 1995,
increased  216%, to $138,510,  compared with $43,877 in the year ended  December
31, 1994. The increase  resulted from higher available cash balances in the more
recent period.

      For the year ended  December  31,  1995,  the  Company's  net loss  before
extraordinary  items was $6,920,906,  or $.68 per share, an increase of 35% over
the net loss of  $5,122,010,  or $.65 per share,  incurred  in the prior  year's
comparable  period. The Company recorded an extraordinary gain of $94,117 in the
year ended  December 31, 1995 and $656,770 in the year ended  December 31, 1994,
the result of the extinguishment of certain  obligations for value that was less
than the amounts recorded on the Company's books for such obligations.  Net loss
after  the  extraordinary  gain  for the  year  ended  December  31,  1995,  was
$6,826,789,  or $.67 per share as compared to $4,465,240, or $.57 per


                                       23
<PAGE>


share, for the year ended December 31, 1994. The increase in net loss was due to
principally to the increased  operating,  selling and  administrative  and stock
appreciation right expenses noted above during the more recent year.

Liquidity and Capital Resources

      Since its inception,  the Company  (including  its operating  subsidiaries
ACTV Entertainment,  ACTV Net, Inc., The Los Angeles  Individualized  Television
Network,  Inc., and 3D Virtual,  Inc.) has not generated revenues  sufficient to
fund its operations,  and has incurred  operating  losses.  Through December 31,
1996, the Company had an accumulated deficit of approximately $39.2 million. The
Company's  cash  position on  December  31,  1996,  was  $6,520,756  compared to
$3,531,782 on December 31, 1995.

      During the year ended  December 31, 1996,  the Company used  $7,560,486 in
cash for its  operations,  compared with  $5,098,477 for the year ended December
31, 1995.  The increase in the more recent year was due to higher  operating and
selling and administrative  expenses. The Company met its cash needs in the year
ended December 31, 1996 from the proceeds of a private placement of common stock
($1.9 million in net proceeds) and of convertible  preferred stock issued by its
wholly-owned subsidiary ($9.1 million in net proceeds). The Company met its cash
needs in the year ended  December 31, 1995,  principally  from the proceeds of a
series of sales of common stock to private investors  throughout the first three
quarters of the year  (aggregating  $9.0 million in  proceeds).  During the year
ended  December 31, 1995,  the Company used cash of  $2,247,469 to repay in full
both its short-term and long-term notes payable obligations.

      With respect to investing  activities in the year ended December 31, 1996,
the  Company  used  cash of  $444,189  related  to the  purchase  of  television
production  equipment and office  improvements.  In the year ended  December 31,
1995,  the  Company  used cash of  $575,323  related  principally  to  equipment
purchases for the California trial referred to above.

        ACTV  Entertainment,  ACTV  Net  and  The  Los   Angeles  Individualized
Television Network, Inc. and 3D Virtual, Inc. are dependent on advances from the
Company to meet their obligations.

      During  the  year  ended   December   31,  1996,   the  Company   advanced
approximately  $1.2  million  to ACTV Net and $2.4  million  to The Los  Angeles
Individualized   Television  Network,  Inc.  subsidiaries.   Advances  to  other
subsidiaries were minimal during 1996.

      Advances are based upon budgeted expenses and revenues for each respective
subsidiary.  Adjustments  are made  during the course of the year based upon the
subsidiary's performance versus the projections made in the budget.

      The  Company's  balance  sheet as of December 31, 1996,  also reflects the
accrual of expenses  of $701,517  related to the  Company's  stock  appreciation
rights plan. As compared to the Company's balance sheet as of December 31, 1995,
the  Company's  balance  sheet as of December 31, 1996,  reflects an increase of
$195,384 in  preferred  dividends  payable,  resulting  from the issuance of $10
million principal value of convertible preferred stock during August 1996.

      The Company believes that it may be required to expend  approximately $1.5
to $2.0 million during 1997 to facilitate the completion of current research and
development  projects,  relating  principally  to firmware  for digital  set-top
converter  boxes,   upgraded  software  for  its  entertainment  master  control
facilities and Internet software applications.

      Management of the Company  believes that its current funds will enable the
Company to finance its  operations  at their present level for at least the next
twelve  months.  Such  belief is based on  assumptions  that  could  prove to be
incorrect,  in which case the Company may require additional


                                       24
<PAGE>


financing  during  this  period.  Moreover,  the Company  believes  that it will
require  additional  funds of $25 - $35  million to launch and  operate  the two
Regional  Networks planned for the next twelve-month  period.  While the Company
has engaged an investment  bank for assistance in securing such  financing,  the
Company has no  commitments  from lenders or investors at this time and there is
no assurance that it will be able to raise the necessary  capital to effect such
launches.

      The Company does not have any material contractual commitments for capital
expenditures.

Impact of Inflation

      Inflation has not had any  significant  effect on the Company's  operating
costs.

Statement of Financial Accounting Standards No. 121.

      This statement,  "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of," which is effective for fiscal years  beginning  after December 15,
1995, did not have a material impact on the consolidated financial statements of
the Company.

Statement of Financial Accounting Standards No. 123 ("SFAS No. 123").

      This statement,  "Accounting for Stock-Based  Compensation,"  is effective
for fiscal years beginning  after December 15, 1995. The new standard  defines a
fair value  method of  accounting  for the  issuance of stock  options and other
equity instruments.  Pursuant to SFAS No. 123 companies are encouraged,  but not
required,  to adopt the fair value method of employee stock-based  transactions.
If the fair value method is not adopted for reporting purposes, the supplemental
pro forma  disclosures  are  required of the effect of the fair value  method on
operations and per share results.  The Company has decided not to adopt the fair
value method in its financial  statements  and to present the  supplemental  pro
forma information.

Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements are listed under Item 14 in this report.

Item 9.     DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

      None.

PART III

Item 10.    MANAGEMENT

Executive Officers and Directors

      The Company  intends to file with the Securities  and Exchange  Commission
within 120 days of the end of the  fiscal  year  covered by this  Report on Form
10-K  a  definitive  proxy  statement  (the  "Proxy  Statement"),   pursuant  to
Regulation 14A pertaining to the Annual  Meeting of  Stockholders  to be held in
May 1997.  Information regarding directors and executive officers of the Company
will appear under the caption "Election of Directors" in the Proxy Statement and
is incorporated herein by reference.




                                       25
<PAGE>


Item 11.    EXECUTIVE COMPENSATION

      Information regarding executive compensation will appear under the caption
"Executive  Compensation"  in the Proxy Statement and is incorporated  herein by
reference.

Item 12.    SECURITY OWNERSHIP OF CERTAIN
            BENEFICIAL OWNERS AND MANAGEMENT

      Information  regarding security ownership of certain beneficial owners and
management will appear under the caption  "Ownership of Securities" in the Proxy
Statement and is incorporated herein by reference.

Item 13.    CERTAIN TRANSACTIONS

      Information  regarding certain  transactions will appear under the caption
"Certain  Transactions"  in the Proxy  Statement and is  incorporated  herein by
reference.

PART IV

Item 14.    FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND
            REPORTS ON FORM 8-K:


(a)1. FINANCIAL STATEMENTS:

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

(a)2. FINANCIAL STATEMENT SCHEDULE

The following  Financial Statement Schedule for the year ended December 31, 1996
is filed as part of this Annual Report.  The Company had no activity  reportable
on this schedule for the years ended December 31, 1995 and 1994.

Schedule II - Valuation and Qualifying Accounts and Reserves

                    Column B            Column C           Column D    Column E
                  ----------     ----------------------   ----------   --------
                   Balance at  Charged to  Charged to                  Balance
                   Beginning    Costs and       Other   Deductions         End
Description        of Period     Expenses    Accounts    -Describe   of Period



Year ended
12/31/96:

Accounts
receivable             $--        $82,746      $--          $--        $82,746
allowance for
doubtful accounts

Reserve for
investment losses      $--       $274,325      $--          $--       $274,325





                                       26
<PAGE>


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

3.1.a         Restated Certificate of Incorporation of the Company.*
3.1.b         Amendment to Certificate of Incorporation of the Company.**
3.2           By-Laws of the Company.*
9.1           Voting Agreement dated November 11, 1994, by and between William
              C. Samuels and Michael J. Freeman.***
9.2           Voting Trust Agreement dated March 10, 1994 by and among William
              C. Samuels, The Washington Post Company and ACTV, Inc.**
10.1          First Amendment to Lease, dated December January 13, 1997 by and
              between the Registrant, as the Tenant, and Rockefeller Center
              Properties, as the Landlord.
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.*
10.6          1986 Non-qualified Stock Option Plan.*
10.7          Form of 1986 Non-qualified Stock Option Agreement.*
10.8          1996 Non-qualified Stock Option Plan.
10.9          1992 Stock Appreciation Rights Plan.
10.10         1996 Stock Appreciation Rights Plan.
10.11         Employment Agreement dated August 1, 1995, as amended January 1,
              1997 between the Company and William Samuels.
10.12         Employment Agreement dated August 1, 1995, as amended January 1,
              1997 between the Company and David Reese.
10.13         Employment Agreement dated 15th day of December, 1995, as amended
              January 1, 1997 between the Company and Bruce Crowley.
10.14         Master Programming License Agreement dated December 2, 1996, by
              and between the Company and Liberty/Fox Sports, LLC.
10.15         Enhancement License Agreement dated December 4, 1996, by and
              between the Company and Prime Ticket Networks, L.P., d/b/a Fox
              Sports West.****
10.16         Enhancement License Agreement dated February 28, 1997, by and
              between the Company and ARC Holding, Ltd., d/b/a Fox Sports
              Southwest.****
10.17         Agreement dated march 30, 1995 between General Instrument
              Corporation and the Company.***
10.18         Technical Services Agreement dated May 1995 between the David
              Sarnoff Research Center, Inc. and the Company.***
10.19         Option Agreement dated December 4, 1995 between the David Sarnoff
              Research Center and the Company.
10.20         Form of Option Agreement entered into by William Samuels, David
              Reese, Bruce Crowley and Christopher Cline in connection with the
              Series B Common Stock of ACTV Entertainment, Inc., ACTV Net, Inc.,
              Los Angeles Individualized Regional Network, Inc. and Texas
              Individualized Regional Network, Inc.
10.21(a)      deleted
10.21(b)      deleted
10.21(c)      Option Agreement dated September 29, 1995 between the Company and
              Richard H. Bennett.***
10.21(d)      Assignment dated September 29, 1995 between the Company and
              Richard H. Bennett.***
10.21(e)      Stock Option Agreement, dated as of December 1, 1995, amended
              March 24, 1997 by and between the Registrant and William C.
              Samuels.
10.21(f)      Stock Option Agreement, dated March 24, 1997, by and between the
              Registrant and William C. Samuels.


                                       27
<PAGE>



10.21(g)      Stock Option Agreement, dated as of March 24, 1997, by and between
              the Registrant and David Reese.
10.21(h)      Stock Option Agreement, dated as of December 1, 1995, amended
              March 24, 1997 by and between the Registrant and David Reese.
10.21(i)      Stock Option Agreement, dated as of March 24, 1997, by and between
              the Registrant and Bruce Crowley.
10.21(j)      Stock Option Agreement, dated as of December 1, 1995, amended
              March 24, 1997 by and between the Registrant and Bruce Crowley.
10.21(k)      Stock Option Agreement, dated as of March 24, 1997, by and between
              the Registrant and Christopher Cline.
10.22         Option Agreement, dated March 11, 1997, by and between the
              Registrant and The Washington Post Company.


27            Financial Data Schedule


*        Incorporated by reference from Form S-1 Registration Statement (File
         No. 33-34618)

**       Incorporated by reference to the Company'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.

****     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.


                                       28


<PAGE>




INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of ACTV, Inc.:

We have audited the accompanying  consolidated  balance sheets of ACTV, Inc. and
subsidiaries  ("the  Company")  as of December 31, 1996 and 1995 and the related
consolidated  statements of operations,  shareholders' equity and cash flows for
the years ended December 31, 1996,  1995, and 1994. Our audits also included the
financial  statement  schedule  listed  in the  index at Item 14  (a)(2).  These
financial  statements and financial statement schedule are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  consolidated  financial  position of the Company as of
December 31, 1996 and 1995 and the results of its  operations and its cash flows
for the years  ended  December  31,  1996,  1995,  and 1994 in  conformity  with
generally accepted accounting  principles.  Also, in our opinion,  the financial
statement  schedule,  when  considered  in  relation  to the basic  consolidated
financial statements taken as a whole,  presents fairly in all material respects
the information set forth therein.

DELOITTE & TOUCHE LLP


February 27, 1997
New York, New York


                                       F-1

<PAGE>


ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


           ASSETS
<TABLE>
<CAPTION>

                                                                  December 31,            December 31,
                                                                      1995                    1996
                                                               ----------------          ---------------
         Current Assets:
      <S>                                                         <C>                       <C>
      Cash and cash equivalents.......................             $3,531,782                $6,520,756
      Accounts receivable-net.........................                349,291                   410,193
      Education equipment inventory...................                112,218                   337,504
      Other                                                            61,011                   316,962
                                                               ----------------          ---------------
           Total current assets.......................              4,054,302                 7,585,415
                                                               ----------------          ---------------
      Property and equipment-net......................                416,895                   724,089
                                                               ----------------          ---------------
           Other Assets:
      Video program inventory.........................                214,824                        --
      Patents and patents pending.....................                268,980                   253,779
      Goodwill                                                      3,493,932                 3,067,560
      Other                                                           102,195                    61,781
                                                               ----------------          ---------------
           Total other assets.........................              4,079,931                 3,383,120
                                                               ----------------          ---------------
                Total   ..............................             $8,551,128               $11,692,624
                                                               ================          ===============
`
           LIABILITIES AND
           SHAREHOLDERS' EQUITY

    Current Liabilities:
      Accounts payable and accrued expenses...........             $1,090,392                $1,594,655
      Deferred stock appreciation rights..............                566,883                   701,517
      Preferred dividends payable.....................                     --                   195,384
                                                               ----------------          ---------------
           Total current liabilities..................              1,657,275                 2,491,556
   Shareholders' equity:
      Preferred stock, $.10 par value, 1,000,000
           shares authorized, none issued.............                     --                        --
      Convertible preferred stock, no par value,
                 436,000 shares authorized: issued and
           outstanding none at December 31, 1995,
                 400,000 at December 31, 1996.........                     --                 9,115,664
         Common stock, $.10 par value, 35,000,000
           shares authorized: issued and outstand-
           ing 11,396,419 at December 31, 1995,
              11,787,106 at December 31, 1996.........              1,139,642                 1,178,711
      Additional paid-in capital......................             36,686,742                38,272,205
      Notes receivable from stock sales...............               (567,500)                 (200,000)
      Accumulated deficit.............................            (30,365,031)              (39,165,512)
                                                               ----------------          ---------------
           Total shareholders' equity.................              6,893,853                 9,201,068
                                                               ----------------          ---------------
                Total.................................             $8,551,128               $11,692,624
                                                               ================          ===============


</TABLE>


                 See Notes to Consolidated Financial Statements

                                      F-2

<PAGE>


ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>


Year Ended December 31,                                                1994               1995                1996
                                                                    ---------          ----------          ----------

Revenues:
<S>                                                                 <C>                <C>                 <C>

   Sales revenues....................................                $928,640          $1,311,130          $1,459,540
   License fees from related party...................                      --                 730              16,789
   Royalties from related party......................                   9,776                  --                  --
                                                               -----------------   -----------------   -----------------
       Total revenues................................                 938,416           1,311,860           1,476,329

   Cost of Sales.....................................                 296,839             334,136             647,488
                                                               -----------------   -----------------   -----------------
       Gross profit..................................                 641,577             977,724             828,841

Expenses:

   Operating expenses................................                 890,871           1,260,134           1,955,601
   Selling and administrative........................               4,193,931           4,998,020           6,332,759
   Depreciation and amortization.....................                 446,092             686,906             419,979
   Amortization of goodwill..........................                 343,467             426,372             426,372
   Loss on investment................................                      --                  --             274,325
   Stock appreciation rights.........................                (437,068)            567,316             183,634
                                                               -----------------   -----------------   -----------------
       Total expenses................................               5,437,293           7,938,748           9,592,670

Interest (income)....................................                 (43,877)           (138,510)           (158,732)
Interest expense-- related parties...................                 226,671              98,392                  --
                                                               -----------------   -----------------   -----------------
   Interest expense (income) - net...................                 182,794             (40,118)           (158,732)

Loss before minority interest in equity
   of investee and extraordinary gain................               4,978,510           6,920,906           8,605,097
Interest in ACTV Interactive.........................                (143,500)                 --                  --
                                                               -----------------   -----------------   -----------------

Net loss before extraordinary
gain.................................................               5,122,010           6,920,960            8,605,097
Gain on extinguishment of debt and equipment lease
obligations..........................................                 656,770              94,117                   --
                                                               -----------------   -----------------   -----------------
Net loss.............................................               4,465,240           6,826,789            8,605,097
Preferred stock dividend.............................                      --                  --              195,384
Loss applicable to common stock
shareholders.........................................              $4,465,240          $6,826,789           $8,800,481
                                                               =================   =================   =================
Loss per common share before
extraordinary gain...................................                    $.65                $.68                 $.75

Loss per common share after
extraordinary gain...................................                    $.57                $.67                 $.75

Weighted average number of common shares
outstanding. ........................................               7,897,278          10,162,128            11,739,768

                                       See Notes to Consolidated Financial Statements

</TABLE>

                                      F-3

<PAGE>


ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                        Common Stock          Convertible Preferred Stock    Additional
                                   -------------------------   -------------------------       Paid-In
                                   Shares           Amount      Shares          Amount         Capital         Deficit
                                   ----------    -----------   ---------      ----------     -----------     ------------
<S>                                <C>            <C>          <C>            <C>            <C>             <C>
Balances January 1, 1994            6,507,799       $650,780          --              --     $20,332,825     $(19,073,002)
Issuance of shares in connection
with financing                        757,100         75,710          --              --       2,892,628            --
Issuance of shares in connection
with exercise of stock options        818,317         81,832          --              --       1,564,326            --
Issuance of shares in connection
with conversion of convertible
note                                  871,334         87,133          --              --       1,508,051            --
Issuance of shares for services        65,000          6,500                                     311,000            --
Net loss                                   --             --          --              --           --           (4,465,240)
                                   ----------     ----------   ---------      ----------     -----------     -------------
Balances December 31, 1994          9,019,550       $901,955          --              --     $26,608,830     $ (23,538,242)
                                   ==========     ==========   =========      ==========     ===========     =============
Issuance of shares in connection
with financings                     1,990,293        199,029          --              --       8,730,627            --
Issuance of shares in connection
with exercise of stock options        308,247         30,825          --              --       1,129,924            --
Issuance of shares for services        78,329          7,833          --              --         217,361            --
Net loss                                   --             --          --              --           --           (6,826,789)
                                   ----------     ----------   ---------      ----------     -----------     -------------
Balances December 31, 1995         11,396,419     $1,139,642          --              --     $36,686,742     $ (30,365,031)
                                   ==========     ==========   =========      ==========     ===========     =============
Issuance of shares in connection
with financings                       450,000         45,000    400,000        9,115,664       1,832,985
Issuance of shares for services        45,687          4,569                                     109,478
Reversal of option exercise          (105,000)       (10,500)                                   (357,000)
Net loss                                --                --          --              --              --        (8,800,481)
                                   ----------     ----------   ---------      ----------     -----------     -------------
Balances December 31, 1996         11,787,106     $1,178,711     400,000      $9,115,664     $38,272,205     $ (39,165,512)
                                   ==========     ==========   =========      ==========     ===========     =============

</TABLE>

                 See Notes to Consolidated Financial Statements.


                                      F-4


<PAGE>


ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

Year Ended December 31,                                           1994                 1995                 1996
                                                               ----------           ----------           ----------
<S>                                                            <C>                  <C>                  <C>
Cash flows from operating activities:
      Net loss applicable to common
      shareholders...................................          $4,465,240           $6,826,789           $8,605,097
                                                               ----------           ----------           ----------
Adjustments to reconcile net loss to net cash used in operations:
      Depreciation and amortization...................            789,558            1,220,873              846,354
      Stock appreciation rights.......................           (549,068)            (183,309)             134,634
      Gain on extinguishment of debt and equipment
      lease obligations...............................           (656,770)             (94,717)                  --
      Stock issued in lieu of cash
           compensation...............................            250,000              563,430              114,047
      Other                                                         1,151                   --                   --
      Loss on investment..............................                 --                   --              274,325
      Bad debt reserve................................                 --                   --               82,746
Changes in assets and liabilities:
      Accounts receivable.............................            (48,917)            (150,938)            (143,648)
      Education equipment inventory...................            (13,183)              34,065             (225,286)
      Other assets....................................             31,765               80,552             (542,824)
      Accounts payable and accrued expenses...........            404,733              165,023              504,263
      Interest payable................................            226,619               93,333                   --
      Loss from interest in ACTV Interactive..........            143,500                   --                   --
                                                               ----------           ----------           ----------

           Net cash used in operating
           activities.................................         (3,885,852)          (5,098,477)          (7,560,486)
                                                               ----------           ----------           ----------
Cash flows from financing activities:
      Proceeds from exercise of warrants
      and options.....................................          1,646,159              122,810                   --
      Proceeds from convertible preferred
      stock issuance..................................                 --                   --             9,115,664
      Proceeds from equity financing..................          2,968,338            8,951,859             1,877,985
      Equipment lease repayment.......................            (65,000)                  --                   --
      Discounted note prepayment......................                 --             (101,458)                  --
      Note repayment..................................                 --           (2,247,469)                  --
      Repayment pool principal repayment..............            (71,020)                   --                  --
                                                               ----------           -----------          ----------
Net cash provided by financing activities.............          4,478,477            6,725,742           10,993,649
Cash flows from investing activities:
      Cash acquired in acquisition of remaining
           interest in affiliate......................            672,160                   --                   --
      Cash paid for interest in affiliate.............         (2,500,000)                  --                   --
      Investment in patents pending...................           (142,122)                  --                   --
      Investment in property and equipment............             (1,686)            (575,323)            (444,189)
                                                               -----------          ----------           ----------
Net cash used in investing activities.................          (1,971,648)           (575,323)            (444,189)
                                                               -----------          ----------           ----------
Net (decrease) increase in cash and cash
equivalents     ......................................          (1,379,023)         (1,051,942)           2,988,974
      Cash and cash equivalents,
      beginning of period.............................           3,858,863           2,479,840            3,531,782
                                                               -----------          ----------           ----------
      Cash and cash equivalents,
      end of period...................................           2,479,840           3,531,782            6,520,756
                                                               ===========          ==========           ==========
</TABLE>


                 See Notes to Consolidated Financial Statements.
          Supplemental disclosure of cash flow information: See Note 15


<PAGE>


ACTV, INC. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization  ACTV, Inc.,  incorporated  July 8, 1983, and its subsidiaries (the
"Company"  or  "ACTV"),  were  organized  to develop  and  market a  proprietary
individualized    television   programming   technology   (the   "Individualized
Programming"),  which  permits  a  viewer  to  experience  instantly  responsive
television. Since its inception, the Company has been engaged in the development
of  Individualized  Programming,   the  production  of  programs  that  use  its
Individualized  Programming ("ACTV  Programming") and the marketing and sales of
the various  products and services  incorporating  the Company's  Individualized
Programming.

On July 14, 1992, the Company entered into an agreement with a subsidiary of The
Washington  Post  Company  (the  "Post  Company")  to form ACTV  Interactive,  a
partnership  organized  to  sell  products  and  services  using  the  Company's
Individualized Programming to the education marketplace. The Company contributed
its applicable Individualized Programming and the subsidiary of the Post Company
contributed  $2,500,000 in cash. As a result thereof,  the Company recognized an
increase of $1,225,000 in its additional  paid-in capital  representing  its pro
rata share in the equity of the joint venture.  The Company owned,  during 1993,
through its wholly owned  subsidiary ACTV Net, Inc. ("ACTV Net"),  formerly ACTV
Interactive,  Inc., a 49% interest in ACTV  Interactive,  and  accounted for its
investment under the equity method of accounting.  Furthermore,  under the terms
of a worldwide license,  the Company received a 5% royalty on sales made by ACTV
Interactive.

On March 11, 1994, the Company purchased the Post Company's full 51% interest in
ACTV  Interactive for $2.5 million in cash and a $2 million 8% note due December
31, 1996 (See Note 13). During 1995, in a series of payments, the Company repaid
in full  this  note and all  accrued  interest  thereon.  ACTV Net is  currently
dependent on advances and/or loans from the Company.

Principles of Consolidation - The Company's  consolidated  financial  statements
include  the  balances  of  its  wholly-owned   operating   subsidiaries,   ACTV
Entertainment, ACTV Net, The Los Angeles Individualized Television Network, Inc.
and 3D Virtual,  Inc. In  consolidation,  all intercompany  account balances are
eliminated.

Property  and  Equipment  - Property  and  equipment  are  recorded  at cost and
depreciated  on the  straight-line  method  over their  estimated  useful  lives
(generally  five years).  Depreciation  expense for the years ended December 31,
1994, 1995 and 1996 aggregated $6,207, $70,790 and 189,957, respectively.

Education  Equipment - Education  equipment  consists of distance  learning  and
classroom terminals,  videocassette recorders,  television monitors and computer
printers that the Company holds in inventory.  This  inventory is carried on the
Company's books at the lower of cost or market.

Patents and  Patents  Pending - The cost of  patents,  which for patents  issued
represents  the  consideration  paid for the  assignment of patent rights to the
Company by an employee and for patents  pending  represents  legal costs related
directly to such patents  pending,  is being amortized on a straight-line  basis
over the  estimated  economic  lives of the  respective  patents  (averaging  10
years),  which is less than the statutory  life of each patent.  The balances at
December 31, 1995, and 1996, are net of accumulated amortization of $101,170 and
$116,371, respectively.

Cash  Equivalents - The Company  considers  all highly  liquid debt  instruments
purchased  with  an  original  maturity  of  three  months  or  less  to be cash
equivalents.

Revenue  Recognition - Sales are primarily  recorded as products are shipped and
services are rendered, using the completed contract method of accounting.

Research and  Development  - Research and  development  costs,  which  represent
primarily refinements to the Programming Technology,  were $465,740 for the year
ended  December 31, 1994,  $616,455  for the year ended  December 31, 1995,  and
$1,221,362 for the year ended December 31, 1996.

                                      F-6

<PAGE>


Loss per Common  Share - Loss per common  share  equals net loss  divided by the
weighted average number of shares of Common Stock outstanding during the period.
The Company did not  consider  the effect of stock  options and the  Convertible
Preferred Stock upon the calculation of the loss per common share as it would be
anti-dilutive.

Reclassifications - Certain reclassifications have been made in the December 31,
1994,  and 1995,  financial  statements  to conform to the  December  31,  1996,
presentation.

Intangibles  - The excess of the purchase cost over the fair value of net assets
acquired in an  acquisition  (goodwill)  is being  amortized on a  straight-line
basis over a period of 10 years. On a quarterly basis, the Company evaluates the
realizability of goodwill based upon the expected undiscounted cash flows of the
acquired business.  Impairments,  if any, will be recognized through a charge to
operation  in the period in which the  impairment  is deemed to exist.  Based on
such analysis, the Company does not believe that goodwill has been impaired.

Long-Lived  Assets- In 1996, the Company adopted Statement of Financial Standard
No.  121,  which  requires  that  long-lived  assets  and  certain  identifiable
intangibles   be  reviewed  for  impairment   whenever   events  or  changes  in
circumstances  indicate  that the  carrying  amount of an asset may no longer be
recoverable.  Adoption of this  statement did not have a material  impact on the
Company.

2.      NATURE OF OPERATIONS

ACTV generates revenues from the sale of individualized ACTV Programming that it
either  owns,  has  licensed  or that has been  created by a third party under a
license from ACTV.  Currently,  the principal markets for the Company's products
are in-home  entertainment  and education (with an emphasis on distance learning
and  Internet  applications)  within the United  States  and  Canada.  Education
programming  and related  equipment  is sold to schools,  colleges,  and private
education networks.  In-home  entertainment  programming will be sold to the end
user through cable television systems on a subscription  basis, or through other
providers of television programming to home viewers, e.g., satellite,  telephone
company fiber networks, etc. No single client accounted for more than 10% of the
Company's  revenues during the year ended December 31, 1996,  except for Georgia
Public  Television,  which  accounted  for  approximately  11% and 17% of  total
revenues in 1995 and 1996, respectively.

3.      ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS

The  preparation  of the  Company's  financial  statements  in  conformity  with
generally accepted  accounting  principles required management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at December 31, 1996 and the
reported  amounts of revenues  and expenses  during the year ended  December 31,
1996. Actual results could differ from these estimates.

4.      PROPERTY AND EQUIPMENT - NET

Property and  equipment - net at December 31, 1995,  and 1996,  consisted of the
following (at cost):

                                        1995       1996
                                        ----       ----

Machinery and equipment             $477,213    $636,845
Office furniture and fixtures         10,472     357,373
                                      ------     -------

Total                                487,685     994,218

Less accumulated depreciation         70,790     270,129
                                      ------     -------
Total                               $416,895    $724,089
                                    ========    ========

                                      F-7

<PAGE>


5.      EXTRAORDINARY ITEM

On June 11, 1985,  the Company  entered  into a  Refinancing  and  Restructuring
Agreement  (the  "Plan")  providing  for the  termination  of  prior  agreements
relating to the  formation  of ACTV,  Inc. The Plan also stated that any amounts
owing by the Company to related  parties and other  creditors at the date of the
agreement  were the  responsibility  of the  Company.  Such  amounts  were to be
repayable solely from the "Repayment Pool",  which was defined as ten percent of
"available  cash flow" in excess of  $1,000,000  generated by the Company in any
given  calendar  year.  Available  cash flow was  defined as the excess of gross
revenues (excluding  financing proceeds) over certain cash expenditures.  During
1994,  the  Company,  in  separate  transactions  concluded  with all holders of
Repayment Pool obligations,  settled all outstanding  liabilities related to the
Repayment  Pool.  Average  consideration  paid by the Company in such settlement
transactions  was  approximately  17% of face value. For the year ended December
31, 1994, the Company  recognized an  extraordinary  gain of $620,898 related to
the Repayment Pool settlement transactions.

In addition,  for the year ended  December 31, 1994,  the Company  recognized an
extraordinary gain of $35,872 pursuant to an unrelated transaction.

6.      FINANCING ACTIVITIES

During  1996,  the  Company  raised  approximately  $11.0  million  net from the
proceeds of a private  placement of common stock ($1.9  million in net proceeds)
and of 5% convertible preferred stock (the "Convertible Preferred Stock") issued
by its wholly-owned  subsidiary ($9.1 million in net proceeds).  The Convertible
Preferred  Stock is  convertible  into  Common  Stock of ACTV,  Inc.,  beginning
January 1, 1997,  at  discounts  to the  market  price of the Common  Stock that
increase  from 14% in January  1997 to a maximum of 30.375% in  September  1997.
After September 1, 1997, holders of the Convertible Preferred Stock will be able
to use the lesser of (i) the then current  market price of the Company's  Common
Stock,  or (ii) an average  market  price during the month of August 1997 as the
price to which the 30.375%  discount is applied for  conversions.  In  addition,
beginning  in  October  1997,  the  Company  will have the  right to redeem  the
Convertible  Preferred  Stock at a price equal to $25 times the number of shares
being purchased,  plus accrued and unpaid  dividends (the  "Redemption  Price").
This right may be  exercised  by the Company  only if the  closing  price of the
Company's Common Stock is above $9.00 for thirty consecutive  trading days prior
to  redemption.  Notwithstanding  the foregoing,  any or all of the  Convertible
Preferred  Stock may be  purchased  by the  Company  from the holders at a price
equal to the  Redemption  Price times 1.43627 at any time prior to October 1997.
The  Company  believes  that  it is  highly  likely  that  the  holders  of  the
Convertible  Preferred Stock will elect to convert their stock into Common Stock
of the Company and, accordingly, has included the Convertible Preferred Stock in
its consolidated statement of shareholders' equity.

In March  1992,  the Company  issued to the Post  Company  $1,500,000  aggregate
principal   amount  of  units   represented  by  an  8%  convertible  note  (the
"Convertible  Note")  and  720,000  shares of the  Company's  common  stock (the
"Common Stock").  Also in March 1992, the Post Company  acquired  pursuant to an
option  agreement  (the "Option  Agreement") an option to purchase up to 750,000
shares of Common Stock at either $2.00 or $2.50 per share, depending on the date
of exercise. Both the conversion of the Convertible Note and the exercise of the
option were  dependent upon the occurrence of certain  events.  The  Convertible
Note required that 25% of the outstanding  balance be retired by March 17, 1994,
and  the  remaining   outstanding   balance  be  retired  in  three  semi-annual
installments.  The Company  recorded the fair market value of the common  shares
issued  ($720,000) as original  issue  discount,  and had been  amortizing  this
amount  over the life of the  Notes.  The  Convertible  Note  was  secured  by a
security interest as described in Note 13.

In  connection  with the Option  Agreement,  the Post Company also  received the
right to  purchase  from  the  Company  at a fair  market  exercise  price to be
determined  an amount of shares of Common  Stock  necessary to increase the Post
Company's  percentage  ownership of the total then outstanding  shares of Common
Stock to 51%.  Such right is  exercisable  through  March 17,  1997,  subject to
extension  in certain  circumstances.  Until March 17,  1995,  the Post  Company
agreed  not to  acquire  more  than 40% of the  Company  unless  certain  events
occurred, such as a tender offer, a proxy contest, or the acquisition by a third
party of in  excess  of 15% of the  Company's  common  stock,  as set forth in a
standstill agreement between the Company and the Post Company.

In March 1994, the Post Company  exercised its option to purchase 750,000 shares
at $2.00 per share, and converted the Convertible Note's principal, plus accrued
interest of $241,000, into 871,334 shares of the Common Stock.

                                      F-8

<PAGE>

During 1995, the Company repaid in full principal and interest  relating to a $2
million note issued in March 1994 pursuant to the Company's purchase of the Post
Company's 51% interest in ACTV  Interactive.  Upon repayment of this obligation,
the security interest described in Note 13 was canceled.

Management  of the  Company  believes  that its  current  funds will  enable the
Company to finance its  operations  at their present level for at least the next
twelve  months.  Such  belief is based on  assumptions  that  could  prove to be
incorrect,  in which case the Company may require  additional  financing  during
this period.  Moreover,  the Company  believes  that it will require  additional
funds of $25 - $35  million  to launch and  operate  the two  Regional  Networks
planned  for the next  twelve-month  period.  While the  Company  has engaged an
investment  bank for assistance in securing such  financing,  the Company has no
commitments  from  lenders or  investors  at this time and there is no assurance
that it will be able to raise the necessary capital to effect such launches.

7.      SHAREHOLDERS' EQUITY

At  December  31,  1996,  the Company had  reserved  shares of Common  Stock for
issuance as follows:


1989 Qualified Stock Option Plan               59,000
1989 Non-Qualified Stock Option Plan           46,500
1996 Qualified Stock Option Plan              212,500
Options granted outside of formal plans     3,010,718
                                            ---------

  Total                                     3,328,718

Preferred  Stock At December  31,  1996,  the Company  was  authorized  to issue
1,000,000 shares of Preferred  Stock,  par value $0.10 per share,  designated as
Series A Convertible  Preferred Stock (666,667  shares) and Series B Convertible
Preferred  Stock (333,333  shares).  No shares of Preferred Stock are issued and
outstanding.

Convertible  Preferred  Stock At December 31, 1996,  the Company's  wholly-owned
subsidiary,  ACTV  Holdings,  Inc. was  authorized  to issue  436,000  shares of
Convertible  Preferred  Stock, no par value, of which 400,000 shares were issued
and outstanding.

8.      STOCK OPTIONS

During 1989, the Board of Directors  approved an Employee Incentive Stock Option
Plan (the "Employee Plan"). The Employee Plan provides for the granting of up to
100,000  options to purchase  Common Stock to key  employees.  The Employee Plan
stipulates  that the option price be not less than fair market value on the date
of grant.  Options  granted will have an expiration date not to exceed ten years
from the date of grant.  At December 31, 1996,  100,000 options had been granted
under this plan,  of which 19,000 had been  exercised  and 22,000 had expired or
been canceled.

In addition,  in August 1989,  the Board of Directors  approved a  Non-Qualified
Stock Option Plan (the "Non-Qualified Plan"), to be administered by the Board or
a committee  appointed by the Board.  The  Non-Qualified  Plan  provides for the
granting  of up to  100,000  options  to  purchase  shares  of  Common  Stock to
employees,  officers,  directors,  consultants and independent contractors.  The
Non-Qualified Plan stipulates that the option price be not less than fair market
value at the date of grant,  or such  other  price as the  Board may  determine.
Options  granted  under  this  Plan  shall  expire on a date  determined  by the
committee  but in no event  later than three  months  after the  termination  of
employment or retainer.  At December 31, 1996,  100,000 options had been granted
under this plan,  of which 31,500 had been  exercised  and 22,000 had expired or
been canceled.

During 1996,  the Board of Directors  approved the  Company's  1996 Stock Option
Plan (the "1996 Option  Plan").  The 1996 Option Plan provides for option grants
to employees and others who provide significant  services to the Company.  Under
the 1996 Option Plan,  the Company is authorized to issue options for a total of
500,000 shares of Common Stock.  As of December 31, 1996, the Company had issued
224,500 options under the plan.

At December 31, 1995, the Company also had outstanding  options that were issued
to Directors,  certain  employees and  consultants for the purchase of 2,526,582
shares of Common  Stock  that were not issued  pursuant  to a formal  plan.  The
prices  of these  options  range  from  $1.03  to $5.50  per  share;  they  have
expiration  dates in the years 1996 through  2002.

                                      F-9

<PAGE>

The options granted are not part of the Employee  Incentive Stock Option Plan or
the Non-Qualified Stock Option Plan discussed above.

A summary of the status of the Company's  stock options as of December 31, 1996,
1995 and 1994 is as follows:

<TABLE>
<CAPTION>
                                         1996               1995              1994
                                         Wgtd.              Wgtd.             Wgtd.
                                          Avg.               Avg.              Avg.
                                1996     Exer      1995    Exer     1994      Exer
                               Shares    Price    Shares   Price   Shares     Price
                             ----------  -----  ---------  -----  ---------   -----
<S>                          <C>         <C>    <C>        <C>    <C>         <C>
Outstanding at beginning
of period                    2,747,082          1,605,104         2,196,531
Options granted                887,500   $3.73  1,706,087  $3.41    327,500   $5.21
Options exercised                    0      --    141,833  $2.33    818,316   $2.01
Options terminated             305,864   $3.76    422,276  $5.27    100,611   $5.57
Outstanding at end
of period                    3,328,718   $2.99  2,747,082  $3.27  1,605,104   $4.00
Options exercisable at end
of period                    1,719,134   $3.19  1,091,083  $3.04  1,338,437   $3.75
</TABLE>


The following table summarizes  information  about stock options  outstanding at
December 31, 1996

<TABLE>
<CAPTION>
                                Weighted Aver-
                                 age Remaining       Weighted                      Weighted
                        Number     Contractual          Aver-                         Aver-
                   Outstanding            Life   age Exercise          Number           age
       Range of             at                          Price  Exercisable at      Exercise
Exercise Prices       12/31/96                                       12/31/96         Price
---------------   ------------  --------------   ------------  --------------  ------------
  <S>                <C>             <C>                <C>         <C>               <C>
      0 to 1.50         22,000       1.8 Years          $0.56          17,000         $0.73
   1.51 to 3.75      2,839,218       4.9 Years          $2.76       1,269,052         $2.77
  3.76 to 5.625        467,500        1.0 Year          $4.48         420,000         $4.52
</TABLE>

The  weighted  average  fair value of options  granted  during 1995 and 1996 was
$1.69 and $1.21 per share, respectively,  excluding the value of options granted
and  terminated  within the year.  In the case of each  issuance,  options  were
issued at an exercise  price that was higher  than the fair market  value of the
Company's  Common  Stock on the date of grant.  The Company  applies  Accounting
Principles  Board Opinion No. 25 and related  Interpretations  in accounting for
its stock option and purchase plans. Accordingly,  no compensation cost has been
recognized for option issuances.  Had compensation cost for the Company's option
issuances been determined  based on the fair value at the grant dates consistent
with the method of FASB Statement 123, the Company's net loss and loss per share
for the year ended  December 31, 1995 and 1996 would have been  increased to the
pro forma amounts indicated below:


Net loss to common shareholders              1995              1996
                                             ----              ----
           As reported                   $6,826,789      $8,800,481
           Pro forma                     $9,506,556      $9,685,735

Net loss per common share                      1995            1996
                                               ----            ----
           As reported                        $0.67           $0.75
           Pro forma                          $0.94           $0.83

                                      F-10

<PAGE>

The Company  estimated the fair value of options  issued during 1995 and 1996 on
the date of each grant  using the  Black-Scholes  option-pricing  model with the
following  weighted-average   assumptions  used:  no  dividend  yield,  expected
volatility of 61.5% and a risk free interest rate of 6%.


9.      STOCK APPRECIATION RIGHTS PLANS

The  Company's  1992 Stock  Appreciation  Rights  Plan (the "1992 SAR Plan") was
approved by the Company's  stockholders in December 1992.  Subject to adjustment
as set forth in the 1992 SAR Plan,  the aggregate  number of Stock  Appreciation
Rights ("SARs") that may be granted shall not exceed 900,000.

The  Company's  1996 Stock  Appreciation  Rights  Plan (the "1996 SAR Plan") was
adopted by the Board of Directors in April 1996 and approved by the shareholders
in July  1996.  Subject  to  adjustment  as set forth in the 1996 SAR Plan,  the
aggregate number of SARs that may be granted pursuant to the 1996 SAR Plan shall
not exceed 500,000; provided,  however, that at no time shall there be more than
an aggregate of 900,000  outstanding,  unexercised SARs granted pursuant to both
the 1996 SAR Plan and the 1992 SAR Plan.  The 1996 SAR Plan  imposes no limit on
the number of recipients to whom awards may be made.

Both the 1992 and 1996 SAR Plans  are  administered  by the  Stock  Appreciation
Rights Committee (the "SAR Committee").

SARs may not be  exercised  until the six  months  from the date of grant.  SARs
issued  pursuant  to the 1992 SAR Plan vest in five  equal  annual  installments
beginning twelve months from the date of grant. SARs issued pursuant to the 1996
SAR Plan vest  either in a lump sum or in such  installments,  which need not be
equal,  as the Committee shall  determine.  If a holder of a SAR ceases to be an
employee, director or consultant of the Company or one of its subsidiaries or an
affiliate,  other than by reason of the holder's death or  disability,  any SARs
that have not vested shall become void. Exercise of SARs also will be subject to
such further  restrictions  (including limits on the time of exercise) as may be
required to satisfy the requirements of Rule 16b-3 promulgated by the Securities
and Exchange  Commission and any other applicable law or regulation  (including,
without limitation, federal and state securities laws and regulations). SARs are
not transferable except by will or under the laws of descent and distribution or
pursuant to a domestic  relations order as defined in the Internal  Revenue Code
of 1986, as amended..

Upon  exercise of a SAR,  the holder will receive for each share for which a SAR
is exercised,  as determined by the SAR Committee in its discretion,  (a) shares
of the Company's Common Stock, (b) cash, or (c) cash and shares of the Company's
Common  Stock,  equal to the  difference  between (i) the fair market  value per
share of the Common  Stock on the date of exercise of the SAR and (ii) the value
of a SAR,  which amount shall be no less than the fair market value per share of
Common Stock on the date of grant of the SAR.

Under the  Company's  1992 SAR Plan,  as of December 31,  1996,  the Company has
granted  683,000  outstanding  SARs (with exercise  prices of $1.50 or $2.69 per
share) to eleven employees.  The SARs expire between 1998 and 2006. During 1996,
a total of 16,000 SARs were exercised.  Under the Company's 1996 SAR Plan, as of
December 31, 1996,  the Company has granted  214,000  outstanding  SARs (with an
exercise price $2.69 per share) to eight employees.

10.     INCOME TAXES

The Company  accounts  for income taxes in  accordance  with the  provisions  of
Statement of Financial  Accounting  Standards  (SFAS) No. 109,  "Accounting  for
Income Taxes".

Deferred  income taxes  reflect the net tax effects at an effective  tax rate of
35.33% of (a) temporary  differences  between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes,

                                      F-11


<PAGE>


and (b)  operating  loss  and tax  credit  carryforwards.  The  tax  effects  of
significant items comprising the Company's net deferred tax asset as of December
31, 1995, and December 31, 1996, are as follows:

<TABLE>
<CAPTION>
                                                                     1995                1996
                                                                     ----                ----
<S>                                                              <C>                <C>
   Deferred tax assets:
          Operating loss carryforwards                           $10,192,638        $13,365,772
          Differences between book and tax basis of property          86,029             34,019
                                                                 -----------        -----------
                                                                  10,278,667         13,399,791
   Deferred tax liabilities:
          Differences between book and tax basis of property        (261,193)          (106,819)
                                                                 -----------        -----------
                                                                  10,017,474         13,292,972

   Valuation Allowance                                           (10,017,474)       (13,292,972)
                                                                 -----------        -----------
   Net deferred tax asset                                        $         0        $         0
                                                                 ===========        ===========
</TABLE>

The increase in the valuation  allowance  for the year ended  December 31, 1996,
was  approximately  $3.3 million.  There was no provision or benefit for federal
income taxes as a result of the net operating loss in the current year.

At December 31, 1996, the Company has Federal net operating  loss  carryovers of
approximately  $37.8  million.  These  carryovers  may  be  subject  to  certain
limitations and will expire between the years 1998 and 2010.

11.     COMMITMENTS

At  December  31,  1995,   future  aggregate  minimum  lease  commitments  under
non-cancelable   operating   leases,   which  expire  in  1999  and  2001,  were
approximately $1,097,660. The leases contain customary escalation clauses, based
principally on real estate taxes.  Rent expense  related to these leases for the
years ended December 31, 1994, 1995 and 1996 aggregated $169,457,  $176,264, and
$129,600  respectively.  The Company has employment  agreements with certain key
employees.  These agreements  extend for a period of a maximum of five years and
contain  non-competition  provisions which extend two years after termination of
employment  with the Company.  At December 31, 1996, the Company is committed to
expend a total of approximately $2.4 million under these agreements.

12.     CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentrations of
credit risk consist  principally of temporary cash  investments and receivables.
The  Company  attempts  to  mitigate  cash  investment  risks  by  placing  such
investments in insured depository accounts and with financial  institutions that
have  high  credit  ratings.  Concentrations  of  risk  with  respect  to  trade
receivables exist because of the relatively few companies or other organizations
(primarily  educational or government  bodies) with which the Company  currently
does business.  The Company attempts to limit these risks by closely  monitoring
the credit of those to whom it is  contemplating  providing  its  products,  and
continuing such credit  monitoring  activities and other  collection  activities
throughout  the  payment  period.  In certain  instances,  the  Company  further
minimizes  concentrations  of credit risks by requiring partial advance payments
for the products provided.

13.     PURCHASE OF REMAINING INTEREST IN SUBSIDIARY

On March 11, 1994, the Company purchased the Post Company's full 51% interest in
ACTV Interactive for  consideration of $4.5 million,  consisting of $2.5 million
in cash at closing  and a $2  million  note due  December  31,  1996,  (the "New
Note"). The New Note accrued interest at 8%, and specified required  prepayments
from net proceeds in excess of an  aggregate $5 million  received by the Company
in the event of subsequent  debt or equity  financing.  The principal of the New
Note was secured by certain collateral pursuant to a security agreement, through
which the Post Company acquired (a) a security  interest in and lien,  second in
priority,  with respect to the  collateral as to which the Company has granted a
first priority security interest pursuant to the Termination Agreement and (b) a
security  interest in and lien, first in priority,  with respect to any existing
United States patents and pending applications.  During 1995, the Company repaid
in full principal and interest  relating to the New Note. Upon repayment of this
obligation, the security interest described above was canceled.

                                      F-12

<PAGE>


14.    INVESTMENT AND ADJUSTMENTS

In  January  1995,  the  Company  granted  an  exclusive  license  to  Greenwich
Entertainment  Group ("The Greenwich  Group") for the use of its  Individualized
Programming in the theater environment,  specifically in shopping malls, museums
and entertainment centers.  During 1996, ACTV invested $274,325 in The Greenwich
Group's common stock (approximately 15% of ownership interest).

The agreement with The Greenwich Group provides for the Company to receive an 8%
to 10% royalty of annual ticket sales per theater, dependent upon each theater's
volume. The Greenwich Group has one theater operating,  and, at present,  is not
constructing  sufficient  theaters to meet the minimum  royalty  required by the
ACTV license agreement.  If the minimum royalty is not paid, the Company has the
right to cancel its license as to future  theaters  or to require the  Greenwich
Group to issue to ACTV such number of The Greenwich Group shares of common stock
of equivalent value.

The Company has also performed  executive  production services for The Greenwich
Group  on a fee  basis.  During  1996,  the  Company  recorded  license  fee and
production  service  revenue from The  Greenwich  Group of $16,789 and $199,666,
respectively.  At December 31, 1996, the Company had unpaid receivables pursuant
to such revenues of $82,746.

The Greenwich Group has experienced  difficulty in raising sufficient capital to
fund its  operations  and growth and has been  unable to pay the Company for its
services and  license.  Therefore,  at December 31, 1996 the Company  provided a
reserve  for the full  amount of the  receivables  outstanding  of $82,746 and a
valuation allowance for its full investment in The Greenwich Group of $274,325.

15.    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The consolidated  balance sheet at December 31, 1995, reflects non-cash activity
during the year ended  December 31, 1995,  that relates to the  acquisition of a
patent: a credit to shareholders'  equity of $110,000 for options issued but not
yet vested at a price below the prevailing market price on the date of issuance.
In addition,  the  consolidated  balance  sheet at December  31, 1995,  reflects
non-cash  activity  during  the  year  ended  December  31,  1995,  relating  to
non-recourse  loans made by the Company to certain  employees  in August 1995 to
purchase  the  Company's  Common  Stock  by  exercising   options:  a  debit  to
shareholders'  equity  of  $567,500.  The due  dates of the  non-recourse  loans
correspond with the respective expiration dates of the options exercised.

The consolidated  balance sheet at December 31, 1996, reflects non-cash activity
during the year ended  December 31, 1996,  that relates to a reversal of certain
of the option exercises and resulting  non-recourse loan transactions  described
above: a credit to shareholders' equity of $367,500.

The Company  made no cash  payments of interest or income taxes during the years
ended December 31, 1995 and 1996.


                                      F-13

<PAGE>

                                   SIGNATURES


Pursuant  to the  requirements  of  Section 13 or 15 (d) of the  Securities  and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned  thereunto duly authorized in the City of New York
and State of New York on the 27th day of March 1997.

                  ACTV, Inc.

                  By:  /s/William C. Samuels
                       ---------------------
                          William C. Samuels
                          Chairman and Chief Executive
                          Officer



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

<TABLE>
<CAPTION>

Signature                         Title                                                Date
---------                         -----                                                ----
<S>                               <C>                                                  <C>
/s/ William C. Samuels                                                                 March 27, 1997
----------------------
William C. Samuels                Chairman of the Board, Chief Executive
                                  Officer, President and Director

/s/ David Reese                                                                        March 27, 1997
---------------
David Reese                       Executive Vice President, President - ACTV
                                  Entertainment, Inc., and Director


/s/ Bruce Crowley                                                                      March 27, 1997
-----------------
Bruce Crowley                     Executive Vice President, President - ACTV
                                  Net, Inc., and Director

/s/ Christopher C. Cline                                                               March 27, 1997
------------------------
Christopher C. Cline              Vice President, Chief Financial Officer and
                                  Secretary

/s/ William Frank                                                                      March 27, 1997
William A. Frank                  Director

/s/ Richard Hyman                                                                      March 27, 1997
Richard Hyman                     Director

/s/ Jess Ravich                                                                        March 27, 1997
Jess Ravich                       Director

/s/ Steven W. Schuster                                                                 March 27, 1997
Steven W. Schuster                Director
</TABLE>
<PAGE>



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

                                    FORM 10-K

        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1996

                                   ACTV, Inc.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)







                                    EXHIBITS



<PAGE>



                                  EXHIBIT INDEX


3.1.a         Restated Certificate of Incorporation of the Company.*
3.1.b         Amendment to Certificate of Incorporation of the Company.**
3.2           By-Laws of the Company.*
9.1           Voting Agreement dated November 11, 1994, by and between William
              C. Samuels and Michael J. Freeman.***
9.2           Voting Trust Agreement dated March 10, 1994 by and among William
              C. Samuels, The Washington Post Company and ACTV, Inc.**
10.1          First Amendment to Lease, dated December January 13, 1997 by and
              between the Registrant, as the Tenant, and Rockefeller Center
              Properties, as the Landlord.
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.*
10.6          1986 Non-qualified Stock Option Plan.*
10.7          Form of 1986 Non-qualified Stock Option Agreement.*
10.8          1996 Non-qualified Stock Option Plan.
10.9          1992 Stock Appreciation Rights Plan.
10.10         1996 Stock Appreciation Rights Plan.
10.11         Employment Agreement dated August 1, 1995, as amended January 1,
              1997 between the Company and William Samuels.
10.12         Employment Agreement dated August 1, 1995, as amended January 1,
              1997 between the Company and David Reese.
10.13         Employment Agreement dated 15th day of December, 1995, as amended
              January 1, 1997 between the Company and Bruce Crowley.
10.14         Master Programming License Agreement dated December 2, 1996, by
              and between the Company and Liberty/Fox Sports, LLC.
10.15         Enhancement License Agreement dated December 4, 1996, by and
              between the Company and Prime Ticket Networks, L.P., d/b/a Fox
              Sports West.****
10.16         Enhancement License Agreement dated February 28, 1997, by and
              between the Company and ARC Holding, Ltd., d/b/a Fox Sports
              Southwest.****
10.17         Agreement dated march 30, 1995 between General Instrument
              Corporation and the Company.***
10.18         Technical Services Agreement dated May 1995 between the David
              Sarnoff Research Center, Inc. and the Company.***
10.19         Option Agreement dated December 4, 1995 between the David Sarnoff
              Research Center and the Company.
10.20         Form of Option Agreement entered into by William Samuels, David
              Reese, Bruce Crowley and Christopher Cline in connection with the
              Series B Common Stock of ACTV Entertainment, Inc., ACTV Net, Inc.,
              Los Angeles Individualized Regional Network, Inc. and Texas
              Individualized Regional Network, Inc.
10.21(a)      deleted
10.21(b)      deleted
10.21(c)      Option Agreement dated September 29, 1995 between the Company and
              Richard H. Bennett.***
10.21(d)      Assignment dated September 29, 1995 between the Company and
              Richard H. Bennett.***
10.21(e)      Stock Option Agreement, dated as of December 1, 1995, amended
              March 24, 1997 by and between the Registrant and William C.
              Samuels.
10.21(f)      Stock Option Agreement, dated March 24, 1997, by and between the
              Registrant and William C. Samuels.


<PAGE>


10.21(g)      Stock Option Agreement, dated as of March 24, 1997, by and between
              the Registrant and David Reese.

10.21(h)      Stock Option Agreement, dated as of December 1, 1995, amended
              March 24, 1997 by and between the Registrant and David Reese.

10.21(i)      Stock Option Agreement, dated as of March 24, 1997, by and between
              the Registrant and Bruce Crowley.

10.21(j)      Stock Option Agreement, dated as of December 1, 1995, amended
              March 24, 1997 by and between the Registrant and Bruce Crowley.

10.21(k)      Stock Option Agreement, dated as of March 24, 1997, by and between
              the Registrant and Christopher Cline.

10.22         Option Agreement, dated March 11, 1997, by and between the
              Registrant and The Washington Post Company.


27            Financial Data Schedule


*        Incorporated by reference from Form S-1 Registration Statement (File
         No. 33-34618)

**       Incorporated by reference to the Company'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.

****     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.