|  |
|--|
|  |
|  |

  

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

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**FORM 10-Q**

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|  | **QUARTERLY REPORT PURSUANT TO      SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--|--------------------------------------------------------------------------------------------------------|

**For the quarterly period ended June 30, 2002**

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

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| **Delaware**                                                   | **94-2907258**      |
|----------------------------------------------------------------|---------------------|
| (State or other jurisdiction of                                | (I.R.S. Employer    |
| incorporation or organization)                                 | Identification No.) |
|                                                           |                |
| **233 Park Avenue South**                                      |                |
| **New York, New York**                                         | **10003**           |
| (Address of principal executive offices)                       | (Zip Code)          |
|                                                           |                |
| **(212) 497-7000**                                             |
| (Registrant’s telephone number, including      area code) |

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

As of August 12, 2002, there were 55,931,181 shares of the    registrant’s common stock outstanding.

 

|  |
|--|
|  |
|  |

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**Item 1.  Financial Statements**

**ACTV, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

|                                                                                                                                                                     | **June 30, 2002** |         | **December 31, 2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------|--------------|---------------------------------|--------|
|                                                                                                                                                                     |                             |         |                                 |   |
| **ASSETS**                                                                                                                                                               | **(Unaudited)**             |         |                            |   |   |
| Current assets:                                                                                                                                                          |                        |         |                            |   |   |   |
| Cash and cash equivalents                                                                                                                                                | $                           | 46,623,473   |                            | $      | 69,035,707 |   |
| Short-term investments                                                                                                                                                   |                        | 17,632,019   |                            |   | 8,951,695 |   |
| Accounts receivable-net                                                                                                                                                  |                        | 1,208,149    |                            |   | 1,319,805 |   |
| Other                                                                                                                                                                    |                        | 1,818,373    |                            |   | 1,696,617 |   |
|                                                                                                                                                                     |                             |              |                            |        |  |   |
| Total current assets                                                                                                                                                     |                        | 67,282,014   |                            |   | 81,003,824 |   |
|                                                                                                                                                                     |                        |         |                            |   |   |   |
| Property and equipment-net                                                                                                                                               |                        | 5,272,041    |                            |   | 6,344,631 |   |
|                                                                                                                                                                     |                        |         |                            |   |   |   |
| Other assets:                                                                                                                                                            |                        |         |                            |   |   |   |
| Restricted cash                                                                                                                                                          |                        | 484,913      |                            |   | 484,913 |   |
| Investment in warrant                                                                                                                                                    |                        | 6,975,148    |                            |   | 16,255,355 |   |
| Investments-other                                                                                                                                                        |                        | 7,426,414    |                            |   | 7,397,776 |   |
| Patents and patents pending                                                                                                                                              |                        | 8,496,520    |                            |   | 8,425,889 |   |
| Software development costs                                                                                                                                               |                        | 5,652,852    |                            |   | 5,310,100 |   |
| Goodwill                                                                                                                                                                 |                        | 12,935,701   |                            |   | 12,935,701 |   |
| Other                                                                                                                                                                    |                        | 1,308,343    |                            |   | 1,429,132 |   |
|                                                                                                                                                                     |                             |              |                            |        |  |   |
| Total other assets                                                                                                                                                       |                        | 43,279,891   |                            |   | 52,238,866 |   |
|                                                                                                                                                                     |                             |              |                            |        |  |   |
| Total assets                                                                                                                                                             | $                           | 115,833,946  |                            | $      | 139,587,321 |   |
|                                                                                                                                                                     |                             |              |                            |        |  |   |
|                                                                                                                                                                     |                        |         |                            |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                            |                        |         |                            |   |   |   |
| Current liabilities:                                                                                                                                                     |                        |         |                            |   |   |   |
| Accounts payable and accrued expenses                                                                                                                                    | $                           | 3,489,051    |                            | $      | 5,664,088 |   |
| Deferred revenue                                                                                                                                                         |                        | 3,653,444    |                            |   | 4,068,450 |   |
|                                                                                                                                                                     |                             |              |                            |        |  |   |
| Total current liabilities                                                                                                                                                |                        | 7,142,495    |                            |   | 9,732,538 |   |
|                                                                                                                                                                     |                        |         |                            |   |   |   |
| Deferred revenue                                                                                                                                                         |                        | 65,156,732   |                            |   | 66,966,638 |   |
| Minority interest                                                                                                                                                        |                        | 1,509,252    |                            |   | 3,215,652 |   |
|                                                                                                                                                                     |                        |         |                            |   |   |   |
| Stockholders’ equity:                                                                                                                                               |                        |         |                            |   |   |   |
| Common stock, $0.10 par value, 200,000,000 shares authorized:      issued and outstanding 55,929,560 at June 30, 2002 and 55,881,938 at December 31,      2001 |                        | 5,592,956    |                            |   | 5,588,194 |   |
| Additional paid-in capital                                                                                                                                               |                        | 311,468,567  |                            |   | 317,496,700 |   |
| Stockholder loans                                                                                                                                                        |                        | (204,499     | )                               |   | (339,035 | ) |
| Accumulated deficit                                                                                                                                                      |                        | (274,831,557 | )                               |   | (263,073,366 | ) |
|                                                                                                                                                                     |                             |              |                            |        |  |   |
| Total stockholders’ equity                                                                                                                                          |                        | 42,025,467   |                            |   | 59,672,493 |   |
|                                                                                                                                                                     |                             |              |                            |        |  |   |
| Total liabilities and stockholders’ equity                                                                                                                          | $                           | 115,833,946  |                            | $      | 139,587,321 |   |
|                                                                                                                                                                     |                             |              |                            |        |  |   |

*See notes to consolidated financial statements.*

2

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**ACTV, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited)**

|                                                                                     | **For the Three Months Ended June 30,** |        | **For the Six Months Ended June 30,** |   |
|------------------------------------------------------------------------------------------|----------------------------------------------|-------------|--------------------------------------------|--------|
|                                                                                     |                                              |             |                                            |        |  |   |  |  |  |  |  |   |
|                                                                                     | **2002**                                     |        | **2001**                                   |   | **2002** |   | **2001** |   |
|                                                                                     |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| Revenues                                                                                 | $                                            | 3,233,518   |                                       | $      | 4,226,452 |   | $ | 6,419,939 |   | $ | 7,499,894 |   |
|                                                                                     |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                                      |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Selling, general        and administrative                                               |                                         | 8,553,363   |                                       |   | 12,657,243 |   |   | 14,603,779 |   |   | 26,746,378 |   |
| Depreciation        and amortization                                                     |                                         | 1,399,491   |                                       |   | 1,466,813 |   |   | 2,704,952 |   |   | 2,886,335 |   |
| Amortization        of goodwill                                                          |                                         | —      |                                       |   | 1,042,308 |   |   | — |   |   | 1,460,806 |   |
| Stock-based        compensation reduction                                                |                                         | —      |                                       |   | (4,121,649 | ) |   | (6,002,831 | ) |   | (2,819,155 | ) |
|                                                                                     |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| Total costs        and expenses                                                          |                                         | 9,952,854   |                                       |   | 11,044,715 |   |   | 11,305,900 |   |   | 28,274,364 |   |
|                                                                                     |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
|                                                                                     |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Loss from operations                                                                     |                                         | (6,719,336  | )                                          |   | (6,818,263 | ) |   | (4,885,961 | ) |   | (20,774,470 | ) |
|                                                                                     |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Interest income                                                                          |                                         | 413,037     |                                       |   | 1,171,229 |   |   | 701,577 |   |   | 2,791,638 |   |
|                                                                                     |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Other (expense)/income                                                                   |                                         | (6,820,334  | )                                          |   | 12,955,697 |   |   | (9,280,207 | ) |   | 4,220,285 |   |
|                                                                                     |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
|                                                                                     |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| (Loss)/income        before minority interest and cumulative effect of accounting change |                                         | (13,126,633 | )                                          |   | 7,308,663 |   |   | (13,464,591 | ) |   | (13,762,547 | ) |
| Minority interest - subsidiaries                                                         |                                         | 917,584     |                                       |   | 819,157 |   |   | 1,706,400 |   |   | 1,513,771 |   |
|                                                                                     |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| (Loss)/income        before cumulative effect of accounting change                       | $                                            | (12,209,049 | )                                          | $      | 8,127,820 |   | $ | (11,758,191 | ) | $ | (12,248,776 | ) |
| Cumulative        transition effect of adopting SFAS No. 133                             |                                         | —      |                                       |   | — |   |   | — |   |   | (58,732,197 | ) |
|                                                                                     |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
|                                                                                     |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Net (loss)/income                                                                        | $                                            | (12,209,049 | )                                          | $      | 8,127,820 |   | $ | (11,758,191 | ) | $ | (70,980,973 | ) |
|                                                                                     |                                              |             |                                       |        |  |   |  |   |  |  |   |
|                                                                                     |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Net (loss)/income per share:                                                             |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Basic                                                                                    |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Before cumulative        effect of accounting change                                     | $                                            | (0.22       | )                                          | $      | 0.15 |   | $ | (0.21 | ) | $ | (0.23 | ) |
| Cumulative        transition effect of adopting SFAS No. 133                             |                                         | —      |                                       |   | — |   |   | — |   |   | (1.08 | ) |
|                                                                                     |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| Basic net        (loss)/income per share                                                 | $                                            | (0.22       | )                                          | $      | 0.15 |   | $ | (0.21 | ) | $ | (1.31 | ) |
|                                                                                     |                                              |             |                                       |        |  |   |  |   |  |  |   |
|                                                                                     |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Diluted                                                                                  |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Before cumulative        effect of accounting change                                     | $                                            | (0.22       | )                                          | $      | 0.14 |   | $ | (0.21 | ) | $ | (0.23 | ) |
| Cumulative        transition effect of adopting SFAS No. 133                             |                                         | —      |                                       |   | — |   |   | — |   |   | (1.08 | ) |
|                                                                                     |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| Diluted net (loss)/income per share                                                      | $                                            | (0.22       | )                                          | $      | 0.14 |   | $ | (0.21 | ) | $ | (1.31 | ) |
|                                                                                     |                                              |             |                                       |        |  |   |  |   |  |  |   |
|                                                                                     |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Shares used in basic calculations                                                        |                                         | 55,936,341  |                                       |   | 55,916,619 |   |   | 55,910,282 |   |   | 54,147,428 |   |
|                                                                                     |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Shares used in diluted calculations                                                      |                                         | 55,936,341  |                                       |   | 60,107,307 |   |   | 55,910,282 |   |   | 54,147,428 |   |

*See notes to consolidated financial statements.*

3

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**ACTV, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

|                                                                     | **For the Six Months Ended June      30,** |        |
|--------------------------------------------------------------------------|--------------------------------------------|-------------|
|                                                                     |                                            |        |
|                                                                     | **2002**                                   |        | **2001** |   |
|                                                                     |                                            |        |  |   |
| Cash flows from operating activities:                                    |                                       |        |   |   |   |   |
| Net loss                                                                 | $                                          | (11,758,191 | ) | $ | (70,980,973 | ) |
| Adjustments        to reconcile net loss to net cash used in operations: |                                       |        |   |   |   |   |
| Cumulative        transition effect of adopting SFAS No. 133             |                                       | —      |   |   | 58,732,197 |   |
| Change        in fair value of warrant                                   |                                       | 9,280,207   |   |   | (4,220,285 | ) |
| Depreciation        and amortization                                     |                                       | 2,704,952   |   |   | 4,347,141 |   |
| Deferred        compensation - other                                     |                                       | —      |   |   | 75,000 |   |
| Stock-based        compensation                                          |                                       | (6,002,831  | ) |   | (2,819,155 | ) |
| Amortization        of deferred revenue                                  |                                       | (1,809,906  | ) |   | (1,809,906 | ) |
| Common stock        issued in lieu of cash payment                       |                                       | 89,156      |   |   | 1,767,275 |   |
| Deferred        revenue                                                  |                                       | (415,006    | ) |   | 138,304 |   |
| Minority interest                                                        |                                       | (1,706,400  | ) |   | (1,513,771 | ) |
|                                                                     |                                       |        |   |   |   |   |
| Changes in assets and liabilities:                                       |                                       |        |   |   |   |   |
| Accounts        receivable                                               |                                       | 111,656     |   |   | (1,528,965 | ) |
| Other assets                                                             |                                       | (106,676    | ) |   | (2,097,101 | ) |
| Accounts        payable and accrued expenses                             |                                       | (2,175,037  | ) |   | (957,675 | ) |
|                                                                     |                                            |             |   |  |  |   |
| Net cash used        in operating activities                             |                                       | (11,788,076 | ) |   | (20,867,914 | ) |
|                                                                     |                                            |             |   |  |  |   |
|                                                                     |                                       |        |   |   |   |   |
| Cash flows from investing activities:                                    |                                       |        |   |   |   |   |
| Investment        in short-term investments                              |                                       | (8,680,324  | ) |   | — |   |
| Investment        in patents                                             |                                       | (399,687    | ) |   | (567,499 | ) |
| Investment        in property and equipment                              |                                       | (831,599    | ) |   | (5,892,035 | ) |
| Investment        in software development costs                          |                                       | (708,750    | ) |   | (2,192,252 | ) |
| Strategic        investments                                             |                                       | (28,638     | ) |   | (5,217,349 | ) |
|                                                                     |                                            |             |   |  |  |   |
| Net cash used        in investing activities                             |                                       | (10,648,998 | ) |   | (13,869,135 | ) |
|                                                                     |                                            |             |   |  |  |   |
|                                                                     |                                       |        |   |   |   |   |
| Cash flows from financing activities:                                    |                                       |        |   |   |   |   |
| Transfer to        restricted cash                                       |                                       | —      |   |   | (1,066,278 | ) |
| Net proceeds        from equity financings                               |                                       | 6,089       |   |   | 106,320 |   |
| Repayment        of stockholders loans                                   |                                       | 18,751      |   |   | 35,910 |   |
|                                                                     |                                            |             |   |  |  |   |
| Net cash provided        by/(used in) financing activities               |                                       | 24,840      |   |   | (924,048 | ) |
|                                                                     |                                            |             |   |  |  |   |
|                                                                     |                                       |        |   |   |   |   |
| Net decrease in cash and cash equivalents                                |                                       | (22,412,234 | ) |   | (35,661,097 | ) |
| Cash and cash        equivalents, beginning of period                    |                                       | 69,035,707  |   |   | 122,488,041 |   |
|                                                                     |                                            |             |   |  |  |   |
| Cash        and cash equivalents, end of period                          | $                                          | 46,623,473  |   | $ | 86,826,944 |   |
|                                                                     |                                            |             |   |  |  |   |

**Supplemental Disclosure to the Consolidated Statements of Cash Flows**

The following schedule provides additional information concerning retirement of common stock and acquisitions:

|                                  | **For the Six Months Ended June 30,** |    |
|---------------------------------------|--------------------------------------------|---------|
|                                  |                                            |    |
|                                  | **2002**                                   |    | **2001** |   |
|                                  |                                            |         |   |  |  |   |
| Retirement of Common Stock:           | $                                          | 115,786 |   | $ | 1,520,000 |   |
| Purchase Acquisitions:                |                                       |    |   |   |   |   |
| Assets acquired      (excluding cash) |                                       | —  |   |   | 2,089,071 |   |
| Liabilities      assumed              |                                       | —  |   |   | 2,695,524 |   |
| Market value      of shares issued    |                                       | —  |   |   | 27,475,090 |   |

*See notes to consolidated financial statements.*

4

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**ACTV, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(Unaudited)**

|                                                                                | **Common Stock** |       | **Stockholder      Loans** |      | **Additional      Paid in      Capital** |   | **Accumulated      Deficit** |   | **Total** |        |
|-------------------------------------------------------------------------------------|------------------|------------|----------------------------|-----------|------------------------------------------|--------|------------------------------|--------|-----------|-------------|
|                                                                                     |
| **Shares**                                                                          |             | **Amount** |
|                                                                                |                  |       |                            |      |                                          |   |                              |   |           |        |  |   |
| Balance at December 31, 2001                                                        | 55,881,938       |       | $                          | 5,588,194 |                                     | $      | (339,035                     | )      | $         | 317,496,700 |   | $ | (263,073,366 | ) | $ | 59,672,493 |   |
|                                                                                |             |       |                       |      |                                     |   |                         |   |      |        |   |   |   |   |   |   |   |
| Issuance of        shares in connection with exercise of stock options and warrants | 25,374           |       |                       | 2,537     |                                     |   | —                       |   |      | 3,552       |   |   | — |   |   | 6,089 |   |
|                                                                                |             |       |                       |      |                                     |   |                         |   |      |        |   |   |   |   |   |   |   |
| Adjustment to deferred stock compensation                                           | —           |       |                       | —    |                                     |   | —                       |   |      | (6,002,831  | ) |   | — |   |   | (6,002,831 | ) |
|                                                                                |             |       |                       |      |                                     |   |                         |   |      |        |   |   |   |   |   |   |   |
| Issuance of common stock for 401k plan                                              | 67,141           |       |                       | 6,714     |                                     |   | —                       |   |      | 82,442      |   |   | — |   |   | 89,156 |   |
|                                                                                |             |       |                       |      |                                     |   |                         |   |      |        |   |   |   |   |   |   |   |
| Retirement of common stock                                                          | (44,893          | )          |                       | (4,489    | )                                        |   | —                       |   |      | (111,296    | ) |   | — |   |   | (115,785 | ) |
|                                                                                |             |       |                       |      |                                     |   |                         |   |      |        |   |   |   |   |   |   |   |
| Rescission/repayment of shareholder loans                                           | —           |       |                       | —    |                                     |   | 134,536                      |   |      | —      |   |   | — |   |   | 134,536 |   |
|                                                                                |             |       |                       |      |                                     |   |                         |   |      |        |   |   |   |   |   |   |   |
| Net loss                                                                            | —           |       |                       | —    |                                     |   | —                       |   |      | —      |   |   | (11,758,191 | ) |   | (11,758,191 | ) |
|                                                                                |                  |       |                            |           |                                     |        |                              |   |           |             |   |  |  |   |  |  |   |
|                                                                                |             |       |                       |      |                                     |   |                         |   |      |        |   |   |   |   |   |   |   |
| Balance at June 30, 2002                                                       | 55,929,560       |       | $                          | 5,592,956 |                                     | $      | (204,499                     | )      | $         | 311,468,567 |   | $ | (274,831,557 | ) | $ | 42,025,467 |   |
|                                                                                |                  |       |                            |           |                                     |        |                              |   |           |             |   |  |  |   |  |  |   |

*See notes to consolidated financial statements.*

5

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTSTHREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001**

**1.**  **Basis of Presentation**

The results of operations for the three months ended June 30, 2002 and 2001 are not necessarily indicative of a full year’s operations. In the opinion of management, the accompanying consolidatedfinancial statements include all adjustments of a normal recurring nature, which are necessary to present fairly such financial statements.

All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the financial statements prepared inaccordance with generally accepted accounting principles have been condensed or omitted.

These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December31, 2001.

We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Certain reclassifications have been made to the prior years’ financial statements to conform to the 2002 presentation.

**2.**  **Recent Accounting  Pronouncements**

In July 2001, the FASB issued Statement of Financial Accounting    Standard No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets,    effective for fiscal years beginning after December 15, 2001. Under SFAS 142,    goodwill and intangible assets deemed to have indefinite lives will no longer    be amortized but will be subject to annual impairment tests. Other intangible    assets will continue to be amortized over their useful lives. We adopted SFAS    142 beginning on January 1, 2002. We completed the transitional goodwill impairment    test as required by SFAS 142 using a measurement date of January 1, 2002.    Based on the results of the transitional impairment test, we were not required    to recognize an impairment of goodwill. We will continue to perform future    impairment tests as required by SFAS 142. There can be no assurance that future    impairment tests will not result in a charge to earnings.

The following pro forma information for the three and six months ended June 30, 2001 presents net income/loss and income/loss per common share adjusted to exclude goodwill amortization expense of $1,042,308and $1,460,806 recognized respectively during the periods.

|                                    | **Three Months Ended        June 30, 2001** |    | **Six Months Ended        June 30, 2001** |    |
|----------------------------------------------|------------------------------------------------------------|--------------|----------------------------------------------------------|--------------|
|                                         |                                                            |         |                                                          |         |
| Net income/(loss):                           |                                                       |         |                                                     |         |   |   |
| As reported                                  | $                                                          | 8,127,820    |                                                     | $            | (70,980,973 | ) |
| Pro forma                                    | $                                                          | 9,170,128    |                                                     | $            | (69,520,167 | ) |
| Income/(loss) per common share—Basic:   |                                                       |         |                                                     |         |   |   |
| As reported                                  | $                                                          | 0.15         |                                                     | $            | (1.31 | ) |
| Pro forma                                    | $                                                          | 0.16         |                                                     | $            | (1.28 | ) |
|                                         |                                                       |         |                                                     |         |   |   |
| Income/(loss) per common share—Diluted: |                                                       |         |                                                     |         |   |   |
| As reported                                  | $                                                          | 0.14         |                                                     | $            | (1.31 | ) |
| Pro forma                                    | $                                                          | 0.15         |                                                     | $            | (1.28 | ) |

6

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**3.**  **Intangible Assets  and Goodwill**

Goodwill totaled $12.9 million at June 30, 2002 and December 31, 2001. Our other intangible assets consist of patents, which as of June 30, 2002 and December 31, 2001 were as follows:

|              | **Gross      Intangible      Assets** |       | **Accumulated      Amortization** |   | **Net Intangible      Assets** |   |
|-------------------|---------------------------------------|------------|-----------------------------------|--------|-------------------------------------|--------|
|              |                                       |       |                                   |   |                                     |   |
| June 30, 2002     |                                  |       |                              |   |                                |   |   |   |   |
| Patents           | $                                     | 10,432,846 |                              | $      | (1,936,326                          | )      | $ | 8,496,520 |   |
|              |                                  |       |                              |   |                                |   |   |   |   |
| December 31, 2001 |                                  |       |                              |   |                                |   |   |   |   |
| Patents           | $                                     | 10,033,157 |                              | $      | (1,607,268                          | )      | $ | 8,425,889 |   |

Amortization expense related to patents totaled $329,057 and $302,819 during the six months ended June 30, 2002 and 2001. The estimated aggregate future amortization expense for intangible assets remainingas of June 30, 2002 is as follows:

| Remainder of 2002 | $      | 341,184   |   |
|-------------------|--------|-----------|--------|
| 2003              |   | 682,368   |   |
| 2004              |   | 682,368   |   |
| 2005              |   | 682,368   |   |
| 2006              |   | 682,368   |   |
| Thereafter        |   | 5,425,864 |   |
|              |        |           |   |
| Total             | $      | 8,496,520 |   |
|              |        |           |   |

**4.**  **Financial Instruments**

Effective January 1, 2001, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”),as amended by SFAS 137 and 138. SFAS 133 requires that all derivative financial instruments be recorded on the balance sheet at fair value. The provisions of SFAS 133 affected accounting for 2.5 million restricted warrants of Liberty LivewireCorporation held by us. Prior to the adoption of SFAS 133, we carried the warrants at cost. With the adoption of SFAS 133, we now record the warrants at fair value. The adoption of SFAS 133 resulted in our recording a cumulative effect transitionadjustment loss of $58.7 million at January 1, 2001. Beginning in the first quarter of 2001, we have recorded subsequent changes in the fair value of the warrants in our statements of operations.

There may be periods with significant non-cash increases or decreases to our net income/loss related to the changes in the fair value of the Livewire investment. The carrying value of our derivativeinstrument approximates fair value. We determine the fair value of the Livewire warrants by reference to underlying market values of Liberty Livewire’s common stock as reported by Nasdaq, and on estimates using the Black-Scholes valuationmodel.

**5.**  **Acquisition of Intellocity**

In March 2001, we acquired all of the assets and business of    Intellocity, Inc., a technology and engineering solutions provider focusing    on the interactive television market. The aggregate purchase price of $27.5    million consisted of 4,007,890 shares of our common stock, aggregating $23.2    million, and options to purchase 762,665 shares of our common stock, valued    at $4.3 million. Intellocity shareholders are subject to provisions restricting    the sale of the ACTV stock; these restrictions range over 4 years. The acquisition    was accounted for in the first quarter of 2001 under the purchase method of    accounting.

The fair value of assets acquired and liabilities assumed in the acquisition of Intellocity amounted to approximately $1.5 million. We calculated goodwill, representing the excess cost over the fair valueof net assets acquired, to be $26.4 million. Through December 31, 2001, we were amortizing this amount over a seven-year period. In connection with our year-end review of 2001 results, we assessed the realizability of the goodwill value attributedto Intellocity at December 31, 2001. As a result of this assessment, we

7

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recorded an impairment charge to goodwill of $11.2 million during the fourth quarter of 2001, adjusting the asset value of such goodwill from $23.2 million to $12.0 million.

The results of Intellocity's operations are included in our consolidated results from the date of acquisition.

The following table presents the pro forma results of operations had the acquisition of Intellocity been completed as of January 1, 2001. The pro forma results are shown for illustrative purposes only anddo not purport to be indicative of the results that would have been reported if the business combination had occurred on the date indicated or that may occur in the future. These pro forma amounts include estimates and assumptions that we believeare reasonable.

|                                                                            | **For the Six      MonthsEnded      June 30, 2001** |        |
|---------------------------------------------------------------------------------|----------------------------------------------------------|-------------|
|                                                                            |                                                          |             |   |
|                                                                            |                                                     |        |   |
|                                                                            |                                                     |        |   |
| Revenues                                                                        | $                                                        | 8,698,313   |   |
|                                                                            |                                                          |             |   |
| Loss before        minority interest and cumulative effect of accounting change | $                                                        | (14,610,251 | ) |
|                                                                            |                                                          |             |   |
| Loss before cumulative effect of accounting change                              | $                                                        | (13,096,480 | ) |
|                                                                            |                                                          |             |   |
|                                                                            |                                                     |        |   |
| Net loss                                                                        | $                                                        | (71,828,677 | ) |
|                                                                            |                                                          |             |   |
|                                                                            |                                                     |        |   |
| Basic and diluted                                                               |                                                     |        |   |
| Loss per share before cumulative effect of accounting change                    |                                                     | (0.24       | ) |
| Cumulative effect of accounting change                                          | $                                                        | (1.04       | ) |
|                                                                            |                                                          |             |   |
| Basic and diluted loss per share                                                | $                                                        | (1.28       | ) |
|                                                                            |                                                          |        |

**6.**  **Minority Interest**

We record a minority interest benefit resulting from Digital ADCO, in which third parties hold a minority equity position. Digital ADCO was formed in November 1999 by co-founders ACTV, Inc. and MotorolaBroadband. Digital ADCO develops applications for the delivery of addressable advertising. Under the terms of our agreement with Motorola Broadband, we licensed five of our patents to Digital ADCO and Motorola Broadband licensed six of its patentsand made a capital commitment to Digital ADCO. During August 2000, OpenTV made a capital contribution and contributed patents on a non-exclusive basis to Digital ADCO. Additionally, we formed Digital ADCO International to license and distributeproducts and services outside of North America and other western hemisphere countries. Digital ADCO, Inc.’s issued and outstanding shares of capital stock presently consist of Class A common stock, having one vote per share, and Class B commonstock, having 25 votes per share. OpenTV currently owns all of the issued and outstanding Class A common shares. Motorola Broadband and we together own all of the issued and outstanding Class B common shares. We currently exercise voting control ofthe venture.

For the three months ended June 30, 2002 and 2001, we allocated    losses in the amount of $794,172 and $685,905, respectively, and for the six    months ended June 30, 2002 and 2001, we allocated losses in the amount of    $1,479,731 and $1,380,520, respectively, from Digital ADCO to its minority    shareholders.

We also record a minority interest benefit from one other subsidiary,    Advision LLC, in which we currently hold 51% equity ownership. For the three    months ended June 30, 2002 and 2001, we allocated losses in the amount of    $123,412 and $133,251, respectively, and for the six months ended June 30,    2002 and 2001, we allocated losses in the amount of $226,669 and $133,251,    respectively, to the minority shareholders of this subsidiary.

The minority interest entry on our balance sheet at December 31, 2001, reflects a decrease of $6.9 million as compared to that recorded in previously reported financial statements. This decrease is theresult of a correction in the calculation of our minority interest liability and does not affect the minority interest benefit reported on our past statements of operations.

8

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**7.** **Segment Information**

We have two principal business segments, which are delineated by their respective markets: Digital Television and Enhanced Media. Information concerning these business segments for the three and six monthsending June 30, 2002 and 2001 is as follows:

|                                       | **For the Three Months Ended June 30,** |        | **For the Six Months Ended June 30,** |   |
|--------------------------------------------|----------------------------------------------|-------------|--------------------------------------------|--------|
|                                       |                                              |        |                                            |   |
|                                       | **2002**                                     |        | **2001**                                   |   | **2002** |   | **2001** |   |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| **Revenues**                               |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Digital Television                         | $                                            | 849,385     |                                       | $      | 1,820,097 |   | $ | 1,705,494 |   | $ | 2,549,413 |   |
| Enhanced Media                             |                                         | 2,384,133   |                                       |   | 2,406,355 |   |   | 4,714,445 |   |   | 4,950,481 |   |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| Total                                      | $                                            | 3,233,518   |                                       | $      | 4,226,452 |   | $ | 6,419,939 |   | $ | 7,499,894 |   |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
|                                       |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| **Depreciation        & Amortization** |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Digital Television                         | $                                            | 813,131     |                                       | $      | 688,244 |   | $ | 1,557,628 |   | $ | 1,377,245 |   |
| Enhanced Media                             |                                         | 321,107     |                                       |   | 405,597 |   |   | 627,637 |   |   | 824,312 |   |
| Unallocated Corporate                      |                                         | 265,253     |                                       |   | 1,415,280 |   |   | 519,687 |   |   | 2,145,584 |   |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| Total                                      | $                                            | 1,399,491   |                                       | $      | 2,509,121 |   | $ | 2,704,952 |   | $ | 4,347,141 |   |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
|                                       |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| **Interest Income**                        |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Digital Television                         | $                                            | 12,231      |                                       | $      | 73,787 |   | $ | 23,883 |   | $ | 187,945 |   |
| Enhanced Media                             |                                         | 12,276      |                                       |   | 490 |   |   | 21,395 |   |   | 3,298 |   |
| Unallocated Corporate                      |                                         | 388,530     |                                       |   | 1,096,952 |   |   | 656,299 |   |   | 2,600,395 |   |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| Total                                      | $                                            | 413,037     |                                       | $      | 1,171,229 |   | $ | 701,577 |   | $ | 2,791,638 |   |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
|                                       |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| **Net (Loss)/Income**                      |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Digital Television                         | $                                            | (3,312,790  | )                                          | $      | (1,667,007 | ) | $ | (4,851,444 | ) | $ | (3,499,440 | ) |
| Enhanced Media                             |                                         | (6,331,000  | )                                          |   | (2,212,320 | ) |   | (8,251,366 | ) |   | (4,948,693 | ) |
| Unallocated Corporate                      |                                         | (2,565,259  | )                                          |   | 12,007,147 |   |   | 1,344,619 |   |   | (62,532,840 | ) |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| Total                                      | $                                            | (12,209,049 | )                                          |   | 8,127,820 |   | $ | (11,758,191 | ) |   | (70,980,973 | ) |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
|                                       |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| **Capital Expenditures**                   |                                         |        |                                       |   |   |   |   |   |   |   |   |   |
| Digital Television                         | $                                            | 551,989     |                                       | $      | 320,095 |   | $ | 734,487 |   | $ | 4,517,605 |   |
| Enhanced Media                             |                                         | 1,847       |                                       |   | 692,798 |   |   | 1,847 |   |   | 85,274 |   |
| Unallocated Corporate                      |                                         | 12,664      |                                       |   | 2,209,195 |   |   | 95,265 |   |   | 1,289,156 |   |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |
| Total                                      | $                                            | 566,500     |                                       | $      | 3,222,088 |   | $ | 831,599 |   | $ | 5,892,035 |   |
|                                       |                                              |             |                                       |        |  |   |  |  |   |  |  |   |

|                       |
|----------------------------|
| **Balance Sheet Accounts** |
|                       | **June 30, 2002** |   | **December 31, 2001** |   |
|                       |  |   |  |   |
| **Current Assets**         |   |   |   |   |   |   |
| Digital Television         | $ | 3,567,639 |   | $ | 4,061,843 |   |
| Enhanced Media             |   | 6,283,656 |   |   | 4,735,475 |   |
| Unallocated Corporate      |   | 57,430,719 |   |   | 72,206,506 |   |
|                       |  |  |   |  |  |   |
| Total                      | $ | 67,282,014 |   | $ | 81,003,824 |   |
|                       |  |  |   |  |  |   |
|                       |   |   |   |   |   |   |
| **Total Assets**           |   |   |   |   |   |   |
| Digital Television         |   | 11,076,491 |   | $ | 12,022,462 |   |
| Enhanced Media             |   | 16,339,066 |   |   | 24,471,782 |   |
| Unallocated Corporate      |   | 88,418,389 |   |   | 103,093,077 |   |
|                       |  |  |   |  |  |   |
| Total                      | $ | 115,833,946 |   | $ | 139,587,321 |   |
|                       |  |  |   |  |  |   |

9

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**8.**  **Executive Incentive  Compensation**

We incurred executive incentive compensation expense related to an executive bonus of $2,300,000 for the six months ended June 30, 2001. This expense related to incentive compensation awarded in the 2000fiscal year but paid in a series of quarterly installments, which were subject to forfeiture under certain conditions. The contractual provision that gave rise to this bonus, which was based on changes in the market value of our common stock andpaid in unregistered securities, was cancelled during the second quarter of 2001.

**9.**  **Investment in Warrant**

ACTV and Liberty Livewire LLC, a unit of Livewire (formerly known as Todd AO Corporation), entered into a joint marketing venture “HyperTV(R) with Livewire” in April 2000. HyperTV with Livewirehas the right to use our patented HyperTV convergence technology in providing to advertisers, TV programmers, studios and networks such services as application hosting, web authoring, data management, and e-commerce.

In connection with our entering into the joint marketing agreement, we received warrants to acquire 2,500,000 shares of Livewire at $30 per share. The warrants, which become exercisable at the rate of500,000 shares per year, beginning April 13, 2001, include certain registration rights and may be exercised until March 31, 2015. With certain exceptions, the warrants are not transferable. We previously recorded an investment and correspondingdeferred revenue in the amount of $76,016,175, the estimated value of the warrants as of April 2000. We are amortizing the deferred revenue into income over a period of 21 years, the contractual term of the joint marketing agreement.

The estimated fair value of the warrants at June 30, 2002 was approximately $7.0 million. We perform fair value estimates of the warrants using Black-Scholes pricing model. Currently, we account for thewarrants under SFAS No. 133 (See Note 4).

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

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

|                                                               | **Three Months Ended** |        | **Six Months Ended** |   |
|--------------------------------------------------------------------|------------------------|-------------|----------------------|--------|
|                                                               |                        |        |                      |   |
|                                                               | **June 30, 2002**      |        | **June 30, 2001**    |   | **June 30, 2002** |   | **June 30, 2001** |   |
|                                                               |                        |             |                 |        |  |   |  |  |   |  |  |   |
| Numerator                                                          |                   |        |                 |   |   |   |   |   |   |   |   |   |
| (Loss)/income        before cumulative effect of accounting change | $                      | (12,209,049 | )                    | $      | 8,127,820 |   | $ | (11,758,191 | ) | $ | (12,248,776 | ) |
| Cumulative        transition effect of adopting SFAS No. 133       |                   | —      |                 |   | — |   |   | — |   |   | (58,732,197 | ) |
|                                                               |                        |             |                 |        |  |   |  |  |   |  |  |   |
| Net (loss)/income                                                  |                   | (12,209,049 | )                    |   | 8,127,820 |   |   | (11,758,191 | ) |   | (70,980,973 | ) |
|                                                               |                        |             |                 |        |  |   |  |  |   |  |  |   |
|                                                               |                   |        |                 |   |   |   |   |   |   |   |   |   |
| Denominator                                                        |                   |        |                 |   |   |   |   |   |   |   |   |   |
| Basic weighted-average        shares outstanding                   |                   | 55,936,341  |                 |   | 55,916,619 |   |   | 55,910,282 |   |   | 54,147,428 |   |
| Weighted-average        options outstanding                        |                   | —      |                 |   | 4,190,688 |   |   | — |   |   | — |   |
|                                                               |                        |             |                 |        |  |   |  |  |   |  |  |   |
| Diluted weighted        average shares outstanding                 |                   | 55,936,341  |                 |   | 60,107,307 |   |   | 55,910,282 |   |   | 54,147,428 |   |
|                                                               |                        |             |                 |        |  |   |  |  |   |  |  |   |
|                                                               |                   |        |                 |   |   |   |   |   |   |   |   |   |
| Net (loss)/income per share                                        |                   |        |                 |   |   |   |   |   |   |   |   |   |
| Basic                                                              |                   |        |                 |   |   |   |   |   |   |   |   |   |
| Before cumulative        effect of accounting change               | $                      | (0.22       | )                    | $      | 0.15 |   | $ | (0.21 | ) | $ | (0.23 | ) |
| Cumulative        transition effect of adopting SFAS No. 133       |                   | —      |                 |   | — |   |   | — |   |   | (1.08 | ) |
|                                                               |                        |             |                 |        |  |   |  |  |   |  |  |   |
| Basic net        (loss)/income per share                           | $                      | (0.22       | )                    | $      | 0.15 |   | $ | (0.21 | ) | $ | (1.31 | ) |
|                                                               |                        |             |                 |        |  |   |  |   |  |  |   |
|                                                               |                   |        |                 |   |   |   |   |   |   |   |   |   |
| Diluted                                                            |                   |        |                 |   |   |   |   |   |   |   |   |   |
| Before cumulative        effect of accounting change               | $                      | (0.22       | )                    | $      | 0.14 |   | $ | (0.21 | ) | $ | (0.23 | ) |
| Cumulative        transition effect of adopting SFAS No. 133       |                   | —      |                 |   | — |   |   | — |   |   | (1.08 | ) |
|                                                               |                        |             |                 |        |  |   |  |  |   |  |  |   |
| Diluted net        (loss)/income per share                         | $                      | (0.22       | )                    | $      | 0.14 |   | $ | (0.21 | ) | $ | (1.31 | ) |
|                                                               |                        |             |                 |        |  |   |  |   |  |  |   |

**11.  Corporate Restructuring**

During the third and fourth quarter of 2001, we completed certain restructuring initiatives. The restructuring charges totaled $6.6 million and related to the surrender of real estate leases and employeeseverance expenses. We had paid out all accrued restructuring charges by June 30, 2002.

10

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**12.  Agreement with iN DEMAND**

In April 2002, we signed a multi-year agreement with iN DEMAND,    pursuant to which iN DEMAND will use our digital video technology to offer    digital cable customers Nascar In-Car on iN DEMAND. Nascar In-Car is a multi-channel    television package that uses a mix of digital compression technology, real-time    telemetry data and superior graphics to give subscribers an enhanced, interactive    viewing experience. iN DEMAND, is distributing the package on a pay-per-view    basis through certain digital cable systems in the US. Our agreement with    iN DEMAND, which covers a total of approximately 90 races through 2004, obligates    us to incur certain    production costs, which we estimate will average $170,000 per race. In turn,    we receive a percentage of gross receipts from the sale of pay-per-view subscriptions.

We cannot be certain that subscription sales will produce more than negligible revenues for us, given that Nascar In-Car is the first such programming ever sold in the U.S. Because commercialization of thesubscription package began in late June 2002, we do not yet have comprehensive data from the cable operators responsible for sales, billing and collection of the Nascar In-Car package fees. Accordingly, our reported revenues for the three and sixmonths ended June 30, 2002 reflect no revenue from Nascar In-Car.

**13.  Supplemental Disclosure of Cash and Non-Cash Activities**

We recorded no reduction in non-cash stock-based compensation    expense for the three months ended June 30, 2002 and a reduction in non-cash    stock-based compensation expense in the amount of $6,002,831 for the six months    ended June 30, 2002. We recorded a reduction of non-cash, stock-based compensation    expense in connection with vested variable options of $4,121,649 and $2,819,155    for the three and six months ended June 30, 2001, respectively. In the first    quarter of 2002, we rescinded the applicable option exercise provisions that    resulted in the variable option accounting treatment for such options in our    financial statements.

During both the three months ended June 30, 2002 and June 30, 2001, we recorded revenue of $904,954 from amortization of the deferred revenue recognized in connection with the Liberty Livewire warrants (SeeNote 9).

In January 2002, we canceled outstanding options totaling 2,093,334    shares at exercise prices of $6.50 to $13.50 and, in their place, granted    new options totaling 1,046,667 shares at an exercise price of $2.00 per share,    which was above the market value of such shares at the time of grant. All    the grantees were employees whose salary compensation had been reduced in    conjunction with the Company's restructuring efforts in the second half of    2001. However, the executive officers whose salary compensation was reduced    were not eligible to participate.

The newly granted options will be subject to variable option accounting treatment. That is, if the closing market price of our common stock is greater than $2.00 per share at any reporting date, we willrecognize a non-cash compensation expense equal to the difference between such market price and $2.00 multiplied by the number of outstanding option shares subject to variable accounting treatment. To the extent that we are carrying an accruedexpense of this type at any given reporting date and there is a decline in the market price of our stock at the end of the subsequent reporting period, we will recognize a reduction in expense for the subsequent period.

Our June 30, 2002 consolidated financial statements reflect no expense related to the 1,046,667 variable options, since the closing market price of our common stock at June 30, 2002 was less than the optionexercise price of $2.00 per share.

**14.   Agreement with Liberty Media Corporation Regarding  Possible Acquisition of ACTV, Inc.**

In May 2002, we signed a letter agreement with Liberty Media    Corporation regarding a possible acquisition of all outstanding shares of    ACTV common stock. Under the terms of the letter agreement, Liberty, which    currently owns approximately 16% of our outstanding shares, would purchase    all remaining shares at a price of $2.00 per share. We entered into a 65-day    exclusive negotiating period with Liberty with respect to the possible transaction,    during which Liberty conducted due diligence. In July 2002, we executed an    amended agreement with Liberty that extended the exclusive negotiating period    to August 15, 2002 and reduced the consideration to be paid for ACTV shares    to $1.65 per share. Such purchase price would be payable in either cash, shares    of Liberty Series A common stock, or the publicly traded common stock of a    Liberty subsidiary or affiliate. On August 14, 2002, we agreed with Liberty    to an extension of the amended agreement through September 15, 2002.    The proposed acquisition terms remained unchanged. Neither Liberty nor we    can provide any assurances that a definitive agreement will be reached, or    that a transaction ultimately will be consummated. Any potential transaction    calling for the acquisition of all outstanding shares of our common stock    would require the board approval of Liberty Media and ACTV as well as our    shareholder approval.

11

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| **ITEM 2. ** | **MANAGEMENT’S DISCUSSION      AND ANALYSIS****OF FINANCIAL CONDITION AND RESULTS      OF OPERATIONS**  |
|-------------------|-------------------------------------------------------------------------------------------------------------------|

**Overview**

You should read the following discussion together with our consolidated financial statements and related notes included elsewhere. The results discussed below are not necessarily indicative of the resultsto be expected in any future periods. To the extent that the information presented in this discussion addresses financial projections, information or expectations about our products or markets or otherwise makes statements about future events, suchstatements 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. For further information about forward-looking statements, see “Special NoteRegarding Forward-Looking Statements” in our annual report on Form 10-K for the year ended December 31, 2001.

We are a digital media company that provides proprietary technologies, tools, and technical and creative services for interactive TV advertising, programming, and enhanced media applications. We have twooperating business segments, which we call Digital TV and Enhanced Media.

We believe that our Digital TV technologies are unique in providing targeting, interactivity and accountability for television commercials, and in giving viewers the ability to instantly customize theirviewing experiences for a wide variety of programming applications. Our Enhanced Media technologies allow both for the enhancement of video and audio content, including standard TV programming, with Web-based information andinteractivity.

We believe the expansion of digital TV transmission systems and the emergence of platforms providing the simultaneous delivery of video and Internet content (convergence programming), will allow televisiondistributors, advertisers and programmers to bring interactivity to a mass audience. We believe that our proprietary technologies, tools, and expertise in providing technical and creative services position us to capitalize on this growth.

We have received strategic investments from Liberty Media Corporation, our largest shareholder, and Motorola Broadband Communications Sector.

**Results of Operations**

**Comparison of Three-Month Periods Ended June 30, 2002 and June 30, 2001**

*Revenues.* During the three-month period ended June 30, 2002, our revenues decreased 24%, to $3.2 million, compared with $4.2 million in the three-month period ended June 30, 2001.The decrease was principally the result of a decline in technical and professional service revenue from our Digital Television segment.

*Total Selling, General and Administrative Expenses.* Total    selling, general and administrative expenses decreased approximately 32% in    the second quarter of 2002, to $8.6 million, from $12.7 million in the second    quarter of 2001. The decrease reflects significantly reduced personnel, occupancy    and related expenses in the more recent quarter, which more than compensated    for increased costs related to our Nascar In-Car project, launched in the    second quarter of 2002.

*Stock-Based Compensation*. We    recorded no increase or decrease in stock-based compensation expense for the    three months ended June 30, 2002, as compared to a credit of stock-based compensation    expense of $4.1 million for the three months ended June 30, 2001. We had recorded    a charge or credit to stock-based compensation expense based on increases    in the market value of our common stock in excess of the exercise price of    certain employee options, which were subject to variable option accounting    treatment. In the first quarter of 2002, we rescinded the applicable option    exercise provisions that resulted in the variable option accounting treatment    of the options in question. Although we have other currently outstanding options    subject to variable option accounting treatment, the exercise price of these    options was greater than the market price on each reporting date since their    issuance in January 2002. Accordingly, we recognized no stock-based compensation    expense related to such options.

*Depreciation and Amortization*. Depreciation  and amortization expense decreased 44%, to $1.4 million in the three months  ended June 30, 2002, versus $2.5 million during the same period in 2001. The  decrease is due principally to our adoption of SFAS 142 as of January 1, 2002,  resulting in no amortization expense for goodwill in the three months ended  June 30, 2002. Depreciation expense for our Digital Television segment showed  a marginal increase, from $0.7 million in the second quarter of 2001 to $0.8  million in the more recent quarter, as the result of capital equipment purchases  in 2002 related to the Nascar In-Car project.

*Interest Income*. Interest income    in second quarter of 2002 was $0.4 million, compared with $1.2 million in    the second quarter of 2001. The decrease was the result of significantly reduced    prevailing interest rates and lower average cash balances during the more    recent quarter. We incurred no interest expense in the second quarter of 2002    or 2001.

*Other (Expense)/Income. *Other  (expense)income comprises the change in fair value of warrants held by us, which  we currently account for as a derivative instrument, pursuant to the requirements  of SFAS No. 133. For the three months ended June 30,

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2002, we recorded a decrease in the value of the warrants of  $6.8 million, compared with an increase of $13.0 million for the three months  ended June 30, 2001.

*Net (Loss)/Income*. For the three months ended June 30, 2002, our net loss was $12.2 million, or $0.22 per basic and diluted share, compared to net income of $8.1 million, or $0.15per basic share and $0.14 per diluted share, for the three months ended June 30, 2001.

**Comparison of Six-Month Periods Ended June 30, 2002 and June 30, 2001**

*Revenues.* During the six-month period ended June 30, 2002, our revenues decreased 15%, to $6.4 million, compared with $7.5 million in the six-month period ended June 30, 2001. Thedecrease was principally due to a decline in technical and professional service revenue from our Digital Television segment. The revenue decline was even greater on a fully comparable basis, given that the 2001 six-month period included only fourmonths of results of Intellocity, which we acquired in March of that year.

*Total Selling, General and Administrative Expenses. *Total  selling, general and administrative expenses decreased approximately 45% in  the first half of 2002, to $14.6 million, from $26.7 million in the first half  of 2001. The decrease reflects significantly reduced personnel, occupancy and  related expenses in the more recent quarter as a result of our corporate restructuring  implemented in the second half of 2001.

*Stock-Based Compensation.* Stock-based    compensation expense was credited $6.0 million for the six months ended June    30, 2002, and credited $2.8 million for the six months ended June 30, 2001.    We had recorded a charge or credit to stock-based compensation expense based    on increases in the market value of our common stock in excess of the exercise    price of certain employee options, which were subject to variable option accounting    treatment. In the first quarter of 2002, we rescinded the applicable option    exercise provisions that resulted in the variable option accounting treatment    of the options in question. Although we have other currently outstanding options    subject to variable options accounting treatment, the exercise price of these    options was greater than the market price on each reporting date since their    issuance in January 2002. Accordingly, we recognized no stock-based compensation    expense related to such options.

*Depreciation and Amortization*. Depreciation  and amortization expense decreased 37%, to $2.7 million in the six-month period  ended June 30, 2002, from $4.3 million in the six-month period ended June 30,  2001. The decrease is due principally to our adoption of SFAS 142 as of January  1, 2002, resulting in no amortization expense for goodwill in the six months  ended June 30, 2002.

*Interest Income*. Interest income  in first half of 2002 was $0.7 million, compared with $2.8 million in the first  half of 2001. The decrease was the result of lower average cash balances during  the six months ended June 30, 2001. The decrease was the result of significantly  reduced prevailing interest rates and lower average cash balances during the  more period. We incurred no interest expense in the first half of 2002 or 2001.

*Other (Expense)/Income. *Other  (expense)income comprises the change in fair value of warrants held by us, which  we currently account for as a derivative instrument, pursuant to the requirements  of SFAS No. 133. For the six months ended June 30, 2002, we recorded a decrease  in the value of the warrants of $9.3 million, compared with an increase of $4.2  million for the six months ended June 30, 2001.

*Cumulative Transition Effect of Change in Accounting Principle.* Effective January 1, 2001, ACTV adopted FASB Statement No. 133, “Accounting for Derivative Instruments and HedgingActivities”, as amended by SFAS 137 and 138(“SFAS 133”). SFAS 133 requires that all derivative financial instruments be recorded in the balance sheet at fair value. The provisions of SFAS 133 affected the accounting for our investment of 2.5million restricted warrants for Liberty Livewire Corporation(“Livewire”). Prior to the adoption of SFAS 133, these warrants were carried at cost. With the adoption of SFAS 133, the Livewire investment is recorded at fair value. This resultedrecording a cumulative effect transition adjustment loss of $58.7 million at January 1, 2001. There may be periods with significant non-cash increases or decreases to our net income/loss pertaining to the Livewire investment.

*Net Loss*. For the six months  ended June 30, 2002, our net loss was $11.8 million, or $0.21 per basic and  diluted share, compared to the net loss of $71.0 million, or $1.31 per basic  and diluted share, for the six months ended June 30, 2001.

**Liquidity and Capital Resources**

Since our inception, we have not generated revenues sufficient    to fund our operations and have incurred operating losses. Through June 30,    2002, we had an accumulated deficit of $274.8 million. Our cash position on    June 30, 2002 (including short-term investments) was $64.3 million, compared    with $78.0 million on December 31, 2001.

*Net Cash Used In Operating Activities.* During the six month period ended June 30, 2002, we used cash of $11.8 million for operations, compared with $20.9 million for the sixmonths ended June 30, 2001. The decrease in net cash used by operating activities principally relates to lower operating losses and decreased working capital uses.

*Net Cash Used In Investing Activities and Capital Expenditures.* With    regard to investing activities, in the six months ended June 30, 2002, we    used cash of $10.6 million, compared to $13.9 million in the six months ended    June 30, 2001. Approximately $8.7 million of the more recent period’s    total related to investments in short-term financial instruments, compared    to $0 of such investments in the

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2001 quarter. The large decrease in cash used in other investing  activities is due principally to a significant reduction in capital expenditures  and strategic investments. 

In April 2001, we provided $5 million in financing to Playboy.com,    Inc. in the form of an 8% convertible promissory note. The note was automatically    converted on August 13, 2001 into shares of Series A Convertible Preferred    Stock of Playboy.com. The Series A Convertible Preferred    Stock is convertible into common stock of Playboy.com on a one-to-one basis,    and may be redeemed at the holder’s option, after five years, and has    customary anti-dilution provisions. Holders of the Series A Convertible Preferred    Stock will receive a non-cumulative 8% per annum dividend. If Playboy.com is unable to pay the redemption price for the Series A Convertible Preferred Stock, a holder can require payment by Playboy Enterprises, Inc. In this event, Playboy Enterprises, Inc. has theoption of making such payment in cash or in shares of its common stock.

*Net Cash Provided By (Used In) Financing Activities.* We    had no significant cash provided by or used in financing activities for either    the six-month periods ended June 30, 2002 or June 30, 2001. We have and continue    to fund our cash requirements from the net proceeds of a public, follow-on    offering completed in February 2000. Through a group of underwriters, we sold    a total of 4.6 million common shares, resulting in net proceeds of $129.4    million. In addition, on March 27, 2000, Liberty Digital, Inc. invested an    additional $20 million in us by exercising a warrant granted in March 1999,    and OpenTV invested $10 million in our Digital ADCO subsidiary.

**Critical Accounting Policies**

The cost of patents, which represents patent acquisition costs    and legal costs relating to patents pending, is being amortized on a straight-line    basis over the estimated economic lives of the respective patents (averaging    15 years), which is less than the statutory life of each patent.

We capitalize costs incurred for the development of software    products when economic and technological feasibility of such products has    been established. Capitalized software costs are amortized on a straight-line    basis over the estimated useful lives of the respective products.

We record a charge or a credit to stock-based compensation    expense for increases or decreases in the market value of our common stock    in excess of the exercise price of certain employee options that are subject    to variable option accounting treatment. Our financial results for the three-month    period in 2001 and the six-month periods in both 2002 and 2001 reflect credits    in stock-based compensation pursuant to certain employee options. These credits    are the result of market price declines of our common stock during these periods.    In the first quarter of 2002, we rescinded the applicable option exercise    provisions that resulted in the variable option accounting treatment of such    options, and therefore no charges were recorded in the second quarter of 2002.

In January 2002, we canceled outstanding options totaling 2,093,334    shares at exercise prices of $6.50 to $13.50 and, in their place, granted    new options totaling 1,046,667 shares at an exercise price of $2.00 per share.    All the grantees were employees whose salary compensation had been reduced    in conjunction with the Company's restructuring efforts in the second half    of 2001. However, the executive officers whose salary compensation was reduced    were not eligible to participate. The newly granted options will be subject    to variable option accounting treatment. That is, if the closing market price    of our common stock is greater than $2.00 per share at any reporting date,    we will recognize a non-cash compensation expense equal to the difference    between such market price and $2.00 times the number of outstanding option    shares subject to variable accounting treatment. To the extent that we are    carrying an accrued expense of this type at any given reporting date and there    is a decline in the market price of our stock at the end of the subsequent    reporting period, we will recognize a reduction in expense for the subsequent    period.

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amount of assets and liabilitiesand disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ from these estimates.

**Impact of Inflation**

Inflation has not had any significant effect on our operating costs.

**Item 3.  Quantitative and Qualitative Disclosures About Market Risk**

Our interest income is affected by changes in the general level of U.S. interest rates. Changes in U.S. interest rates could affect the interest earned on our cash equivalents and investments. Currently,changes in U.S. interest rates would not have a material effect on the interest earned on our cash equivalents and investments. A majority of these cash equivalents and investments earn a fixed rate of interest while the remaining portion earnsinterest at a variable rate. We do not anticipate that exposure to interest rate market risk will have a material impact on us due to the nature of our investments.

During April 2000, we received a warrant to acquire 2,500,000 shares of Livewire, a publicly traded company. The warrant becomes exercisable at the rate of 500,000 shares per year, commencing on April 13,2001, includes certain registration rights and may be exercised until March 31, 2015. The warrant is not transferable, except in certain circumstances. As of January 1, 2001, changes in fair value in the investment in warrant were recorded to thestatement of operations as we adopted SFAS No. 133. We expect the value of the warrant to fluctuate based on the underlying stock price of Livewire. We do not currently expect to exercise or register shares in the coming year.

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We record stock-based compensation expense based on increases    and decreases in the market price of our common stock above the exercise price    of employee options that are subject to variable option accounting treatment.    To the extent that we have a stock-based compensation obligation at the beginning    of a given reporting period, we recognize a reduction in stock-based compensation    expense related to unexercised variable options for that period based on a    reduction of the market price for our stock at the end of the period. The    obligation will increase as the market price for our common stock increases    at the end of a reporting period.

In January 2002, we canceled outstanding options totaling 2,093,334    shares at exercise prices of $6.50 to $13.50 and, in their place, granted    new options totaling 1,046,667 shares at an exercise price of $2.00 per share.    All the grantees were employees whose salary compensation had been reduced    in conjunction with the Company’s restructuring efforts in the second    half of 2001. However, the executive officers whose salary compensation was    reduced were not eligible to participate. The newly granted options will be    subject to variable option accounting treatment. That is, if the closing market    price of our common stock is greater than $2.00 per share at any reporting    date, we will recognize a non-cash compensation expense equal to the difference    between such market price and $2.00 times the number of outstanding option    shares subject to variable accounting treatment. To the extent that we are    carrying an accrued expense of this type at any given reporting date and there    is a decline in the market price of our stock at the end of the subsequent    reporting period, we will recognize a reduction in expense for the subsequent    period.

**PART II. OTHER INFORMATION**

**Item 1.  Legal Proceedings**

ACTV, Inc. and its wholly-owned subsidiary HyperTV Networks,    Inc. are co-plaintiffs in a civil action filed against The Walt Disney Co.,    ABC, Inc., and ESPN, Inc. in December 2000, which action alleges that the    defendants’ “Enhanced TV” system synchronizing a web site application    to, amongst others, ESPN*Sunday Night*    and ABC*Monday Night Football*    telecasts has infringed and is continuing to infringe certain of the plaintiffs'    patents. In May 2002, the United States District Court for the Southern District    of New York granted summary judgment in favor of the defendants. Without addressing    the validity and enforceability of the three patents in suit, the Court reached    summary judgment on non-infringement alone. On July 3, 2002, the Company appealed    the District Court’s decision to the U.S. Court of Appeals for the Federal Circuit in Washington, D.C.

**Item 2.  Changes in Securities**

Not applicable.

**Item 3.  Defaults Upon Senior Securities**

Not applicable.

**Item 4.  Submission of Matters to a Vote of Stockholders**

None.

**Item 5.  Other Information**

None.

**Item 6.  Exhibits and Reports on Form 8-K**

|   | (a)   | Exhibits             |
|--------|-----------------|----------------------|
|   |            |                 |   |   |   |   |   |
|   |            | 11                   | Computation of net (loss)/income      per share — See Note 10. |
|   |            |                 |   |
|   |            | 99.1       | Certification. |
|   |            |                 |
|   | (b)   | Reports on Form 8-K: |
|   |            |                 |   |   |
|   |            | **DateFiled**        | **ItemReported** | **Event** |
|   |            |                 |   |   |
|   |            | May 10, 2002    | Items 5 and 7. | Press Release dated May 8, 2002 announcing      the execution of a Letter Agreement by and between ACTV, Inc. and Liberty      Media Corporation. |
|   |            |                 |   |   |
|   |            | May 30, 2002    | Items 5 and 7. | Press Release dated May 24, 2002 announcing      summary judgment in favor of the Walt Disney Co. and certain of its subsidiaries      (collectively “Walt Disney”) in connection with ACTV, Inc.’s      patent infringement suit against Walt Disney. |
|   |            |                 |   |   |
|   |            | July 16, 2002        | Items 5 and 7. | Press Release dated July 9, 2002 announcing      the execution of an Amendment to the Letter Agreement by and between ACTV,      Inc. and Liberty Media Corporation. |
|   |            |                 |   |   |

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|                  | **ACTV, Inc.**                                                           |
|-----------------------|--------------------------------------------------------------------------|
|                  |                                                                     |
|                  | Registrant                                                               |
|                  |                                                                     |
| Date: August 13, 2002 | /s/ David Reese                                                          |
|                  |                                                                          |
|                  | David Reese                                                              |
|                  | Chairman, Chief Executive Officer      and Director                      |
|                  |                                                                     |
| Date: August 13, 2002 | /s/ Christopher C. Cline                                                 |
|                  |                                                                          |
|                  | Christopher C. Cline                                                     |
|                  | Chief Financial Officer(Principal Financial and Accounting      Officer) |

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