December 15, 1998      RECOMMENDATION:BUY

ACTV, Inc. (NASDAQ: IATV)

Exchange Symbol.....................IATV (NASDAQ)
Price of Common Stock (12/14/98)............$3.72
30-Day Average Trading Volume.............401,000
Shares Outstanding..........................28.4M
52-Week High/Low......................$4.50/$1.31

Address....................1270 Avenue of the Americas
...................................New York, NY  10020
Telephone.................................212-217-1600
Chairman & CEO......................William C. Samuels
CFO...............................Christopher C. Cline
Website...................................www.ACTV.com

• ACTV's Individualized Television provides the tools needed to create, encode, distribute, decode and view live or pre-recorded television programming that individualizes what the viewer sees and hears for an unlimited number of simultaneous viewers. The proprietary software remembers every viewer's response enabling the television to literally "talk back" to each viewer with individually tailored programming and advertising content;
  
• ACTV's HyperTV software technologies uniquely enable simultaneous delivery of video and Internet content to television users;
  
• ACTV's proprietary technology enables and enhances potentially large programming applications, from sports to music to interactive advertising and e-commerce.
  

• To drive commercialization of its technologies, ACTV has partnered with Liberty Media (an equity owner), Tele-Communications, Inc. (TCI), General Instrument (an equity owner), Fox Sports Net and Sun Microsystems.

• We believe ACTV's investment case is not widely understood or appreciated by the investment community, and that its shares trade at a significant discount to comparable companies;
  
• Follow the "smart money": John Malone's Liberty Media recently purchased a $5 million, 10% equity interest in ACTV and has options to invest another $5 million; Tudor Investment bought 1.4 million shares this quarter.

We believe these companies, and others, are jockeying to get ownership, control or access to the cable entering your home. As the infrastructure is deployed, companies will offer a wide range of products, services and programming through that cable, including Internet access, telephony, and enriched entertainment programming. This latter category, the enriched entertainment programming, will include interactivity with the television, combined video and Internet information, viewer-defined programming and advertising, and virtual environments for learning and shopping.

Question: With respect to the question of HDTV, or higher-definition television, are you going to watch more TV because the picture is bigger, or "more blue," or a bit clearer? We don't think so.

Question: Are you going to watch more TV because the broadband cable network provides for "multi-casting," or the ability to bombard the homes with 500 channels instead of 60? Again, we don't think multi-casting represents the real value in the broadband cable infrastructure.

Answer: We believe the real value in the broadband cable infrastructure -- value for viewers, programmers, distribution companies and advertisers -- will be in the provision of enriched home entertainment programming and services. ACTV has cleverly positioned itself to capitalize on these trends, with unique patented software technologies, content and tools for programmers and educators, and with strategic alliances and partners who stand to gain economically from the deployment of ACTV's technology.

Nota bene: The buzz at the Western Cable Show in Anaheim earlier this month was the convergence of broadband media, and all of the new businesses in which cable operators are now participating -- high-speed Internet access, interactive advertising, voice telephony and high-speed data, e-commerce and e-banking, and enhanced video services. We believe investors will be rewarded by looking beyond the pure-play Internet companies to companies like ACTV that provide content and technology for the converged broadband media.



ACTV, Inc. -- Capturing the Real Value in the Broadband Cable Infrastructure

Important Recent Developments: In September 1998, Liberty Media Corporation invested $5 million for a 10% equity stake in ACTV, with options to invest an additional $5 million. We believe the investment by Liberty Media, clearly one of the shrewdest operators in the entertainment industry, is reflective of Liberty's commitment to ACTV's planned roll-out of its programming service. The structure of the investment and comments in the media by Liberty Vice President David Jensen, illuminate additional value opportunities within ACTV:

• The agreement with Liberty included the formation of a joint venture, Liberty Media IATV LLC, to explore other applications of the ACTV technology outside of regional sports programming. While neither ACTV nor Liberty is commenting on the details of the joint venture, there are clearly applications in other areas of programming that lend themselves to the interactive nature of ACTV technology. There could be plans for applications of ACTV individualized programming on one-of-a-kind marquee events of general interest, that could be offered on a pay-per-view basis. The recent announcement from TCI Music's The Box Music Network and ACTV, which contemplated nationwide pay-per-view music events where viewers can get multiple video feeds, song lyrics, artist bios, etc., during an event, is indicative of the breadth of application for ACTV's technology.
  
• At the recent Western Cable Show, ACTV and Prevue Networks, Inc. announced that Individualized Television programming capabilities would be integrated into the same General Instrument digital set-top boxes, and be compatible and available with Prevue Interactive (soon to be renamed TV Guide( Interactive). From these announcements, and the announced release dates of Prevue Interactive, we believe that a TCI launch of Fox SportsPlus is now certain no later than mid-year 1999.
  
  
• ACTV's technology can work with direct satellite TV as well. TCI recently announced it had added 20 new cable networks to HITS (Headend In The Sky, a division of TCI, which provides satellite uplink service), and is growing its base of agreements with multiple system operators. We believe that TCI could reach over 6 to 7 million digital subscribers today (includes current digital cable subscribers and direct TV subscribers) with a pay-per-view marquee sporting event utilizing ACTV's Individualized Television technology.
  
  
• Jensen is quoted as stating that ACTV has some potentially important patents, including those that cover the interface between streaming video on the Internet and TV. ACTV has 18 patents on different aspects of individualized TV and streaming video, both on the TV and Internet.

Individualized Television

For Example: During the telecast of a live basketball game, ACTV's technology will allow the viewer to switch seamlessly between the regular telecast, a close-up of a star player, a feature such as "In the Paint" which provides off-the-ball action, instant replays at any time, and a signal with statistics, player profiles and sports trivia. The technology also allows the viewer to select the type of advertising he or she would like to see, which should be particularly attractive to companies and cable providers, as ACTV market studies have shown that viewers have a much higher retention level when they select the products in which they're interested.

Corporate Partnerships

Central to ACTV's strategy has been the development of partnerships and alliances that position the Company to capitalize on the deployment of digital cable technology. Before discussing ACTV's strategy on building out its regional networks, we feel it is helpful to understand the partnerships and alliances that ACTV has established, and how they fit into the overall development and distribution of ACTV technology and programming.

FOX Sports Net -- In December, 1996, ACTV and FOX Sports Net signed a multi-year master programming agreement granting ACTV the right to license FOX Sports Net programming in each of its 22 owned and affiliated networks, through the year 2003. FOX Sports Net (which is equally owned by Rainbow Media Holdings, Inc. and FOX/Liberty Networks), is the first truly nationwide, regional and local supplier of sports programming, reaching more than 60 million homes. Essentially, each of the 22 FOX Sports Regional Networks will provide ACTV with its sports programming feeds. ACTV, in regional production facilities, will create its individualized, multi-signal sports program (called FOX SportsPlus, in this case), and provide it to any cable operator that is carrying the Fox Sports channel.

Tele-Communications, Inc. ("TCI") -- ACTV has signed an agreement with TCI, the largest cable TV provider in the US, with an excess of 10.5 million subscribers. Under this agreement, TCI will distribute ACTV's FOX SportsPlus individualized sports programming to subscribers in the region served by FOX Sports SouthWest, with the potential of nationwide distribution by TCI in the future. So, ACTV will create the FOX SportsPlus programs and deliver them to TCI, which will make them available on a premium subscription basis to its subscriber base that is outfitted with digital cable boxes (this does not eliminate the possibility of certain cable operators positioning ACTV as a basic service). In parts of the region where TCI is not the cable provider, ACTV will sign affiliated distribution agreements to broaden its in-region reach. The Company anticipates that competing cable distribution companies will be eager for additional, higher value-added programming to enhance profitability, and to grow their "digital-cable" subscriber bases during the current transition from analog to digital-cable.

ACTV Entertainment's Strategy

ACTV's first application of its Individualized Television technology is in the area of sports programming. Sports programming is a good place to start as traditional sports programming of local professional and college sporting events represents the most popular cable network programming based on total viewership. ACTV intends to roll-out its individualized programming networks on a regional basis, using a number of criteria to select specific FOX Sports regions to enter. The FOX Sports SouthWest region, including Texas, Louisana, Arkansas, Oklahoma and nine New Mexico counties, will be the first to be launched. FOX Sports Southwest was chosen for a number of reasons, including (1) it is large, with approximately 5.4 million FOX Sports subscribers, (2) it has a high number of professional sports teams and college sports programs, (3) TCI is the dominant operator in the region, and (4) the Dallas/Fort Worth area is a TCI focus area for deployment of digital cable boxes. ACTV has established its master control production facilities in the same Irving, Texas facility that is home to FOX Sports SouthWest. Also, ACTV has already produced many sporting events in its Irving production facility, having staffed it with highly qualified programming personnel hired from FOX and other networks.

ACTV is currently working on the integration of its programming with the delivery systems for national programming distribution. Upon completion, ACTV will announce a date for the launch of FOX SportsPlus, which is currently anticipated to be no later than mid-year 1999. ACTV is currently planning for the roll-out in the next two FOX Sports regions, which are as yet unannounced. Consistent with the strategy used in selecting the SouthWest region, we expect the next few regions to include FOX Sports West (based in Los Angeles), FOX Sports Bay Area (based in San Francisco) and FOX Sports NorthWest (based in Seattle).

The economic model for ACTV Entertainment's business is detailed later in the report.

Deployment of Digital Cable Boxes and Digital Television

ACTV's Individualized Television software is being integrated into the digital TV set-top cable boxes of General Instrument. As such, the penetration of ACTV's programming is dependent upon the deployment of these digital cable boxes. To ascertain how fast these boxes are being deployed, we reviewed the information provided to us by ACTV as well as publicly available announcements by the two largest manufacturers of these boxes, General Instrument and Scientific-Atlanta.

• In General Instruments' recent earnings release, GI stated that it expects to ship 2 million digital cable boxes this year (1998) and 3 million next year.
  
• GI stated it had shipped over 580,000 boxes in the third quarter of 1998, a 38% increase over the second quarter, and equipped 40 cable systems with digital upgrades.
  
• In recent announcements by Scientific-Atlanta, S-A stated it had received purchase orders or commitments from 11 major cable operators including Time Warner, TCI, Cox, Comcast, Adelphia, and Rogers, in 76 major US cable systems representing 15 million subscribers, and it expects robust shipments of set-top boxes in the second half of this year.

HyperTV

For Example: During the telecast of a live football game, ACTV's Individualized Television technology will allow the viewer to switch seamlessly between the regular telecast, a montage of the best pass plays, instant replays at any time, and a signal with statistics, player profiles and sports trivia. Simultaneously, HyperTV technology will allow you to push a button to get to your favorite teams' web site, where you can purchase a team jersey or an autographed football online (e-commerce). Also, an auto manufacturer will allow you to decide which vehicle you'd like to see advertising for -- the pick-up truck, the sedan or the mini-van ("pull" advertising, rather than "push" advertising).

HyperTV's First Application -- eSchool Online^TM

ACTV has developed and is successfully marketing an Internet educational product, eSchool Online^TM, to the K-12 education market. eSchool Online creates a virtual learning environment by combining content from the Internet with other education media such as videos, streamed audio, moderated chat and video conferencing. ACTV is able to bring this all to the student's desktop with one simple interface. The educational content can be customized and updated to meet the specific needs of the teacher and school, allowing the teacher to use the latest material available on the Web.

For Example: The School District of Philadelphia is using eSchool Online to train teachers on the use of the Internet. ACTV has developed customized content that allows the teacher to see an instructional video on use of the Internet, while simultaneously accessing any website directly on the Internet and chatting with other teachers or the instructor -- all on the same desktop. Teacher education, especially pertaining to technology and the Internet, is both a priority and an identifiable budget item for all school districts today.

Target Markets: ACTV has initially targeted the K-12 education market for a number of reasons. First, the current management team had some experience and knowledge of this potentially very large market. Second, there has been considerable political emphasis and public spending on this market -- providing Internet access to public schools, and increased spending on technology and teacher education. Estimates are that approximately 80% of the nation's 100,000 public schools have Internet access, up from roughly 40% one year ago. However you slice it, the potential size of this market is huge. Industry sources predict that the total US online learning market could reach $3 billion by the year 2000. Lastly, the K-12 education market lends itself well to the resale of eSchool Online content, allowing ACTV to leverage the development of content across multiple school districts and contracts. Other Markets: ACTV is currently evaluating several other markets for eSchool Online, including the College and University market, the Corporate Education market, and other potential applications, including the integration of educational instruction and electronic commerce for the Corporate market.

Intellectual Property and Know-How: ACTV has been awarded patents pertaining to provision of streaming video over the Internet, and integration with other information. In particular, ACTV has been awarded patents on systems that integrate and display streaming video with information retrieved from the Internet, including Universal Resource Locators (URLs), or web addresses. The patents were acknowledged by personnel from Liberty Media in announcements pertaining to their recent investment, and we believe they could be a significant source of value to ACTV in the future.

Contracts and Corporate Partnerships

ACTV Net has relationships with some of the dominant players in the educational technology field. ACTV Net and Sun Microsystems are offering large school districts and state education departments eSchool Online alongside Sun network hardware.

ACTV Net has recently signed eSchool Online contracts with the New York City Board of Education and the Massachusetts Corporation for Educational Telecommunications (MCET). The contracts have a total value of more than $1 million over the next 12 months. Under the New York City agreement, ACTV Net will implement eSchool Online in select non-public schools for staff development and instructional applications for the elementary, middle and high school levels. In addition to licensing the eSchool Online software, ACTV Net will provide content development, system implementation and technical support to the schools.

The School District of Philadelphia is now using eSchool Online for professional development and integrated classroom instruction for the second consecutive year. Since August 1997, eSchool Online has enabled the School District of Philadelphia to deliver staff development training to more than 2,500 teachers. The district has also deployed eSchool Online for direct student instruction in language arts, math and science at various grade levels. Over the coming year, ACTV Net will work with the district to create 25 new professional development seminars delivered via eSchool Online. The School District of Philadelphia is one of the largest in the U.S., with more than 212,000 students and 13,000 teachers.



Management

David Reese joined ACTV in December of 1988 and currently is the Executive Vice President of ACTV, Inc., President of ACTV Entertainment and serves as a member of the Board of Directors. Mr. Reese oversees all aspects of business development, programming and day-to-day operations for ACTV Entertainment. David Reese joined the Company as Chief Financial Officer, and prior to working at ACTV, he worked with Deloitte and Touche. Mr. Reese is a graduate of the University of Pennsylvania.

Bruce J. Crowley joined ACTV in July of 1994 and currently is Executive Vice President of ACTV, Inc., President of ACTV Net, and serves as a member of the Board of Directors. Mr. Crowley oversees all aspects of business development, programming and day-to-day operations for ACTV Net. Prior to joining ACTV, Mr. Crowley was Corporate Vice President for KDI Corporation. Mr. Crowley also served as Senior Vice President for KDI's wholly-owned subsidiary, Modern Talking Pictures, Inc., a company involved in providing distance learning programming and multi-media products to education. Mr. Crowley is a graduate of Colgate University and has an M.B.A. in Marketing and Finance from Columbia University Graduate School of Business.

Christopher C. Cline joined ACTV in November of 1993 and currently is Senior Vice President and Chief Financial Officer of ACTV, Inc. Prior to joining ACTV, Mr. Cline was employed by Showcase Communications Network, Ltd., a multimedia computer software and publishing company, as Vice President, Finance, and later President and CEO. Previously Mr. Cline was Vice President of Intercontinental Trade and Finance Corp., a cross-border financial trading and consulting company. Mr. Cline is a graduate of Haverford College and has an M.B.A. from Stanford University.

David Alworth joined ACTV in June of 1996 and currently is Executive Vice President of ACTV Entertainment. Prior to joining ACTV, Mr. Alworth worked in the Office of the Commissioner of Major League Baseball and was a lead negotiator in 1993 for Major League Baseball in renewing the national cable television agreement with ESPN, the agreement with CBS Radio and in establishing The Baseball Network (TBN) partnership with ABC and NBC, where he served as Vice President of Broadcasting and Production Management.

Richard R. Barron joined ACTV in June of 1997 and is currently General Manager of Regional Networks of ACTV. He is considered a pioneer in the cable television industry with twenty years of experience with the launch of the sports cable network that is now Fox Sports SouthWest. He then assisted with the start up of another half dozen regional sports networks.

Brent Imai joined ACTV in April of 1995 and currently is Vice President of ACTV. Prior to joining ACTV, in 1985 Mr. Imai became one of the original creators of the Prime Ticket Network (now Fox Sports West). From the network's inception through 1994, he served as Executive Producer. He was in charge of the channels creative direction and all original program production. Mr. Imai received four Cable Ace award nominations and three local Emmy award nominations for his work at Prime.

Financial Information and Valuation Discussion

ACTV Entertainment: With respect to ACTV Entertainment, we have provided a model of the FOX Sports SouthWest region, the first region in which ACTV Individualized Programming will be launched. We have provided a "bottoms-up" approach, looking at the number of subscribers, deployment of digital cable boxes, penetration of the "addressable" market, and so forth. These projections are consistent with the publicly made statements of other players, such as General Instruments and TCI, that impact the launch and success of ACTV. We have made per-subscriber revenue assumptions (both subscriber fee and advertising), and margin assumptions, that we believe are achievable. With respect to regional roll-out, we have made a conservative assumption that ACTV rolls out in five of the 20 available markets in the next five years.

Not only do we believe it is likely that the roll-out will occur at a faster rate, we believe there could be opportunities to license the technology to other programming companies, for different programming genres or to broaden reach. Also, the model does not include any revenues pertaining to the recently announced joint venture with Liberty Media, which could contribute in the near term, and in a significant manner, with marquee pay-per-view sporting events using ACTV's technology.

ACTV Net: As the market for internet educational software and content is quite new, it is more difficult to predict the revenue ramp on this side of the business. Clearly the target markets (K-12, university, corporate e-business, advertising, etc.) are large. We believe our projections for the next 24 months are achievable, and the long term potential for this business could be substantial. Also, we believe the technology and intellectual property is compelling, and that it would lend itself to corporate partnering and licensing, not only in the university and corporate markets, but also in the areas of e-commerce and advertising.

Valuation: We have provided a variety of different valuation methodologies, including discounted cash flow, terminal P/E multiples, and terminal operating income multiples. Regardless of the valuation methodology, ACTV's share price appears undervalued at its current level. We believe current fair value to be in the range of $14 to $17 per share. Based upon the expected growth in net earnings and EBITDA, and approaching corporate milestones, we believe an appropriate 12-18 month price target of $7 to $9 is achievable.

Earnings Model and Valuation Analyses: See Below

Summary Balance Sheet ($000s)
Cash & equivalents A/R Total Assets Long term debt Shareholders' equity	12/31/97A $554 303 $7,902 0 5,416	9/30/98A $7,087 579 $177 4,300 9,362

Risk Considerations

• Market risk: Investors should consider technical risks common to many small-cap or micro-cap stock investments, including liquidity levels, small float, risk of dilution, dependence upon key personnel, dependence upon single products or technologies, and the strength of competitors that may be larger, better capitalized and hold dominant market positions.
  
• Business risk: ACTV has limited experience in emerging business of interactive television programming and internet educational software and support. Many of its products and services are in the early stage of commercialization. There can be no assurance that ACTV's business or the markets in which it competes will materialize or achieve the desired levels of revenues or profitability as expected.
  
• Competitive risk: The entertainment and software industries are extremely competitive, and many perceive the barriers to entry to be low. Added competition could lead to price competition and lower margins.

Sources for Additional Information