About Two Way TV US(TWTV) -- Two Way TV US(TWTV)

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Date Posted: 17:13:53 03/07/03 Fri
Author: Tim
Subject: About Two Way TV US(TWTV)

TWO WAY TV US INC 10-K 2001-12-31: Item 1. Business

Item 1. Business

Overview

Our company, Two Way TV (US), formerly known as TWIN Entertainment,
provides interactive television technology solutions and games to digital cable
and satellite operators, as well as programmers and content owners, interested
in developing interactive gaming capabilities. As part of our service, we
intend to provide customers with technical assistance in developing and
integrating interactive games into branded virtual games channels. These
virtual game channels will reach the consumer through digital satellite or
cable distribution networks that support some of the leading digital television
platforms, including Liberate, OpenTV, Wink and Microsoft TV. The game offering
can be a stand alone game comprised of still graphics and animation, or an
enhanced overlay to an existing TV program, such as a sports event or a game
show and will depend on many factors including the set top box hardware and the
middleware chosen by the operator.

Licensed from Two Way TV Limited, our digital TV technology enables
real time broadcast of interactive applications during live program
transmissions. Two Way TV Limited's proprietary patented tool suite also
enables the quick and reliable creation of interactive game content for both
applications synchronized to broadcasts and standalone virtual games.

We intend to commercially launch our first service in the fourth
quarter of 2002 and have already conducted a trial of certain games on the
Charter Communications network in St Louis in partnership with digeo
Technology, Inc. (formerly digeo Broadband Technology, Inc.), using the
Microsoft TV platform. Two Way TV Limited's existing games library will provide
a basis for the branded games to be developed for customers with our
assistance. Initially these games will not be linked to broadcast TV and will
consist of graphics based formats which will provide competitive, interactive
entertainment 24 hours a day.

Our service will have a choice of games for the viewer at all times
which may include trivia style games, casino games, word games, number games
and other types of formats. Wherever the network infrastructure and hardware
allow, up to four players in each household will be able to compete at any one
time, reinforcing the challenge and excitement of competition.

In the future, we intend to develop games based around broadcast TV
that allow the TV viewer to join in and participate in the TV show they are
watching. This type of service is dependent on certain hardware and middleware
being deployed by the operator and will consist of graphics overlayed on the TV
screen.

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The primary sources of revenues for us will be development agreements
with either broadcasters or digital cable and satellite network operators, as
well as revenue-sharing agreements based on interactive games developed in
conjunction with us.

Recent Developments

On May 31, 2001 we entered into a merger agreement along with
Interactive Network, Inc. and Two Way TV Limited, which contemplates the merger
of Interactive Network, Inc. into us. We will be the surviving entity. The
merger was approved by the shareholders of Interactive Network at a meeting of
the shareholders held on March, 21, 2002. The merger is contingent upon, among
other things, customary closing conditions.

Industry Background

Significant digital infrastructure upgrades by cable companies have
taken place and resulted in upgraded consumer video experiences, two-way
connectivity, digital set top box deployment, and new home entertainment
services. Besides expanded video channels, digital TV now allows operators to
begin to offer various interactive applications through the set top box. The
financial opportunities involving interactive television ("iTV") applications,
beyond just merely charging for upgraded channel offerings, have become one of
the new drivers of revenue growth for the operators. We believe the
significance of iTV is likely to increase for the following reasons:

. Distributors need to offset the cost of infrastructure upgrades. Cable
and satellite companies are therefore seeking to drive revenue from iTV
services ranging from simple Electronic Program Guides (EPG's) to
games. According to a recent report, it is anticipated that the cable
industry's iTV revenues in the U.S. will grow to over $42 billion by
2006 with more than 38 million iTV-ready households in the U.S. by the
same year.

. Broadcasters are seeking ways to maintain and/or increase audience
share as they face an expanding multi-channel environment and a growing
number of internet-capable homes.

. Content providers are attempting to react and adapt to the changing
environment and create additional revenue/value from existing formats.
Game shows such as ABC's "Who Wants to Be a Millionaire" and sports
programs such as "Monday Night Football" allow viewers to play along
via their PCs during the broadcast. Millions of sports fans logged on
to the PC-enhanced Monday Night Football broadcasts and ESPN Sunday
games.

We believe that within the developing iTV industry, the sector with the
greatest potential is "entertainment services". We further believe that the
market for interactive TV games, combining the power of TV with the competitive
nature of "playing-along", is largely underserved and has been slow to develop
in the United States.

We intend to target this high potential market and focus on a
"single-screen" solution using the set top box, rather than a personal
computer, to offer a compelling service to TV viewers.

Our Business Strategy

Our strategy is centered on providing interactive television solutions
and games to digital cable and satellite providers as well as broadcasters. We
intend to utilize our technology, branded games and patents to develop virtual
channels and branded games for our customers. We will derive revenue from
development agreements with cable or satellite providers and content owners as
well as through sharing of game usage revenues from games developed by us for
our customers. We believe that a key strength and opportunity for us is our
technical capability and interactive toolsets and we therefore intend to
establish a professional services team similar to a standard
business-to-business enterprise software deployment team. We expect this
structure to provide us with a platform to derive early revenues

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through third party licensing and partner channels, and leverage strategic
relationships with existing content, channel and technology providers.

We contemplate that once the necessary infrastructure is in place,
games will be provided to the end user via a pay-per-play or subscription-based
revenue model. Additionally, we will seek to sub-license our technology to
partner channels which will provide access to alternative content and an
existing customer base familiar with the partner brand. Our professional
services teams will endeavor to put in place third party channels and then
provide technology support while the partner channel undertakes the operational
risk and business development.

We are currently a party to a distribution agreement with digeo. The
agreement grants digeo the right to distribute two of our interactive games and
one of our trivia applications. The agreement provides that subscriber and
advertising revenues, if any, will be split equally between us and digeo. The
agreement contemplates a future agreement between the parties for a pay-per-use
or subscription based service using digeo technology and games developed by us.
The agreement is in place until the earlier of (i) one year from the date of
the commercial launch of the games, or (ii) 18 months from March 23, 2001, the
date the parties signed the agreement. Pursuant to an amendment to the
agreement, we have provided an additional games pack to digeo. Through digeo's
strategic alliance with Charter Communications, Inc., a multiple systems
operator, the games pack is currently being offered to a small number of
Charter's cable customers on a trial basis. For the period from inception
through December 31, 2001, we derived $50,000 of revenue from this agreement.

We have entered into a content agreement with Public Broadcasting
Service (PBS) for the development and production of interactive games. Under
the agreement with PBS, we will develop, at no cost to PBS or its distributors,
enhanced TV games based on content from two of PBS's programs, including ZOOM,
PBS's children's program. In lieu of any payment to us for the development of
the games, we are allowed to use the content and PBS logo in trade show and
promotional demonstrations. The agreement excludes us from authoring
technology, licenses or back-end game code based on PBS's content. The
agreement terminates on October 17, 2002. We have derived no revenue from this
agreement.

We have entered into an affiliation agreement with Wink Communications
Inc. allowing us to develop interactive games compatible with Wink's digital
television platform. Based on this agreement, we hope to distribute these games
through Wink-enabled digital cable and satellite operators subject to us
reaching satisfactory agreements with these operators.

In March 2002, we entered into an agreement with the Game Show Network
("GSN") to develop, integrate, manage and operate a GSN branded virtual
channel. The channel will contain a mixture of rebranded Two Way TV library
games and new games based around GSN programming. The intention is for GSN to
obtain distribution for the virtual channel on multiple operators using
different middleware platforms which could include Wink, Liberate, OpenTV, Sony
and Microsoft TV.

Our History

In January 2000, Two Way TV Limited and Interactive Network formed a
joint venture called TWIN Entertainment, Inc., now known as Two Way TV (US), to
offer interactive television entertainment to US and Canadian digital TV
consumers. We spent our first year putting in place key relationships on which
to build our business, including potential carriage/distribution arrangements,
content development with PBS, and content demos with Game Show Network and
Oxygen Cable Network. Robert Regan was hired as our President and Chief
Operating Officer and has assembled a small experienced core team to pursue our
business goals. Our primary offices are located in Los Angeles, California.

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Principal Products and Services

Our core product currently is our games pack. The games pack has been
developed for both Microsoft TV and Liberate platforms and has been used in
trials on the Charter Network in St Louis. The games pack can be made available
on different middleware platforms and can be tailored to meet the needs of our
cable and satellite TV partners. The games will be accessed through a digital
TV set-top box menu selection operated by a standard remote control and
presented on the television screen. Digital set-top boxes are broadband devices
allowing two-way high-speed data transfer. We will develop our games based on
preferences of our partners and our games will be carried on the cable and
satellite TV systems of our partners. Unlike traditional video channels,
interactive TV services are often based on a revenue-sharing model with
distributors and, therefore, there are few up-front access expenses with
distributors. We base the games we develop either on Two Way TV Limited's own
content library or third party material. With the development and deployment of
digital network infrastructure, particularly return path enabled set-top boxes,
we believe the business will increasingly focus on games built around live
scheduled entertainment events.

Two Way TV Limited's existing games, which have been launched in the
United Kingdom, Australia, Israel and Portugal, consist of two types of games:
"standalone" games and enhanced television games.

Standalone games consist of strategy games, word and number puzzles,
trivia quizzes and arcade-style games. They are full-screen games that sit
within a virtual channel and are available for play either on-demand or on a
scheduled basis. An on-demand game is available for a set amount of time,
usually 24 hours. A scheduled game has a specific start time or "window," and
the viewer must play during that time.

Enhanced television games are applications that run in conjunction with
a broadcast television event. They allow the television viewer to play along,
in real time, with the viewer's favorite game show or sports match. However,
these games do not involve gambling on the outcome of the events. Enhanced
television games allow viewing participants to compete in real time as the game
show or match progresses, scoring points through a variety of mechanisms,
including pre-game and in-game predictions, "what will happen next" questions
and trivia quizzes. Points are awarded based on the viewer's ability to
correctly predict events throughout the course of the event and to correctly
answer related trivia questions.

Our Markets

The end users for our games will be digital cable and satellite
viewers. However, we will not target these viewers directly. We have two main
categories of potential customers:

. Broadcasters and content owners who require any combination of our
creative and application development skills, integration and management
services or licenses to content creation and management tools.

. Cable and satellite operators who either want us to develop an "own
branded' interactive games offering for their customers or wish to
license from us the technology and tools to develop their own
interactive applications.

Product Development

The majority of our product development effort is concentrated on
reintegrating or reshaping Two Way TV Limited's developed technology for the
U.S. market. Accordingly, because of our relationship with Two Way TV Limited,
we do not need an emphasis on expensive "new" product development. We leverage
Two Way TV Limited's catalog of over 60 games developed and deployed across
digital cable, terrestrial and satellite networks in Europe and Australia.
Enhanced television applications and formats

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are also being deployed based on Two Way TV Limited technology to fit in with
both U.S. pre-recorded programs and live event broadcasting.

Intellectual Property

We have licensed from one of our shareholders, Interactive Network, the
non-exclusive use of its patents and other intellectual property for the United
States and Canada. The technology covered by Interactive Network's patent
portfolio includes the overall concept and underlying principle of interactive
competitive TV games. This includes producing and distributing the application
(such as queuing, sequencing, sending and organizing data), as well as playing,
including scoring and managing the data from the players, viewing data, game
enhancements, and handsets. We have also licensed from our other shareholder,
Two Way TV Limited, certain intellectual property rights and technology,
including then-existing and future content, software, know-how and other
technological materials and information, on a non-exclusive basis.

Exclusive License Agreement to Two Way TV Limited

The merger agreement provides that at the closing of the merger of
Interactive Network into us, we will sign an amended and restated license
agreement with Two Way TV Limited, which amends and restates the current
license agreement between Interactive Network and Two Way TV Limited. Under the
restated license agreement, we will grant to Two Way TV Limited a license to
two of Interactive Network's existing patents for developing, marketing and
providing digital and analog interactive services, products in territories
outside of the U.S. and Canada. The licensed patent rights relate to
interactive games and a method of data evaluation that will be proprietary to
us after the merger. The agreement will also permit Two Way TV Limited to
sublicense its license rights on a non-exclusive basis to other parties in
territories outside of the U.S. and Canada if we give our written approval to
do so. With limited exceptions, the license agreement is exclusive to Two Way
TV Limited within territories outside of the U.S. and Canada in consideration
for payments equal to 3% of gross profits of Two Way TV Limited through January
31, 2005 and 2.5% of gross profits of Two Way TV Limited thereafter until
termination. The exclusivity is subject to a license previously granted to NTN
Communications. In addition, the license rights may become non-exclusive if Two
Way TV Limited fails to make royalty payments to us or otherwise breaches the
agreement. The minimum royalty payments are $270,000 for the first year and
increase annually at 8% per year.

This agreement is an updated version of an existing license already in
place between Interactive Network and Two Way TV Limited, which was entered
into on January 31, 2000, and reflects the new corporate structure resulting
from the merger. Other than modifications in the new agreement that were made
for the purpose of taking the new structure into account, there have not been
any substantial changes made to the original agreement. If the merger is not
completed, the original license will stay in place and remain valid.

Proposed Exclusive License Agreement from Two Way TV Limited

The merger agreement provides that at the closing of the merger, we
will also sign an amended and restated license agreement with Two Way TV
Limited which amends and restates the current license agreement among
Interactive Network, Two Way TV Limited and us. Under the restated license
agreement, Two Way TV Limited will grant to us a license to all of Two Way TV
Limited's intellectual property and technology for developing, marketing and
providing interactive services and products within the U.S. and Canada in
consideration for payments equal to 4% of our gross revenues through January
31, 2005 and 3% of our gross revenues thereafter until termination. With
limited exceptions, the license is exclusive to us within the U.S. and Canada.
In particular, the exclusivity is subject to licenses that either have been or
may be granted in favor of third parties. The license may become non-exclusive
if we breach material provisions of the license agreement or of the merger
agreement.

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This agreement is an updated version of an existing license already in
place between us and Two Way TV Limited, which was entered into on January 31,
2000, but which is a non-exclusive license. The new license agreement grants us
an exclusive license and reflects the new corporate structure resulting from
the merger. A provision was added to the new agreement that provides that the
licenses will become non-exclusive if we breach material representations in the
merger agreement. The new agreement also provides that the exclusivity of the
licenses are subject to a license in favor of Liberate Technologies and a
potential license in favor of Microsoft Corporation. In exchange for permitting
the exclusivity of the license from Two Way TV Limited to us to be subject to
the license in favor of Liberate and the potential license in favor of
Microsoft, we will receive the benefit derived from these two license
agreements within the U.S. and Canada. Two Way TV Limited will retain the
benefit of the Liberate and Microsoft agreements derived from any territories
outside the U.S. and Canada. Also, the new agreement states that much of the
source code to Two Way TV Limited's technology will not be provided directly to
us but instead will be placed in escrow. Two Way TV Limited believes that its
source code is a core asset and a highly valuable trade secret and therefore
needs to be protected accordingly. In order to protect the trade secrets
embodied in source code, it is typical for licensors to escrow their source
code rather than transfer it directly to a licensee.

In addition, under the new license agreement, we would license back to
Two Way TV Limited derivative works that we make in connection with
intellectual property licensed from Two Way TV Limited. The license back would
apply to all territories outside of the U.S. and Canada. Two Way TV Limited
would also be given a right of first negotiation before we license any of our
other technology outside of the U. S. and Canada. Finally, another provision
was added to the license agreement, such that if we desire to transfer any of
those licenses, we must first give Two Way TV Limited notice and permit Two Way
TV Limited to reacquire those licenses on the same terms as the proposed
transfer. Two Way TV Limited's right to reacquire these licenses is secured by
a first priority security interest in all of the intellectual property and
technology licensed to us, as well as in the derivative works that we make from
those licensed items. Other than the modifications just described, there have
not been any substantial changes made to the original agreement. If the merger
is not completed, the original license will stay in place and remain valid.

Competition

It is our understanding that U.S. broadcast networks (ABC, CBS, NBC,
PBS and Game Show Network) are doing research into creating and distributing
interactive programming. They are taking the time to build knowledge of
enhanced television technology, programming, and production tools. These
companies represent both competition for viewers/users and an opportunity for
our professional services and licensing. The following are some examples of
these efforts:

. CBS-internet synched version of "Survivor", produced in-house

. PBS-internet synched versions of "Life 360", produced with Liberty
LiveWire

. ABC-internet synched version of the "Oscars" and syncTV version of "Who
Wants to be a Millionaire?", produced in-house

. Game Show Network-game show formats for WebTV and AOLTV-produced by
GoldPocket.

Companies such as Spiderdance and GoldPocket who mainly develop and
manage two screen internet synched content (i.e. using a PC monitor to display
content synchronized to a TV show) may present competition if they can
successfully migrate from the synchronized Web market into the interactive
television market using a set top box and the TV screen (known as single screen
applications).

Within the iTV space, there are some potential competitors such as
Static (Playjam), VisiWare (LudiTV), Buzztime, MetaTV and Net4TV. Using a
combination of in house and outsourced resources,

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they are now building interactive applications for use on digital TV platforms
which may compete with the applications and technology we develop and market.

Employees

As of December 31, 2001, we employed four full-time employees. In
addition, we currently have five full-time consultants and independent
contractors as well as three individuals who are employees and on the payroll
of Two Way TV Limited but have been assigned to work full-time in our Los
Angeles office. None of the employees is subject to a collective bargaining
agreement, and we believe that we generally have good relations with our
employees.

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