LIBERTY SATELLITE & TECHNOLOGY INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

F O R M 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission File Number: 0-21317

LIBERTY SATELLITE & TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)

State of Delaware 84-1299995
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

12300 Liberty Boulevard
Englewood, Colorado 80112
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (720) 875-5400

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No

The number of shares outstanding of Liberty Satellite & Technology, Inc.'s
common stock as of October 31, 2002, was:

Series A common stock - 11,078,834 shares; and
Series B common stock - 34,765,055 shares.

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Balance Sheets
(unaudited)

(continued)
I-1

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Balance Sheets, continued
(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-2

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Statements of Operations
(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-3

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Statements of Comprehensive Loss
(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-4

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Statement of Stockholders' Equity

Nine months ended September 30, 2002
(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-5

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Statements of Cash Flows
(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-6

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements

September 30, 2002
(unaudited)

(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Liberty Satellite & Technology, Inc. and those of all
majority-owned or controlled subsidiaries ("LSAT" and together with its
consolidated subsidiaries, the "Company"). All significant inter-company
transactions have been eliminated.

GENERAL. LSAT has been a consolidated subsidiary of Liberty Media
Corporation ("Liberty Media") since March 16, 2000, when LSAT issued
preferred stock to Liberty Media in exchange for certain assets. At
September 30, 2002, Liberty Media owned approximately 86% of LSAT's
outstanding common stock, which, when considered with LSAT preferred stock
owned by Liberty Media, represented approximately 98% of LSAT's outstanding
voting power. On March 28, 2000, Liberty Media acquired voting control of
Ascent Entertainment Group, Inc. ("Ascent"), and on June 8, 2000, Liberty
Media completed its acquisition of Ascent pursuant to which Ascent became
an indirect wholly-owned subsidiary of Liberty Media. Ascent's primary
operating subsidiary is On Command Corporation ("On Command"), which
provides in-room, on-demand video entertainment and informational services
to hotels, motels and resorts. On April 1, 2002, LSAT issued 34,000,000
shares of its Series B common stock ("Series B Common Stock") to Liberty
Media in exchange for the 89.41% interest in Liberty Satellite, LLC ("LSAT
LLC") not already owned by LSAT, and 100% of the capital stock of Ascent
(the "LSAT LLC and Ascent Transaction"). At September 30, 2002, LSAT,
primarily through its ownership interest in Ascent, controlled
approximately 63% of the outstanding On Command common stock ("On Command
Common Stock"). The foregoing transactions are described in greater detail
below.

As a result of the consummation of the LSAT LLC and Ascent Transaction,
LSAT became the owner of 100% of the common equity interests of Ascent and
LSAT LLC. Due to the fact that LSAT, LSAT LLC and Ascent are all under the
common control of Liberty Media, the LSAT LLC and Ascent Transaction has
been accounted for in a manner similar to a pooling-of-interests. As such,
the Company's financial statements have been restated to include LSAT LLC
and Ascent as wholly-owned subsidiaries of LSAT, effective with the
respective March 2000 dates that Liberty Media acquired control of such
entities.

I-7

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

Separate results of operations for LSAT, LSAT LLC and Ascent for the
periods prior to the LSAT LLC and Ascent Transaction are as follows:

- ----------
(1) Includes Liberty Media purchase accounting adjustments that have
not been "pushed down" to Ascent's historical financial
statements.

In addition to LSAT's indirect interests in On Command and various
investments, the Company is currently pursuing strategic opportunities
worldwide in the distribution of Internet and other content via satellite
and related businesses.

CONTRIBUTION OF SPRINT PCS STOCK AND FORMATION OF LSAT LLC. On March 16,
2000, LSAT completed two transactions with Liberty Media. Pursuant to the
terms of the first transaction, LSAT acquired a beneficial interest in
5,084,745 shares of Sprint Corporation PCS Group common stock ("Sprint PCS
Stock") with an aggregate market value on the closing date of $300,000,000
in exchange for 150,000 shares of LSAT Series A 12% Cumulative Preferred
Stock ("Series A Preferred Stock") with a liquidation value of $150,000,000
and 150,000 shares of LSAT Series B 8% Cumulative Convertible Voting
Preferred Stock ("Series B Preferred Stock") with a liquidation value of
$150,000,000. While the shares of Series A Preferred Stock have no voting
rights, the shares of Series B Preferred Stock have super voting rights,
which give Liberty Media voting control over LSAT. Accordingly, since March
16, 2000, LSAT has been a consolidated subsidiary of Liberty Media.

Pursuant to the terms of the second transaction with Liberty Media, LSAT
(through its wholly-owned subsidiaries) became the managing member of two
newly formed limited liability companies, LSAT LLC and LSAT Astro LLC
("LSAT Astro," and together with LSAT LLC, the "LSAT Joint Ventures"). LSAT
contributed (i) its beneficial interest in 4,221,921 shares of General
Motors Corporation Class H common stock ("GM Hughes Stock"), subject to a
stock appreciation right, and (ii) other assets to LSAT LLC in exchange for
a 10.59% ownership interest in LSAT LLC. Liberty Media contributed cash and
its interests in various satellite related assets, including an 86.01%
ownership interest in LSAT Astro, to LSAT LLC in exchange for the remaining
89.41% ownership interest in LSAT LLC. For a description of the
consideration paid by the Company to acquire its ownership interest in LSAT
Astro, see note 3. As LSAT is a consolidated subsidiary of Liberty Media,
all of the assets contributed by LSAT and Liberty Media to the LSAT Joint
Ventures were recorded at their net book values at the date of
contribution.

I-8

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

LIBERTY MEDIA'S ACQUISITION OF ASCENT. On March 28, 2000, Liberty Media
completed its cash tender offer for the outstanding common stock of Ascent
at a price of $15.25 per share. Approximately, 85% of the outstanding
common shares of Ascent were tendered in the offer, and Liberty Media paid
approximately $385,000,000. On June 8, 2000, Liberty Media acquired the
remaining 15% of Ascent common shares then outstanding for an additional
$67,000,000. The total purchase price for the acquisition was $452,000,000.
Liberty Media accounted for such transaction using the purchase method of
accounting.

LSAT LLC AND ASCENT TRANSACTION. On August 16, 2001, LSAT entered into two
interrelated purchase agreements with Liberty Media and certain of its
subsidiaries and affiliates. Both agreements were amended in November 2001
and January 2002. One agreement provided for LSAT's acquisition of certain
subsidiaries of Liberty Media that collectively held the 89.41% ownership
interest in LSAT LLC not already owned by LSAT in exchange for 25,298,379
shares of Series B Common Stock. The second purchase agreement provided for
LSAT's acquisition of 100% of the capital stock of Ascent from a subsidiary
of Liberty Media in exchange for 8,701,621 shares of Series B Common Stock.
The foregoing transaction closed on April 1, 2002. As noted above, the LSAT
LLC and Ascent Transaction has been accounted for in a manner similar to a
pooling-of-interests.

REVERSE STOCK SPLIT. On April 1, 2002, LSAT effected 1 for 10 reverse stock
splits of its Series A common stock ("Series A Common Stock") and Series B
Common Stock. All share and per share amounts included in these condensed
consolidated financial statements have been adjusted to give retroactive
effect to such reverse stock splits.

These interim condensed consolidated financial statements are unaudited. In
the opinion of management, all adjustments (consisting only of normal
recurring accruals) have been made that are necessary to present fairly the
financial position of the Company as of September 30, 2002 and the results
of its operations for the three and nine months ended September 30, 2002
and 2001. The results of operations for any interim period are not
necessarily indicative of the results for the entire year. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes thereto included in the
Company's December 31, 2001 Annual Report on Form 10-K, and in the
Company's Form 8-K/A filed on September 10, 2002.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified for comparability with
the 2002 presentation.

I-9

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

(2) NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS
("Statement 141"), and Statement of Financial Accounting Standards No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS ("Statement 142"). Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement 141 also specifies,
for all purchase method business combinations completed after June 30,
2001, criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. Statement 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement
142. Statement 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance
with Statement of Financial Accounting Standards No. 144, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS.

The Company adopted the provisions of Statement 141 upon issuance, and
adopted Statement 142 effective January 1, 2002. Statement 141 requires
that upon adoption of Statement 142, the Company evaluate its existing
intangible assets and goodwill that were acquired in a prior purchase
business combination, and make any necessary reclassifications in order to
conform with the new criteria in Statement 141 for recognition apart from
goodwill. In connection with Statement 142's transitional goodwill
impairment evaluation, the Company was also required to perform an
assessment of whether there was an indication that goodwill was impaired as
of the date of adoption. In connection with the adoption of Statement No.
142, the Company recognized a $93,131,000 impairment loss, net of taxes, as
the cumulative effect of a change in accounting principle.

Adjusted net loss attributable to common stockholders and pro forma loss
per common share for the three and nine months ended September 30, 2001,
exclusive of amortization expense related to goodwill are as follows:

I-10

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

Amortization of the intangible asset associated with On Command's hotel
contracts aggregated $40,750,000 for the nine months ended September 30,
2002. This intangible asset, which represents the Company's only
significant intangible asset with a finite useful life, will be fully
amortized by March 31, 2003.

In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
("Statement 144"), which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. Statement 144 supercedes
prior statements that address the disposal of a segment of a business, and
eliminates the exception to consolidation for subsidiaries for which
control is likely to be temporary. Statement 144 retains the prior
statement's fundamental provisions for the recognition and measurement of
impairment of long-lived assets to be held and used, as well as the
measurement of long-lived assets to be disposed of by sale. Statement 144
is effective for fiscal years beginning after December 15, 2001. The
adoption of this statement did not have a material impact on the Company's
financial position, results of operations or cash flows.

In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS ("Statement 143"). In
April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS ("Statement 145"). In June
2002, the FASB issued Statement of Financial Accounting Standards No. 146,
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
("Statement 146"). The adoption of Statements 143, 145 and 146 is not
expected to have a material impact on the Company's financial position,
results of operations or cash flows.

(3) TRANSACTIONS WITH LIBERTY MEDIA AND OTHER RELATED PARTIES

TRANSACTIONS WITH LIBERTY MEDIA

NOTE PAYABLE. In connection with the March 16, 2000 formation of LSAT LLC,
LSAT issued a $60,000,000 note payable to Liberty Media in exchange for its
13.99% ownership interest in LSAT Astro. The note bears interest at the 3
month London Interbank Offering Rate ("LIBOR") plus 2% (3.74% at September
30, 2002). Interest payments are due semi-annually on the first day of
March and September. The note, which allows for prepayments, matures on
March 16, 2003 at which time all unpaid principal and interest is due. At
September 30, 2002, the unpaid principal on the note was $48,411,000 and
the accrued interest on the note was $151,000.

I-11

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

TAX LIABILITY ALLOCATION AND INDEMNIFICATION AGREEMENT. In connection with
the LSAT LLC and Ascent Transaction, LSAT and Liberty Media entered into a
tax liability allocation and indemnification agreement whereby LSAT will be
obligated to make a cash payment to Liberty Media in each year that LSAT
(taken together with any of its subsidiaries) has taxable income. The
amount of the payment will be equal to the amount of the taxable income of
LSAT and its subsidiaries (determined as if LSAT and its subsidiaries filed
a separate return) multiplied by the highest applicable corporate tax rate.
In the event that (1) LSAT and its subsidiaries, when treated as a separate
group, has a net operating loss or deduction or is entitled to a tax credit
for a particular year; and (2) Liberty Media is able to use such loss,
deduction or credit to reduce its tax liability, LSAT will be entitled to a
credit against current and future payments to Liberty Media under the
agreement. If LSAT disaffiliates itself with Liberty Media and the members
of Liberty Media's affiliated group prior to the time that LSAT is able to
use such credit, LSAT will be entitled to a payment from Liberty Media at
the earlier of the time that (1) LSAT and its subsidiaries show they could
have used the net operating loss or net tax credit to reduce their own
separately computed tax liability or (2) the voting power of the stock of
LSAT held by Liberty Media and the members of its affiliated group drops
below 20%.

In addition, under the tax liability allocation and indemnification
agreement, LSAT will have the opportunity to participate in the defense of
claims of the Internal Revenue Service that might affect its liability
under the agreement, and to participate in tax refunds paid to Liberty
Media where such refunds are due in part to LSAT's operations.

In connection with the LSAT LLC and Ascent Transaction, the Company assumed
an intercompany income tax liability owed by Ascent to Liberty Media
pursuant to a tax liability allocation and indemnification agreement with
terms similar to the agreement described above. At September 30, 2002, the
amount owed by Ascent to Liberty Media pursuant to this agreement was
$18,446,000. Such amount is non-interest bearing and is due on demand.

EXPENSE ALLOCATIONS AND REIMBURSEMENTS. Liberty Media allocates rent,
salaries, benefits and certain other general and administrative expenses to
the Company. Although there is no written agreement with Liberty Media for
these allocations, the Company believes the allocated amounts to be
reasonable. The aggregate allocations from Liberty Media were $228,000 and
$313,000 for the nine months ended September 30, 2002 and 2001,
respectively. Such amounts are included in selling, general and
administrative expenses in the accompanying condensed consolidated
statements of operations. In addition, the Company reimburses Liberty Media
for certain expenses paid by Liberty Media on behalf of the Company.
Amounts owed to Liberty Media pursuant to these arrangements ($1,332,000 at
September 30, 2002) are non-interest bearing and are generally paid on a
monthly basis.

SKY LATIN AMERICA LOANS. During the year ended December 31, 2001, and the
three months ended March 31, 2002, Liberty Media loaned $18,552,000 and
$6,573,000, respectively, to LSAT LLC. LSAT LLC used the proceeds from
these loans to fund capital calls from its various 10% investees that
operate satellite television systems in Latin America ("Sky Latin
America"). The loans provided for interest at 8% per annum and were due and
payable on demand after November 27, 2001. Concurrently with the closing of
the LSAT LLC and Ascent Transaction, (i) Liberty Media contributed to the
Company, as part of that transaction and for no additional consideration,
promissory notes issued by subsidiaries of Liberty Media, with an aggregate
principal balance of $18,552,000 and related accrued interest of $651,000,
representing the loans described above that were made through December 31,
2001, and (ii) LSAT LLC repaid principal of $6,573,000 and accrued interest
of $37,000 related to the first quarter 2002 advances.

I-12

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

SALE OF ASCENT NETWORK SERVICES. Effective September 4, 2001, Ascent
completed the sale of Ascent Network Services to Liberty Livewire
Corporation ("Liberty Livewire"), a consolidated subsidiary of Liberty
Media, for cash consideration of $32,038,000. Ascent Network Services
provides video distribution services to the NBC television network and
other private networks. As Ascent and Liberty Livewire are both
consolidated subsidiaries of Liberty Media, no gain or loss was recognized
in connection with this transaction. During the nine months ended September
30, 2001, Ascent Network Services paid management fees to Liberty Livewire
aggregating $6,400,000. Such management fees are included in selling,
general and administrative expenses in the accompanying condensed
consolidated statement of operations.

PUT OPTION LIABILITY. Effective September 29, 2000, LSAT LLC acquired a 1%
managing common interest in a joint venture ("IB2 LLC") from a subsidiary
of Liberty Digital, Inc. ("Liberty Digital") for $652,000. Liberty Digital,
an indirect wholly-owned subsidiary of Liberty Media, retained a preferred
interest (the "Preferred Interest") in IB2 LLC, which owns approximately
360,000 shares of iBEAM Broadcasting Corp. ("iBEAM") common stock ("iBEAM
Stock"). The Preferred Interest had an initial liquidation value of
$64,574,000 and is entitled to a return of 9%, compounded annually. As part
of the transaction, LSAT LLC granted Liberty Digital the right to put the
Preferred Interest to LSAT LLC for a purchase price equal to $26,000,000
(the value of iBEAM Stock on September 29, 2000) plus a 9% return,
compounded annually (the "Put Option"). LSAT LLC has the right to call
Liberty Digital's Preferred Interest at a price equal to the initial
liquidation value plus a return of 9%, compounded annually. Both the Put
Option and call option are exercisable on September 29, 2008. Under certain
limited circumstances, including iBEAM's bankruptcy, LSAT LLC can force
Liberty Digital to exercise the Put Option prior to September 29, 2008.

During the fourth quarter of 2001, iBEAM filed for bankruptcy under Chapter
11 of the Bankruptcy Code. As a result of such bankruptcy filing, the
Company began carrying the Put Option liability at an amount ($30,369,000
at September 30, 2002), which represents the Put Option purchase price to
LSAT LLC plus an accrued return to Liberty Digital of 9%, compounded
annually. The Company anticipates that future losses with respect to the
Put Option will be limited to Liberty Digital's 9% return on the Put Option
liability.

Changes in the fair market value of the Put Option subsequent to September
29, 2000 have been recognized as unrealized gains (losses) on financial
instruments in the Company's consolidated statements of operations. During
the nine months ended September 30, 2002 and 2001, the Company recorded
unrealized losses of $1,881,000 and $6,808,000, respectively, related to
the Put Option.

I-13

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

TRANSACTIONS WITH OTHER RELATED PARTIES

PHOENIXSTAR MANAGEMENT AGREEMENT. Effective February 1, 2000, the Company
entered into a management agreement with Phoenixstar, Inc. (formerly known
as PRIMESTAR, Inc.) ("Phoenixstar") pursuant to which the Company is
managing Phoenixstar's affairs in exchange for a monthly management fee.
Prior to 1999, the Company beneficially owned 37% of Phoenixstar's
outstanding shares. In connection with certain other transactions that
closed in 1999, the Company agreed to forego any liquidating distribution
or other payment that may be made in respect of the outstanding shares of
Phoenixstar upon any dissolution and winding-up of Phoenixstar, or
otherwise in respect of Phoenixstar's equity, and to transfer its shares in
Phoenixstar to the other Phoenixstar stockholders. Management fees from
Phoenixstar aggregated $315,000 for each of the nine-month periods ended
September 30, 2002 and 2001, respectively. In addition, the Company
allocates certain general and administrative expenses, such as office rent
and computer support to Phoenixstar. Under the current management
agreement, expense allocations have been limited to $5,000 per month since
February 2001. Such allocations aggregated $45,000 and $54,000 during the
nine months ended September 30, 2002 and 2001, respectively, and are
reflected as a reduction of general and administrative expenses in the
accompanying condensed consolidated statements of operations.

(4) LOSS PER COMMON SHARE
The loss per common share for the three and nine months ended September 30,
2002 and 2001 is based on 44,176,400 and 42,564,800 weighted average shares
outstanding during the three- and nine-month 2002 periods, respectively and
41,524,900 and 41,388,600 weighted average shares outstanding during the
three- and nine-month 2001 periods. Potential common shares were not
included in the computation of diluted loss per share because their
inclusion would have been anti-dilutive. At September 30, 2002, the number
of potential common shares was approximately 2,159,000. Such potential
common shares consist of stock options to acquire shares of Series A Common
Stock and securities that are convertible into 1,696,717 shares of Series B
Common Stock at September 30, 2002. The foregoing potential common share
amounts do not take into account the assumed number of shares that might be
repurchased by the Company upon the exercise of stock options.

(5) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $13,121,000 and $21,207,000 for the nine months
ended September 30, 2002 and 2001, respectively. Cash paid for income taxes
was not significant during these periods. For descriptions of certain
non-cash investing and financing activities, see notes 7 and 8.

(6) INVESTMENTS IN AFFILIATES
The following table reflects the Company's carrying amount of its
investments accounted for using the equity method:

I-14

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

The following table reflects the Company's share of losses of affiliates:

ASTROLINK

The Company owns a direct 13.99% interest in LSAT Astro and an indirect
(through LSAT LLC) 86.01% interest in LSAT Astro. LSAT Astro owns an
approximate 31.5% ownership interest in Astrolink. Astrolink, a
developmental stage entity, was originally established to build a global
telecom network using Ka-band geostationary satellites to provide broadband
data communications services. Astrolink's original business plan required
approximately $2.4 billion in additional financing over the next several
years. During the fourth quarter of 2001, certain of the members of
Astrolink informed Astrolink that they did not intend to provide any of
Astrolink's required financing. In light of this decision, Astrolink is
considering several alternatives with respect to its proposed business
plan, including, but not limited to, seeking alternative funding sources,
scaling back its proposed business plan, and liquidating the venture
entirely. There can be no assurance that Astrolink will be able to obtain
the necessary financing for a scaled-back business plan on acceptable
terms.

During the second quarter of 2002, LSAT signed a non-binding letter of
intent with the other members of Astrolink in connection with a proposed
restructuring of Astrolink. The non-binding letter of intent contemplates
the settlement of all claims among the parties and their affiliates
relating to Astrolink and the acquisition of all the assets of Astrolink by
LSAT. If the transactions contemplated by the non-binding letter of intent
are consummated, Liberty Media will make a capital contribution to LSAT at
the closing, in exchange for shares of Series B Common Stock at fair market
value at closing. The parties have agreed not to publicly disclose the
specific economic terms of the proposed transaction, pending execution of a
definitive agreement on such terms. Subject to consummation of the
transactions contemplated by the non-binding letter of intent, and any
necessary regulatory approvals, LSAT currently plans to pursue a revised
operating plan for the new Astrolink system, taking into account current
financial and market factors. The transactions contemplated by the
non-binding letter of intent are subject to, among other conditions, the
negotiation, execution and delivery of definitive agreements, required
third party and governmental consents, and the termination or
renegotiation, on terms acceptable to LSAT, of Astrolink's prior
procurement contracts.

I-15

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

During the second quarter of 2001, the Company determined that its
investment in Astrolink had experienced a nontemporary decline in value.
Accordingly, the carrying amount of such investment was adjusted to its
then estimated fair value resulting in a recognized loss of $155,000,000.
Such loss is included in share of losses of affiliates in the accompanying
condensed consolidated statements of operations. Based on a fourth quarter
2001 assessment of Astrolink's remaining sources of liquidity and
Astrolink's inability to obtain financing for its business plan, the
Company concluded that the carrying value of LSAT Astro's investment in
Astrolink should be reduced to reflect a fair value that assumes the
liquidation of Astrolink. Accordingly, LSAT Astro wrote-off all of its
remaining investment in Astrolink during the fourth quarter of 2001. The
aggregate amount required to reduce LSAT Astro's investment in Astrolink to
zero was $249,868,000. Including such fourth quarter amount, LSAT Astro
recorded losses and charges relating to its investment in Astrolink
aggregating $417,202,000 during the year ended December 31, 2001.

Since LSAT Astro's investment in Astrolink was reduced to zero at
December 31, 2001, LSAT Astro's share of Astrolink's losses since
December 31, 2001 has been limited to the amounts loaned to Astrolink by
the Company during the nine months ended September 30, 2002 ($647,000). At
September 30, 2002, the Company was not obligated to provide additional
funding to Astrolink.

AEROCAST

LSAT LLC owns an approximate 45.5% ownership interest in Aerocast. Aerocast
is developing next generation streaming media technologies for broadband
network operators and video content providers. Aerocast intends to utilize
terrestrial and satellite platforms to distribute streaming media to
businesses and consumers with high-speed internet access.

At September 30, 2002, the carrying amount of the Company's investment in
Aerocast exceeded the Company's proportionate share of Aerocast's net
assets by $7,106,000. Such excess relates to intellectual property and
technology developed by Aerocast, and is being amortized over a useful life
of five years. Amortization aggregated $1,561,000 and $1,503,000 for the
nine months ended September 30, 2002 and 2001, respectively, and is
included in share of losses of affiliates.

Aerocast is in the start-up phase of its business, and the Company
anticipates that Aerocast will need additional financing to fund its
business plan. In order to maintain its current ownership interest in
Aerocast, the Company may be required to participate in such additional
financing. If the Company is unable or unwilling to provide additional
financing, its ownership interest may be diluted or it may forfeit certain
voting or other shareholder rights. There is no assurance that Aerocast
will be able to obtain the necessary financing on acceptable terms. If it
is unable to secure the necessary financing, Aerocast may be forced to
alter its business plan or consider a plan of liquidation.

I-16

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

Summarized unaudited financial information for Aerocast is as follows:

(7) INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in available-for-sale securities and other cost investments are
summarized as follows:

* Denotes an investment carried as an available-for-sale security. Amounts
shown in the table represent the combined fair market value of the
security and any related derivative instrument.

(a) SPRINT PCS GROUP

The Company acquired beneficial interest in 5,084,745 shares of Sprint
Corporation PCS Group common stock ("Sprint PCS Stock") from Liberty Media
in March 2000. The Company accounts for such investment as an
available-for-sale security.

The trust holding the Sprint PCS Stock for LSAT's benefit has entered into
an equity collar (the "Sprint PCS Collar") with a financial institution
with respect to the Sprint PCS Stock. The collar provides the trust with a
put option that gives it the right to require its counterparty to buy
5,084,745 shares of Sprint PCS Stock from the trust in seven tranches in
March 2003 for a weighted average price of $59.71 per share. The trust
simultaneously sold a call option giving the counterparty the right to buy
the same shares of stock from the trust in seven tranches in March 2003 for
a weighted average price of $82.39 per share. The put and call options for
this collar were equally priced, resulting in no cash receipts or payments.
At September 30, 2002, the fair value of the Sprint PCS Collar was
approximately $291,519,000.

I-17

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

Effective May 9, 2001, LSAT transferred (i) its beneficial interest in the
Sprint PCS Stock, (ii) the Sprint PCS Collar and (iii) the PCS Loan
Facility (as described in note 9) to LSAT LLC in exchange for two secured
demand promissory notes in the aggregate principal amount of $224,226,000.
Such notes bear interest at a rate of 6.5% per annum and are due in March
2003. As LSAT LLC is a consolidated subsidiary of LSAT, there was no effect
on the Company's consolidated balance sheet on the date of the transaction.

(b) SKY LATIN AMERICA

The amounts shown in the table for Sky Latin America represent the
aggregate book basis of a number of different satellite television
operators located in Mexico, Brazil, Chile and Colombia. LSAT LLC has a 10%
beneficial interest in each of the Sky Latin America businesses. See note
12 for a discussion of the Company's contingent obligations with respect to
Sky Latin America.

During the second quarter of 2002, the Company recorded a $58,948,000 loss
to reflect a nontemporary decline in the value of LSAT LLC's investment in
Sky Latin America.

(c) GM HUGHES

The Company, through LSAT LLC, holds 1,821,921 shares of General Motors
Corporation Class H common stock ("GM Hughes Stock") and accounts for such
shares as available-for-sale.

LSAT LLC has entered into a put spread collar with a financial institution
with respect to its shares of GM Hughes Stock. The collar (i) provides LSAT
LLC with a put option that gives it the right to require its counterparty
to buy 1,821,921 shares of GM Hughes Stock from LSAT LLC in three tranches
in October 2003 for a weighted average price of $26.64 per share, and (ii)
provides the counterparty with a put option that gives it the right to
require LSAT LLC to repurchase the shares of GM Hughes Stock for a weighted
average price of $14.80 per share. LSAT LLC simultaneously sold a call
option giving the counterparty the right to buy the same shares of stock
from LSAT LLC in three tranches in October 2003 for a weighted average
price of $54.32 per share. The put and call options for this collar were
equally priced, resulting in no cash receipts or payments. At September 30,
2002, the fair value of the GM Hughes put spread collar was approximately
$20,274,000, which represented an increase of $5,528,000 from December 31,
2001. Such increase is included in unrealized gains on financial
instruments in the accompanying condensed consolidated statement of
operations.

(d) XMSR

XMSR, a publicly traded company, offers 100 national audio channels of
music, news, talk, sports and children's programming from two satellites
directly to vehicle, home and portable radios. LSAT LLC currently owns
1,000,000 shares of XMSR common stock representing an approximate 1%
interest.

LSAT LLC has entered into an equity collar with a financial institution
with respect to its shares of XMSR common stock. The collar provides LSAT
LLC with a put option that gives it the right to require its counterparty
to buy 1,000,000 shares of XMSR common stock from LSAT LLC in three
tranches in November 2003, December 2003 and February 2004 for a weighted
average price of $28.55 per share. LSAT LLC simultaneously sold a call
option giving the counterparty the right to buy the same shares of stock
from LSAT LLC in three tranches in November 2003, December 2003 and
February 2004 for a weighted average price of $51.49 per share. The put and
call options for this collar were equally priced, resulting in no cash
receipts or payments. At September 30, 2002, the fair value of the XMSR
equity collar was approximately $24,147,000.

I-18

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

On June 27, 2001, LSAT LLC entered into an agreement to lend 1,000,000
shares of XMSR to a third party. The obligation of such third party to
return those shares to LSAT LLC is secured by cash collateral equal to 100%
of the market value of that stock, which was $3,900,000 at September 30,
2002. Such cash collateral is reported as restricted cash in the
accompanying condensed consolidated balance sheet. During the period of the
loan, which is terminable by either party at any time, the cash collateral
is to be marked-to-market daily. Interest accrues on the cash collateral
for the benefit of LSAT LLC at the rate of 0.15% per annum. As of September
30, 2002, 1,000,000 shares of XMSR had been lent under this agreement. The
loan has no stated maturity date.

(e) OTHER

Information concerning certain of the Company's other investments is set
forth below.

On March 30, 2001, On Command acquired certain preferred stock of STSN,
Inc. ("STSN"), a high speed access provider, in exchange for cash of
$15,000,000 and the conversion of a $5,000,000 convertible promissory note.
During the fourth quarter of 2001, On Command recorded a $16,539,000 loss
to reflect an other than temporary decline in the estimated fair value of
its investment. Such estimated fair value was based on the price of
securities sold by STSN to On Command and other investors during the first
quarter of 2002. In this regard, On Command purchased $2,599,000 of
preferred stock from STSN during the first six months of 2002.

Subsequent to September 30, 2002, STSN informed the Company that additional
financing would be required during the first quarter of 2003 due to
revisions to STSN's business plan. As a result, the Company's ownership
interest in STSN will be diluted if the Company does not participate in
such additional financing. Based on the foregoing developments, the Company
will reevaluate the carrying value of its investment in STSN during the
fourth quarter of 2002.

During the first quarter of 2001, On Command completed a transaction that
resulted in On Command's acquisition of a 7.5% interest in e-ROOM
CORPORATION ("e-ROOM") and the settlement of certain litigation. To acquire
the 7.5% interest and settle the litigation, On Command (i) contributed its
Asia-Pacific subsidiaries to e-ROOM and transferred On Command intercompany
receivables from such subsidiaries to e-ROOM, (ii) issued 275,000 shares of
On Command Common Stock to e-ROOM, and (iii) paid $1,000,000 to e-ROOM. On
Command also agreed that e-ROOM would have the option during the 15 day
period beginning on March 1, 2003 to cause On Command to repurchase all,
but not less than all, of the 275,000 shares of On Command Common Stock
issued to e-ROOM at a price of $15 per share. Such repurchase obligation
will terminate if the On Command Common Stock closes at or above $15 per
share on any ten consecutive trading days prior to March 1, 2003, and the
shares of On Command Common Stock held by e-ROOM are freely tradable during
such period. Due to the existence of this repurchase obligation, On Command
valued the On Command Common Stock issued to e-ROOM at $15 per share. The
excess of the value assigned to the consideration paid to e-ROOM over the
then estimated $5,298,000 fair value of the 7.5% interest in e-ROOM
received by On Command has been reflected as loss on settlement of
litigation in the accompanying condensed consolidated statements of
operations. On Command's original estimate of the litigation loss resulted
in a $4,764,000 charge during the fourth quarter of 2000. An additional
charge of $3,700,000 was recorded during the first quarter of 2001 to
reflect a change in the estimate of the amount of On Command's intercompany
receivables to be transferred to e-ROOM. During the fourth quarter of 2001,
On Command recorded a $2,000,000 impairment charge to reflect an other than
temporary decline in the estimated fair value of its investment in e-ROOM.

I-19

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

DERIVATIVE INSTRUMENTS

The Company uses equity collars and put spread collars to manage fair value
risk associated with certain investments. Derivative instruments are
generally not used for speculative purposes. The derivative instruments may
involve elements of credit and market risk in excess of amounts recognized
in the financial statements. The Company monitors its positions and the
credit quality of counterparties, consisting primarily of major financial
institutions and does not expect nonperformance by any of its
counterparties.

The Company's equity collars are accounted for as fair value hedges.
Accordingly, changes in the fair value of the equity collars are recognized
in earnings as unrealized gains or losses on financial instruments together
with the changes in the fair value of the underlying securities. The
Company's put spread collars have not been designated as fair value hedges,
and therefore changes in the fair value of the put spread collars are
recorded as unrealized gains or losses on financial instruments in the
Company's condensed consolidated statements of operations.

For derivatives designated either as fair value or cash flow hedges,
changes in the time value of the derivatives are excluded from the
assessment of hedge effectiveness and are recognized in earnings currently.
Hedge ineffectiveness, determined in accordance with Statement of Financial
Accounting Standard No. 133, had no impact on earnings for the nine months
ended September 30, 2002 and 2001. No fair value hedges or cash flow hedges
were derecognized or discontinued during the nine months ended
September 30, 2002 and 2001.

For the nine months ended September 30, 2002, unrealized losses on
financial instruments include a $5,528,000 gain related to the GM Hughes
put spread collar, a $1,782,000 loss related to changes in the time value
of equity collars and a $1,881,000 loss related to the iBEAM Put Option.

NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS

During the nine months ended September 30, 2002 and 2001, the Company
determined that certain of its investments experienced other-than-temporary
declines in value. As a result, the cost bases of such investments were
adjusted to their respective estimated fair values. Such adjustments
resulted in recognized losses of $76,333,000 ($58,948,000 of which related
to Sky Latin America and $17,385,000 which related to LSAT LLC's investment
in Loral Space & Communications Ltd. ("Loral")) during the 2002 period, and
$40,139,000 (including $20,725,000 related to LSAT LLC's investment in
Wildblue Communications, Inc. ("Wildblue") and $14,575,000 related to LSAT
LLC's investment in XMSR) during the 2001 period.

Investments in available-for-sale securities (including related equity
collars) are summarized below. Such amounts are in addition to the
unrealized gains and losses recognized in the condensed consolidated
statements of operations.

I-20

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

(8) DISPOSITION

In July 2002, On Command consummated the sale (the "OCE Sale") of its
70% majority shareholdings in On Command Europe Limited ("OCE") to
Techlive Limited ("Techlive"), the owner of the remaining 30% interest
in OCE. Proceeds from the sale aggregated $2,550,000. Such proceeds do
not reflect any reduction for OCE's cash balances of $1,415,000 that
were transferred to Techlive as a part of the OCE Sale. As a result of
the consummation of the OCE Sale, On Command recorded a $5,103,000
impairment loss during the second quarter of 2002 to reduce the carrying
value of OCE's long-lived assets to the fair value indicated by the OCE
Sale. During the third quarter of 2002, OCE's remaining net assets,
including a $930,000 cumulative foreign currency translation loss, were
written-off against the net proceeds received, resulting in no material
impact to the Company's net loss for the period.

(9) DEBT
Debt is summarized as follows:

(a) On Command's revolving credit facility, as amended, (the "On Command
Revolving Credit Facility") provides for aggregate borrowings of
$275,000,000. Borrowings under the On Command Revolving Credit
Facility are due and payable in July 2004. On Command had $16,367,000
of remaining availability under the On Command Revolving Credit
Facility at September 30, 2002. On Command's ability to draw
additional funds under the On Command Revolving Credit Facility is
limited by certain financial covenants.

Revolving loans extended under the On Command Revolving Credit
Facility bear interest at the London Interbank Offering Rate ("LIBOR")
plus a spread that may range from 1.10% to 2.75% depending on certain
operating ratios of On Command (4.32% effective borrowing rate at
September 30, 2002). In addition, a facility fee ranging from 0.15% to
0.50% per annum is charged on the On Command Revolving Credit
Facility, depending on certain operating ratios of On Command. The On
Command Revolving Credit Facility contains customary covenants and
agreements, most notably the inclusion of restrictions on On Command's
ability to pay dividends or make other distributions, and restrictions
on On Command's ability to make capital expenditures. In addition, On
Command is required to maintain leverage and interest coverage ratios.
On Command was in compliance with such covenants at September 30,
2002. Substantially all of On Command's assets are pledged as
collateral for borrowings under the On Command Revolving Credit
Facility.

I-21

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

At September 30, 2002, the maximum leverage ratio permitted under the
On Command Revolving Credit Facility was 4.50, and On Command's actual
leverage ratio was 4.07. The maximum leverage ratio permitted under
the On Command Revolving Credit Facility at December 31, 2002 and
March 31, 2003 is 4.25 and 3.50, respectively. On Command is seeking
an amendment to the On Command Revolving Credit Facility that would
allow On Command to maintain compliance with this covenant. Although
no assurance can be given, On Command believes that it will be
successful in obtaining such an amendment on acceptable terms to On
Command. In the event On Command is unable to obtain an acceptable
amendment to the On Command Revolving Credit Facility, On Command
would seek to refinance the On Command Revolving Credit Facility with
alternative sources of financing. No assurance can be given that any
such alternative financing would be available on terms acceptable to
On Command or at all.

(b) LSAT LLC's revolving credit facility, as amended, provides for maximum
borrowings of $303,000,000 (the "PCS Loan Facility"). In May 2001,
LSAT transferred its rights and obligations under the PCS Loan
Facility to LSAT LLC. The PCS Loan Facility is secured by LSAT LLC's
interest in shares of Sprint PCS Stock and by the Sprint PCS Collar
described in note 7. Interest accrues at the 30 day LIBOR (1.82% at
September 30, 2002) and is payable monthly. The principal balance is
due and payable March 10, 2003. At September 30, 2002, borrowing
availability pursuant to the PCS Loan Facility was $190,497,000.

The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. Due to
its variable rate nature, the fair value of the Company's debt approximated
its carrying value at September 30, 2002.

(10) TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
During the second quarter of 2001, Ascent purchased 2,245,155 shares of
common stock of On Command from On Command's former Chairman of the Board
and Chief Executive Officer for aggregate cash consideration of
$25,191,000. Such purchase price represents a per share price of $11.22.
The closing market price for On Command common stock on the day the
transaction was signed was $7.77. The Company has included the $7,746,000
difference between the aggregate market value of the shares purchased and
the cash consideration paid in selling, general and administrative expenses
in the accompanying condensed consolidated statement of operations.

On August 8, 2000, the Company issued 13,500 shares of the Company's Series
A, $.01 Par Value Convertible Participating Preferred Stock ("Series A
Preferred Stock"), to the former Chairman and Chief Executive Officer of
the Company in exchange for a $21,080,000 promissory note and a $13,500
cash payment. The promissory note is secured by the Series A Preferred
Stock or proceeds thereon and the former Chairman and Chief Executive
Officer's personal obligations under such promissory note are limited to
25% of the principal amount of the note plus accrued interest thereon. The
note, which may not be prepaid, is due and payable on August 1, 2005, and
interest on the note accrues at a rate of 7% per annum, compounded
quarterly.

I-22

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

(11) SIGNIFICANT CUSTOMERS
During the first nine months of 2002, hotels owned, managed or franchised
by Marriott International, Inc. ("Marriott"), Hilton Hotels Corporation
("Hilton") and Six Continents Hotels, Inc. ("Six Continents") accounted for
29.9%, 15.9% and 10.9%, respectively, of On Command's room revenue. The
loss of any of these customers, or the loss of a significant number of
other hotel chain customers, could have a material adverse effect on On
Command's results of operations and financial condition. However, contracts
with respect to individually owned, managed or franchised hotels expire
over an extended period of time depending on the installation date of the
individual hotel. Additionally, the terms of On Command's contracts with
hotels owned by a hotel chain are sometimes different than those of On
Command's contracts with hotels that are managed or franchised by the same
hotel chain.

In October 2000, Hilton announced that it would not be renewing its master
contract with On Command. In addition, On Command's master contract with
Promus Hotel Corporation ("Promus"), a subsidiary of Hilton, expired on May
25, 2002. As a result, hotels owned, managed or franchised by Hilton or
Promus are currently subject to a master contract between Hilton and a
competitor of On Command. Accordingly, On Command anticipates that hotels
owned by Hilton or Promus will not renew their contracts as they expire. On
the other hand, hotels that are managed or franchised by Hilton are not
precluded from renewing their contracts with On Command, and, although no
assurance can be given, On Command anticipates that certain of those hotels
will choose to renew. At September 30, 2002, On Command provided service to
approximately 128,700 rooms in 543 hotels that are owned, managed or
franchised by Hilton or Promus. The majority of these rooms are located in
managed or franchised hotels that are not owned by Hilton or Promus.
Through September 30, 2002, On Command's contracts with 64 of the
aforementioned 543 hotels (16,500 rooms) had expired and service to these
hotels is currently provided under monthly or other short-term renewals. On
Command's individual contracts with the remaining 479 Hilton or Promus
hotels (112,200 rooms) expire at various dates through 2010, with the
majority expiring by 2005. Over time, On Command anticipates that the
revenue it derives from hotels that are owned, managed or franchised by
Hilton or Promus will decrease. However, due to the uncertainties involved,
On Command is currently unable to predict the amount and timing of the
revenue decreases.

I-23

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

(12) COMMITMENTS AND CONTINGENCIES
The Company and other investors in the Sky Latin America businesses have
severally guaranteed obligations due under certain transponder agreements
and equipment lease agreements through 2018. At September 30,2002, the
portions of the remaining undiscounted obligations due under such
transponder agreements and equipment lease agreements that were severally
guaranteed by the Company aggregated approximately $109,057,000 and
$7,000,000, respectively. Subsequent to September 30, 2002, Globo
Comunicacoes e Participacoes ("GloboPar"), an investor in three of the Sky
Latin America entities, announced that it was reevaluating its capital
structure. As a result, the Company believes that it is probable that
GloboPar will not meet some, if not all, of its future funding obligations
with respect to these three Sky Latin America entities. To the extent that
GloboPar does not meet its funding obligations, the Company and other
investors could mutually agree to assume GloboPar's obligations. To the
extent that the Company or such other investors do not fully assume
GloboPar's funding obligations, any funding shortfall could lead to
defaults under applicable transponder agreements and equipment lease
agreements. With respect to the equipment lease agreements, default also
includes bankruptcy, debt default, or material adverse change in the
business or financial condition of any guarantor that materially adversely
affects the ability of any such guarantor to perform its obligations under
the guarantee. In the event any such defaults were to occur, the default
provisions of the applicable agreements would determine the ultimate amount
to be paid by the Company. The Company believes that the maximum amount of
the Company's aggregate exposure under the default provisions of the
various agreements is not in excess of the undiscounted remaining
obligations guaranteed by the Company, as set forth above. The three
entities in which GloboPar is an investor account for approximately
$89,667,000 of the approximately $116,057,000 of aggregate obligations
guaranteed by the Company at September 30, 2002. The Company cannot
currently predict whether it will be required to perform under any of such
guarantees.

The Company leases office space and certain equipment pursuant to
noncancelable operating leases.

On Command is a party to affiliation agreements with programming suppliers.
Pursuant to certain of such agreements, On Command is committed to carry
such suppliers' programming on its video systems. Additionally, certain of
such agreements provide for penalties and charges in the event the
programming is not carried or not delivered to a contractually specified
number of rooms.

The Company has contingent liabilities related to legal proceedings, taxes
and other matters arising in the ordinary course of business. Although it
is reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the
opinion of management, it is expected that amounts, if any, which may be
required to satisfy such contingencies will not be material in relation to
the accompanying condensed consolidated financial statements.

(13) INFORMATION ABOUT OPERATING SEGMENTS
LSAT identifies its reportable segments as those consolidated subsidiaries
that represent 10% or more of its combined revenue, net earnings or loss,
or total assets. The Company's investments in equity affiliates are
considered reportable segments if the Company's investment in, or share of
losses of, any equity affiliate represents 10% or more of the Company's
total assets or pre-tax earnings or loss, respectively. Subsidiaries and
affiliates not meeting this threshold are aggregated together for segment
reporting purposes. The segment presentation for prior periods has been
conformed to the current period segment presentation.

I-24

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

For the nine months ended September 30, 2002, LSAT had two operating
segments: On Command and Other. On Command provides in-room, on-demand
video entertainment and information services to hotels, motels and resorts
primarily in the United States and is majority-owned and consolidated by
LSAT. Other includes LSAT's non-consolidated investments and corporate.

LSAT evaluates performance based on the measures of revenue and operating
cash flow. LSAT defines operating cash flow as operating income before
deducting stock compensation, depreciation and amortization, and asset
impairments and other charges. LSAT's definition of operating cash flow may
differ from cash flow measurements provided by other public companies. LSAT
believes operating cash flow is a widely used financial indicator of
companies similar to LSAT and its affiliates, which should be considered in
addition to, but not as a substitute for, operating income, net income,
cash flow provided by operating activities and other measures of financial
performance prepared in accordance with generally accepted accounting
principles. LSAT generally accounts for intersegment sales and transfers as
if the sales or transfers were to third parties, that is, at current
prices.

LSAT utilizes the following financial information for purposes of making
decisions about allocating resources to a segment and assessing a segment's
performance:

I-25

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

The following table provides a reconciliation of segment operating cash
flow to loss before income taxes and minority interest:

I-26

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The following discussion and analysis provides information concerning the
financial condition and results of operations of the Company and should be read
in conjunction with the accompanying condensed consolidated financial statements
of the Company.

Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. To the extent that such statements are not
recitations of historical fact, such statements constitute forward-looking
statements which, by definition, involve risks and uncertainties. Where, in any
forward-looking statement, the Company expresses an expectation or belief as to
future results or events, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual
results or events to differ materially from those anticipated:

- - general economic and business conditions and industry trends;
- - trends in hotel occupancy rates and business and leisure travel patterns;
- - the regulatory and competitive environment of the industries in which the
Company, and the entities in which it has interests, operate;
- - the risk of potentially changing attitudes and community standards regarding
On Command's adult content;
- - uncertainties inherent in new business strategies, new product launches and
development plans;
- - rapid technological changes;
- - the acquisition, development and/or financing of telecommunications networks
and services;
- - future financial performance, including availability, terms and deployment of
capital;
- - the ability of On Command to obtain an amendment to the On Command Revolving
Credit Facility that will allow On Command to maintain compliance with the
covenants contained therein;
- - the ability of vendors to deliver required equipment, software, content and
services on terms acceptable to the Company;
- - availability of qualified personnel;
- - changes in, or failure or inability to comply with, government regulations,
including, without limitation, regulations of the Federal Communications
Commission, and adverse outcomes from regulatory proceedings;
- - changes in the nature of key strategic relationships with major customers,
partners and joint venturers;
- - competitor responses to the Company's products and services, and the products
and services of the entities in which it has interests, and the overall market
acceptance of such products and services.

These forward-looking statements and such risks, uncertainties and other factors
speak only as of the date of this Quarterly Report, and the Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein, to reflect any change in our
expectations with regard thereto, or any other change in events, conditions or
circumstances on which any such statement is based.

RECENT TRANSACTIONS

LSAT LLC AND ASCENT TRANSACTION. On August 16, 2001, LSAT entered into two
interrelated purchase agreements with Liberty Media and certain of its
subsidiaries and affiliates. Both agreements were amended in November 2001 and
January 2002. One agreement provided for LSAT's acquisition of certain
subsidiaries of Liberty Media that collectively held the 89.41% ownership
interest in LSAT LLC not already owned by LSAT in exchange for 25,298,379 shares
of Series B Common Stock of the Company. The second purchase agreement provided
for LSAT's acquisition of 100% of the capital stock of Ascent from a subsidiary
of Liberty Media in exchange for 8,701,621 shares of Series B Common Stock of
the Company. The LSAT LLC and Ascent Transaction closed on April 1, 2002. At
September 30, 2002, Liberty Media owned approximately 86% of LSAT's outstanding
common stock, which, when considered with the Series B Preferred Stock owned by
Liberty Media, represented approximately 98% of LSAT's outstanding voting power.

I-27

As a result of the consummation of the LSAT LLC and Ascent Transaction, LSAT
became the owner of 100% of the common equity interests of Ascent and LSAT LLC.
Due to the fact that the Company, LSAT LLC and Ascent are all under the common
control of Liberty Media, the LSAT LLC and Ascent Transaction has been accounted
for by the Company in a manner similar to a pooling-of-interests. As such, the
Company's consolidated financial statements have been restated to include LSAT
LLC and Ascent as wholly-owned subsidiaries of LSAT effective with the
respective March 2000 dates that Liberty Media acquired control of such
entities.

As a result of the LSAT LLC and Ascent Transaction, LSAT's primary operating
subsidiary is On Command. Through Ascent, a wholly-owned subsidiary of LSAT,
LSAT owned approximately 63% of the outstanding On Command Common Stock at
September 30, 2002. On Command develops, assembles, installs, and operates
proprietary video systems. On Command's primary distribution system allows hotel
guests to select, on an on-demand basis, motion pictures on computer-controlled
television sets located in their hotel rooms. On Command also provides, under
long-term contracts, in-room viewing of select cable channels and other
interactive services to hotels and businesses. The interactive services include
video games, Internet offerings, digital music and various hotel and guest
services. At September 30, 2002, On Command had operating subsidiaries or
branches in the United States, Canada, Mexico, Argentina, Spain and Portugal.

SALE OF ASCENT NETWORK SERVICES. Effective September 4, 2001, Ascent completed
the sale of Ascent Network Services to Liberty Livewire, a consolidated
subsidiary of Liberty Media, for cash consideration of $32,038,000. Ascent
Network Services provides video distributions services to the NBC television
network and other private networks. As Ascent and Liberty Livewire are both
consolidated subsidiaries of Liberty Media, no gain or loss was recognized in
connection with this transaction.

CRITICAL ACCOUNTING POLICIES

CARRYING VALUE OF INVESTMENTS. The Company continually reviews its investments
to determine whether a decline in fair value below the cost basis is
nontemporary. The Company considers a number of factors in its determination
including (i) the financial condition, operating performance and near term
prospects or the investee; (ii) the reason for the decline in fair value, be it
general market conditions, industry specific of investee specific; (iii) the
length of time that the fair value of the investment is below the Company's
carrying value and (iv) the Company's intent and ability to hold the investment
for a period of time sufficient to allow for a recovery in fair value. If the
decline in fair value is deemed to be nontemporary, the cost basis of the
security is written down to fair value. In situations where the fair value of an
asset is not evident due to a lack of public market price or other factors,
management uses its bests estimates and assumptions to arrive at the estimated
fair value of such an asset. The Company's assessment of the foregoing factors
pursuant to this accounting policy involves a high degree of judgment and
includes significant estimates and assumptions.

CARRYING VALUE OF LONG-LIVED ASSETS. The Company considers its policy for
assessing the recoverability of its long-lived assets to be a critical
accounting policy due to the materiality of the amounts involved and the high
degree of judgment involved in determining the estimates and assumptions that
form the basis for the Company's recoverability conclusions under the policy.
For additional information concerning this policy, see note 2 to the
accompanying condensed consolidated financial statements.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

REVENUE

IN-ROOM ENTERTAINMENT REVENUE

Revenue from On Command's in-room entertainment services consists primarily of
fees collected from hotels for in-room services provided to hotel guests by On
Command ("room revenue"). Services provided by On Command to hotel guests
include pay-per-view movies, free-to-guest programming, video games, Internet
service, short video products and digital music. On Command also earns revenue
from the sale of video systems to third parties and the sale of video equipment
to hotels ("video system and equipment sales"). Total in-room entertainment
revenue (comprised of room revenue and video systems and equipment sales)
increased $2,468,000 or 4.2% and decreased $4,703,000 or 2.6% during the three
and nine months ended September 30, 2002, respectively, as compared to the
corresponding prior year periods.

I-28

Room revenue increased $2,667,000 from $55,342,000 during the three months
ended September 30, 2001 to $58,009,000 during the corresponding 2002 period,
and decreased $3,966,000 from $175,359,000 during the nine months ended
September 30, 2001 to $171,393,000 during the corresponding 2002 period. The
increase in room revenue during the three-month period is attributable to (i)
increases attributable to higher average rates for certain pay-per-view
products; (ii) increases in revenue from short videos and other new products;
and (iii) a lower volume of pay-per-view buys. During the nine-month period,
the lower volume of pay-per-view buys more than offset the increases
associated with higher rates and new products. On Command believes that most
of the decrease in pay-per-view buys is attributable to a decline in
occupancy rates, as further discussed below. A 3.3% reduction in the average
number of rooms served by On Command during the nine months ended September
30, 2002, as compared to the corresponding prior year period, also
contributed to the decrease in pay-per-view buys. The decline in the average
number of rooms served by On Command is attributable to (i) the disposition
of certain hotel rooms to e-ROOM and Techlive (as further described in notes
7 and 8 to the accompanying condensed consolidated financial statements),
(ii) the loss of rooms to competitors, and (iii) the discontinuance of
service to certain non-profitable hotels.

Overall hotel occupancy rates declined 3.2% during the nine months ended
September 30, 2002, as compared to the corresponding prior year period. In
addition, occupancy rates for hotels in the top 25 markets declined 5.9% over
the same period. Since On Command derives a significant portion of its revenue
from hotels in the top 25 markets, On Command believes that the occupancy rate
for this segment is the best indicator of the impact changes in hotel occupancy
are having on On Command's business. Hotel occupancy rates are outside of On
Command's control, and changes in hotel occupancy rates can have a significant
impact on On Command's results of operations.

During the nine months ended September 30, 2002, hotels owned, managed or
franchised by Marriott, Hilton and Six Continents accounted for 29.9%, 15.9% and
10.9%, respectively, of On Command's room revenue. The loss of any of these
customers, or the loss of a significant number of other hotel chain customers,
could have a material adverse effect on On Command's results of operations and
financial condition. However, contracts with respect to individually owned,
managed or franchised hotels expire over an extended period of time depending on
the installation date of the individual hotel. Additionally, the terms of On
Command's contracts with hotels owned by a hotel chain are sometimes different
than those of On Command's contracts with hotels that are managed or franchised
by the same hotel chain.

In October 2000, Hilton announced that it would not be renewing its master
contract with On Command. In addition, On Command's master contract with Promus,
a subsidiary of Hilton, expired on May 25, 2002. As a result, hotels owned,
managed or franchised by Hilton or Promus are currently subject to a master
contract between Hilton and a competitor of On Command. Accordingly, On Command
anticipates that hotels owned by Hilton or Promus will not renew their contracts
as they expire. On the other hand, hotels that are managed or franchised by
Hilton are not precluded from renewing their contracts with On Command, and,
although no assurance can be given, On Command anticipates that certain of those
hotels will choose to renew. At September 30, 2002, On Command provided service
to approximately 128,700 rooms in 543 hotels that are owned, managed or
franchised by Hilton or Promus. The majority of these rooms are located in
managed or franchised hotels that are not owned by Hilton or Promus. Through
September 30, 2002, On Command's contracts with 64 of the aforementioned 543
hotels (16,500 rooms) had expired and service to these hotels is currently
provided under monthly or other short-term renewals. On Command's individual
contracts with the remaining 479 Hilton or Promus hotels (112,200 rooms) expire
at various dates through 2010, with the majority expiring by 2005. Over time, On
Command anticipates that the revenue it derives from hotels that are owned,
managed or franchised by Hilton or Promus will decrease. However, due to the
uncertainties involved, On Command is currently unable to predict the amount and
timing of the revenue decreases.

OTHER REVENUE

Other revenue in the 2001 periods is primarily comprised of the revenue of
Ascent Network Services. Ascent sold Ascent Network Services to Liberty Livewire
on September 4, 2001. For additional information, see note 3 to the accompanying
condensed consolidated financial statements.

I-29

OPERATING COSTS

IN-ROOM ENTERTAINMENT OPERATING COSTS

In-room entertainment operating costs consist primarily of fees paid to movie
and other content providers, hotel commissions, direct costs associated with
On Command's Internet product, costs associated with video and music systems
sold to other providers, costs associated with the repair, maintenance and
support of video systems and other room service equipment, and costs
associated with research and development activities.

In-room entertainment operating costs remained relatively constant during the
three months ended September 30, 2002, as compared to the corresponding prior
year period due to the net effect of (i) increases attributable to higher
direct in-room service costs (content fees, hotel commissions, and other
direct in-room service costs), as further described below; (ii) decreases
attributable to the third quarter 2002 reversal of $1,618,000 of accruals
deemed no longer needed for their originally intended purpose; (iii)
decreases in labor and overhead costs resulting from a May 2001 corporate
restructuring and other cost saving measures; (iv) decreases in research and
development expenses; and (v) decreases in the costs associated with video
system and equipment sales and other revenue. Direct in-room service costs
were higher during the third quarter of 2002 due primarily to increases in
guest programming costs, hotel commissions, license fee royalties, and video
duplication and distribution costs. Such increases were only partially offset
by reductions in Internet direct costs. The increases in guest programming
costs are the result of higher rates from program suppliers, and an increase
in the number of rooms with upgraded video systems that provide for a greater
number of programming alternatives. The increases in hotel commissions and
license fee royalties are largely attributable to increases in the
corresponding revenue amounts during the three-month 2002 period.

In-room entertainment operating costs decreased $7,719,000 or 6.4% during the
nine months ended September 30, 2002, as compared to the corresponding prior
year period. Such decrease is primarily due to the net effect of (i)
decreases in labor and overhead costs attributable to a May 2001 corporate
restructuring and other cost saving measures; (ii) decreases in the costs
associated with video system and equipment sales and other revenue; (iii)
decreases due to the reversal of accruals, as described above; (iv)
decreases in research and development expenses; and (v) increases
attributable to higher direct in-room service costs. Direct in-room service
costs were higher during the nine months ended September 30, 2002 due to the
net effect of (i) increases attributable to higher guest programming costs
and hotel commissions; and (ii) decreases attributable to lower license fee
royalties, video duplication and distribution costs, and Internet direct
costs. The decrease in license fee royalties is primarily attributable to a
lower volume of feature film buys. Hotel commissions, as a percentage of
total room revenue, increased slightly during the nine-month 2002 period.
Direct in-room service costs represented 50.1% and 49.0% of total room
revenue during the nine months ended September 30, 2002 and 2001,
respectively. Certain of the Company's content fees and other in-room service
costs do not vary with room revenue and occupancy rates.

On Command is a party to various agreements that permit On Command to distribute
movies and programming networks. No assurance can be given that the cost of such
movies and programming networks will not increase in future periods as contracts
expire and renewals are negotiated. Certain of the Company's contracts with
hotel customers limit the amount of any cost increases that can be passed on to
such hotel customers. Any cost increases that On Command is not able to pass on
to its customers would result in increased pressure on On Command's operating
margins.

OTHER OPERATING COSTS

Other operating costs in the 2001 periods represent the operating costs of
Ascent Network Services. Ascent sold Ascent Network Services to Liberty Livewire
on September 4, 2001. For additional information, see note 3 to the accompanying
condensed consolidated financial statements.

I-30

SELLING GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expense decreased $3,948,000 or 38.4% and
$33,484,000 or 64.7% during the three and nine months ended September 30, 2002,
respectively, as compared to the corresponding prior year periods. Costs
associated with On Command's relocation and restructuring activities during the
2001 periods accounted for $1,824,000 and $13,269,000, respectively of the
decreases. In addition, the elimination of expenses as a result of the September
2001 sale of Ascent Network Services accounted for approximately $3,100,000 and
$8,800,000, respectively of the decreases. The nine-month decrease also includes
$7,746,000 related to Ascent's second quarter 2001 purchase of 2,245,155 shares
of On Command Common Stock from the then Chief Executive Officer of On Command.
For additional information regarding this transaction, see note 10 to the
accompanying condensed consolidated financial statements. The remaining decrease
during the nine-month period is primarily attributable to cost reductions
realized by On Command as a result of a May 2001 corporate restructuring and
other cost saving measures. During the three-month period, the effect of On
Command's cost reduction efforts was more than offset by the effects of higher
labor costs associated with an employee incentive plan initiated by On Command
during 2002, higher bad debt expense and certain other individually
insignificant items.

STOCK COMPENSATION

LSAT records estimated stock compensation pursuant to the intrinsic value method
of Accounting Principles Board Opinion No. 25. Such estimate is subject to
future adjustment based upon the market value of the underlying common stock.
Since none of LSAT's outstanding stock appreciation rights ("SARs") were
in-the-money at September 30, 2002 or 2001, LSAT recorded no compensation
expense with respect to SARs during the nine months ended September 30, 2002 and
2001. The stock compensation expense recorded during the nine months ended
September 30, 2002 and 2001 is attributable to restricted stock awards granted
in February 2001.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense decreased $9,277,000 or 22.0% and
$28,585,000 or 22.2% during the three and nine months ended September 30, 2002
and 2001 respectively, as compared to the corresponding prior year periods. Such
decreases are primarily attributable to the Company's adoption of Statement 142,
which, as further described in note 2 to the accompanying condensed consolidated
financial statements, required the Company to cease recording goodwill
amortization effective January 1, 2002. Depreciation remained relatively
constant during the 2002 and 2001 periods as reductions to On Command's
depreciable asset base attributable to assets becoming fully depreciated and
asset dispositions were largely offset by increases attributable to capital
expenditures.

ASSET IMPAIRMENTS AND OTHER CHARGES

The Company recorded an impairment loss during the nine months ended September
30, 2002 of $5,103,000 relating to the OCE Sale. For additional information, see
note 8 to the accompanying condensed consolidated financial statements. The
Company also recorded other charges aggregating $2,822,000 and $422,000 during
the nine months ended September 30, 2002 and 2001, respectively. Such charges
are comprised of amounts related to obsolete materials and equipment, and losses
on various asset dispositions.

OTHER INCOME (EXPENSE)

The Company recognized interest income of $1,547,0000 and $11,066,000 during the
nine months ended September 30, 2002 and 2001, respectively. The 2002 income was
earned primarily on certain bonds that were purchased by LSAT LLC in August
2001. Such bonds are included with the Company's investment in Sky Latin
America. The 2001 income was earned primarily on the cash and cash equivalent
balances maintained by Ascent. The majority of Ascent's cash and cash equivalent
balances were utilized to redeem the Ascent Senior Secured Discount Notes on
December 31, 2001. To a lesser extent, interest earned on LSAT Astro's cash and
cash equivalent balances also contributed to the Company's interest income
during the nine months ended September 30, 2001. During 2001, all of LSAT
Astro's cash and cash equivalent balances were utilized to fund the capital
calls of Astrolink, LSAT Astro's 31.5%-owned investee.

I-31

During the nine months ended September 30, 2002 and 2001, the Company recognized
interest expense of $14,425,000 and $36,890,000, respectively. The decrease in
interest expense represents the combined effect of a decrease in interest rates
and a decrease in the Company's weighted average debt balance. The reduction in
the Company's weighted average debt balance is primarily due to the December 31,
2001 redemption of the Ascent Senior Secured Discount Notes.

During the nine months ended September 30, 2002 and 2001, the Company's share of
losses of affiliates aggregated $4,765,000 and $172,425,000, respectively. The
2002 amount includes $4,118,000 representing the Company's share of Aerocast's
losses and $647,000 representing losses with respect to the Company's investment
in Astrolink. Since LSAT Astro's investment in Astrolink was reduced to zero at
December 31, 2001, LSAT Astro's share of Astrolink's losses has been limited to
the amounts loaned to Astrolink by the Company during the nine months ended
September 30, 2002. At September 30, 2002, the Company was not obligated to
provide additional funding to Astrolink. The Company's share of losses for the
nine months ended September 30, 2001 includes a $155,000,000 loss representing a
reduction in the carrying value of LSAT Astro's investment in Astrolink. For
additional information, see note 6 to the accompanying condensed consolidated
financial statements.

Unrealized gains on financial instruments during the nine months ended September
30, 2002 and 2001 aggregated $1,865,000 and $25,814,000, respectively. The
details of such gains (losses) are as follows:

Nontemporary declines in fair values of investments aggregated $76,333,000 and
$40,139,000 during the nine months ended September 30, 2002 and 2001,
respectively. The 2002 amount includes reductions of the carrying values of LSAT
LLC's investments in Sky Latin America and Loral of $58,948,000 and $17,385,000,
respectively. The 2001 amount includes reductions of the carrying values of LSAT
LLC's investments in Wildblue and XMSR of $20,725,000 and $14,575,000,
respectively. For additional information, see note 7 to the accompanying
condensed consolidated financial statements.

INCOME TAXES

The Company recognized income tax benefits of $14,745,000 and $16,819,000 during
the nine months ended September 30, 2002 and 2001, respectively. The 2002
benefit includes a $5,666,000 tax refund received by LSAT as a result of a
change in tax law that occurred during the first quarter of 2002. Such change
resulted in the elimination of restrictions on the use of net operating loss
carryforwards to offset alternative minimum tax liabilities. The 2002 and 2001
income tax benefits also include deferred tax benefits associated with losses
recognized by Ascent. Ascent has recognized such losses to the extent that the
tax effect of such losses offsets Ascent's deferred income tax liability. At
September 30, 2002, Ascent's deferred tax liability was $14,849,000. Ascent's
majority-owned subsidiary, On Command, is not included in the consolidated tax
return of Liberty Media. At the LSAT level, LSAT is only able to recognize
income tax benefits for financial reporting purposes to the extent that such
benefits offset recorded income tax liabilities or LSAT generates taxable
income. For financial reporting purposes, all of LSAT's income tax liabilities
had been fully offset by income tax benefits at September 30, 2002 and 2001. In
connection with the consummation of the LSAT LLC and Ascent Transaction, the
Company and Liberty Media entered into a Tax Liability Allocation and
Indemnification Agreement. For additional information, see note 3 to the
accompanying condensed consolidated financial statements.

I-32

MINORITY INTERESTS IN LOSS OF CONSOLIDATED SUBSIDIARIES

The minority interests' share of losses of consolidated subsidiaries aggregated
$186,000 and $20,698,000 during the nine months ended September 30, 2002 and
2001, respectively. Such amounts primarily represent the minority interests'
share of On Command's net losses. The decrease is primarily attributable to a
change in how On Command's losses are allocated. During the first quarter of
2002, the cumulative losses allocated by Ascent to the On Command minority
interests exceeded Ascent's carrying amount for the minority interests in On
Command's equity. Since the On Command minority interest holders have no
obligation to make further contributions to On Command, 100% of On Command's
losses for periods subsequent to March 31, 2002 have been, and will be in future
periods, allocated to Ascent unless and to the extent that the On Command
minority interest holders make additional investments in On Command's equity.

MATERIAL CHANGES IN FINANCIAL CONDITION

LSAT is a holding company that does not generate positive cash flow at the
LSAT level. The only subsidiary of LSAT that generates significant revenue is
On Command. Due to covenant restrictions contained in the On Command
Revolving Credit Facility, LSAT is generally not entitled to the cash
resources or cash generated by the operations of On Command. The sources of
liquidity available to LSAT at the LSAT level are described below.

On a consolidated basis, the Company used cash provided by operating activities
of $47,001,000 and cash provided by financing activities of $9,336,000 to fund
investing activities of $67,779,000. The Company's investing activities included
$27,163,000 of investments in and advances to affiliates and $41,447,000 of
capital expenditures.

LSAT LLC's PCS Loan Facility, as amended, provides for maximum borrowings of
$303,000,000 and is due and payable on March 10, 2003. The PCS Loan Facility is
secured by the Company's interest in the Sprint PCS Stock and the Sprint PCS
Collar described below. Interest accrues at the 30 day LIBOR (1.82% at September
30, 2002) and is payable monthly. The Company anticipates that it will use
available borrowings under the PCS Loan Facility to fund its investing and
operating activities. At September 30, 2002, borrowing availability pursuant to
the PCS Loan Facility was $190,497,000.

In March 2000, LSAT entered into a $60,000,000 note payable to Liberty Media.
The note bears interest at the 3 month LIBOR plus 2% (3.74% at September 30,
2002). Interest payments are due semi-annually on the first day of March and
September. The note, which allows for prepayments, matures on March 16, 2003 at
which time all unpaid principal and interest is due. At September 30, 2002, the
unpaid principal on the note was $48,411,000 and the accrued interest on the
note was $151,000.

Borrowings under the PCS Loan Facility and the note payable to Liberty Media are
due and payable in March 2003. Although the Company could elect to use proceeds
from the sale of its Sprint PCS Stock and the unwinding of the Sprint PCS Collar
to repay in full the PCS Loan Facility and the note payable to Liberty Media,
the Company might also seek to refinance or extend the PCS Loan Facility and/or
the note payable to Liberty Media in order to avoid selling some or all of its
Sprint PCS Stock. No assurance can be given that the Company would be able to
obtain, on terms acceptable to the Company, the external financing that might be
required to repay the Liberty Media note and/or the PCS Loan Facility if such
borrowings are not otherwise extended or repaid.

In August 2002, the LSAT Board of Directors authorized the Company's purchase of
up to 3,000,000 of LSAT's Series A and Series B common stock in open market
purchases. The timing of purchases, prices paid and actual number of shares of
common stock purchased will depend on market conditions and the direction of
management. During the third quarter of 2002, LSAT purchased 14,300 shares of
Series A common stock for aggregate cash consideration of $32,000 pursuant to
this share buy back program.

I-33

In March 2000, LSAT issued 150,000 shares of Series A Preferred Stock, and
150,000 shares of Series B Preferred Stock to Liberty Media in exchange for
shares of Sprint PCS Stock. On the date of issuance, each such series of
preferred stock had an aggregate stated value of $150,000,000. The Series A
Preferred Stock and Series B Preferred Stock, which were each issued at a
discount to their stated values, are redeemable at the option of Liberty Media
on or after April 1, 2020 at a price equal to stated value plus all accrued and
unpaid dividends. The Company may elect to use cash, Series A Common Stock or a
combination thereof to satisfy such dividend requirements through March 2003.
During the third quarter of 2002, the Company issued 4,320,277 shares of Series
A Common Stock in satisfaction of dividends accrued through June 30, 2002.
Accrued and unpaid dividends on the Series A Preferred Stock and Series B
Preferred Stock aggregated $7,500,000 at September 30, 2002.

During the year ended December 31, 2001 and the three months ended March 31,
2002, Liberty Media loaned $18,552,000 and $6,573,000, respectively, to LSAT
LLC. LSAT LLC used the proceeds from these loans to fund capital calls from Sky
Latin America. The loans provided for interest at 8% per annum and were due and
payable on demand after November 27, 2001. Concurrently, with the closing of the
LSAT LLC and Ascent Transaction, (i) Liberty Media contributed to the Company,
as part of that transaction and for no additional consideration, promissory
notes issued by subsidiaries of Liberty Media, with an aggregate principal
balance of $18,552,000 and related accrued interest of $651,000, representing
the loans described above that were made through December 31, 2001, and (ii)
LSAT LLC repaid principal of $6,573,000 and accrued interest of $37,000 related
to the first quarter 2002 advances.

As a result of the consummation of the LSAT LLC and Ascent Transaction, Liberty
Media no longer has a direct ownership interest in LSAT LLC, and has no
obligation to provide funding to LSAT LLC. Accordingly, LSAT's primary sources
of liquidity at the LSAT level are expected to be borrowing availability under
the PCS Loan Facility and cash and cash equivalent balances held by LSAT. At
September 30, 2002, LSAT's cash and cash equivalent balances aggregated
$20,658,000. LSAT does not expect Ascent or its principal operating subsidiary,
On Command, to provide any of LSAT's financial resources during 2002. The
financial resources and requirements of On Command are described below. During
2002, LSAT anticipates that, at the LSAT level, it will use a portion of its
financial resources to fund LSAT LLC's capital contributions to Sky Latin
America, LSAT's operating deficit, its interest requirements under the PCS Loan
Facility and the note payable to Liberty Media, and its preferred stock dividend
requirements.

The On Command Revolving Credit Facility, as amended, provides for aggregate
borrowings of $275,000,000. Borrowings under the On Command Revolving Credit
Facility are due and payable in July 2004. On Command had $16,367,000 of
remaining availability under the On Command Revolving Credit Facility at
September 30, 2002. On Command's ability to draw additional funds under the On
Command Revolving Credit Facility is limited by certain financial covenants.

Revolving loans extended under the On Command Revolving Credit Facility bear
interest at the LIBOR plus a spread that may range from 1.10% to 2.75% depending
on certain operating ratios of On Command (4.32% effective borrowing rate at
September 30, 2002). In addition, a facility fee ranging from 0.15% to 0.50% per
annum is charged on the On Command Revolving Credit Facility, depending on
certain operating ratios of On Command. The On Command Revolving Credit Facility
contains customary covenants and agreements, most notably the inclusion of
restrictions on On Command's ability to pay dividends or make other
distributions, and restrictions on On Command's ability to make capital
expenditures. In addition, On Command is required to maintain leverage and
interest coverage ratios. On Command was in compliance with such covenants at
September 30, 2002. Substantially all of On Command's assets are pledged as
collateral for borrowings under the On Command Revolving Credit Facility.

I-34

At September 30, 2002, the maximum leverage ratio permitted under the On Command
Revolving Credit Facility was 4.50, and On Command's actual leverage ratio was
4.07. The maximum leverage ratio permitted under the On Command Revolving Credit
Facility at December 31, 2002 and March 31, 2003 is 4.25 and 3.50, respectively.
Although On Command anticipates that it will be in compliance with the leverage
ratio covenant at December 31, 2002, On Command currently believes that it will
not be in compliance with such covenant at March 31, 2003. On Command is seeking
an amendment to the On Command Revolving Credit Facility that would allow On
Command to maintain compliance with this covenant. Although no assurance can be
given, On Command believes that it will be successful in obtaining such an
amendment on acceptable terms to On Command. In the event On Command is unable
to obtain an acceptable amendment to the On Command Revolving Credit Facility,
On Command would seek to refinance the On Command Revolving Credit Facility with
alternative sources of financing. No assurance can be given that any such
alternative financing would be available on terms acceptable to On Command or at
all.

In connection with a first quarter 2001 transaction, On Command agreed that
e-ROOM would have the option during the 15 day period beginning on March 1, 2003
to cause On Command to repurchase all, but not less than all, of the 275,000
shares of On Command Common Stock issued to e-ROOM at a price of $15 per share.
Such repurchase obligation will terminate if the On Command Common Stock closes
at or above $15 per share on any ten consecutive trading days prior to March 1,
2003, and the shares of On Command Common Stock held by e-ROOM are freely
tradable during such period.

Historically, On Command has required external financing to fund the cost of
installing and upgrading video systems in hotels. However, during the first nine
months of 2002, On Command has reduced its reliance on external financing by
reducing expenses, increasing revenue per equipped room, and by more effectively
managing capital expenditures. Assuming On Command continues to meet its revenue
targets, reduce expenses and effectively manage capital expenditures, On Command
expects that it will be able to rely on cash provided by operations, existing
availability under the On Command Revolving Credit Facility, and existing cash
and cash equivalent balances to fund its capital expenditures and other
anticipated liquidity requirements through 2003. Through September 30, 2002, On
Command 's actual revenue was in line with the targeted range for the year ended
December 31, 2002. On Command 's revenue targets for 2003 are based in part on
the assumption that occupancy rates for 2003 will be consistent with the 2002
rates. Although no significant revenue shortfall is expected in 2002 or 2003, On
Command expects that it would compensate for any revenue shortfall by reducing
expenses and managing its capital expenditures. Accordingly, although no
assurance can be given, On Command continues to believe that it will not require
additional sources of liquidity to fund its capital expenditures and anticipated
liquidity requirements through 2003. Notwithstanding the foregoing, On Command
anticipates that it will require additional external financing to (i) fund any
significant new growth initiatives or unanticipated liquidity requirements; or
(ii) refinance the On Command Revolving Credit Facility, if necessary (as
discussed above). No assurance can be given that On Command will continue to be
successful in reducing its reliance on external financing during the balance of
2002 and 2003, and if external financing is required, no assurance can be given
that any such financing would be available on terms acceptable to On Command or
at all.

The Company uses equity collars and a put spread collar to hedge market risk
with respect to certain of its publicly traded securities. Although the
Company's equity collars and put spread collar provide protection against market
risk, such derivative instruments may involve elements of credit risk and market
risk in excess of what is recognized in the Company's condensed consolidated
financial statements. The Company monitors its positions and the credit quality
of counterparties, consisting primarily of major financial institutions and does
not anticipate nonperformance by any counterparty. For additional information
concerning the Company's investments in publicly traded securities and related
derivative financial instruments, see note 7 to the accompanying condensed
consolidated financial statements of the Company.

I-35

The Company and other investors in the Sky Latin America businesses have
severally guaranteed obligations due under certain transponder agreements and
equipment lease agreements through 2018. At September 30,2002, the portions of
the remaining undiscounted obligations due under such transponder agreements and
equipment lease agreements that were severally guaranteed by the Company
aggregated approximately $109,057,000 and $7,000,000, respectively. Subsequent
to September 30, 2002, Globo Comunicacoes e Participacoes ("GloboPar"), an
investor in three of the Sky Latin America entities, announced that it was
reevaluating its capital structure. As a result, the Company believes that it is
probable that GloboPar will not meet some, if not all, of its future funding
obligations with respect to these three Sky Latin America entities. To the
extent that GloboPar does not meet its funding obligations, the Company and
other investors could mutually agree to assume GloboPar's obligations. To the
extent that the Company or such other investors do not fully assume GloboPar's
funding obligations, any funding shortfall could lead to defaults under
applicable transponder agreements and equipment lease agreements. With respect
to the equipment lease agreements, default also includes bankruptcy, debt
default, or material adverse change in the business or financial condition of
any guarantor that materially adversely affects the ability of any such
guarantor to perform its obligations under the guarantee. In the event any such
defaults were to occur, the default provisions of the applicable agreements
would determine the ultimate amount to be paid by the Company. The Company
believes that the maximum amount of the Company's aggregate exposure under the
default provisions of the various agreements is not in excess of the
undiscounted remaining obligations guaranteed by the Company, as set forth
above. The three entities in which GloboPar is an investor account for
approximately $89,667,000 of the approximately $116,057,000 of aggregate
obligations guaranteed by the Company at September 30, 2002. The Company cannot
currently predict whether it will be required to perform under any of such
guarantees.

Effective September 29, 2000, LSAT LLC acquired a 1% managing common interest in
IB2 LLC from a subsidiary of Liberty Digital for $652,000. Liberty Digital
retained a Preferred Interest in IB2 LLC, which owns approximately 360,000
shares of iBEAM Stock. The Preferred Interest had an initial liquidation value
of $64,574,000 and is entitled to a return of 9%, compounded annually. As part
of the transaction, LSAT LLC granted Liberty Digital the right to put the
Preferred Interest to LSAT LLC for a purchase price equal to $26,000,000 (the
value of iBEAM Stock on September 29, 2000) plus a 9% return, compounded
annually (the "Put Option"). LSAT LLC has the right to call Liberty Digital's
Preferred Interest at a price equal to the initial liquidation value plus a
return of 9%, compounded annually. Both the Put Option and call option are
exercisable on September 29, 2008. Under certain limited circumstances,
including iBEAM's bankruptcy, LSAT LLC can force Liberty Digital to exercise the
Put Option prior to September 29, 2008. During the fourth quarter of 2001, iBEAM
filed for bankruptcy under Chapter 11 of the Bankruptcy Code. As a result of
such bankruptcy filing, the Company began carrying the Put Option liability at
an amount ($30,369,000 at September 30, 2002), which represents the Put Option
purchase price to LSAT LLC plus an accrued return to Liberty Digital of 9%,
compounded annually. The Company anticipates that future losses with respect to
the Put Option will be limited to Liberty Digital's 9% return on the Put Option
liability.

I-36

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2002, the Company had $419,547,000 of variable-rate liabilities
with a weighted-average interest rate of 3.58%. Accordingly, the Company is
sensitive to interest rate risk. To date, the Company has not entered into any
derivative instruments to manage its interest rate exposure. Assuming no
increase or decrease in the amount outstanding, a hypothetical 1% increase (or
decrease) in interest rates at September 30, 2002 would increase (or decrease)
the Company's annual interest expense and cash outflows by approximately
$4,915,000. At September 30, 2002, the Company's variable rate liabilities were
due and payable as follows (amounts in thousand):

March 2003 $ 160,914
July 2004 258,633
-----------------
$ 419,547
=================

The Company is exposed to changes in stock prices primarily as a result of its
significant holdings in Sprint PCS Stock and other publicly traded securities.
The Company uses equity collars and a put spread collar to hedge market risk
with respect to certain of its publicly traded securities. At September 30,
2002, the aggregate fair market value of the Company's publicly traded
securities (excluding the fair value of related hedge instruments) was
$33,096,000 ($9,966,000 of which represents the fair value of the Sprint PCS
Stock). At September 30, 2002, the fair value of the Company's equity collars
was $315,666,000 ($291,519,000 of which represents the fair value of the Sprint
PCS Stock equity collar), and the fair value of the Company's put spread collar
was $20,274,000. At September 30, 2002, the fair market value of the GM Hughes
Stock that is the subject of the put spread collar was $16,671,000. Among other
things, the GM Hughes put spread collar (i) provides the Company with the right
to require a counterparty to purchase shares of GM Hughes Stock for a weighted
average price of $26.64 per share in October 2003; and (ii) provides a
counterparty with the right to require the Company to repurchase shares of GM
Hughes Stock for a weighted average price of $14.80 per share in October 2003.
At September 30, 2002, the per share market value of GM Hughes Stock was $9.15.
In addition, the Company owned $2,559,000 of publicly traded securities at
September 30, 2002 that were not hedged. For additional information concerning
the Company's investments in publicly traded securities and related derivative
financial instruments, see note 7 to the accompanying condensed consolidated
financial statements of the Company.

On Command transacts business in various foreign currencies, including Canada
and Mexico and to a lesser extent, Argentina, Spain and Portugal. On Command
believes the risks of foreign exchange rate fluctuations on its present
operations are not material to On Command's overall financial condition.
However, On Command will consider using foreign currency contracts, swap
arrangements, or other financial instruments designed to limit exposure to
foreign exchange rate fluctuations, if deemed prudent.

ITEM 4. CONTROLS AND PROCEDURES

The Company's acting president and chief financial officer performed an
evaluation of the Company's disclosure controls and procedures as of a date
within 90 days prior to the filing of this quarterly report on Form 10-Q. Based
on this evaluation, the Company believes that such controls and procedures
effectively ensure that information required to be disclosed in this quarterly
report on Form 10-Q is appropriately recorded, processed and reported. There
have been no significant changes in the Company's disclosure controls and
procedures or in other factors that could significantly affect these controls
subsequent to the date of this evaluation.

I-37

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits:

None.

(b) Reports on Form 8-K filed during quarter ended September 30, 2002:

II-1

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.

LIBERTY SATELLITE & TECHNOLOGY, INC.

Date: November 14, 2002 By: /s/ Kenneth G. Carroll
------------------------
Kenneth G. Carroll
Acting President, Chief Financial Officer and
Treasurer (Principal Financial Officer and
Principal Accounting Officer)

II-2

CERTIFICATION

I, Kenneth G. Carroll, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Liberty Satellite &
Technology, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to me by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report my conclusions about the effectiveness of
the disclosure controls and procedures based on my evaluation as of the
Evaluation Date;

5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 14, 2002

/s/ Kenneth G. Carroll
- ------------------------------------
Kenneth G. Carroll

Acting President and Chief Financial Officer

II-3