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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number: 000-01461

ASCENT MEDIA GROUP, INC.

520 Broadway, Fifth Floor
Santa Monica, CA 90401
(310) 434-7000
(Address of Registrant’s principal executive offices, zip code
and telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $.01 PAR VALUE
(Title of Class)

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]
No [   ]

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yes [   ]. No [X].

The aggregate market value of voting stock held by non-affiliates on the last business day of the registrant’s most recently completed second fiscal quarter (June 28, 2002) was approximately $14,226,557. The number of shares of common stock issued and outstanding at March 7, 2003 was: 4,884,565 Class A common stock and 52,341,164 Class B common stock.

Documents incorporated by reference: None.

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ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

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     This report contains statements that 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 that, by definition, involve risks and uncertainties. Where, in any forward-looking statement, Ascent Media Group, also referred to in this report as “we” or 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:

	•		industry-wide market factors such as the timing of, and spending on, feature film and television production;
	•		spending on foreign and domestic television advertising;
	•		foreign and domestic spending by broadcasters, cable companies and syndicators on first run and existing content libraries;
	•		the possibility of an industry-wide strike or other job action by or affecting a major entertainment industry union;
	•		failure to maintain relationships with key customers and certain key personnel;
	•		more rapid than expected technological obsolescence;
	•		failure to integrate acquired operations in expected time frames;
	•		continuing negative economic conditions potentially impacting our ability to maintain compliance with our debt covenants; and
	•		threatened terrorist attacks and ongoing military action in the Middle East and other parts of the world.

     These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this annual 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. For a discussion of additional factors which may affect future results of operations, see Part II, Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS—Factors That May Affect Future Results of Operations” below.

PART I

ITEM 1. BUSINESS.

OVERVIEW

     Ascent Media Group, Inc., incorporated in Delaware in 1952, provides creative and technical media services to the media and entertainment industries. Our clients include the major motion picture studios, independent producers, broadcast networks, cable channels, advertising agencies and other companies that produce, own and/or distribute entertainment, news, sports, corporate, educational, industrial and advertising content. Our assets and operations are primarily composed of the assets and operations of ten companies acquired during 2001 and 2000. The combination and integration of these acquired entities allow us to offer integrated outsourcing solutions for the technical and creative requirements of our clients, from content creation to distribution of the final product.

     We have organized our facilities and operations into three business segments or groups. Each business segment has a president, director of finance, director of technology and director of sales and marketing supported by centralized corporate staff functions such as operations, information technology, finance, human resources, strategic planning, business development and legal affairs. This delineation allows each business segment to focus on its particular set of services and client base, while our centralized corporate functions facilitate implementation of financial and operational controls across the organization. Our business segments are described below. For financial information about each business segment, see Part IV, Item 15, “EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.” For information about the services that each business segment provides, see “Services” in this Item 1 below.

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Ascent Media Creative Services

     Our Creative Services Group provides services necessary to complete the creation of original content including feature films, television shows, movies of the week/mini series for television, television commercials, music videos, promotional and identity campaigns and corporate communications programming. Our services begin after principal photography and cover a wide range of services necessary to complete a project. This may include film to video tape transfers, color correction, creative editorial services, graphics and title sequences, electronic assembly, two-dimension compositing, creation of computer generated images, sound editorial, sound mixing, music composition, sound design and integration of interactive program elements. The Creative Services Group has three divisions: Entertainment Television, Commercial Television and Audio.

Ascent Media Management Services

     Our Media Management Services Group optimizes, archives, manages and repurposes media assets for global distribution. We provide access to all forms of content, duplication and formatting services, language conversions and laybacks, restoration and preservation of old or damaged content, mastering from motion picture film to high resolution or data formats, digital audio and video encoding services and digital media management services for global home video, broadcast, pay-per-view, video-on-demand, streaming media and other emerging new media distribution channels.

Ascent Media Network Services

     Our Network Services Group provides the services necessary to assemble and distribute programming for cable and broadcast networks via fiber, satellite and the Internet to audiences in North America, Europe and Asia. Our Network Services Group primarily provides dedicated facilities and resources designed for specific client requirements on the basis of contractual agreements.

FORMATION

Name Change

     On November 20, 2002, we changed our name from Liberty Livewire Corporation to Ascent Media Group, Inc.

Change in Control and Subsequent Acquisitions and Divestitures

     Change in Control. On June 9, 2000, our company, then known as The Todd-AO Corporation or Todd-AO, B-Group Merger Corp., a wholly-owned subsidiary of AT&T Corp., AT&T Corp. and Liberty Media Corporation, referred to in this report as Liberty Media, entered into a merger agreement, which provided for the acquisition by Liberty Media of Todd-AO. In connection with the merger, also referred to as the Todd Merger, the following transactions occurred:

	(1) a reclassification of the existing common stock of Todd-AO;
	(2) the merger of B-Group Merger Corp. with and into Todd-AO, as described below; and
	(3) the change of Todd-AO’s name to Liberty Livewire Corporation.

     Upon the consummation of the Todd Merger and the related reclassification of stock, which occurred simultaneously, each issued and outstanding share of common stock of Todd-AO was converted into the right to receive 0.4 shares of our new Class A common stock and 0.5 shares of Liberty Media Group Class A common stock which was at that time a tracking stock of AT&T. As a result, Liberty Media acquired 60% of our outstanding equity, which represented approximately 94% of our voting power. For more information on Liberty Media, see “Liberty Media Corporation” in this Item 1 below. Prior to the Todd Merger, the Company, provided sound, video and ancillary post production and distribution services to the motion picture and television industries in the United States and Europe.

     Four Media Company. On April 10, 2000, Liberty Media acquired Four Media Company, also known as 4MC, in exchange for $123.3 million in cash plus 3,182,300 shares of Liberty Media Group Class A common stock valued at $137.7 million, the assumption of 4MC stock options which were converted into stock appreciation rights to purchase 1,936,778 Liberty Media Group Class A common stock valued at $52.9 million, and the assumption of a warrant to an investor which was converted into a warrant to purchase 354,838 shares of Liberty Media Group Class A common stock valued at $7.8 million. 4MC provides technical and creative services

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to owners, producers and distributors of television programming, television commercials, feature films and other entertainment content. 4MC’s California facilities are located in Los Angeles, Hollywood, Burbank and Santa Monica. Its international facilities are located in Mexico City, Mexico; London, England; and the Republic of Singapore.

     Virgin Media Group Limited. On May 31, 2000, 4MC acquired six entities from the Virgin Media Group Limited (“Virgin”) for $39.5 million in cash.

     On June 9, 2000, Liberty Media contributed all of the issued and outstanding shares of 4MC to us in exchange for 16,614,952 shares of our Class B common stock, pursuant to a contribution agreement between Liberty Media and us.

     Certain Assets of SounDelux Entertainment Group of Delaware. On July 19, 2000, a wholly-owned subsidiary of Liberty Media, referred to in this report as Liberty Sub, acquired Soundelux, which consisted of certain assets and operations of SounDelux Entertainment Group of Delaware, Inc., referred to in this report as SEG, for $90.0 million in cash. Immediately following the closing of this asset purchase, Liberty Media contributed 100% of its ownership interests in Liberty Sub to us in exchange for 8,181,818 shares of our Class B common stock pursuant to a previously negotiated contribution agreement between us and Liberty Media. Soundelux provides sound design, editorial and re-recording services for feature films, television, advertising and new media. Soundelux operations are located in Los Angeles, California.

     Triumph Communications Group. On July 25, 2000, we acquired (i) Triumph Communications Inc., (ii) Triumph Communications & Fiber Services, LLC, (iii) Triumph Communications & Leasing Services Inc., (iv) American Simulcast Corp., and (v) The Triumph Switch Company LLC, collectively referred to in this report as Triumph, in exchange for a cash payment to the seller totaling $5.7 million, forgiveness of existing notes payable to us from Triumph totaling $4.5 million, and 705,554 shares of our Class A common stock, which had an aggregate market value at the time of issuance of $44.6 million, partially offset by $1.7 million of cash acquired.

     On December 23, 2002, the Company sold to Leafco Communications, Inc. all of its equity interest in Triumph for nominal consideration plus the assumption of net liabilities in the amount of $4.0 million. In connection with this sale, the Company entered into an agreement to loan the buyer an amount not to exceed $4.0 million. As of the date of this report, such loan agreement has been terminated by the parties and the buyer has repaid to the Company all monies advanced to the buyer pursuant to this loan. In connection with this loan termination, the Company entered into an agreement to loan Rapco Enterprises, Inc., an affiliate of Leafco Communications, Inc., $2.0 million.

     Soho Group Limited. On August 11, 2000, one of our wholly-owned subsidiaries acquired all of the outstanding shares of Soho Group Limited, or Soho, for $27.0 million in cash (net of approximately $200,000 of cash acquired), which included real property in the Soho area of London, England. Soho provides services primarily to the commercial advertising industry, including negative developing, negative cutting (using proprietary technology), film to digital media transfer, two-dimension and three-dimension compositing and animation and television commercial finishing.

     Visiontext Limited. On October 9, 2000, one of our wholly-owned subsidiaries acquired all of the outstanding shares of Visiontext Limited, or Visiontext, for $2.9 million in cash (net of approximately $300,000 of cash acquired) plus a note payable to the sellers for $1.9 million. Visiontext is located in Los Angeles, California and London, England and provides sub-titling services to the commercial advertising and home video markets.

     Video Services Corporation. On December 22, 2000, Liberty Media acquired Video Services Corporation, also referred to as VSC. The total consideration paid by Liberty Media was valued at $119.7 million. The $119.7 million was comprised of $38.0 million in cash, paid to the shareholders of VSC, and an additional $46.5 million of debt of VSC paid or assumed by Liberty Media for a total of $84.5 million in cash. In addition, Liberty Media issued 1,441,212 shares of Liberty Media Group Class A common stock and options to purchase 119,666 shares of Liberty Media Group Class A common stock, with an aggregate estimated fair market value of $35.2 million at the time of signing of the transaction.

     Also on December 22, 2000, pursuant to a contribution agreement, Liberty Media contributed to us 100% of the outstanding capital stock of VSC in exchange for a convertible promissory note in the principal amount of $92.5 million and the assumption by us of Liberty Media’s obligations with respect to stock options originally granted by VSC. The convertible promissory note was issued to Liberty Media under a credit agreement between Liberty Media and us (which we refer to as the Liberty Subordinated Credit Agreement). An additional $9.6 million in cash was paid by us to retire debt of VSC and we agreed to indemnify Liberty Media with respect to any debt or other obligations of VSC. VSC provides engineering, production and distribution services for the video and broadcast industries, nationally and internationally. It has locations in New York, New Jersey, Florida and California.

     Ascent Network Services. On January 5, 2001, we entered into an Ownership Interest Purchase Agreement with ANS Acquisition Sub, Inc., our wholly-owned subsidiary, and Ascent Entertainment Group, Inc., or AEG, an affiliate of Liberty Media. Pursuant to the terms of the Ownership Interest Purchase Agreement, all of the assets used in connection with the business of Ascent Network Services, a division of AEG, were transferred to Livewire Network Services, LLC, or LNS, a newly-formed and wholly-owned subsidiary of AEG. AEG then transferred a one percent ownership interest in LNS to us in exchange for $300,000 in cash. In connection with the Ownership Interest Purchase

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Agreement between us and AEG, AEG and LNS executed a Contribution and Assumption Agreement pursuant to which LNS assumed all liabilities, obligations and commitments of AEG relating to the business of Ascent Network Services, whether before or after January 5, 2001.

     We and AEG also became parties to the LNS Operating Agreement. Under the LNS Operating Agreement: (1) we became responsible for managing the operations of LNS as of January 5, 2001; (2) we became entitled to receive $800,000 per month from LNS as a guaranteed payment to compensate us for our managerial services; (3) AEG obtained the right to receive a preferred return in the amount of 10% per annum, compounded quarterly, on the balance of its capital account as of January 5, 2001, which amounted to approximately $29.7 million, calculated for the period beginning on January 5, 2001 and ending on the date on which the members of LNS receive final liquidating distributions; and (4) we and AEG entered into certain put-call arrangements.

     On September 6, 2001, we purchased from AEG the 99% ownership interest of LNS that we did not already own. The transaction, which was financed with debt from the Liberty Subordinated Credit Agreement, was valued at $31.3 million (net of approximately $425,000 of cash acquired). LNS provides operational, installation, maintenance, and support services for satellite communication systems and their users. LNS is located in Melbourne, Florida.

     Group W Network Services and Asia Broadcast Centre. On February 1, 2001, we acquired from Viacom, Inc. and certain of its subsidiaries, substantially all of the assets of the domestic business unit known as Group W Network Services and 100% of the outstanding capital stock of Singapore-based Asia Broadcast Centre Pte. Ltd. and Group W Broadcast Pte. Ltd. (collectively, “GWNS”) for $108.2 million (net of $2.5 million of cash acquired). GWNS provides production and distribution services for the broadcast and cable industries from locations in the Republic of Singapore; Minneapolis, Minnesota; and Stamford, Connecticut.

     Cinram-POP. On August 23, 2001, we acquired from Cinram U.S. Holdings, Inc., the remaining 51% membership interest in Cinram-POP DVD Center LLC, or Cinram-POP, that we did not already own. The transaction, financed with cash from operations, was valued at approximately $536,000 (net of $295,000 of cash acquired). Cinram-POP provides digital versatile disc (DVD) design, authoring and encoding services to the home video market. Cinram-POP is located in Santa Monica, California.

     BVI-Miami, LLC. On May 6, 2002, we entered into both an Amended and Restated Operating Agreement and a Contribution and Assignment and Assumption Agreement with Broadcast Video, Inc. (referred to in this report as “Broadcast Video”) and BVI-Miami, LLC (referred to in this report as “BVI-Miami”). Pursuant to such agreements, we contributed assets and obligations of our former subsidiary, The Post Edge, Inc., doing business as Manhattan Transfer-Miami, into BVI-Miami, a newly formed Miami, Florida-based limited liability company with Broadcast Video. BVI-Miami consists of the operations of The Post Edge, Inc. and the operations of Broadcast Video and certain of its affiliated businesses. We own a 40% membership interest in BVI-Miami. Broadcast Video owns the remaining 60% membership interest and manages BVI-Miami’s operations. The net book value of the assets and liabilities of $2.5 million were reclassified as an investment. We do not have any current or contingent material obligations to BVI-Miami.

Liberty Media Corporation

     As a result of these acquisitions and certain other transactions, at December 31, 2002, Liberty Media owned over 91% of our outstanding common stock, which represents over 99% of our voting power. For information on Liberty Media’s interest in the Company, see Part II, Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS — Liquidity and Capital Resources — Liberty Subordinated Credit Agreement and — Stock Sales to Liberty Media” and Part III, Item 12, “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.”

INDUSTRY

Creative Media Services

     The creative media services industry supports the media and entertainment industries in the creation, management and distribution of motion pictures, television programs, television commercials, other promotional or interstitial material and various forms of content for new media applications including interactive content. Content is released into a “first-run” distribution channel, such as theatrical, broadcast or cable network, and later into one or more additional channels, such as home video and pay-per-view, domestic or international syndication. In addition to newly-produced content, film and television libraries are typically repeatedly re-mastered into various formats for redistribution. The creative media services industry has historically been highly fragmented, with a variety of traditional services performed by numerous small companies, each specializing in a unique aspect of the process. We

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are a creative media services company providing fully-integrated service solutions.

     Our business segments benefit from the volume of content being created and distributed rather than the success or popularity of an individual television show, commercial or feature film. The following trends in the media and entertainment industries are expected to have an impact on our business segments:

	•		Growing worldwide demand for original entertainment content. Globally, the demand for entertainment content is increasing, and thus the need for the associated technical and creative services we offer is expanding. At the same time, the pace of technological change is accelerating. This may lead to an increased demand for capital expenditures in order to meet the industry demand for technological innovation. If we meet these technological challenges, we may benefit from the ability to provide an increasingly complex mix of content formats and broadcast standards to various geographic locations and cultures.
	•		The development of new business opportunities for existing content libraries. The vast libraries of the major film and television studios are an ongoing source of programming for traditional and new channels of media distribution. For exploitation in a digital environment, these libraries must be re-mastered, augmented, restored, re-colored, converted and reformatted. In addition, the new digital environment has contributed to the lack of uniformity in worldwide television standards, thus creating the need for the creation of new master elements in unique formats.
	•		Continued proliferation of new distribution channels, such as digital cable, digital broadcast satellite and the Internet. The creation and market acceptance of new content distribution channels such as direct broadcast satellite, video-on-demand, or VOD, and Internet protocol distribution, or IP distribution, requires new technical and operational infrastructure to create, manage and distribute content. The industry requires technical facilities and operational management that facilitates the creation, management and delivery of that content to viewing audiences.
	•		Wider application of digital technologies to content manipulation and distribution. This trend is contributing to the increased demand for technical and creative services for a given volume of content, which could require investment in additional equipment required to service digital media. At the same time, advances in technology, particularly the emergence of high quality compression algorithms, have led to the creation of new standards and the opportunity to create multiple distribution outlets and revenue streams from the same programming.
	•		Increased outsourcing of technical and creative services. Film and television studios as well as broadcast and cable networks are finding that their resources are optimized by outsourcing certain technical and creative services related to the creation, management and distribution of content. Certain of our current and prospective clients are seeking high-quality integrated solutions and the benefit of scale economies.
	•		Increased demand for innovation, technical and creative quality. Advances in technology, new broadcast standards, growing adoption by consumers of personal video recorders, which facilitate “time shifting” of programming by the television consumer, and increasing audience fragmentation require content owners, producers and distributors to cost effectively increase image and audio quality and create increasingly innovative, compelling viewing experiences for audiences. We believe the technology, infrastructure and creative talent that we provide may enhance the creative process of producing original programming and modernizing aging library material.
	•		Reality-Based Programming. Broadcast and cable programmers continue to rely on reality-based programming for significant portions of their primetime and pre-primetime schedules. Such shows tend to have lower post-production budgets than traditional scripted programming. Accordingly, the prevalence of such programming may reduce industry demand for some of the services that we provide.
	•		Content Repurposing. Broadcast and cable programmers have continued to show more regular-season reruns, both in regular time slots and at alternative viewing times. To the extent that this practice may reduce demand for original programming, or erode the traditional concept of the 24-week television season, such trends could reduce industry demand for some of our services.
	•		Extended Use of Advertising Spots. Although television commercials have traditionally had a relatively short “shelf-life,” with spots updated frequently within a given advertising campaign, some advertisers have begun to re-use the same television commercials for longer periods. Accordingly, production of new short-form television commercials remains slow, despite the recent increase in television ad spending. If such trend continues, it could reduce industry demand for some of our services.

Motion Picture Production and Distribution

     Various facilities throughout the Company provide services to the motion picture industry. The Creative Services business segment creates visual effects, sound effects and animation sequences and integrates them into newly-released feature films, while the Media Management and Network Services business segments provide services that support the mastering and distribution of feature films for domestic and international home video, cable and broadcast markets.

     The domestic motion picture industry encompasses the production, distribution and exhibition of feature-length motion pictures, including their distribution in home video, broadcast and cable television and other ancillary channels. While the domestic motion picture industry continues to be dominated by the major studios, including Paramount Pictures, Sony Pictures Corporation, Twentieth Century Fox, Universal Pictures, The Walt Disney Company, Metro-Goldwyn-Mayer and Warner Brothers, independent production companies also play an important

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role in the production of motion pictures for domestic and international feature film markets.

     Another trend experienced by the U.S. film industry is the growing reliance on international box office revenues, as they continue to account for an increasing percentage of total feature film revenues. In addition, as the demand for digital video product grows, most media content libraries will be re-released, stimulating a new cycle of home entertainment cash flows.

Television Production and Distribution

     Substantially all of our facilities provide services related to the production and distribution of television programming. The Creative Services Group provides a full array of services to facilitate the creation of television programs and commercials, the Media Management Services Group provides a full array of services for managing existing content libraries, and the Network Services Group provides a full array of services necessary to deliver television programming to program distributors.

     The increase in international demand for entertainment content has further driven the need for new and repurposed content. Over the last decade, the privatization of broadcasting systems, the proliferation of broadcast licenses, and the introduction of sophisticated delivery technologies such as digital broadcasting, digital cable and direct broadcast satellite systems, have led to the growth of broadcasting and cable television markets outside the United States. Most foreign broadcasters require both local programming (to satisfy the local content requirements) and popular international programming, largely produced in the United States.

New Media Production and Distribution

     The television production and distribution industry is in a state of transformation. Both multiple system cable operators, also called MSOs, and direct broadcast satellite, or DBS, operators have introduced new products and services into the marketplace. These content distributors compete aggressively for new subscribers and are using new media services as an inducement to attract and retain consumers. Additionally, companies such as TiVo are currently marketing personal video recorders, or PVRs, that have the potential to change the television viewing habits of consumers. Over the next several years we expect that an increasing number of consumers will be able to access the programs they want to see, when they want to see them. New business models are expected to emerge that may challenge the concept of mass audiences receiving programming from networks in a linear fashion.

     Many of these new services not only propose to give viewers greater control over the programming they see, they may also provide them with a range of interactive experiences. To facilitate the introduction of these new services, both MSOs and DBS operators are developing and deploying advanced set top boxes and additional hardware into their operations. Interactive television, or ITV, middleware developers such as Wink, OpenTV, and Liberate Technologies are currently deploying their technology platforms into digitally enabled TV households.

     As a result of the introduction of services such as PVRs, VOD, subscription video-on-demand, or SVOD, and ITV, the various participants in the industry, including studios, program suppliers, networks and advertisers, many of whom are our current clients, are working to understand how these changes will affect their businesses.

Factors Affecting the Growth and Development of Our Businesses.

     The growth and development of the businesses described above is dependent upon a number of factors that could cause actual results to differ materially from those anticipated. For a discussion of those factors see Part II, Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS – Factors That May Affect Future Results of Operations.” Additionally, the liquidity and capital resources of the Company may also affect the growth and development of such businesses. For a discussion of the Company’s liquidity and capital resources, see Part II, Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS – Liquidity and Capital Resources.”

STRATEGY

     The entertainment services industry has been historically fragmented with numerous providers offering

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discrete, non-integrated services. Our services, however, span the entirety of the value chain from the creation and management of content to the delivery of content via multiple distribution paths including satellite, fiber and IP-based networks. We believe the breadth and range of our services uniquely provide us the scale necessary to realize significant efficiencies: a global, scaleable media services platform integrating preparation, management and distribution services, common “best practices” operations management across the Ascent Media Group enterprise; and integration of financial and administrative functions.

     Our objective is to be a leading provider of services to the media and entertainment industry and provide customers quality solutions for the creation, management and distribution of content, individually and as part of a package solution on a global basis. We intend to achieve this objective by pursuing the following strategies:

     Establish centralized, scalable, financial and operating infrastructure. We have established an experienced management team. We are building operational, financial and internal control systems to improve financial administration. We are reducing overhead through centralization and have begun to restructure our operations to improve margins and financial performance.

     Develop and grow our core businesses. We intend to leverage our scale opportunities, our technical capacities, our breadth of services and our global reach in order to broaden our relationships within the organizational structure of our client base. We intend to further integrate our facilities and operations establishing “best practices” and increase scale and capacity to drive growth. Our goal is to deploy proven, leading technologies in a consistent manner across all of our operations.

     Leverage our core businesses in the developing digital media service platform. We intend to leverage our existing client relationships, technological expertise and digital infrastructure to build new revenue streams in emerging new media markets. We intend to develop new business opportunities in areas such as digital imaging, digital media management and interactive media.

     Drive the convergence of traditional and new media. We intend to create joint ventures, partnerships and alliances with technology providers, content creators, and “last mile” distributors to create cost effective scalable infrastructure to drive new media revenue streams. We intend to assist in the development of industry standards and business models to help develop new media opportunities.

     We intend to create stockholder value by prioritizing our growth initiatives in the following manner. First, we plan to capitalize on current opportunities by delivering scaleable enterprise solutions to our existing client base. Second, we intend to effectively consolidate and integrate newly acquired assets and operations with our existing businesses. Finally, we plan to invest in emerging growth opportunities and deploy next-generation digital media services in the areas of digital imaging, digital media management, and new media services. All of our emerging next generation digital media growth opportunities are expected to increase our value-added proposition to our clients and assist them in creating new revenue streams from their content.

     Our ability to execute our strategy is dependent upon a number of factors that could cause actual results to differ materially from those anticipated. For a discussion of those factors see Part II, Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS – Factors That May Affect Future Results of Operations.” Additionally, our ability to execute our strategy is also dependent on our liquidity and capital resources. For a discussion of the Company’s liquidity and capital resources, see Part II, Item 7., “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS – Liquidity and Capital Resources.”

SERVICES

Creative Services Group

     The Creative Services Group has three divisions: Entertainment Television, Commercial Television and Audio. Generally, the Creative Services Group provides the technical and creative services necessary to conform principal photography into a final product suitable for viewing audiences. We digitally create or manipulate sounds and images in high-resolution formats for integration into feature films, television programs, television commercials, music videos, promotional and identity campaigns and corporate communications programming. In fiscal year 2002, the Creative Services Group contributed $ 275.1 million, or 51% of our total revenues, as compared to $332.9 million, or 56.2%, in fiscal year 2001 and $221.0 million, or 72.1%, in fiscal year 2000.

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     Entertainment Television Division

     We have created a consolidated group of facilities providing services to producers of episodic television series, movies-of-the-week, and specials. We provide services primarily in Los Angeles, New York and London. We believe our competitive advantages lie in the breadth and scalability of our services, the reputation and accessibility of our creative talent and our relationships with our client base. We will continue to support the expansion of our brand equity in the marketplace by maintaining the differentiation of our facilities. However, our entertainment television facilities are managed as a consolidated global group enabling us to drive “best practices,” cross sell services and maximize the value of our client relationships across our entire organization. The major brands of the entertainment television division include: Encore, Level 3, Digital Symphony, Soho Images and St. Anne’s. Each brand is well known and highly regarded in its area of expertise and creative contribution.

     Recent awards received by the Entertainment Television Division include an Academy Award for What Dreams May Come (Best Visual Effects); an Emmy Award for The X-Files (Best Visual Effects for a Series); and Monitor Awards for Alias, “Pilot” (Film Originated TV Series, Best Color), The X-Files, “John Doe” (Film Originated TV Series, Best Color Finalist), CSI: Crime Scene Investigators, “Alter Boys” (Film Originated TV Series-Best Color Finalist), Almost A Woman (Film Originated TV Specials-Best Color Correction), The Lost Battalion (Film Originated TV Specials-Best Color Correction Finalist), Fidel (Film Originated TV Specials-Best Color Correction Finalist), Kite & Fly, “Trip” (Music Videos, Best Color Correction Finalist). A detailed description of the key services provided by our Entertainment Television Division is presented below.

     Negative developing. Because of the creative freedom, high-resolution image quality and flexibility attained by working with film, the majority of prime-time network and first-run syndicated television programming originates on film. “Dailies,” the original negative shot during each production day for a one-hour drama, situation comedy or movie-of-the-week, are developed by our film laboratory. Our film laboratories specialize in negative developing for television shows.

     Transfer and digital formatting. We receive developed negative from our and other laboratories and transfer the film to digital media. The transfer process enables the customer to view the previous day’s work and begin the creative editorial process. The transfer process is technically challenging and is used to integrate various forms of audio and encode the footage with feet and frame numbers from the original film. We also convert film into various digital formats suitable for multiple distribution paths including DVD.

     Off-line editing. We deliver low-resolution digital images to the customer for processing by various non-linear editing workstations. Using our systems, the customer determines a program’s content and creates an edit decision list, or EDL, which is used to assemble the source material into a final product suitable for broadcast. We support our clients with personnel and equipment either within our facilities or at a designated location. In addition, we are able to offer expanded communications infrastructure to provide digital images directly from the film-to-tape transfer process to a workstation through dedicated data lines.

     Visual effects. Visual effects are used to enhance the viewing audience’s entertainment experience by supplementing images obtained in principal photography with computer-generated imagery. Visual effects are typically used to create images that cannot be created by any other cost-effective means. We generate bends, warps, morphs and 3D shapes as well as other visual effects for customers. We also offer an array of graphics and animation workstations using a variety of software to accomplish unique effects, including 3D animation. We are actively involved in providing visual effects for the television industry as evidenced by our contribution to numerous television series, including Star Trek and Smallville.

     Assembly, formatting and duplication. We implement clients’ creative decisions, including decisions regarding the integration of sound and visual effects, to assemble source material into its final form. In addition, we use sophisticated computer graphics equipment to generate titles and character imagery and to format a given program to meet specific network requirements, including time compression and commercial breaks. Finally, we create multiple master videotapes for delivery to the network for broadcast, archival and other purposes designated by the customer.

     Commercial Television Division

     Our recent acquisitions have created a large group of facilities specializing in the delivery of technical and creative services to producers of television commercials, music videos, theatrical film trailers, interstitial and promotional material and identity and corporate image campaigns. We believe our competitive advantages lie in the reputation and accessibility of our creative talent, the ability to provide scale and global reach for national and international advertising campaigns and the ability to provide the technologies and working environments to achieve

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the creative and technical objectives of our clients. We will continue to support the expansion of our brand equity in the marketplace by maintaining the differentiation of our facilities. However, our commercial television facilities benefit from coordination of certain policies, including pricing, vendor relationships, employment practices and compensation and incentive structures. The major brands of our Commercial Television Division include Company 3, R!OT, Method, Filmcore, POP, Rushes, SVC, One Post Ltd. and Editworks. Each brand is well known and highly regarded in its area of expertise and creative contribution.

     Recent awards received by the Commercial Television Division include Clio Awards for Nike, “Virtual Andre” and “Topseed”; Chevy, “Brawl”, Snap.com, “New Friend”, First Union Bank, “Noise”, San Francisco Jazz Festival, “Low Riders”, and Public Service Announcement, “Antismoking”; Association of Independent Creative Editors Awards for Nike, “Horror” and EPS, “Cat Herders”; Monitor Awards for We Stand Alone (Documentaries, Best Audio Mixer), United Airlines, “Pager” (National Commercials, Best Audio Mixing), Skittles, “Maze” (National Commercials, Best Color Correction Finalist), FX, “Born to be Wild” (On Air Promotions, Best Audio Mixing), FX “Born to be Wild” (On Air Promotions, Best Sound Design Finalist); Telly Awards for TNT, “Shaft Marathon” (Gold, Creative Editorial), TNT, “Johnny Cash, Overview” (Gold, Creative Editorial); TNT, “Behind the Scenes: Dollar for the Dead” (Gold, Creative Editorial), TNT, “Saturday Night New Classic: Fargo” (Silver, Creative Editorial); Broadcast Design Awards for Turner Production Effects, “Turner Investor Sales Tapes” (Gold), Turner Classic Movies, “Trailers” (Gold), VH-1 Fashion Awards, “Open Animation” (Bronze), a Belding Award for Toyota Tacoma, “Family Reunion” and a Lions Award for Sony Playstation, “Soundcheck.” A detailed description of the key services provided by our Commercial Television Division is presented below.

     Negative developing. Because of the creative freedom, high-resolution image quality and flexibility attained by working with film, most television commercials originate on film. Our facilities deliver negative development and imaging services for complex and technically demanding commercial work. We also provide negative cutting services for the distribution of commercials on film.

     Telecine. Telecine is the process of transferring film into digital media. During this process, a variety of parameters can be manipulated, such as color and contrast. Because the color spectrum of film and digital media are different, we have creative talent who utilize creative colorizing techniques, equipment and processes to enable our clients to achieve a desired visual look and feel for television commercials and music videos, as well as feature films and television shows.

     Digital Effects. Digital effects enhance principal photography and physical effects with computer-generated imagery. Our digital artists use hardware and software tools as well as proprietary methods to create three-dimensional animation, special visual effects and other specialized graphical elements for commercial television.

     Creative Editorial. The process of creative editorial consists of the steps required to mold film that has been shot for a television commercial into a final product that is ready to be distributed for television viewing. After principal photography has been completed, our editors assemble the various elements into a cohesive story consistent with the messaging, branding and creative direction by our clients, which are mainly advertising agencies.

     Distribution. Once a television commercial has been completed, we provide broadcast and support services, including complete video and audio duplication, distribution, and storage and asset management, for advertising agencies, corporate advertisers and entertainment companies. We use domestic and international satellite, fiber and Integrated Services Digital Network, or ISDN, Internet access, and conventional air freight for the delivery of television and radio spots. We currently house over 85,000 commercial production elements in our vaults for future use by our clients. Our commercial television distribution facilities in Los Angeles and San Francisco, California and our satellite hub facilities in New York, enable us to service any regional or national client.

     Audio Division

     We provide audio services to the entertainment industry for theatrical feature films, television series, television specials, movies-of-the-week, trailers, television commercials and new digital media in the United States and Europe. We have audio facilities in Los Angeles, New York and London. Todd-AO Studios and Soundelux are the major brand names supported by the Audio Division. Each has contributed to many television and motion picture projects and each has won awards for their efforts in these areas. Soundelux also provides high-end microphones for the music industry. The Hollywood Edge and Soundelux Microphones distribute sound tools to the consumer market through worldwide distribution channels and the Internet.

     Recent awards garnered by the Audio Division include Academy Awards for Chicago (Best Sound), Black Hawk Down (Best Sound), Braveheart (Best Sound Effects Editing), Last of the Mohicans (Best Sound), British Academy Awards for

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Chicago (Best Sound), Almost Famous (Best Sound), Braveheart (Best Sound) and JFK (Best Sound); Golden Reel Awards for Gladiator (Best Sound Effects Editing), American Beauty (Best ADR Editing), Jerry Maguire (Best ADR Editing), The Hunchback of Notre Dame (Best Animated Sound Effects Editing), Braveheart (Best Sound Effects Editing), Born on the Fourth of July (Best Sound Editing), a Grammy Award for Alanis Morissette: Jagged Little Pill (Best Long Form Music Video); Monitor Awards for We Stand Alone (Best Audio Mixer, Documentaries); Alias, “Pilot” (Best Color Correction, Film Originated Television Series) and Almost a Woman (Best Color Correction, Film Originated Television Specials), United Airlines, “Pager” (Best Audio Mixing, National Commercial), FX, “Born to be Wild” (Best Audio Mixing, On Air Promotions), Nike, “Horror” (Best Audio Mixing for a National Commercial), Book of Virtues (Best Audio Mixing for Children’s Programming), Sega, “Obsidian Egg” (Best Audio Mixing), Sega, “Apocalypse” (Best Audio Post), Infiniti, “Motorcade” (Best Audio Post), The Rolling Stones, “Stripped” (Best Audio Mixing), Arizona Department of Health Services, “Why Smoke” (Best Audio Mixing for Public Service Announcement); a Clio Award for Snap.com, “New Friend” (Best Sound Design); a Mexican Silver Ariel Award for Amores Perros (Best Sound), and a Cinema Audio Society Award and TEC Award for our sound effects work on Gladiator. We have also been an Emmy recipient for a Governor’s Award for The Native Americans.

     We provide music editing, music recording, music composition and clearance, music supervision, overseas music recording, score production and song placement. Feature film and television producers utilize our studio facilities and creative staff for the creation of sound effects, replacement of dialog, and the re-recording of audio elements for integration with film and video elements. Re-recording combines sound effects, dialogue, music and laughter or applause to complete the final product. In addition, the re-recording process enhances the listening experience by adding specialized sound treatments and formats.

Media Management Services Group

     The Media Management Services Group provides owners of content libraries with an entire complement of facilities and services necessary to optimize, archive, manage and repurpose media assets for global distribution via freight, satellite, fiber and the Internet. We provide access to all forms of content, duplication and formatting services, language conversions and laybacks, restoration and preservation of old or damaged content, mastering from motion picture film to high resolution or data formats, digital audio and video encoding services and digital media management services for global home video, broadcast, pay-per-view, video-on-demand, streaming media and other emerging new media distribution channels. We believe our competitive advantages include client loyalty, reputation, capacity to handle large-scale projects and our ability to offer integrated content management solutions on a global basis. Our media facilities are located in Burbank, Hollywood, and Santa Monica, California; Northvale, New Jersey; Barcelona, Spain and London, England.

     We anticipate continued growth, primarily due to the emergence of new digital distribution platforms, including digital cable television, pay-per-view, and VOD, as well as the growing international demand for content– particularly in Asia and Europe. We also expect to develop new revenue streams as the demand for services related to the management and exploitation of resolution independent virtual media (as opposed to physical media) grows. In fiscal year 2002, the Media Management Services group contributed $104.9 million, or 19.5% of our total revenues, as compared to $104.1 million, or 17.6%, in fiscal year 2001 and $56.8 million, or 18.5%, in fiscal year 2000. A more detailed description of the key services provided by our Media Management Services group is presented below.

     Storage of original elements and working masters. The storage and handling of videotape and film elements requires specialized security and environmental control procedures. Throughout the entertainment industry, content is stored in physically small units that are subject to the risk of loss resulting from physical deterioration, natural disaster, unauthorized duplication or theft. Our archives are designed to store working master videotapes and film elements in a highly controlled environment protected from temperature and humidity variation, seismic disturbance, fire, theft and other external events. In addition to the physical security of the archive, content owners require frequent and regular access to their libraries. Speed and accuracy of access is a critical factor that benefits our clients. We are an independent archive provider and believe we are advanced with respect to security, environmental control and access features.

     Asset management center. Physical elements stored in the archive are uniquely barcoded and maintained in a library management database offering rapid access to elements, concise reporting of element status and element tracking throughout its travel through the Company’s operations.

     Restoration and preservation of existing and damaged content. Substantially all film elements originating prior to 1983 have faded, degraded or been damaged. Damaged film negative must be restored because sub-masters

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produced from damaged film will generally not meet the minimum quality standards required in domestic and international broadcast markets. Our technicians restore damaged film negative to original and sometimes enhanced quality through the use of proprietary optical and electronic equipment and techniques. In order to protect film assets from degradation, older film is frequently converted to new archival film stock. Modern film stock is the preferred archival medium because it has the highest image resolution of any image storage medium and a shelf life that exceeds 100 years. Using a proprietary process, we take the original or restored film negative and create a new negative. Due to technical and operational advances in our proprietary restoration and preservation processes, we are able to provide restoration and preservation services for existing film content.

     Transferring film to digital media. A considerable amount of film content ultimately is distributed to the home video, broadcast, cable or pay-per-view television markets. This requires film images to be transferred to a video format. Each frame must be color corrected and adapted to the size and aspect ratio of a television screen in order to ensure the highest level of conformity to the original film version. Because certain film formats require transfers with special characteristics, it is not unusual for a motion picture to be mastered in many different versions. Technological developments, such as the domestic introduction of television sets with a 16 x 9 aspect ratio and the implementation of advanced and high definition digital television systems for terrestrial and satellite broadcasting, are expected to contribute to the growth of our film transfer business.

     Converting videotape or digital media to film. Production companies may choose to originate their work on videotape or in other media formats, even though the destination market is a theatrical release on film. We use advanced electronic systems to transform content from all current broadcast standards and formats to 16mm or 35mm film. This process is used for all forms of theatrical film distribution, including short form and long form advertising, commercials, studio promotions and trailers, as well as theatrical length presentations including feature films, concerts and special events.

     Audio restoration and integration. Audio layback is the process of creating duplicate digital masters with sound tracks that are different from the original recorded master sound track. Content owners selling their assets in international markets require the original dialog to be replaced with dialog in the local language. In some cases, all of the audio elements, including dialogue, sound effects, music and laughs, must be recreated, remixed and synchronized with the original master elements.

     Professional duplication and standards conversion. Professional duplication is the process of creating broadcast quality and resolution independent sub-masters for distribution to professional end users. Master elements are used to make sub-masters in numerous domestic and international broadcast standards as well as up to 22 different tape formats. Standards conversion is the process of changing the frame rate of a video signal from one video standard, such as the United States standard (NTSC), to another, such as a European standard (PAL or SECAM). Content is regularly copied and converted for use in intermediate processes, such as editing, on-air backup and screening, and for final delivery to cable and pay-per-view programmers, broadcast networks, television stations, airlines, home video duplicators and foreign distributors. Our duplication and standards conversion facilities are technically advanced with unique characteristics that significantly increase equipment capacity while reducing error rates and labor cost.

     Digital Media Management Center. We are developing a digital media management infrastructure, also referred to in this report as the Digital Media Management Center. For more information on the Digital Media Management Center, see “DEVELOPING BUSINESSES—Digital Media Management Center” in this Item I below.

Network Services Group

     The acquisitions of the assets and operations that comprise our Network Services Group have created a global operation primarily focused on the broadcasting and distribution of content via satellite and fiber. We provide facilities and services necessary to assemble and distribute programming content for cable and broadcast networks via fiber and satellite to viewers in North America, Europe and Asia. We facilitate the timely creation of original programming such as hosted and news segments and live shows, providing language translation and subtitling, all the way to assembling programming provided by the customer into a 24-hour “network” format. In addition, we provide facilities and services for the delivery of syndicated television programming in the United States and Canada and also transmit special events, sports or news segments for insertion in broadcast, cable and other third party networks. On December 23, 2002, we divested our equity ownership in the Triumph entities. As a result of this divestiture, our Network Services Group significantly reduced its point-of-presence facilities and its internal fiber capabilities within the U.S. Our Network Services Group, however, continues to maintain, in a more cost effective manner, its fiber capabilities through third party providers.

     We see continued growth opportunities with current and prospective clients who are seeking higher quality and/or lower cost solutions for broadcasting and distribution particularly where new technologies can accomplish these objectives and support the creation of new revenue streams in the digital media space. We believe our competitive advantages lie in our ability to distribute content worldwide, our ability to package our services in a cost-effective

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manner, our backup distribution paths and our reputation for distribution on multiple technological platforms. Our broadcast facilities are located in California, Minnesota, Maryland, New York, New Jersey, Connecticut, Florida, the United Kingdom and Singapore. . In fiscal year 2002, the Network Services group contributed $159.1 million, or 29.5% of our total revenues, as compared to $155.6 million, or 26.2%, in fiscal year 2001 and $28.6 million, or 9.3%, in fiscal year 2000. A more detailed description of the key services provided by our Network Services group is presented below.

     Production. Timely broadcast programming, such as live shows and news, requires immediate and precise coordination of on-camera talent, the script, pre-recorded videotape, promotional and interstitial materials and the broadcast schedule. We operate television production studios in Stamford, Connecticut and Singapore with live-to-satellite interview services, cameras, production and audio control rooms, videotape playback and record, multi-language prompters, computerized lighting, and dressing and makeup rooms. Our Singapore facility also offers field and teleconferencing services.

     On-air promotion. On-screen marketing and broadcast continuity depend on on-air promotional material to support the channel’s brand identity and programming. We work with the client’s writers and producers to offer a complete on-air promotion service, including graphics, editing, voice-over record, sound effects editing, sound mixing and music composition.

     Language translation. Programming designed for export to other markets is prepared through language translation and either subtitling or voice dubbing. We provide dubbed language versioning with an audio layback and conform service that supports various audio and videotape formats to create original international language-specific master videotape. Our Burbank facility also creates music and effects tracks from programming that is filmed before an audience to prepare television situation comedies for dialogue recording and international distribution. Our Singapore facility supports translation, and a complete on-screen and closed-caption subtitling facility.

     Syndication and Commercial Integration. We provide programming to most United States broadcast television stations through daily satellite transmissions. Prior to broadcast, all material is quality control checked and may be pre-compiled into final broadcast form prior to on-air playback. Pre-compilation is performed in our editing facilities, often using proprietary systems and software which permit the efficient assembly of high production value visual effects. We also prepare syndicated programming for distribution with commercials and similar elements that are inserted prior to distribution. We use control procedures to ensure on-air reliability and provide formatting and time compression services, which are used to prepare programming for distribution. We perform commercial, promotional, billboard, warning, logo and other integration, as well as closed captioning for the hearing impaired and source identification encoding. We also provide programmers with: traffic support; affiliate relations and station coordination; library storage of broadcast master tapes; a syndication program library and recycled videotape inventory.

     Origination and distribution. We provide videotape and computer server based playback and origination to cable, pay-per-view and direct-to-home networks. We accept daily program schedules, programs, promos and advertising, and deliver 24 hours of seamless daily programming to cable affiliates and DBS subscribers. We use automated systems for broadcast playback. We also operate industry-standard encryption and/or compression systems as needed for customer satellite distribution. We use a customized approach to satisfy each customer’s timeliness, flexibility and reliability requirements. We also offer quality control, tape storage and trafficking services. Currently, over 50 24-hour channels are supported by our facilities in Singapore; London, England; Burbank, California; Minneapolis, Minnesota; New York, New York; Northvale, New Jersey; Stamford, Connecticut; and Palm Bay, Florida.

     Satellite transport. We operate satellite earth station facilities in Singapore; Burbank, California; New York, New York; Northvale, New Jersey; Minneapolis, Minnesota; Stamford, Connecticut; and Palm Bay, Florida. Our facilities are generally staffed 24 hours a day and may be used for downlink, turnaround and uplink services. We access various “satellite neighborhoods,” including basic and premium cable, broadcast syndication direct-to-home and DBS markets. We resell transponder capacity for occasional and full-time use and bundle our transponder capacity with other broadcast and syndication services to provide a complete broadcast package at a fixed price. Our teleports are high-bandwidth communications gateways for satellite, optical fiber and microwave transmission. Our facilities offer satellite antennae capable of transmitting and receiving feeds in both C-Band and Ku-Band frequencies. We also provide transportable services, including point-to-point microwave transmission, transportable up-link and downlink transmission, and broadcast quality teleconference services.

     Engineering and systems integration. Through our wholly-owned subsidiary, A.F. Associates, also referred to as AFA, we design, build, install, and service advanced video systems for the broadcast and cable television industries for professional and corporate markets. Over 50% of AFA’s business is repeat business from clients who seek AFA’s

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technical and engineering expertise. AFA also serves as the “in house” engineering department for the Network Services Group, enabling us to quickly respond to customer needs and new services. AFA’s clients include major broadcast networks, numerous cable channels, corporate television networks, and numerous production and post-production facilities. We believe that increases in cable, direct satellite and independent broadcasting made possible by emerging digital media technologies, as well as the migration of broadcasting standards from analog to digital, will provide significant opportunities for AFA to expand its customer base.

     Broadcast equipment rental. We rent broadcast and industrial video equipment to the broadcast and professional video industries, and provide support and maintenance for such services. We specialize in network sports production rental needs.

DEVELOPING BUSINESSES

Digital Media Management Center

     We are implementing a new digital media management infrastructure called the Digital Media Management Center, which will provide asset management services to create, edit, assemble, manage, process, catalog, transport and deliver all forms of digital media content. The creation of this digital media management platform provides for an integrated, extensible and scaleable asset management environment across all of our business segments and operating divisions. It also supports the workflows and media assets of our clients. We have developed a set of services for the motion picture, television, commercial and advertising markets and currently use services to edit, assemble, manage and deliver digital assets within the Company and for clients. Our digital media management initiative also provides an operating framework for implementation of new services, such as metadata creation, ingestion and processing, compression and encryption, digital content cataloging as well as media versioning and file based transport and delivery of media content that bring value to our clients. This business applies to multiple traditional distribution platforms as well as new media distribution businesses such as VOD.

     Our digital media management initiative requires custom design and development of a comprehensive suite of next generation services designed to complement our existing businesses, as well as providing a migration path toward servicing the new media initiatives of our clients. As such, the project represents a long term strategic investment designed to position us ahead of our competitors by providing migration paths from the management of existing (physical) media to automated real time management of new (file based) media types. Examples of services that we are currently developing or have begun implementing include the following:

     Dailies gateway. The Dailies Gateway will provide multi-tiered services for the review, approval and digital transfer of film based project dailies. Clients will need only a password and a broadband modem to receive Tier One service, which will stream up to three days’ worth of dailies in Windows or MPEG-4 Media formats. Tier Two service will include DVD-quality files streamed over a private network. Tier Three service will digitize Avid OMF files with a telecine session for “videotape-free” private network delivery of transferred film dailies directly to offline editors.

     Virtual sessions. The Virtual Session allows producers to work collaboratively with editors, effects specialists and telecine artists in an online interactive environment, minimizing costs and other logistics associated with long-distance travel. Real-time sessions can be conducted live, enabling shoulder-to-shoulder collaboration around the globe, with full-resolution images delivered via private or public networks. Other services include online posting of edited commercials, online discussion groups, project timeline management and shared, simultaneous viewing sessions.

     Virtual vault. The Virtual Vault offers commercial advertising, music video and promotional material producers complete range of media management services including online, near line and offline storage solutions, video and audio duplication, and distribution. Clients may order copies, compilation reels and customized playlists in a variety of formats, including recordable digital versatile disc, or DVDR. These elements can be routed quickly and efficiently to clients, broadcasters, and other distributors by either physical distribution or electronic file transfer. Two tiers of service are optimized for customer needs, including Tier One, which gives password-protected access to clients through each facility’s portal; and Tier Two, which creates a client-branded library site for clients to use within their own in-house operations.

New Products Group

     We are implementing initiatives through our newly-created New Products Group that develops new products that will often involve one or more divisions and newer technology. These products are targeted at generating incremental revenue or enhancing current offerings utilizing existing operational infrastructure as a foundation.

     The initiatives that the New Products Group is currently developing or has begun implementing include the

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following:

     VOD/SVOD. Many cable operators see video-on-demand, or VOD, as the key to providing them a competitive advantage over DBS operators. The core functionality gives consumers the ability to access on demand a wide range of content services that are stored on servers located in cable headends. Once a program is selected from a menu of choices, consumers have the ability to pause, rewind, fast-forward, and bookmark a program for later viewing. Networks such as Starz!/Encore, Discovery and HBO have launched subscription video-on-demand, or SVOD, services on various cable systems across the country. With SVOD, a cable subscriber pays a monthly subscription fee and can watch any of the stored programs whenever and how often they desire. We are positioning ourselves to be the preferred provider of essential VOD/SVOD services by expanding our existing services for file encoding, metadata creation, promotional material creation, file delivery and service reporting into a VOD/SVOD infrastructure and by leveraging existing relationships with cable operators and content owners. In addition, we expect to provide support for the other interactive services expected to complement the VOD/SVOD environment.

     Interactive Television. Complementing our work in the VOD/SVOD space, we will continue to closely follow developments in the interactive television space. Over time, we expect that the authoring, hosting and distribution of interactive media will parallel the production and distribution process of the traditional entertainment services industry. We believe that the most artistically correct and cost-effective way to produce, archive and distribute interactive television elements is for the material to be produced, post-produced, archived and distributed at the same time and under the same creative control as the traditional elements.

     Store and Forward. Store and Forward is a technology architecture that allows content to be transported in a cost efficient and timely manner. Many of our current clients require content to be shipped around the globe within tight time frames. Store and Forward allows video and data content to become broken into data packets wrapped in an IP distribution format thus enabling it to be sent as data files over a variety of transport mechanisms. We are exploring opportunities to expand our existing content distribution services into the Store and Forward space.

CUSTOMERS

     For the year ended December 31, 2002, no single customer accounted for more than 10% of our consolidated revenues. No customer accounted for more than 10% of the Creative Services Group revenue, one customer accounted for 11.1% of the Media Management Services Group revenue, and two customers accounted for 14.3% and 11.8%, respectively, of the Network Services Group revenue. The Creative Services client base is composed of the major domestic film studios, independent television production companies, broadcast networks, advertising agencies, creative editorial companies and corporate media producers. The Media Management Services client base includes the major motion picture studios and their international divisions as well as independent owners of television and film libraries. The Network Services client base consists of broadcast and cable television networks, local television channels, broadcast syndicators, satellite broadcasters and corporate television networks.

     A loss of any of our large customers would reduce our revenues. Although we serviced over 3,500 customers during the year ended December 31, 2002, our ten largest customers accounted for approximately 37.5% of our consolidated revenues and our single largest customer accounted for approximately 6.5% of our consolidated revenues during the period. The loss of, and the failure to replace, any significant portion of the services provided to any significant customer could have a material adverse effect on us.

COMPETITION

     The creative media services industry is highly competitive with much of the competition centered in Los Angeles, California, the largest and most competitive market, particularly for domestic television and feature film production as well as for the management of content libraries. We expect that competition will increase as a result of industry consolidation and alliances, as well as the emergence of new competitors. In particular, major motion picture studios such as Paramount Pictures, Sony Pictures Corporation, Twentieth Century Fox, Universal Pictures, The Walt Disney Company, Metro-Goldwyn-Mayer and Warner Brothers, while our customers, can perform similar services in-house with substantially greater financial, technical, creative, marketing and other resources than we have. These studios could also outsource their requirements to other independent providers like us or to other studios. We also actively compete with certain industry participants that may be smaller but have a unique operating niche or specialty business. There is no assurance that we will be able to compete effectively against these competitors, but we believe that our breadth of services is unique among most competitors in the entertainment services industry in terms of the range of service offerings within each business segment. We believe that our reputation and brand names are acknowledged and recognized for their contribution to creating quality content and that our ability to offer integrated solutions within and across our business segments sets us apart from our competitors.

EMPLOYEES

     We have approximately 3,825 employees who work in five countries providing services from approximately 70 operating facilities.

REGULATION

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     Some of our subsidiary companies hold licenses and authorizations from the Federal Communications Commission, or FCC, required for the conduct of their businesses, including earth station and various classes of wireless licenses and an authorization to provide certain services pursuant to Section 214 of the Communications Act. Most of the FCC licenses held by our subsidiaries are for transmit/receive earth stations, which cannot be operated without individual licenses. The licenses for these stations are granted for a period of fifteen years and, while the FCC generally renews licenses for satellite earth stations, there can be no assurance that these licenses will be renewed at their expiration dates. Registration with the FCC, rather than licensing, is required for receiving transmissions from domestic satellites from points within the United States. We rely on third party licenses or authorizations when we transmit domestic satellite traffic through earth stations operated by third parties. The FCC establishes technical standards for satellite transmission equipment that change from time to time and requires coordination of earth stations with land-based microwave systems at certain frequencies to assure non-interference. Transmission equipment must also be installed and operated in a manner that avoids exposing humans to harmful levels of radio-frequency radiation. The placement of earth stations or other antennae also is typically subject to regulation under local zoning ordinances.

GEOGRAPHIC AREAS

     Please see Part IV, Item 15, “EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K” for Consolidated Financial Statements included in this report for financial information in each geographic area in which we conduct business.

ITEM 2. PROPERTIES.

     The Company’s operations are conducted in approximately 70 owned, leased or licensed operating facilities, located throughout the world.

     Domestically, our Creative Services Group, Media Management Services Group, and Network Services Group, operate primarily in California and the Eastern seaboard (New York and New Jersey). Our Creative Services Group also operates facilities in Georgia and Florida; our Media Management Services Group also operates facilities in Florida; and our Network Services Group also operates facilities in Connecticut, Minnesota and Florida.

     Internationally, our Creative Services Group, Media Management Services Group, and Network Services Group, operate primarily in London, England. Our Creative Services Group also operates facilities in Mexico City, Mexico; our Media Management Services Group also operates facilities in Barcelona, Spain; and our Network Services Group also operates facilities in the Republic of Singapore.

     Worldwide, we lease approximately 1.3 million square feet and own another 400,000 square feet. In the United States, our leased facilities total approximately 1.1 million square feet and have terms expiring between June 2003 and December 2012. Several of these agreements have extension options. The leased properties are used for our technical operations, office space and media storage. Our international leases have terms that expire between December 2003 and August 2019, and are also used for our technical operations, office space and media storage. Over half of the international leases have extension clauses. Approximately 320,000 square feet of our owned facilities are located in Southern California, with another 80,000 square feet located in Northvale, New Jersey; Atlanta, Georgia; and Stamford, Connecticut. In addition, we own approximately 50,000 square feet in London, England. Nearly all of our owned facilities are purpose-built for our technical and creative service operations. Our facilities are adequate to support our current near term growth needs.

ITEM 3. LEGAL PROCEEDINGS

     Paul Dujardin v. Liberty Media Corporation and Ascent Media Group, Inc. Mr. Paul Dujardin filed a complaint (the “Complaint”) in U.S. District Court, Southern District of New York, on November 30, 2001, against Liberty Media and the Company, alleging violations of Section 10(b), Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934, common law fraud, negligent misrepresentation, breach of the earnout provisions of an acquisition agreement involving the sale of Mr. Dujardin’s company, Triumph Communications (“Triumph”), to the Company in July 2000 (the “Triumph Acquisition”), and breach of contract for failure to make Mr. Dujardin head of the Company’s Network Services Group. The securities claims in the Complaint allege that, in a series of transactions during 2000, Liberty Media agreed to secretly contribute assets to the Company in exchange for the Company’s stock,

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at prices that ultimately were below the NASDAQ trading price on the date the transactions were consummated. The Complaint alleges that the Company and Liberty Media fraudulently concealed these “below-market” transactions and that, as a result, the Company’s stock price was inflated. In reality, all of these allegedly “concealed” transactions were fully disclosed in numerous public filings made with the Securities and Exchange Commission. According to this theory, Mr. Dujardin claims approximately $15 million in damages, plus punitive damages. Mr. Dujardin also claims that, pursuant to the acquisition agreement between Triumph and the Company, he is entitled to an “earnout” entitling him to approximately 88,000 shares of the Company’s stock. The earnout provision allows Mr. Dujardin to collect the entire amount upon his termination on August 29, 2001, unless the Company had grounds to terminate Mr. Dujardin for failure to perform his job duties and commission of misconduct injurious to the Company. Based on the arbitrator’s decision in a related arbitration proceeding with Mr. Dujardin, we returned the earnout shares to Mr. Dujardin on August 6, 2002. Mr. Dujardin rejected delivery of the shares and claims that he instead is owed the lost value of the earnout shares as of August 29, 2001, which he claims is approximately $682,000. On February 13, 2003, the Company and Liberty Media filed a motion to dismiss the Complaint in its entirety. We are still awaiting a decision on the motion from the federal court. We will vigorously defend our interests in this matter.

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

Restated Certificate of Incorporation

     On November 15, 2002, the holders of 99% of the voting power of the issued and outstanding shares of capital stock of the Company adopted a restated certificate of incorporation for the Company (“Restated Certificate of Incorporation”), through a written consent of stockholders to action without a meeting, which was delivered to the Company the same day. The Restated Certificate of Incorporation, which became effective on November 20, 2002, changed the name of the Company to “Ascent Media Group, Inc.” and amended information with respect to the Company’s registered agent in Delaware. On November 18, 2002, the Company mailed a notice regarding such taking of action by written consent to the persons (other than the persons who executed and delivered the written consent) who were the holders of record of issued and outstanding capital stock of the Company on November 15, 2002, such date being the date that the signed written consent of stockholders was delivered to the Company.

Annual Meeting of Stockholders

     On December 20, 2002, the Company filed with the SEC and mailed to its stockholders a definitive proxy statement for its 2002 annual meeting of stockholders, which was held on January 23, 2003. Stockholders of record as of December 16, 2002 voted as follows on the following matters:

(1)

Election of the three nominees listed below (in alphabetical order) to Class III of the Company’s board of directors. The names of the nominees and votes for each nominee were as follows:

	i. Robert R. Bennett

(2)

Approval of the issuance of shares of Class B common stock and convertible notes convertible into shares of Class B common stock after the date of the annual meeting of stockholders pursuant to Supplement No. 3 (referred to in this report as “Supplement No. 3”), dated as of August 13, 2002, to the First Amended and Restated Credit Agreement, dated as of December 22, 2000, between the Company and Liberty Media (referred to in this report as the “Liberty Subordinated Credit Agreement”); the potential issuance of shares of Class B common stock and convertible notes convertible into shares of Class B common stock pursuant to future supplements to the Liberty

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Subordinated Credit Agreement for a purchase price per share or with an initial conversion price per share, as applicable, determined in a manner no less favorable to the Company than as provided in Supplement No. 3; and the potential issuance of shares of Class B common stock upon conversion of convertible notes convertible into shares of Class B common stock issued pursuant to Supplement No. 3 and outstanding on the date of the annual meeting of stockholders. For details on the Liberty Subordinated Credit Agreement and Supplement No. 3, see Part II, Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Liquidity and Capital Resources – Liberty Subordinated Credit Agreement” below.

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(3)

Ratification of the appointment of KPMG LLP as independent auditors for the Company for the year ending December 31, 2002.

     The term of office for the following directors continued after the 2002 annual meeting of stockholders (in alphabetical order):

     Gary S. Howard (Class II Director)
     David P. Malm (Class I Director)
     Brian C. Mulligan (Class I Director)
     Barney W. Schotters (Class II Director)

     The Class I Directors’ term expires at the 2003 annual meeting of stockholders and the Class II Directors’ term expires at the 2004 annual meeting of stockholders.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

Class A Common Stock

     Our Class A common stock, par value $.01 per share, is traded on the National Market tier of the Nasdaq Stock Market under the symbol “AMGIA”, which was changed from “LWIRA” on November 20, 2002 in connection with our corporate name change. The Transfer Agent and Registrar for our Class A common stock is Continental Stock Transfer and Trust Company, 17 Battery Place, 8th Floor, New York, New York 10004-1123. We have not paid cash dividends during the last two fiscal years and do not expect to pay cash dividends in the foreseeable future. As of December 31, 2002, there were 310 record holders of our Class A common stock. The number of holders of Class A common stock does not include an indeterminate number of stockholders whose shares are held by brokers in “street name.” The following table sets forth, for the periods indicated, the high and low sales prices for our Class A common stock for each full quarterly period within the two most recent fiscal years, as reported on the Nasdaq Stock Market.

Class B Common Stock

     A holder of shares of our Class B common stock, par value $.01 per share, has ten votes per share, as compared to one vote per share for holders of the Class A common stock. We have not paid cash dividends during the last two fiscal years and do not expect to pay cash dividends in the foreseeable future. Pursuant to our Restated Certificate of Incorporation, our Class B common stock is convertible into shares of Class A common stock at any time at the option of the holder, at a conversion ratio of one-to-one, as the same may be adjusted from time to time as the result of any stock split, reverse stock split or similar event effecting the Class A common stock. In all other respects, the Class A common stock and Class B common stock are substantially identical and have equal rights and privileges, except that shares of Class B common stock are convertible into shares of Class A common stock, on a one-to-one basis, at the option of the holder at any time. All of our Class B common stock is held by Liberty Media and its subsidiaries and is not publicly traded. We act as transfer agent for our Class B common stock.

Recent Sales of Unregistered Securities

     The following paragraph sets forth certain required information with respect to securities of the Company that were sold by the Company and were not registered under the Securities Act of 1933, as amended (referred to in this report as the “Securities Act”). All of the securities so issued were issued in reliance upon the exemption from registration under the Securities Act afforded by Section 4(2) thereof.

     On December 31, 2002, we issued 2,056,506 shares of our Class B common stock to Liberty Media, 1,756,770 of our Class B common stock to Liberty LWR, Inc., and 857,471 shares of our Class B common stock to Liberty Livewire Holdings, Inc., as quarterly interest payments under the Liberty Subordinated Credit Agreement. For details on the Liberty Subordinated Credit Agreement, see Part II, Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Liquidity and Capital Resources – Liberty Subordinated Credit Agreement” below, and for details on stock sales to Liberty Media, see Part II, Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Liquidity and Capital Resources – Supplement No. 3 and – Other Stock Issuances to Liberty Media” below.

Equity Compensation Plan Information

     For Equity Compensation Plan Information, see Part III, Item 12, “SECURITY OWNERSHIP OF CERTAIN

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BENEFICIAL OWNERS AND MANAGEMENT – Non-Security Holder-Approved Equity Compensation Plans.

ITEM 6. SELECTED FINANCIAL DATA.

     The periods presented above reflect the results of the change in control on June 9, 2000. See Note 1 to the Consolidated Financial Statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     Management’s discussion and analysis of financial condition and results of operations contain certain forward-looking statements. Words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of such terms and similar expressions reflecting something other than historical fact may be intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements involve known and unknown risks and uncertainties. The actual levels of our activity, performance, achievements or industry may differ materially from those expressed or implied by any forward-looking statement due to such risks and uncertainties. Factors that may cause or contribute to such differences include factors described in this and our other filings with the Securities and Exchange Commission including, but not limited to, those set forth in this section under the caption, “Factors That May Affect Future Results of Operations”. We disclaim any obligation to update any of the forward-looking statements contained in this discussion to reflect any future events or developments. The discussion that follows should be read in conjunction with the accompanying Consolidated Financial Statements and the Notes to Consolidated Financial Statements.

Overview

     Ascent Media Group provides technical and creative services to the entertainment industry. Our clients include the major motion picture studios, independent producers, broadcast networks, cable channels, advertising agencies and other companies that produce, own and/or distribute entertainment content. Our assets and operations are primarily comprised of ten companies acquired during 2001 and 2000. The combination and integration of these acquired entities allow us to offer our clients a complete range of services, from image capture to “last mile” distribution. We are able to offer outsourcing solutions for the technical and creative requirements of our clients. We have organized our facilities and operations into the three business segments, that we call Groups, as described below.

     Creative Services Group. Our Creative Services Group provides services necessary to complete the creation of original content including feature films, television shows, movies of the week/mini series for television, television commercials, music videos, promotional and identity campaigns and corporate communications programming. Our services begin after principal photography and cover a wide range of services necessary to complete a project. This may include film to video tape transfers, color correction, creative editorial services, graphics and title sequences, electronic assembly, two-dimension compositing, creation of computer generated images, sound editorial, sound mixing, music composition, sound design and integration of interactive program elements. The Creative Services Group has three divisions: Entertainment Television, Commercial Television and Audio.

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     Media Management Services Group. Our Media Management Services Group optimizes, archives, manages and repurposes media assets for global distribution. We provide access to all forms of content, duplication and formatting services, language conversions and laybacks, restoration and preservation of old or damaged content, mastering from motion picture film to high resolution or data formats, digital audio and video encoding services and digital media management services for global home video, broadcast, pay-per-view, video-on-demand, streaming media and other emerging new media distribution channels.

     Network Services Group. Our Network Services Group provides the services necessary to assemble and distribute programming for cable and broadcast networks via fiber and satellite to audiences in North America, Europe and Asia. Our Network Services Group primarily provides dedicated facilities and resources designed for specific client requirements on the basis of contractual agreements.

Acquisitions in 2001

     On February 1, 2001, we acquired GWNS from Viacom, Inc. On August 23, 2001, we acquired from Cinram U.S. Holdings, Inc. the 51% interest in Cinram-POP that we did not already own. On September 6, 2001, we acquired the remaining 99% interest in LNS that we did not already own, thereby acquiring the operations of Ascent Network Services.

Joint Venture in 2002

     On May 6, 2002, we contributed assets and obligations of our former subsidiary, The Post Edge, Inc., doing business as Manhattan Transfer-Miami, into a newly formed Miami, Florida-based limited liability company with Broadcast Video, Inc. The new entity, BVI-Miami, consists of the operations of The Post Edge, Inc. and the operations of Broadcast Video, Inc. and certain of its affiliated businesses. We own a 40% membership interest in BVI-Miami. Broadcast Video, Inc. owns the remaining 60% membership interest and manages BVI-Miami’s operations. The net book value of the assets and liabilities of $2.5 million were reclassified as an investment. We do not have any current or contingent material obligations to BVI-Miami.

Divestiture in 2002

     On December 23, 2002, we sold to Leafco Communications, Inc. all of our equity interest in Triumph for nominal consideration plus the assumption of net liabilities in the amount of $4.0 million. In connection with this sale, we entered into an agreement to loan the buyer an amount not to exceed $4.0 million. As of date of this report, such loan agreement has been terminated by the parties and the buyer has repaid us all monies advanced pursuant to such loan. In connection with this loan termination, we entered into an agreement to loan Rapco Enterprises, Inc., an affiliate of Leafco Communications, Inc., $2.0 million. The above transactions, in the aggregate, resulted in a gain from this divestiture of $1.6 million.

Earnings Before Interest Taxes Depreciation and Amortization

     We believe that Earnings Before Interest Taxes Depreciation and Amortization, or EBITDA, is an important measure of our financial performance. We define EBITDA as earnings before interest, taxes, depreciation and amortization, excluding gains and losses on asset sales and unusual charges such as restructuring, integration and impairment. Our investments in new infrastructure, machine capacity, technology and goodwill arising from our significant acquisition activity have produced a relatively high depreciation and, prior to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, amortization expense, which have historically been significant annual non-cash charges to earnings. EBITDA is calculated before depreciation and amortization charges and, in businesses with significant non-cash expenses, is widely used as a measure of cash flow available to pay interest and repay debt, and, to the extent available after debt service and other required uses, to make acquisitions or invest in capital equipment and new technologies. As a result, we view EBITDA as an important measure of our financial performance and valuation and have included EBITDA as a measure of financial performance herein. EBITDA does not represent cash generated from operating activities in accordance with generally accepted accounting principles (“GAAP”) and should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP. EBITDA does not reflect that portion of our capital expenditures that may be required to maintain our market share, revenues and leadership position in our industry. Moreover, not all EBITDA will be available to pay interest or repay debt. Additionally, our presentation of EBITDA may not be comparable to similarly titled measures reported by other companies.

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Critical Accounting Policies

     Valuation of Long-lived Assets and Amortizable Other Intangible Assets. We perform impairment tests for our long-lived assets if an event or circumstance indicates that the carrying amount of our long-lived assets may not be recoverable. In response to changes in industry and market conditions, we may also strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses. Such activities could result in impairment of our long-lived assets or other intangible assets. We are subject to the possibility of impairment of long-lived assets arising in the ordinary course of business. We regularly consider the likelihood of impairment and recognize impairment if the carrying amount of a long-lived asset or intangible asset is not recoverable from its undiscounted cash flows in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. Impairment is measured as the difference between the carrying amount and the fair value of the asset.

     Valuation of Goodwill and Non-amortizable Other Intangible Assets. We assess the impairment of goodwill annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include significant underperformance to historical or projected future operating results, substantial changes in our strategy or the manner of use of our assets, and significant negative industry or economic trends. Effective January 1, 2002, we adopted SFAS No. 142 and in accordance with its provisions, during the first quarter of fiscal year 2002, we recorded a transitional impairment charge of $20.2 million against goodwill related to our Entertainment Television reporting unit, which is part of our Creative Services Group. Such charge has been reflected as a cumulative effect of a change in accounting principle. Additionally, as a result of our annual impairment testing, we recorded a goodwill impairment charge of $83.7 million during the fourth quarter of fiscal 2002. Of this impairment charge, $56.8 million impairment related to our Entertainment Television reporting unit and $26.9 million related to our Commercial Television reporting unit. Fair value of each reporting unit was determined through the use of an outside independent valuation consultant. The consultant used both the income approach and market approach in determining fair value.

     In accordance with SFAS No. 142, we ceased amortizing goodwill totaling $421.7 million at the beginning of fiscal year 2002 and $17.5 million of acquired assembled workforce previously classified as identifiable intangible assets. Additionally, in accordance with SFAS No. 142, we ceased amortizing $1.7 million of tradename classified as an other intangible asset. As a result, for the year ended December 31, 2002, we did not recognize $27.8 million of amortization expense that would have been recognized had the previous standards been in effect. For additional information regarding SFAS No. 142, see Notes 2 and 3 in the Notes to Consolidated Financial Statements.

     Valuation of Trade Receivables. We must make estimates of the collectibility of our trade receivables. Our management analyzes the collectibility based on historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. We record an allowance for doubtful accounts based upon specifically identified receivables that we believe are uncollectible. In addition, we also record an amount based upon a percentage of each aged category of our trade receivables. These percentages are estimated based upon our historical experience of bad debts. Our trade receivables balance was $96.1 million, net of allowance for doubtful accounts of $9.0 million, as of December 31, 2002.

     Valuation of Deferred Tax Assets. In accordance with SFAS No. 109, Accounting for Income Taxes, we review the nature of each component of our deferred income taxes for reasonableness. We have determined that it is more likely than not that we will not realize a portion of our tax benefits associated with certain cumulative net operating loss carry forwards and impairment reserves, and as such, we have reserved for a portion of our deferred income tax assets and incurred charges of $24.7 million and $93.8 million during the years ended December 31, 2002 and 2001. For additional information regarding SFAS No. 109, see Notes 2 and 10 in the Notes to Consolidated Financial Statements.

Results of Operations

     The Creative Services Group’s revenues are primarily generated from fees for video and audio post production, special effects and editorial services for the television, film and advertising industries. The Media Management Services Group provides owners of film libraries a broad range of restoration, preservation, archiving, professional mastering and duplication services. The Media Management Services Group’s results also include our Digital Media Management initiative. The Network Services Group’s revenues consist of fees relating to facilities and services necessary to assemble and distribute programming for cable and broadcast networks across the world via fiber, satellite and the Internet. The Network Services Group’s results also include our Bandwidth Management initiative, predominantly Triumph, which was disposed on December 23, 2002. Corporate related items and unallocated revenues and expenses are reflected in Corporate and Other, below. Additionally, Corporate and Other includes the results of our New Products Group which is leading our efforts in developing new products and businesses such as VOD and

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SVOD, Interactive Television and Store and Forward. Cost of services and operating expenses consists primarily of production wages, facility costs and other direct costs, selling, general and administrative expenses, depreciation and amortization and impairment charges.

     Our consolidated results of operations for the year ended December 31, 2002, include a full twelve months of results for GWNS, Cinram-POP and LNS. For these subsidiaries, our consolidated results of operations for the year ended December 31, 2001 include the results of GWNS from February 1, 2001, include the results of Cinram-POP from September 1, 2001 and include the results of LNS from September 1, 2001. Additionally, certain reclassifications have been made to the prior year’s EBITDA in the Comparison of Reported Results for the Year Ended December 31, 2002 to the year ended December 31, 2001 section below to conform to the current year’s presentation.

Comparison of Reported Results for the Year Ended December 31, 2002 to the Year Ended December 31, 2001

     Revenues decreased $53.4 million, or 9.0%, to $539.3 million for the year ended December 31, 2002 from $592.7 million for the year ended December 31, 2001. Creative Services Group revenues decreased by $57.8 million resulting from unfavorable comparisons to 2001, which benefited from increased television and feature film production as a result of the threatened actors and writers strikes. Consequently, 2002 experienced lower film production due to a soft feature market while studios released stock-piled product. Additionally, Creative Services Group revenues suffered as a result of challenging economic conditions impacting film and television post production, and sluggishness in the advertising market reducing television advertising spending. Furthermore, Creative Services Group revenues were impacted by the consolidation of certain facilities as we continued to streamline our operations. Media Management Services Group revenues increased by $.9 million as a result of higher demand for DVD mastering partially offset by lower spending from larger clients for traditional media services. Network Services Group revenues increased by $3.6 million resulting from the full year impact of the GWNS and LNS acquisitions of $7.4 million and an increase in our Bandwidth Management revenue of $1.2 million partially offset by a net decrease of $5.0 million due to cancellation and timing of various contracts, large network construction and installation projects.

     Costs of services decreased $48.2 million, or 13.0%, to $322.0 million for the year ended December 31, 2002 from $370.2 million for the year ended December 31, 2001. The decrease is attributed to a $53.1 million decline across all of our Groups primarily in production material, production personnel and equipment expenses as a result of the decreased production activity noted above, offset by $4.9 million increase resulting from full year impact of 2001 acquisitions discussed above.

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     Selling, general and administrative expenses increased $3.2 million, or 2.5%, to $130.0 million for the year ended December 31, 2002 from $126.8 million for the year ended December 31, 2001. The increase is primarily attributed to $3.9 million in severance costs and $.7 million resulting from the full year impact of 2001 acquisitions, partially offset by lower personnel and support costs.

     As a result of the above, EBITDA, as defined, decreased $18.5 million, or 17.5%, to $87.2 million for the year ended December 31, 2002, from $105.7 million for the year ended December 31, 2001. Creative Services Group EBITDA decreased $16.9 million partially due to the lower revenues described above offset by lower costs, including savings from fiscal 2001 facility consolidations and restructuring activities. Media Management Services Group EBITDA decreased $.8 million resulting from increased spending on our Digital Media Management initiative of $1.5 million partially offset by realization of higher revenues. Network Services Group EBITDA increased $2.0 million due to higher margin projects secured early in the year as well as cost savings and streamlining initiatives partially offset by additional investments of $1.4 million in our Bandwidth Management initiative. Corporate and Other EBITDA decreased $2.8 million primarily due to severance costs of $3.9 million, higher professional fees including legal and marketing of $.7 million offset by reduced costs resulting from the consolidation of our corporate activities.

     Depreciation and amortization decreased $61.3 million, or 47.7%, to $67.3 million for the year ended December 31, 2002, from $128.6 million for the year ended December 31, 2001. Approximately $39.8 million of the decrease is attributed to the Company’s adoption of SFAS No. 142 pursuant to which goodwill and other identifiable intangible assets with indefinite lives are no longer amortized. An additional $19.8 million of decrease is attributed to reduced depreciation expense primarily resulting from the property and equipment impairment charge recorded in the fourth quarter of 2001 (more fully explained in “2001 Impairment Charge” below), the sale of certain owned facilities, and divestitures (more fully discussed in the “Divestiture in 2002” earlier). The remaining $1.7 million decrease is the result of reduced amortization resulting from the 2001 impairment of certain identifiable intangible assets.

     Non-cash compensation expense decreased $4.3 million, or 101.1%, to $48,000 in income for the year ended December 31, 2002, from $4.3 million in expense reported for the year ended December 31, 2001. Results for the twelve months ended December 31, 2002 primarily included income of $3.2 million relating to a decline in the value of the underlying stock price used to value employee stock appreciation rights, or SARs, and unearned stock compensation income of $135,000, offset by compensation expense of $3.2 million relating to the issuance of “in-the-money” stock options pursuant to our 2001 incentive compensation plan. The expense recorded in the twelve months ended December 31, 2001 related primarily to the increase in value of the underlying stock price used to value employee SARs of $2.5 million and issuance of “in-the-money” stock options as discussed above of $1.6 million.

     Impairment of goodwill, intangible and long-lived assets decreased $224.2 million, or 72.8%, to $83.7 million for the year ended December 31, 2002, from $307.9 million for the year ended December 31, 2001. Results for the twelve months ended December 31, 2002 include a charge of $83.7 million during the fourth quarter of fiscal 2002, resulting from the annual impairment test of goodwill in accordance with SFAS No. 142. We recorded a $56.8 million impairment charge in our Entertainment Television reporting unit and a $26.9 million impairment charge in our Commercial Television reporting unit, both part of our Creative Services Group. During the year ended December 31, 2001, we recorded $307.9 million in impairment charges relating to long-lived assets, goodwill and intangibles, which are more fully explained in “2001 Impairment Charge” below.

     Restructuring and other charges decreased $6.0 million to $.4 million in income for the year ended December 31, 2002. During the year ended December 31, 2001 we recorded a restructuring charge of $5.6 million intended to improve operating efficiencies and effectiveness. Income in fiscal year 2002 represents a revision of estimates for certain restructuring reserves recorded in fiscal year 2001.

     Interest expense increased $1.7 million, or 2.7%, to $64.8 million for the year ended December 31, 2002, from $63.1 million for the year ended December 31, 2001. The increase is primarily attributed to additional interest on our interest rate swaps, and increased borrowings under the Liberty Subordinated Credit Agreement offset by a decrease in interest on our Senior Credit Facility. Interest expense for fiscal year 2002 included $21.3 million of non-cash expense related to payments under the Liberty Subordinated Credit Agreement, $18.5 million related to interest under our Senior Credit Facility, $16.2 million related to interest rate swaps (of which $6.5 million is non-cash), $5.4 million of amortization of debt discount and debt issuance cost, and $3.7 million of interest related to capital leases, notes, and mortgages, partially offset by $.3 million of interest income.

     Other income and expense increased $25.4 million, or 231.8%, to $14.5 million in income for the year ended December 31, 2002, from $10.9 million in expense for the year ended December 31, 2001. Other income for the year ended December 31, 2002 primarily includes $8.3 million related to the increase in the market value of certain freestanding interest rate swap instruments, $4.1 million related to the termination of certain interest rate swaps, $1.8 million from a

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gain on sale of certain real estate and a $1.6 million gain on the sale of Triumph, offset by $2.3 million related to the payment of an arbitration award more fully discussed in the “Arbitration Settlement” below. In contrast, the year ended 2001 primarily included $9.9 million loss from the sale of domestic real estate property and $3.8 million as a result of a decrease in the market value of the freestanding interest rate swap agreements.

     As a result of the above, the loss before income taxes and change in accounting principle decreased $311.2 million to $113.5 million for the year ended December 31, 2002 from $424.7 million for the year ended December 31, 2001.

     The provision for income taxes decreased $10.2 million, or 87.9%, to $1.4 million for the year ended December 31, 2002, from $11.6 million for the year ended December 31, 2001. The decrease is primarily due to a valuation allowance recorded on deferred tax assets during the year ended December 31, 2001. Our fiscal year 2002 effective income tax rate was approximately 1.1 % compared to 2.7% for 2001.

     Effective January 1, 2002, we adopted SFAS No. 142 and, in accordance with its provisions, we recorded a transitional impairment charge of goodwill of $20.2 million during the first quarter of fiscal 2002. This charge has been reflected as a cumulative effect of a change in accounting principle.

     As a result, our net loss decreased $301.1 million to $135.2 million for the year ended December 31, 2002 from $436.3 million for the year ended December 31, 2001.

Comparison of Reported Results for the Combined Year Ended December 31, 2001 to Reported Results for the Combined Year Ended December 31, 2000.

     For the purpose of the table and discussion below, our operating results for the seven months ended December 31, 2000 have been combined with the operating results of Todd-AO for the five months ended May 31, 2000 (the “combined year ended December 31, 2000”), The operating results are not comparable between the annual periods as the five months ended May 31, 2000 do not include the effects of purchase accounting adjustments related to the Todd Merger, and the subsequent period representing the seven months ended December 31, 2000 does include the effects of the purchase accounting adjustments related to the Todd Merger.

     Revenues increased $286.4 million, or 93.5%, to $592.7 million for the year ended December 31, 2001 from $306.3 million for the combined year ended December 31, 2000. The contribution of 4MC combined with the

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acquisitions of LNS, GWNS, Cinram-POP, Visiontext, VSC, Soundelux, Triumph and Soho contributed $290.6 million, or 101.5%, of the overall revenue increase among all of our segments. The overall increase was partially offset by a decrease in revenues for the Creative Services Group as a result of the impact of a recessionary market environment and a reduction in television advertising spending.

     Costs of services increased $172.0 million, or 86.8%, to $370.2 million for the year ended December 31, 2001 from $198.2 million for the combined year ended December 31, 2000. The contribution of 4MC combined with the acquisitions of LNS, GWNS, Cinram-POP, Visiontext, VSC, Soundelux, Triumph and Soho contributed $171.5 million, or 99.7%, of the overall increase.

     Selling, general and administrative expenses increased $60.3 million, or 90.7%, to $126.8 million for the year ended December 31, 2001 from $66.5 million for the combined year ended December 31, 2000. The contribution of 4MC combined with the acquisitions of LNS, GWNS, Cinram-POP, Visiontext, VSC, Soundelux, Triumph and Soho contributed $42.9 million, or 71.1%, of the overall increase. The remainder of the increase was primarily due to corporate centralization activities and increases in professional and legal fees.

     As a result of the above, EBITDA, as defined, increased $63.4 million, or 149.9%, to $105.7 million for the year ended December 31,2001, from $42.3 million for the combined year ended December 31, 2000.

     Depreciation and amortization increased $70.1 million, or 119.8%, to $128.6 million for the year ended December 31, 2001, from $58.5 million for the combined year ended December 31, 2000. The increase was primarily due to the equipment, goodwill and other intangibles acquired with respect to the acquisitions previously mentioned and new capital additions incurred during the year ended December 31, 2001.

     Non-cash compensation expense was $4.3 million for the year ended December 31, 2001, as compared to $29.6 million in income reported for the combined year ended December 31, 2000, an increase of $33.9 million. The income recorded during the combined year ended December 31, 2000 was related to a decline in value of the underlying financial instruments used to value employee stock appreciation rights or SARs. The expense in the year ended December 31, 2001 related primarily to the increase in value of the underlying financial instruments used to value employee SARs in addition to the issuance of “in the money” stock options pursuant to our 2001 incentive compensation plan.

     Interest expense increased $42.3 million, or 203.4%, to $63.1 million for the year ended December 31, 2001, from $20.8 million for the combined year ended December 31, 2000. The increase is attributable to additional borrowings under the Senior Credit Agreement, the Liberty Subordinated Credit Agreement and other borrowings incurred primarily related to the funding of acquisitions. Interest expense for fiscal year 2001 included non-cash expense related to payments under the Liberty Subordinated Credit Agreement totaling $17.9 million, $6.2 million related to interest rate swaps, and $4.1 million of amortization of debt discount and debt issuance cost. Interest expense for the combined year ended December 31, 2000 included $254,000 of non-cash expense related to payments under the Liberty Subordinated Credit Agreement.

     Included in operating expenses for the year ended December 31, 2001 is $307.9 million in impairment charges relating to long-lived assets, goodwill and intangibles, which is more fully explained in the “2001 Impairment Charge” section below.

     Additionally, during the fourth quarter of fiscal 2001 we completed certain restructuring activities intended to improve operating efficiencies and effectiveness to strengthen our competitive position in the marketplace through cost and expense reductions. In connection with this initiative, we recorded a pre-tax restructuring charge of $5.6 million. This charge includes payments $5.2 million related to lease charges due to planned facility closures and $425,000 for employee severance payments.

     Other expense increased $10.8 million to $11.0 million for the year ended December 31, 2001 from $198,000 for the combined year ended December 31, 2000. The increase was primarily due to losses on the disposal of assets totaling $9.9 million and charges related to the decline in market value of certain freestanding interest rate swap instruments totaling $2.1 million. These expenses were partially offset by other income.

     As a result of the above, the loss before income taxes and change in accounting principle increased $416.5 million to $424.7 million for the year ended December 31, 2001 from $8.2 million for the combined year ended December 31, 2000.

     The provision for income taxes increased $8.4 million, or 262.5%, to $11.6 million for the year ended December 31,

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2001, from $3.2 million for the combined year ended December 31, 2000. The increase is due to valuation allowances recorded on deferred tax assets during the year ended December 31, 2001. Our fiscal year 2001 effective income tax rate was approximately 2.7% primarily due to disallowed deductions for goodwill of $204.0 million and valuation allowances of $246.0 million.

     As a result, our net loss increased $424.8 million to $436.3 million for the year ended December 31, 2001 from $11.5 million for the combined year ended December 31, 2000.

Comparison of Pro Forma Results (unaudited) for the Year Ended December 31, 2001 to the Pro Forma Results for the Year Ended December 31, 2000 (unaudited).

     As a result of the significance and timing of the contribution of 4MC and the acquisitions of LNS, GWNS, Cinram-POP, Visiontext, VSC, Soundelux, Triumph and Soho in 2001 and 2000, certain information for the years ending December 31, 2001 and 2000 is being presented on a pro forma basis. Our management believes that these pro forma revenue and EBITDA results provide additional information useful in analyzing the underlying business results. However, pro forma operating results should be considered in addition to, and not as a substitute for, actual results of operations. The following unaudited pro forma financial information is presented as if each acquisition was consummated on January 1, 2000.

     Pro forma revenues decreased by $33.4 million, or 5.2%, to $607.5 million for the year ended December 31, 2001 from $640.9 million for the year ended December 31, 2000. This decrease was primarily due to a $34.9 million decrease in Creative Services Group revenue as a result of reduced television advertising spending. Additionally, the Network Services Group experienced a $4.3 million, or 2.5%, decrease in revenue attributed to the timing of certain large projects. These decreases were partially offset by an increase of $5.7 million, or 5.7%, in Media Management Services Group revenue resulting from the expansion of business.

     Pro forma EBITDA decreased by $7.0 million, or 6.0%, to $109.5 million for the year ended December 31, 2001 from $116.5 million for the year ended December 31, 2000. This decrease was primarily the result of a $10.2 million decrease in the Creative Services Group’s EBITDA due to the revenue shortfall as described above offset by cost savings. Such reductions were partially offset by a $5.2 million, or 19.9% increase in Media Management Services Group EBITDA and a $10.4 million, or 24.9%, increase in Network Services Group EBITDA, both as a result of significant reductions in their cost structures resulting from integration and reorganization activities. Additionally, EBITDA decreased by $6.6 million due to additional costs associated with our new Interactive Media business initiative and by $5.8 million due to increases in other expenses, primarily associated with corporate centralization activities and increased professional and legal fees. This combined increase in costs of $12.4 million, as presented above, is reflected in Corporate and Other.

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     Pro forma net loss increased $394.1 million to $439.4 million for the year ended December 31, 2001, from $45.3 million for the combined year ended December 31, 2000. The increase in net loss was primarily driven by the impairment charge described below and higher depreciation and amortization, interest, non-cash compensation and other expenses.

Arbitration Settlement

     During the year ended December 31, 2002, the previously reported arbitration proceeding arising from (i) the termination of Paul Dujardin’s employment with us, and (ii) the disposition of 440,981 shares of our Class A common stock (the “Hold-Back Shares”) owned by Mr. Dujardin and held by us concluded. Pursuant to an arbitrator’s decision, we were ordered to pay $3.4 million plus interest at 9% from August 29, 2001 to July 25, 2002, the date we paid the award, for a total amount of $3.7 million (“Arbitration Award”). In determining the award, the arbitrator concluded that at August 29, 2001, the value of the Hold-Back Shares was $3.4 million, or $7.67 per share. In accordance with generally accepted accounting principles, we were deemed to have paid $3.20 per share for the Hold-Back Shares with the difference of $4.47 per share, or $2.3 million, recorded to other expense. The Hold-Back Shares were originally issued to Mr. Dujardin in partial consideration for the Company’s acquisition of Triumph on July 25, 2000.

2001 Impairment Charge

     During fiscal year 2001, challenging economic conditions impacted overall business trends. In particular, both the entertainment and technology sectors suffered a substantial decline in economic activity. These challenges were further exacerbated by the events of September 11, 2001, resulting in a continued negative economic impact. These factors contributed largely to our inability to meet our 2001 financial and operating objectives and have resulted in reduced expectations and opportunities for the near term.

     Accordingly, we evaluated the recoverability of our goodwill, intangible assets and long-lived assets carrying values pursuant to Accounting Principles Board (“APB”) No. 17, Intangible Assets, and SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This involved writing-down goodwill, intangibles and certain long-lived assets to their fair value, which was based upon both fair market comparables and by discounting the future cash flows of these assets through their remaining useful lives. As these definite-lived intangible assets and long-lived assets will remain in service, the remaining net book value of the assets will be depreciated over their remaining estimated useful lives.

     Therefore, during the quarter ended December 31, 2001, we recorded asset impairment charges totaling $286.9 million. These charges primarily represent a write-off of goodwill, intangible assets and long-lived assets of our existing feature film and entertainment television sound services, and certain assets associated with the development of our fiber optic transport and IP hosting transport services. Part of our original valuation of these assets was affected by our expectation that the development and delivery of interactive television and other interactive services, including the rollout of a broadband infrastructure, would have materialized sooner and therefore would have provided more immediate growth opportunities.

     Additionally, during the fourth quarter of 2001 we completed certain integration and consolidation activities intended to improve operating efficiencies and effectiveness and to strengthen our competitive position in the marketplace through cost and expense reductions. In connection with these initiatives, we recorded a charge of $21.0 million for impairment of certain equipment and other fixed assets.

Liquidity and Capital Resources

     Overview

     We continue to monitor the credit markets and other sources of capital in case we are unable to generate sufficient cash flow from operations to service our indebtedness or to make capital expenditures and other discretionary investments. If we are required to raise capital in the future, there can be no assurance that we will be able do so on favorable terms. If we are unable to generate sufficient cash flow from operations in the future to service our debt and working capital needs, we may be required to reduce capital expenditures, sell assets or refinance all or a portion of our existing debt or obtain additional financing. Our ability to make scheduled principal debt payments, to pay interest or to refinance our indebtedness depends on our future financial position and results of operations, which, to a certain extent, are subject to general conditions in or affecting our industry and our customers and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

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     We expect to fund our capital expenditure requirements with cash flows from operating activities and, to the extent permitted by the Senior Credit Agreement, proceeds derived from leasing transactions and sales of non-strategic assets. To the extent that such cash flows, leasing transactions and proceeds may be insufficient (after servicing our existing indebtedness and funding our working capital requirements) to provide adequate funds for planned capital expenditures, we are exploring alternatives to funding capital expenditures consistent with the restrictions contained in the Senior Credit Agreement, such as loans and equity investments. Although we monitor the credit markets and other sources of capital, there can be no assurance that we will be able to secure funds for capital expenditures or that, if such funds are available, such funds will be available on favorable terms. If we cannot obtain additional funds for our capital expenditures, and the cash flows, leasing transactions and proceeds described above are insufficient (after servicing our existing indebtedness and funding our working capital requirements) to provide adequate funds for planned capital expenditures, we may be required to reduce our planned capital expenditures. Any such reduction in capital expenditures may have a negative effect on our business.

     Cash Flows

     Cash flows provided by operations for the year ended December 31, 2002 were $42.6 million, as compared to $73.6 million for the year ended December 31, 2001. The decrease in net cash flows provided from operations is primarily attributable to lower revenues and EBITDA and changes in working capital. Cash and cash equivalents were $12.0 million at December 31, 2002, a decrease of $11.4 million from December 31, 2001. This decrease relates primarily to cash used for capital expenditures and payments on long-term debt and capital lease obligations offset by cash provided by operating activities.

     Net cash flows used in investing activities was $50.6 million for the year ended December 31, 2002 compared to net cash flows provided by financing activities of $191.7 million for the year ended December 31, 2001. The decrease is primarily attributed to the 2001 acquisitions of GWNS for $108.2 million, LNS for $31.3 million, and Cinram-POP for $0.5 million. Additionally, we invested $55.4 million in property, plant and equipment during the year ended December 31, 2002 compared to $73.7 million for the year ended December 31, 2001. These expenditures reflected continued investments in the Creative, Media and Network Services Groups as well as our shared corporate infrastructure. The decrease from the year ended December 31, 2001 was primarily due to lower spending throughout all Groups. During the year ended December 31, 2002, we sold certain domestic real estate properties that generated net proceeds of $4.8 million.

     During the year ended December 31, 2002, net cash flows used in financing activities was $7.0 million compared to $119.9 million for the year ended December 31, 2001. Net cash flows provided by financing activities for the year ended December 31, 2001 was primarily borrowings under our Liberty Subordinated Agreement and were used for acquisitions. For descriptions and details of financing activities during fiscal year 2002 see discussion below and at Note 8 in the Notes to Consolidated Financial Statements.

     Senior Credit Agreement

     At December 31, 2002, we had borrowed $363.9 million under the Senior Credit Agreement (including Letters of Credit of $.6 million) and $3.7 million was available for future borrowings, subject to the terms of the Senior Credit Agreement. During the year ended December 31, 2002, we borrowed $5.0 million under the Senior Credit Agreement which was primarily used to fund capital expenditures and working capital. During the year ended December 31, 2002, we repaid $33.4 million under our Senior Credit Agreement.

     During the year ended December 31, 2002, we had two additional amendments to the Senior Credit Agreement; one amendment, dated March 26, 2002 (the “March 26, 2002 Amendment”), and another amendment, dated November 13, 2002 (“the November 13, 2002 Amendment”).

     The March 26, 2002 Amendment and the November 13, 2002 Amendment each amended the Senior Credit Agreement to provide greater financial flexibility to us by allowing for more favorable leverage ratio tests and a more favorable fixed charge coverage ratio test. Each also removes some restrictions on transactions we may enter into. In consideration for the above changes, we agreed to (1) higher interest rates on the loans until our leverage ratio is reduced below 4.00 to 1.00, (2) new restrictions on the use of the proceeds from the sale of assets and (3) a permanent reduction of $40.0 million in the

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amount available for the future borrowings under the Senior Credit Agreement. After giving effect to this amendment, $3.7 million is available for future borrowings under the Senior Credit Agreement as of December 31, 2002.

     Under the Senior Credit Agreement, the Company’s Total Leverage Ratio may not exceed 4.55 to 1.00 for any measurement period from December 31, 2002 to June 30, 2003. Thereafter, the Total Leverage Ratio is reduced over subsequent measurement periods until it reaches a Total Leverage Ratio of 3.50 to 1.00 for any measurement period after January 1, 2005. At December 31, 2002, the Company’s Total Leverage Ratio was 4.12 to 1.00. The Company was not subject to a Fixed Charge Coverage Ratio covenant at or prior to December 31, 2002. For any measurement period beginning January 1, 2003, the Company’s Fixed Charge Coverage Ratio may not be less than 0.85 to 1.00, which increases over the succeeding two quarters until October 1, 2003, when the Company’s Fixed Charge Coverage Ratio may not be less than 1.00 to 1.00 for the remainder of the term of the Senior Credit Agreement. At December 31, 2002, the Company's Fixed Charge Coverage Ratio was 1.07 to 1.00. The Company’s failure to generate anticipated levels of revenue or its failure to procure capital equipment necessary to generate such revenues could result in its failure to satisfy the financial covenants described above.

     Liberty Subordinated Credit Agreement

     At December 31, 2002, we had borrowed $224.3 million under the Liberty Subordinated Credit Agreement and $81.9 million was available for future borrowings under the terms of the Liberty Subordinated Credit Agreement with the consent of, and on terms determined by, Liberty Media. During the year ended December 31, 2002, we borrowed $18.1 million under the Liberty Subordinated Credit Agreement which was used for working capital, to fund the Arbitration Award, capital expenditures and repayment of principal under the Senior Credit Agreement. Such amounts were borrowed pursuant to Supplements No. 1, 2 and 3 to the Liberty Subordinated Credit Agreement discussed below. The remaining $206.2 million, borrowed as of December 31, 2001, was used to fund several acquisitions (“Acquisitions Funds”) and was represented by convertible notes in the amount borrowed, which are convertible into our Class B common stock at $10.00 per share. The effective annual interest rate for 2002 on the Liberty Subordinated Credit Agreement is 10.0%.

     Supplement No.1 and Supplement No.2

     The Liberty Subordinated Credit Agreement allows us to borrow the Acquisition Funds and up to an additional $100.0 million from Liberty Media with the consent of, and on terms determined by, Liberty Media (the “Additional Available Funds”). The parties to the Senior Credit Agreement agreed in a letter dated June 28, 2002 (the “Senior Credit Agreement Consent Letter”) and the parties to an agreement between us and Heller Financial Leasing, Inc. (“the Heller Credit Agreement”), agreed in a separate letter dated June 28, 2002 (the “Heller Consent Letter” and, together with the Senior Credit Agreement Consent Letter, the “June 2002 Consent Letters”), that, with respect to $25.0 million of the Additional Available Funds, (1) convertible notes could be issued that could be convertible into our Class B common stock at a price per share determined by us, rather than at $10.00 per share as permitted under the Senior Credit Agreement, and (2) to the extent these funds were borrowed to purchase capital assets and to fund the Arbitration Award, such borrowed funds could be repaid to Liberty Media before we pay amounts owed under the Senior Credit Agreement, provided that, among other conditions, such repayment is funded solely with proceeds of additional equity contributions from Liberty Media or any of its affiliates other than ourselves or any of our subsidiaries. Our ability to determine the conversion rights under the Liberty Subordinated Credit Agreement with respect to Additional Available Funds does not affect the conversion rights for amounts previously borrowed under the Liberty Subordinated Credit Agreement and may be determined on a case by case basis only on amounts borrowed with respect to the $25.0 million of Additional Available Funds to which the June 2002 Consent Letters apply.

     On June 28, 2002, we entered into Supplement No. 1 to the Liberty Subordinated Credit Agreement with Liberty Media, under which we borrowed $6.5 million for the purchase of capital assets, and issued a promissory note, that is convertible into our Class B common stock at $3.50 per share.

     On July 24, 2002, we entered into Supplement No. 2 to the Liberty Subordinated Credit Agreement with Liberty Media, under which we borrowed an additional $2.3 million to fund part of the Arbitration Award, and issued a promissory note in the same amount that is convertible into our Class B common stock at $3.50 per share.

     Supplement No.3

     On August 13, 2002, we entered into Supplement No. 3 to the Liberty Subordinated Credit Agreement with Liberty Media under which we may draw $25.0 million of Additional Available Funds, as needed, at Liberty Media’s option: (a) through loans under the Liberty Subordinated Credit Agreement of subordinated convertible loans with a conversion price per share equal to 115% of the average market price of our Class A common stock for the five most recent trading days ending on and including the date which is two business days prior to the date of the borrowing, (b) through sales of our Class B common stock to Liberty Media at a purchase price per share equal to the average market price of our Class A common stock for the five most recent trading days ending on and including the date which is two business days prior to the date of the stock sale, or (c) through any combination of (a) or (b) (“Supplement No. 3”). Any draws under Supplement No. 3 are subject to us obtaining any necessary consents and approvals and issuing any required notices, including, to the extent applicable, stockholder approval of the issuance of shares of Class B common stock to Liberty Media, whether as a sale of stock or upon conversion of a loan (“Stockholder Consent”). Liberty Media, which then held over 87% of the outstanding common stock and over 99% of the voting power of the

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outstanding common stock and now holds over 91% of the outstanding common stock and over 99% of the voting power of the outstanding common stock, agreed in Supplement No. 3 to vote in favor of any Stockholder Consent. As a result, at a meeting of our stockholders on January 23, 2003, our stockholders (including Liberty Media) approved (1) the potential issuance of shares of our Class B common stock upon conversion of convertible notes convertible into shares of our Class B common stock pursuant to Supplement No. 3 and outstanding on January 23, 2003, (2) the issuance of our Class B common stock and convertible notes convertible into shares of our Class B common stock after January 23, 2003, pursuant to Supplement No. 3 and (3) the potential issuance of shares of our Class B common stock upon conversion of convertible notes convertible into shares of our Class B common stock issued pursuant to future supplements to the Liberty Subordinated Credit Agreement for a purchase price per share or with an initial conversion price per share, as applicable, determined in a manner no less favorable to us than as provided in Supplement No. 3. Proceeds of the loans or stock sales under Supplement No. 3 must be used for capital expenditures, payment of the principal amount of loans made under the Senior Credit Agreement or working capital.

     On September 26, 2002, the parties to the Senior Credit Agreement and the parties to the Heller Credit Agreement agreed in separate letters, (collectively, the “September 2002 Consent Letters”), with respect to an additional $25.0 million of the Additional Available Funds (over and above the $25.0 million contemplated in the June 2002 Consent Letters), convertible notes could be issued that could be convertible into our Class B common stock at a price per share determined by us that was no less than 115% of the average daily market price of our Class A common stock for the five most recent trading days ending on and including the date which is two business days prior to the date of the borrowing.

     On September 30, 2002, we received $17.2 million under Supplement No. 3 in consideration for our issuance of a convertible note in the amount of $5.3 million that is convertible into our Class B common stock at $1.94 per share and sale of 7,070,000 unregistered shares of our Class B common stock at a price of $1.69 per share for total proceeds of $11.9 million. The conversion price of the convertible note and purchase price of the shares sold were calculated in accordance with Supplement No. 3. The proceeds were used to repay borrowings under the Senior Credit Agreement, for capital expenditures and for working capital.

     On October 17, 2002, we borrowed an additional $4.0 million under Supplement No. 3 and issued a convertible note in the same amount that is convertible into our Class B common stock at $1.56 per share. The conversion price was calculated in accordance with Supplement No. 3. The proceeds were used for purchase of capital assets.

     Mortgage Debt, Capital Leases and Other Borrowings

     During the year ended December 31, 2002, we borrowed $4.0 million under certain property mortgages and repaid $12.5 million of debt related to capital leases, mortgage notes and other borrowings.

     Stock Sales to Liberty Media

     In addition to the sale of 7,070,000 unregistered shares of our Class B common stock to Liberty Media discussed above, on July 24, 2002, under Supplement No. 2, we sold 440,981 unregistered shares of our Class B common stock to Liberty Media for $3.05 per share for proceeds of approximately $1.4 million. The closing price of our Class A common stock on July 24, 2002 was $1.95 per share. The proceeds of the stock sale were used to fund part of the Arbitration Award.

     Other Stock Issuances to Liberty Media

     During the year ended December 31, 2002, we issued 10,436,853 shares of our Class B common stock to Liberty Media and its affiliates in payment of $21.3 million in interest under the Liberty Subordinated Credit Agreement. Shares of our Class B common stock are convertible into shares of our Class A common stock, on a one-for-one basis, at any time at the option of the holder.

     Other

     On July 1, 2002, we terminated our $165.0 million notional interest rate swap for $1.4 million in cash proceeds. Additionally, we terminated a $200.0 million notional interest rate swap for cash proceeds of $1.4 million on September 20, 2002 and $1.3 million on September 30, 2002.

     Contractual Obligations

     Information concerning the amount and timing of required payments under our contractual obligations is summarized below:

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     We have contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible we 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 consolidated financial statements.

New Accounting Pronouncements

     The Financial Accounting Standards Board, or FASB, issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, in April 2002; SFAS No. 146, Accounting for Costs Associated with Exit and Disposal Activities, in June 2002; and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, in December 2002. In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”) and in February 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). In November 2002, the FASB’s Emerging Issues Task Force issued EITF 00-21, Revenue Arrangements with Multiple Deliverables.

     In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds SFAS 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Upon adoption of SFAS 145, we will be required to apply the criteria in APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion No. 30), in determining the classification of gains and losses resulting from the extinguishment of debt. Additionally, SFAS 145 amends SFAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS 145 will be effective for fiscal years beginning after May 15, 2002 with early adoption of the provisions related to the rescission of SFAS 4 encouraged. Upon adoption, companies must reclassify prior period items that do not meet the extraordinary item classification criteria in Opinion No. 30. We believe the adoption of SFAS 145 will not have a material impact on our financial statements.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit and Disposal Activities. SFAS 146 nullifies EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF 94-3, a liability for an exit cost is recognized at the date of an entity’s commitment to an exit plan. Under SFAS 146, the liabilities associated with an exit or disposal activity will be measured at fair value and recognized when the liability is incurred and meets the definition of a liability in the FASB’s conceptual framework. This statement is effective for exit or disposal activities initiated after December 31, 2002. We believe the adoption of SFAS 146 will not have a material impact on our financial statements.

     On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 148 amends the disclosure requirements in SFAS 123 for stock-based compensation for annual periods ending after December 15, 2002 and for interim periods beginning after December 15, 2002. The disclosure requirements apply to all companies, including those that continue to recognize stock-based compensation under APB Opinion No. 25, Accounting for Stock Issued to Employees. Effective for financial statements for fiscal years ending after December 15, 2002, SFAS 148 also provides three alternative transition methods for companies that choose to adopt the fair value measurement provisions of SFAS 123. We do not choose to adopt the fair value measurement provisions of SFAS 123.

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     In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. We do not have any guarantees that require disclosure under FIN 45.

     FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees. FIN 45 requires the guarantor to recognize a liability for the non-contingent component of a guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The initial recognition and measurement provisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002.

     As noted above we have adopted the disclosure requirements of FIN 45 and will apply the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002. To date we have not entered into any guarantees within the purview of FIN 45.

     In February 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, which addresses the consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support from other parties, or (2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: (a) the direct or indirect ability to make decisions about the entity’s activities through voting or similar rights, (b) the obligation to absorb the expected losses of the entity if they occur, or (c) the right to receive the expected residual returns of the entity if they occur. FIN 46 will have a significant effect on existing industry practice because it requires existing variable interest entities to be consolidated if those entities do not effectively disburse risks among parties involved. In addition, FIN 46 contains detailed disclosure requirements. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. This Interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. We believe the adoption of FIN 46 will not have a material impact on our financial statements.

     In November 2002, the FASB’s Emerging Issues Task Force issued EITF 00-21, Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF 00-21, separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and should, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting. That presumption may be overcome if there is sufficient evidence to the contrary. EITF 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The guidance in this Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Alternatively, companies may elect to report the change in accounting as a cumulative-effect adjustment. Early application of this consensus is permitted. We believe the adoption of EITF 00-21 will not have a material impact on our financial statements.

Factors That May Affect Future Results of Operations

     Factors that may affect future results of operations include, but are not limited to, industry-wide market factors such as the timing of, spending on, and technological, regulatory or other developments in feature film and television programming production, foreign and domestic television advertising, and foreign and domestic spending by broadcasters, cable companies and syndicators on first run and existing content libraries. In addition, our failure to maintain relationships with key customers and certain key personnel, the possibility of an industry-wide strike or other job action by a major entertainment industry union, more rapid than expected technological obsolescence, significant capital expenditure investments prior to generating revenue, and any failure to compete in the highly-competitive post-production business could also cause actual results to differ materially from those described in forward-looking statements.

     We have incurred significant indebtedness to fund the past acquisitions. This indebtedness may result in a significant percentage of our cash flow being applied to the payment of interest, and there can be no assurance that our operations will generate sufficient cash flow to service the indebtedness. This indebtedness, as well as any indebtedness we may incur in the future, may adversely affect our ability to finance operations, as financial covenant

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limitations reach their maximum which could limit our ability to pursue business opportunities that may be in our best interests and that of our stockholders.

     As part of our business strategy, we have acquired substantial operations in several different geographic locations in the prior two years. These businesses have experienced varying profitability or losses in recent periods. Since the aforementioned dates of acquisition, we have continued to work extensively on the integration of these businesses. However, there can be no assurances regarding the ultimate success of our integration efforts or regarding our ability to maintain or improve the results of operations of these businesses.

     We derive our revenue primarily from the motion picture and television production industries and the content distribution industry. Fundamental changes in the business practices of any of these client industries, whether due to regulatory, technological or other developments, could cause a material reduction in demand by our clients for the services offered by us. Any reduction in demand would have a material adverse effect on our results of operations. The post-production industry is characterized by technological change, evolving customer needs and emerging technical standards, and the content distribution industry is highly competitive with several companies providing services similar to ours. Our existing credit agreements currently limit our ability to make capital investments. There are no assurances that we will be able to obtain or fund the implementation of any of these technologies, that we will be able to effectively implement these technologies on a cost-effective or timely basis or that such technologies will not render obsolete our role as a provider of motion picture and television production services. If our competitors have technology that enables them to provide services that are more reliable, faster, less expensive, reach more customers or have other advantages over the services we provide, then the demand for our services may decrease. See Part I, Item 1, “BUSINESS — Customers.”

     We incur substantial incremental costs (primarily labor) and make significant capital expenditures prior to generating revenues. For example, we have expanded our operations through various acquisitions of key companies, which has increased labor and depreciation expenses significantly, through the addition of new personnel and the purchase of new equipment and the construction and maintenance of infrastructure. We incur such costs before the equipment and infrastructure generate revenues or achieve capacity utilization. The incurrence of incremental costs prior to the generation of revenues will have an adverse effect on our net income. In addition, we may elect to discontinue services that fail to generate sufficient levels of revenue and write off the net book value of the assets related to such services. Our failure to generate anticipated levels of revenue or the write-off of assets would have an adverse effect on our results of operations and financial condition.

     A number of our services are provided on a non-contractual basis. Clients may desire to accelerate, postpone or cancel previously scheduled services prior to the commencement of the project. As a result, we are susceptible to scheduling changes and cancellations by customers and may not be able to reschedule or secure additional work to replace previously scheduled projects. The rescheduling or cancellation of several significant projects may have a material effect on our quarterly and/or annual operating results.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risks

     We seek to reduce cash flow volatility associated with changes in interest rates by entering into financial arrangements intended to provide a hedge against the risk associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged. We assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Interest rate swap agreements are the primary instruments used to manage interest rate fluctuation affecting our $385.5 million of variable rate debt primarily associated with our Senior Credit Agreement. At December 31, 2002, we had three interest rate swap agreements with a combined fair market value of $7.1 million in favor of our counterparties. In one swap agreement, we receive variable interest rate payments and make fixed interest rate payments on a notional amount of $365.0 million. This swap agreement matures on June 30, 2003. In addition, we had two interest rate swap agreements in the UK with a fair value of $0.6 million in favor of our counterparties. These swap agreements mature on March 10, 2016.

     On July 1, 2002, we terminated our $165.0 million notional interest rate swap for $1.4 million in cash proceeds. Additionally, we terminated a $200.0 million notional interest rate swap for cash proceeds of $1.4 million on September 20, 2002 and $1.3 million on September 30, 2002.

     Tabular presentation of interest rate risk

     The table below represents in the prescribed tabular form, the contractual principal (or notional) balances of our interest risk sensitive instruments at the expected maturity dates as well as the fair value of those instruments for the period ended December 31, 2002. All instruments are reported in U.S. dollars, our reporting currency.

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Foreign Currency Risk

     We continually monitor our economic exposure to changes in foreign exchange rates and may enter into foreign exchange agreements where and when appropriate. Whenever possible, we utilize local currency borrowings to fund foreign acquisitions. At December 31, 2002, we did not have any foreign exchange agreements. Substantially all of our foreign transactions are denominated in foreign currencies, including the liabilities of our foreign subsidiaries. Although our foreign transactions are not generally subject to significant foreign exchange transaction gains or losses, the financial statements of our foreign subsidiaries are translated into United States dollars as part of our consolidated financial reporting. As a result, fluctuations in exchange rates affect our financial position and results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     For all Financial Statements and Supplementary Data, see Part IV, Item 15 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

     None.

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PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The following lists our directors and executive officers as of the date of this report.