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UNITED STATES

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13

Commission file number: 00-21315

On Command Corporation

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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 þ          No o

      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.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12(b)-2 of the Securities Exchange Act).     Yes o          No þ

      The aggregate market value of the voting stock held by non-affiliates of the Registrant computed by reference to the last sales price of such stock, as of the close of trading on June 28, 2002, was approximately $19,448,000.

      The number of shares outstanding of On Command Corporation’s common stock as of February 28, 2003 30,858,340 shares.

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ON COMMAND CORPORATION

2002 ANNUAL REPORT ON FORM 10-K

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PART I

General Development of Business

      On Command Corporation, together with its majority-owned subsidiaries (collectively the “Company” or “On Command”), is a leading provider (in terms of revenue and number of rooms served) of in-room entertainment and information services to hotels, motels and resorts. At December 31, 2002, the Company provided in-room entertainment services to approximately 891,000 hotel rooms. Approximately 89% of On Command’s total equipped rooms at December 31, 2002 were located in the United States, with the balance located primarily in Canada and Mexico. The majority of the Company’s domestic operations are conducted through its primary subsidiary, On Command Video Corporation. A hotel, motel or resort is collectively referred to herein as a “hotel.”

      On Command has sustained losses from operations and net losses since inception and, as of December 31, 2002, reported an accumulated deficit of approximately $285,777,000. The Company is attempting to improve its operating results by increasing revenue, reducing expenses and by more effectively managing capital expenditures. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

      On Command Corporation is a Delaware corporation formed in July 1996. At all relevant times since its formation, it has been a majority-owned subsidiary of Ascent Entertainment Group, Inc. (“Ascent”). On March 28, 2000, Liberty Media Corporation (“Liberty”) closed a cash tender offer for the common stock of Ascent, and thereby obtained control of the Company. On June 8, 2000, Liberty completed a merger with Ascent pursuant to which Ascent became an indirect, wholly-owned subsidiary of Liberty. During 2001, (i) Ascent purchased 2,244,155 shares of the Company’s common stock (“Company Common Stock”) from the Company’s former CEO, and (ii) the Company issued to Ascent Series B Cumulative Redeemable Preferred Stock, par value $.01 per share, Series C Cumulative Redeemable Preferred Stock, par value $.01 per share and Series D Cumulative Convertible Redeemable Preferred Stock, par value $.01 per share (“Series D Preferred Stock”) in exchange for aggregate net cash proceeds of $84,926,000. The Certificate of Designation of the Series D Preferred Stock provides that, effective January 1, 2003, Ascent is entitled to vote the Series D Preferred Stock on an as-converted basis on all matters that holders of Company Common Stock are entitled to vote upon. In April 2002, Liberty Satellite & Technology, Inc. (“LSAT”), a majority-owned subsidiary of Liberty, acquired 100% of the common equity of Ascent. As of February 28, 2003, LSAT controlled approximately 74% of the outstanding Company Common Stock, and approximately 80% of the total voting power associated with the Company’s equity securities. Accordingly, LSAT currently has the voting power to control all matters requiring majority approval of On Command’s stockholders.

      Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, some of the statements contained under the captions “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance, or achievements of On Command, or industry results, to differ materially from future results, performance, or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others:

	•	General economic and business conditions, and trends in the travel and entertainment industries;
	•	Trends in hotel occupancy rates and business and leisure travel patterns, including the potential impacts that wars, terrorist activities, or other geopolitical events might have on such occupancy rates and travel patterns;
	•	Uncertainties inherent in the Company’s efforts to renew or enter into agreements on acceptable terms with its significant hotel chain customers and their owned, managed and franchised hotels;

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	•	The Company’s ability to access quality movies, programming networks and other content on acceptable terms;
	•	The regulatory and competitive environment of the industry in which On Command operates;
	•	The potential impact that any negative publicity, lawsuits, or boycotts by opponents of mature-themed programming content distributed by the Company could have on the willingness of hotel industry participants to deliver such content to guests;
	•	The potential for increased government regulation and enforcement actions, and the potential for changes in laws that would restrict or otherwise inhibit the Company’s ability to make mature-themed programming content available over its video systems;
	•	Uncertainties inherent in new business strategies such as the Company’s recent efforts to expand its target market to include smaller hotels;
	•	Competitive threats posed by rapid technological changes;
	•	The development, provision and marketing of new platforms, such as the RoommateTM and MiniMateTM platforms, and customer acceptance, usage rates, and profitability of such platforms;
	•	The development and provision of new services such as the Company’s television-based Internet service, short subject and digital music products, and customer acceptance and usage rates of such services;
	•	Uncertainties inherent in the Company’s efforts to improve future operating results by increasing revenue and decreasing costs;
	•	Uncertainties inherent in the Company’s efforts to more effectively manage capital expenditures;
	•	Uncertainties inherent in the Company’s ability to execute planned upgrades of its video systems, including uncertainties associated with operational, economic and other factors;
	•	The ability of vendors to deliver required equipment, software and services;
	•	Availability of qualified personnel;
	•	Competitor responses to On Command’s products and services, and the overall market acceptance of such products and services;
	•	The ability of On Command to restructure or refinance its revolving credit facility;
	•	The ability of the Company to secure long-term financing on terms acceptable to the Company; and
	•	Other factors discussed in this Report.

      Many of the foregoing risks and uncertainties are discussed in greater detail under the captions “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements (and such risks, uncertainties and other factors) speak only as of the date of this Report, and On Command expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in On Command’s expectations with regard thereto, or any other changes in events, conditions, or circumstances on which any such statement is based.

Narrative Description of Business

      The provision of in-room entertainment and information services to the hotel industry includes offering pay-per-view motion pictures, archived television and other short subject content, games, digital music, Internet connectivity, guest programming of select pay cable channels and an increasing array of interactive programs and information services. Pay-per-view services were introduced in the early 1970s and have since

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      On Command’s operating and growth strategy for the next several years is to increase revenue while containing, and wherever possible, reducing expenses and capital expenditures. Specifically the Company plans to increase revenue by (i) developing and, to the extent economically feasible, implementing new technologies that will enhance the Company’s ability to manage its existing products and/or allow the Company to introduce new or more technologically advanced systems or products; (ii) retaining existing hotel customers and selectively increasing the number of rooms in the Company’s traditional target market (generally hotels with 150 or more rooms); (iii) expanding the Company’s target market by marketing the MiniMate^TM platform to smaller hotels (generally hotels with less than 150 rooms) and lower cost hotels; and (iv) selectively increasing prices. The Company initiated cost reduction and containment efforts in 2001, and the Company expects to continue to focus on all available opportunities to reduce or contain costs for the foreseeable future. In this regard, the Company believes vendor and customer relationships, outsourcing, and new technologies, such as the Company’s new satellite distribution system, are among the areas that will provide opportunities for cost reduction and containment during 2003 and future periods. The Company intends to contain and reduce capital expenditures by continuing its efforts to more effectively manage and deploy capital with a view towards improving the Company’s return on its capital expenditures. The Company’s ability to accomplish its operating objectives is dependent to a degree on hotel occupancy rates and other factors outside of its control. No assurance can be given that the Company will be able to significantly increase its revenue base or reduce its expenses or capital expenditures. To the extent that changes in hotel occupancy rates impact the Company’s revenue base, the Company will not experience proportionate changes in its expenses since many of the Company’s expenses do not vary with hotel occupancy rates.

      The OCX® video system is a multimedia platform that, in most cases, incorporates digital content storage and playback. The OCX® video system currently is capable of providing interactive multimedia menus, high-speed television-based Internet service, PlayStation® games and digital music, as well as the ability to offer more choices of higher-quality on-demand movie services, including full-length feature films and non-theatrical short videos.

      On Command has developed an updated version of the OCX® video system, marketed under the name Roommate^TM. This new version expands upon the basic architecture of the OCX® video system, allowing On Command to take advantage of general cost reductions in hardware technology while preserving its investment in its Site Manager software, discussed below. The Roommate^TM system, which was designed to be installed in hotels with 150 or more rooms, was launched during the fourth quarter of 2001. Due to the cost benefits and greater storage capacity associated with Roommate^TM, On Command generally installs the Roommate^TM

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      During the fourth quarter of 2002, the Company conducted field tests of MiniMate^TM, a reduced scale extension of the Roommate^TM video system that was designed to be economically and technologically viable for hotels with 150 rooms or less. Based on the results of the field testing, the Company has concluded that the MiniMate^TM system was ready to be deployed, and the Company has commenced marketing the MiniMate^TM system to smaller hotels. The standard MiniMate^TM system is designed to provide on-demand pay-per-view services and digital music, with television-based Internet access service also available for an additional cost at the option of the hotel. When compared to the standard configuration of the Roommate^TM system, the standard MiniMate^TM system has the same capacity for the storage of programming titles, but has a smaller capacity for the simultaneous output of entertainment services. The scalable design of MiniMate^TM enables On Command to add additional products and services as such products and services become economically viable.

      One version of the Company’s OCX® system utilizes an analog tape based video storage sub-system, as opposed to the digital content storage sub-system that is utilized by the majority of the OCX® systems. This video system, which the Company refers to as an OCX.i video system, represents an older system that has been upgraded on the “front end” to allow for the provision of the full range of entertainment and guest services available through the OCX® platform. The analog tape based storage sub-system of the OCX.i video system was not upgraded to the digital content storage sub-system utilized in a typical OCX® system due to economic considerations at the time of the upgrade. The analog tape based storage sub-system utilized by the OCX.i system is not compatible with the satellite distribution system that the Company began deploying in 2003. The Company is currently studying different alternatives that might allow the Company to economically convert to a compatible digital content storage sub-system in its OCX.i systems. No specific time frame for this conversion has been set. For additional information concerning the Company’s satellite distribution system, see “Content Distribution” below.

      At December 31, 2002, the OCX® video system was installed in 291,000 rooms, including 85,000 with Roommate^TM systems, and 48,000 with OCX.i systems.

      The OCX® video system supports a high degree of interactivity and customization, including a multimedia user interface. Video content is provided primarily via a digital file server or, in the case of the OCX.i video system, an array of video cassette players.

      A key component of the OCX® video system is the Site Manager software application that controls the system, interfaces with the hotel billing management systems, and acts as the OCX® video system’s overall resource manager (including user session management and resource allocation).

      The OCX® video system provides enhanced multimedia applications and Internet access using a special purpose television-based Internet browser in conjunction with a wireless keyboard. The functionality and features of the Company’s browser software were significantly upgraded during 2002. On Command has also partnered with several Internet content providers to organize Internet sites that have been specifically developed for presentation via the OCX® platform. For additional information concerning the Company’s Internet service, see “Services — Internet Services” below.

      While the OCX® platform itself may be extended or upgraded to support future new product offerings, current implementations include on-demand pay-per-view services, television-based Internet access, PlayStation® video games, digital music and a rich interactive multimedia user interface. With the OCX® video system technology, each component of the platform has multiple uses. For example, the same component used for navigating graphics-intensive menus is used subsequently for accessing the Internet and sending e-mail. With the digital content storage that is included in most OCX® systems, a two-hour feature film could be replaced by four 30-minute short subject videos, unlike one-for-one replacement with videocassettes. In addition, digital content storage will allow the Company to economically implement the

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      The Company is continually upgrading its video systems with the overall objective of maximizing revenue, while minimizing expenses and capital expenditures. During 2002, the Company upgraded 26,000 OCX® rooms to allow for the digital provision, where applicable, of music and a 24-hour mature-themed motion picture product, and to provide a full-motion video and audio promotional screen. The Company plans to install similar upgrades in an estimated 116,000 OCX® rooms during 2003. During 2003, the Company also plans to upgrade all of its OCX® systems that utilize digital content storage sub-systems (approximately 243,000 rooms at December 31, 2002) to facilitate the electronic delivery of digital content through the Company’s satellite distribution system. Wherever possible, the Company will install both of the above-described OCX® upgrades contemporaneously.

      During 2003, the Company also plans to deploy a new graphical interface that will provide for an enhanced menu in all of its OCX® systems that use a digital content storage sub-system. This new menu is expected to increase revenue by expanding the entertainment options available to the guest, improving product presentation, and facilitating guest navigation of the on-screen menu.

      The On Command video system (the “OCV® or Blue Box® video system”) is the Company’s original platform, and the predecessor to the OCX® video system. At December 31, 2002, the OCV® video system was installed in approximately 562,000 rooms. The OCV® video system was patented by On Command in 1992, and consists of a microprocessor controlling the television in each room, a hand-held remote control, and a central “head-end” video rack and system computer located elsewhere in the hotel. Programming signals originate from video cassette players located within the head-end rack and are transmitted to individual rooms by way of the OCV® video system’s proprietary video switching technology. Movie starts are automatically controlled by the system computer. The system computer also records the purchase by a guest of any title and reports billing data for manual or automated entry into the hotel’s property management system, which system posts the charge to the guest’s bill.

      Manual functions of the OCV® video system equipment are limited to changing videocassettes once per month and are all handled by On Command’s service personnel, who also update the system’s movie titles screens. The OCV® video system’s information system is capable of generating regular reports of guests’ entertainment selections, permitting the OCV® video system to adjust its programming to respond to viewing patterns. The number of guests that can view a particular movie at the same time varies from hotel to hotel depending upon the popularity of the movie. The OCV® video system provides more copies of the most popular programming to hotels. The OCV® video system includes a computerized in-room on-screen menu that offers guests a list of only those movie selections available to the guest at that time rather than all of the titles currently playing at the hotel. This minimizes the possibility of a guest being disappointed when the guest’s selection is not available. The high-speed, two-way digital communications capability of the OCV® video system enables On Command to provide advanced interactive and information features, such as video games, in addition to basic guest services such as video checkout, room service ordering and guest satisfaction surveys. The OCV® video system also enables hotel owners to broadcast informational and promotional messages and to monitor room availability.

      The analog tape based storage sub-system utilized by the OCV® system is not compatible with the satellite distribution system that the Company began deploying in 2003. As a result, the Company is currently studying different alternatives that might allow the Company to economically convert to a compatible digital content storage sub-system in its OCV® systems. No specific timeframe for this conversion has been set.

      As discussed above under “Video Systems — OCX® System,” the Company is continually upgrading its video systems with the overall objective of maximizing revenue, while minimizing expenses and capital expenditures. During 2002, the Company upgraded approximately 61,000 OCV® rooms to allow for the digital provision of music, a 24-hour mature-themed motion picture product, and a full-motion video and audio promotional screen. The Company plans to install similar upgrades in an estimated 78,000 OCV® rooms

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      The SpectraVision® video system, which provides in-room entertainment on a rolling schedule basis, and in some upgraded variations, on an on-demand basis, remained in approximately 30,000 rooms at December 31, 2002. The SpectraVision® video system generally offers fewer movie choices than the OCX® or OCV® video systems. The Video Now video system, which provides in-room entertainment on an on-demand basis, remained in approximately 8,000 rooms at December 31, 2002. Both the SpectraVision® and Video Now video systems utilize older technologies, and the Company expects that the number of hotels served by the SpectraVision® and Video Now video systems will decrease significantly during 2003, and will be phased-out completely over the next several years. In general, the Company expects that service will be discontinued to unprofitable or marginally profitable hotels, while other more profitable hotels will be converted to a more technologically advanced video system, if the return on invested capital is projected to be adequate. During the year ended December 31, 2002, the SpectraVision® and Video Now video systems generated less than 3% of the Company’s total net revenue.

      The Company uses several methods to distribute content to the Company’s proprietary video and entertainment systems located in hotels. Free-to-guest cable programming is distributed via satellite to the antennae systems of hotels. VHS tapes and removable hard disk drives containing films, digital music and short subjects, and video game cassettes have historically been distributed to hotels by air and ground transportation. However, during the fourth quarter of 2002, the Company successfully completed test trials of a satellite distribution system for films, short subjects and digital music. The economic feasibility of implementing satellite delivery is dependent upon the nature of the Company’s proprietary equipment installed at hotels. As described above under “Video Systems — OCX® Video System” the Company expects to convert all of its OCX® systems that utilize a digital content storage sub-system (243,000 rooms at December 31, 2002) to satellite delivery by the end of the third quarter of 2003. The Company is currently studying different alternatives that might provide for the economic implementation of satellite delivery for films and videos to hotels that use OCV® and OCX.i video systems, and no specific time frame for this application of satellite delivery has been set. The Company’s satellite delivery technology does not currently encompass the delivery of video games. The use of a satellite delivery system is considered desirable due to the cost savings and efficiencies that are expected to arise from a more efficient distribution system, and the potential increases in revenue that are expected to result from the Company’s ability to more actively manage the content that is available in hotel rooms.

      The Company seeks to pursue the development and deployment of new technologies, system upgrades and other capital projects that the Company expects to be economically viable based on projected increases in revenue and/or decrease in expenses. On Command undertakes a significant investment when it installs its system in a hotel property. Accordingly, On Command typically requires a five-to-seven year commitment from a hotel before On Command will agree to install a video system in a hotel. In general, the cost of the Company’s proprietary video equipment has decreased as new technologies have evolved. Certain of the Company’s contracts with hotels require the Company to provide hotels with various forms of capital assistance in addition to the direct costs incurred by the Company to install its video systems. For additional information concerning the Company’s hotel contracts, see “Hotel Contracts” below.

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      On Command provides on-demand and, in less than 2% of rooms served, scheduled in-room television viewing of major motion pictures and non-rated motion pictures intended for mature audiences, for which a hotel guest pays on a per-view basis. Depending on the type of system installed and the size of the hotel, guests could choose from among 12 to 85 pay-per-view programming titles at December 31, 2002. Based on the current storage capacities of the Company’s most technologically advanced systems, and improvements in the storage capacities of those systems that are expected to occur in 2003 and future periods, the Company expects that the average number of programming titles available to guests will increase over time. On Command obtains the non-exclusive rights to show recently released motion pictures from major motion picture studios generally pursuant to agreements with each studio. The license period and fee for each motion picture are negotiated individually with each studio, which typically receives a percentage of that picture’s net revenue generated by the pay-per-view system. Typically, On Command obtains rights to exhibit major motion pictures during the “Hotel/Motel Pay-Per-View Window,” which is the time period after initial theatrical release and before release for home video distribution or cable television exhibition. On Command attempts to license pictures as close as possible to motion pictures’ theatrical release dates to benefit from the studios’ advertising and promotional efforts.

      Through 2002, On Command also obtained non-rated motion pictures intended for mature audiences for a one-time flat fee that was nominal in relation to the licensing fees paid for major motion pictures. During the first quarter of 2003, the Company began to acquire most of its mature-themed content from a supplier who receives a contractually determined percentage of the net revenue generated from the content provided to the Company. Although the Company expects that the cost of mature-themed content will increase as a result of this new arrangement, the Company believes that the higher cost is justified by the potential for increased revenue as a result of the improved quantity and quality of content that is expected to be provided by the supplier. In addition, the new supplier will perform editing and production services that the Company was generally required to perform under its prior arrangements with providers of mature-themed product.

      The revenue generated from On Command’s pay-per-view service is dependent on the occupancy rate at the hotel, the “buy rate” or percentage of occupied rooms that buy movies or other services at the hotel, and the price of the movie or service. Occupancy rates vary based on general economic conditions, the hotel’s location and its competitive position within the marketplace. Buy rates generally reflect the hotel’s guest demographic profile, the popularity of the motion pictures or services available at the hotel and the guests’ other entertainment alternatives. Buy rates also vary over time with general economic conditions. The business of On Command is closely related to the performance of hotels in the top 25 markets, as defined by Smith Travel Research. Movie price levels are set based on overall economic conditions, recent release dates, and guest acceptability. Currently, On Command’s prices for individual motion pictures typically range from $8.99 to $12.99, and its prices for the 24-hour viewing of certain non-rated motion pictures intended for mature audiences typically range from $14.99 to $21.99.

      In addition to movies, On Command provides short video programming options to the hotel guest. This content includes HBO®’s Sex and the City and The Sopranos, the comedy series Seinfeld, Showtime’s Red Shoe Diaries, programming from the Discovery Networks and other entertainment packages. On Command currently charges $5.99 to $9.99 for this type of programming and pays the supplier of the programming a negotiated percentage of net revenue from the programming. The short subjects offer an alternative to many guests with limited time who cannot watch a full-length feature movie. The Company’s short video suppliers receive license fees that are equal to a negotiated percentage of the net revenue stream generated by the applicable short subject videos. At December 31, 2002, short subject videos were available to 758,000 or 85% of the total rooms served by the Company. Future growth of rooms in which the Company’s short subject service is available is expected to come from those hotels where the Company can expect to earn an adequate return on its invested capital.

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      OCX® video systems are capable of supporting a television-based Internet service that enables guests to access and navigate the Internet through the television, using the remote control and wireless keyboard in their rooms. This service allows up to 24 hours of access for a typical price of $10.99 for basic Internet and e-mail service. In addition, the Company is currently field-testing a premium Internet service in 14 hotels that allows the guest to access the basic Internet service plus certain mature-themed content for a price of $14.99. The Company expects to increase the availability of the premium Internet service during 2003. On Command has continually upgraded its television-based Internet service through improvements to its Internet browser software that offer better reformatting for the television, improved speed and enhanced functionality. Most recently, On Command, in conjunction with an Internet browser provider, developed and, in July 2002, deployed a special purpose Internet browser that reformats web pages for optimal viewing and navigation on a television. The Company has subsequently deployed additional updates of this software to further improve the functionality and features of the television-based Internet browser. In addition, during 2002, On Command entered into agreements with entities such as New Frontier Media, Inc. and TeamOn Systems, Inc. for the provision of pre-formatted interactive content and applications that have been developed specifically for presentation to hotel guests via the OCX® platform. During the first quarter of 2003, the Company renewed a similar arrangement with Gannett Co., Inc. to continue to offer USA TODAY® NewsCenter iTV content to guests. The Company plans to continue to seek out additional arrangements that will allow the Company to expand the amount of pre-formatted interactive content that is available through the Company’s television-based Internet service. In addition to the software and content improvements, the Company has also improved the functionality of the latest versions of its television remote controls and wireless keyboards. Guest surveys indicate that the new browser technology, the improved Internet content, and, where deployed, the new in-room equipment have resulted in significantly increased customer satisfaction with the Company’s television-based Internet service. On Command pays the provider of its Internet browser a flat software fee and either On Command or the applicable hotel pay the connectivity fees related to the service. At December 31, 2002, the Company’s television-based Internet product was available to 235,000 or 26% of the total rooms served by the Company. Future growth of rooms in which the Company’s Internet service is available is expected to come from those hotels where connectivity is available at a reasonable price, and where the Company can expect to earn an adequate return on its investment in the required in-room equipment and other capital requirements.

      In March 2001, On Command acquired control of Hotel Digital Network, Inc. (“Hotel Digital Network”), a company that provides in-room music content to hotels through On Command and other in-room entertainment providers. Until February 2002, Hotel Digital Network operated under the name Digital Music Network. In February 2002, Hotel Digital Network began doing business under the name Instant Media Network (“IMN”). With the IMN system, an On Command hotel guest pays $9.99 per two-hour period to choose from over 600 CDs and over 100 music videos. The IMN system, marketed by the Company as Music On Command®, is available on certain OCX® and upgraded OCV® video systems. At December 31, 2002, On Command’s digital music product was available to 178,000 or 20% of the total rooms served by the Company. The Company plans to continue to install and market Music On Command® in 2003. The Company, through IMN, generally advances minimum royalties to its suppliers, and is subject to additional fees that are calculated as a percentage of net revenue generated from the service once certain thresholds are met. The minimum royalties advanced to suppliers generally are not recoverable by the Company in the event that actual revenue is less than the revenue that is projected for the license period at the time that royalties are advanced to the suppliers. Future growth of rooms in which Music On Command® is available is expected to occur in those hotels where the Company can expect to earn an adequate return on its invested capital.

      At December 31, 2002, On Command’s video game service was available to 390,000 or 44% of the total rooms served by the Company. The Company’s Roommate^TM, OCX® and OCV® video systems support PlayStation® games. The Company’s systems, however, do not support PlayStation®2 games. There are on

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      On Command also markets free-to-guest programming services pursuant to which a hotel may elect to receive one or more programming channels, such as ESPN®, HBO®, Turner Services, USA, STARZ!®, and other popular cable networks, which the hotel provides to guests at no additional cost. On Command provides hotels with guest programming services through a variety of arrangements, ranging from the payment by hotels of a monthly fee per room for each programming channel selected to the inclusion of the cost or part of the cost of such programming within the Company’s overall contractual arrangements with hotels. On Command obtains its free-to-guest programming either directly from the supplier or from DIRECTV, Inc. (“DIRECTV”) pursuant to an agency agreement. Since all of the Company’s free-to-guest programming channels are available pursuant to the DIRECTV agency agreement, the determination of whether to purchase directly from the programming supplier, or from DIRECTV, is based on cost considerations at the time that contracts with programming suppliers are under review for renewal. DIRECTV also provides transport services for most of the Company’s free-to-guest programming. During the fourth quarter of 2002, the Company executed a new agency agreement with DIRECTV, and amended its existing transport agreement with DIRECTV. The Company’s agreements with DIRECTV and its other suppliers expire on various dates ranging from 2003 to 2008. Agreements with respect to certain of the programming carried by the Company’s video systems have expired, and the Company is operating under letter agreements or other arrangements until new arrangements are finalized.

      The Company has agreements with over 25 programming suppliers that provide over 80 channels of programming. However, the standard free-to-guest channel line-up offered by the Company typically provides approximately 20 different channels of programming. Payment to programming suppliers primarily is based on subscriber room counts. However, variables such as the combination of channels received, occupancy, volume and penetration also factor into many of the Company’s rates. Certain of the Company’s arrangements with programming suppliers provide for increases in programming rates in future periods that are significantly in excess of (i) recent rates of inflation and (ii) the Company’s projected growth rates for free-to-guest programming revenue. Although the Company is working with programming suppliers and taking other actions to mitigate future cost increases, there is no assurance that the Company will be able to limit the growth in its free-to-guest programming costs to rates that are less than or equal to the Company’s projected growth rates for free-to-guest programming revenue. If programming costs increase at rates in excess of free-to-guest revenue growth rates in future periods, the Company will experience pressure on its operating margins. As discussed in greater detail under “Hotel Contracts” below, the Company’s ability to pass increases in programming costs on to hotels is limited by certain of the Company’s contracts with hotels.

      In addition to entertainment services, On Command provides other guest services to the hotel industry. These additional services use the two-way interactive communications capability of the Company’s equipment. Among the guest services provided are video check-out, room service ordering and guest satisfaction surveys. Guest services are available in various foreign languages.

      Historically, substantially all of On Command’s growth in rooms served was derived from obtaining contracts with hotels in the United States not under contract with existing vendors or whose contracts with other vendors were expiring or have expired. On Command believes that the opportunity for additional growth in rooms served in the deluxe, luxury and upscale hotel markets in the United States is more limited than in

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      In addition to broadening its strategy to obtain new customers, On Command is focusing on increasing the revenue derived from each equipped room by developing and, to the extent economically feasible, implementing new technologies that will enhance the Company’s ability to manage its existing products and/or allow the Company to introduce new or more technologically advanced systems or products, and by selectively increasing prices.

      On Command markets its services to hotel guests primarily by means of on-screen advertising that highlights the services and motion picture selections for the month. During 2002, the Company upgraded certain of its OCX® and OCV® video systems to provide a full-motion video and audio promotional screen, and the Company plans to implement this upgrade for additional OCX® and OCV® systems during 2003. During 2003, the Company also plans to deploy a new graphical interface that will provide for an enhanced menu in all of its OCX® systems that use a digital content storage sub-system. For additional information concerning planned upgrades of the Company’s video systems, see “Video Systems” above.

      For some of the Company’s large customers, the Company negotiates and enters into a single master contract covering all hotels owned, and in some cases, managed or franchised by the hotel chain customer. A master contract typically provides for the financial and operational terms that govern the provision of in-room services. In some cases, the economic and other terms of a contract with an individual hotel may be different from those contained in the applicable master contract. In this regard, the contractual relationship with an individual hotel that is covered by a master contract generally has a duration that commences on the date that the Company’s video system becomes operational in that hotel. Accordingly, the expiration date of the contractual relationship with any such hotel is largely independent from the expiration date of the applicable master contract. Furthermore, upon expiration, the Company’s contracts typically convert into month-to-month arrangements that generally remain in effect until such time as the Company is able to enter into new or renewed contracts, or a competitor is able to install its proprietary equipment in the applicable hotels. Notwithstanding the foregoing, a limited number of the Company’s master contracts provide for the simultaneous expiration of the Company’s contractual relationships with all of the individual hotels that are subject to such a master contract. For additional information concerning the expiration of hotel chain contracts, see “Significant Customers” below. In the case of hotels that are not covered by master contracts, the Company generally executes contracts separately with each hotel. The Company’s existing contracts, whether master contracts or contracts with individual hotels, generally have terms ranging from five to seven years.

      Under its existing contracts, On Command generally installs its system into the hotel at On Command’s cost, and On Command generally retains ownership of all equipment used in providing the service. However, as discussed under “Sales and Marketing” above, in the case of the recently introduced MiniMate^TM system, the Company’s marketing plan is to sell the MiniMate^TM system to hotels. In certain cases, On Command has entered into master contracts whereby On Command has agreed to purchase televisions and/or provide other

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      On Command’s contracts with hotels generally provide that On Command will be the exclusive provider of in-room, pay-per-view entertainment services to the hotel and generally permit On Command to set its prices. Under certain circumstances, certain hotel customers have the right to prior approval of any price changes, which approval may not be unreasonably withheld. The Company’s contracts with hotels typically set forth the terms governing the Company’s provision of free-to-guest programming as well. Depending on the contract, the Company may or may not be the exclusive provider of free-to-guest programming, and in cases where the Company is not the exclusive provider, certain of the Company’s contracts require the Company to make payments to hotels to subsidize the cost to the hotels of using another free-to-guest programming provider. Most of the Company’s contracts with hotels contain provisions that limit the amount of programming cost increases that may be passed on to the hotels for the free-to-guest service. As a result of these limitations, increases in free-to-guest programming revenue have not kept pace with increases in the corresponding programming costs, and the amount of revenue derived from the Company’s free-to-guest service has been less than the aggregate cost to the Company of the corresponding programming during each of the past three years. The Company is currently working with its programming vendors and hotels to mitigate the shortfall. In this regard, as the Company enters into new contracts, or renews existing contracts, with hotels, the Company seeks to maximize the amount of free-to-guest programming cost increases that are permitted to be passed on to hotels while limiting the overall cost of the free-to-guest channel line-up that is required to be provided.

      The hotels collect fees from their guests and, in most cases, the hotels retain a commission equal to a negotiated percentage of the net revenue generated from the Company’s video systems. The amount of the commission varies depending on the overall economics of the applicable contract and other factors. Some contracts also require On Command to upgrade systems to the extent that new technologies and features are introduced during the term of the contract. At the scheduled expiration of a contract, On Command generally seeks to extend the agreement on terms that are based upon the competitive situation in the market. As of December 31, 2002, contracts covering approximately 40% of the Company’s equipped rooms have expired, or are scheduled to expire, if not renewed, during the two-year period ending December 31, 2004. For information concerning the Company’s relationships with its significant hotel chain customers, see “Significant Customers” below.

      On Command currently provides entertainment and information services to hotels that are associated with major hotel chains, management companies and independent hotels including Marriott®, Hilton, Six Continents^TM, Hyatt®, Starwood, Wyndham Hotels and Resorts®, Radisson®, Four Seasons, Fairmont and other select hotels. The majority of On Command’s hotel customers are located in the United States, with the balance located primarily in Canada and Mexico.

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      The following table sets forth certain information regarding the number of hotels and rooms served by On Command:

      During 2002, hotels owned, managed or franchised by Marriott International, Inc. (“Marriott”), Hilton Hotels Corporation (“Hilton”), Six Continents Hotels, Inc. (“Six Continents”), Hyatt Hotel Corporation (“Hyatt”), and Starwood Hotels and Resorts Worldwide, Inc. (“Starwood”) accounted for 30%, 16% 12%, 7% and 7%, respectively, of the Company’s net room revenue. Accordingly, hotels owned, managed or franchised by the Company’s five largest hotel chain customers accounted for 72% of the Company’s total net room revenue during 2002. The loss of any of these hotel chain customers, or the loss of a significant number of other hotel chain customers, could have a material adverse effect on the Company’s results of operations and financial condition.

      On March 21, 2001, the Company and Marriott entered into a definitive master agreement pursuant to which the Company distributes its services in hotel rooms owned or managed by Marriott. In addition, the Company has the opportunity to enter into agreements to provide its services to additional hotel rooms franchised by Marriott. The master agreement with Marriott expires in 2008. At September 30, 2002, the total number of rooms that were owned or managed by Marriott was approximately 175,000, and the number of rooms that were franchised by Marriott was approximately 167,000. At December 31, 2002, On Command provided entertainment services to approximately 160,000 rooms that were owned or managed by Marriott, and approximately 79,000 rooms that were franchised by Marriott. Subject to the availability of capital and other economic considerations, the Company is seeking to increase the number of Marriott rooms it serves.

      As further discussed below, the Hilton master contract has expired, and Hilton has signed a new master contract with a competitor of the Company. In addition, the Company does not have master contracts with either Starwood or Six Continents, and the Hyatt master contract provides for the simultaneous expiration of the Company’s contractual relationships with all of the individual hotels that are subject to the Hyatt master contract as of December 31, 2004. At December 31, 2002, the Company provided entertainment services to approximately 178,000 rooms in hotels that are owned, managed or franchised by Starwood or Six Continents. Agreements with respect to approximately 54% of such Starwood and Six Continents rooms have already expired, or will expire by December 31, 2004. At December 31, 2002, approximately 39,000 or 61% of the Company’s Starwood rooms were located in Sheraton or Four Points hotels that, depending on whether such hotels are owned, managed or franchised by Starwood, may be covered by a master contract with a competitor of the Company upon the expiration of such hotels’ contracts with the Company. The Company is actively pursuing master agreements with Hyatt and Six Continents, and with Starwood with respect to the Starwood brands that are not already covered by a competitor’s contract. In certain cases, the Company is also pursuing direct contractual relationships with individual hotels that are owned, managed or franchised by these hotel chains. No assurance can be given that the Company will be successful in executing master or individual hotel contracts. Due to the significant cost involved in changing the proprietary video equipment installed in hotels,

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      In October 2000, Hilton announced that it would not be renewing its master contract with the Company. As a result, hotels owned, managed or franchised by Hilton are currently subject to a master contract between Hilton and a competitor of the Company. Accordingly, the Company anticipates that hotels owned by Hilton will not renew their contracts as they expire. On the other hand, hotels that are managed or franchised by Hilton are not precluded from renewing their contracts with the Company, and, although no assurance can be given, the Company anticipates that certain of those hotels will choose to renew. At December 31, 2002, the Company provided service to approximately 126,200 rooms in 534 hotels that are owned, managed or franchised by Hilton. The majority of these rooms are located in managed or franchised hotels that are not owned by Hilton. Through December 31, 2002, the Company’s contracts with 71 of the aforementioned 534 hotels (20,400 rooms) had expired and service to these hotels is currently provided under monthly or other short-term renewals. The Company’s individual contracts with the remaining 463 Hilton hotels (105,800 rooms) expire at various dates through 2010, with 56% of those rooms expiring by 2005. During 2002, the Company entered into new contracts, or renewed existing contracts, with respect to 7,000 rooms that were franchised by Hilton, and 2,600 rooms that were managed by Hilton. Over time, the Company anticipates that the revenue it derives from hotels that are owned, managed or franchised by Hilton will decrease. However, due to the uncertainties involved, the Company is currently unable to predict the amount and timing of the revenue decreases.

      At December 31, 2002, On Command’s installation and service organization consisted of approximately 315 installation and service employees. On Command’s installation and service employees are responsible for system maintenance and distribution of video and audio content for all of the hotel rooms served by On Command. On Command’s installation employees also prepare site surveys to determine the type of equipment to be installed at each hotel, install systems, train the hotel staff to operate the systems and perform quality control tests. On Command also uses local installation subcontractors supervised by full-time On Command employees to install its systems.

      On Command uses a third party vendor to maintain a toll-free technical support hot line that is monitored 24 hours a day by trained support technicians. The on-line diagnostic capability of the OCX® video system, OCV® video system and SpectraVision® systems enables technicians to identify and resolve a majority of the reported system malfunctions from On Command’s service control center without visiting the hotel property. Should a service visit be required, the modular design of the OCX® video system, OCV® video system and SpectraVision® systems generally permit service personnel to replace defective components at the hotel site.

      The Company develops technologies to be used in its video systems to support and enhance their operations, and develops new applications. On Command incurred costs of approximately $4,064,000, $5,600,000 and $8,734,000 in 2002, 2001 and 2000, respectively, related to research and development.

      On Command’s product development philosophy is to design and integrate components for high quality entertainment and information systems that incorporate features allowing the Company to add system enhancements as they become commercially available and economically viable. The high speed, two-way digital communications capability of OCX® video systems enables the Company to provide advanced interactive features such as video games and television-based Internet access in addition to basic guest services such as video checkout and guest survey.

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      The Company’s systems incorporate proprietary communications system designs with commercially manufactured components and hardware such as video cassette players, digital video disk players, other digital storage media, televisions, amplifiers and computers. Because the Company’s systems generally use industry standard interfaces, On Command can often economically integrate new technologies as they become viable.

      The Company is in the process of developing applications of Internet Protocol (“IP”) technology for use in the Company’s video systems. No assurance can be made that the Company will be successful in developing economically viable applications of IP technology.

      On Command contracts directly with various electronics firms for the manufacture and assembly of its systems hardware, the design of which is controlled by the Company. Historically, these suppliers have been dependable and able to meet delivery schedules on time. Certain electronic component parts used with the Company’s products are available from a limited number of suppliers and can be subject to the supplier discontinuing the production of such part. In such event, the Company is given the opportunity to initiate a last time purchase of the applicable part, which provides the Company adequate inventory. If adequate inventory is not available, the Company could experience a temporary reduction in the rate of new installations and/or an increase in the cost of such installations. However, the Company believes that, in the event of a termination of any of its suppliers or the discontinuance of certain electronic components, alternate suppliers or parts can be located without incurring significant costs or delays. Historically these events have not had a significant impact on the timing and/or costs of the Company’s installations.

      The head-end electronics for the Company’s systems are assembled at the Company’s facilities for testing prior to shipping. Following assembly and testing of equipment for a particular hotel, the system is shipped to each location, where On Command-employed and trained technicians install the system, typically assisted by independent contractors.

      On Command maintains direct contractual relations with various suppliers of pay-per-view and guest programming services, including the motion picture studios and/or their domestic and international distributors and programming networks, as well as suppliers of video games and Internet services. For information concerning the Company’s relationships with such content suppliers, see “Services” above. In general, On Command believes its relationships with suppliers are good.

      There are numerous providers of in-room entertainment services to the hotel industry. Market participants include, but are not limited to, (i) other full service in-room providers, such as LodgeNet Entertainment Corporation (“LodgeNet”), Hospitality Network (“Hospitality”), NXTV, Inc, SeaChange International, Inc., KoolConnect Technologies, Inc. and other providers in international markets, (ii) cable television companies, such as Comcast Corporation, AOL Time Warner Inc., Cox Communications, Inc. and., (iii) direct broadcast satellite services, such as DirecTV and the DISH Network, (iv) television networks and programmers, such as ABC, NBC, CBS, FOX, HBO®, STARZ!®, and Showtime, (v) Internet service providers, such as AOL Time Warner, Inc., (vi) broadband connectivity companies, such as STSN, Inc. and (vii) other telecommunications companies. In addition, On Command’s services compete for a guest’s time and entertainment resources with other forms of entertainment and leisure activities. On Command anticipates that it will continue to face substantial competition from traditional as well as new competitors and that certain of these competitors have greater financial resources and better access to the capital markets than On Command. Many of the Company’s potential competitors are developing ways to use their existing infrastructure to provide in-room entertainment and/or informational services. Certain of these competitors are already providing guest programming services and are beginning to provide video-on-demand, Internet and high-speed connectivity services to hotels. At December 31, 2002, On Command served approximately 891,000 rooms world wide, of which approximately 874,000 are served by on-demand systems. Based on publicly available information, On Command estimates that, at December 31, 2002, LodgeNet, and Hospitality provided service to approximately 953,000 and 110,000 rooms, respectively.

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      Competition with respect to the provision of in-room entertainment and information systems centers on a variety of factors, depending upon the circumstances important to a particular hotel. Among the more important factors are (i) the financial terms and conditions of the proposed contract; (ii) the features and benefits of the entertainment and information systems; and (iii) the quality of the vendor’s technical support and maintenance services. With respect to hotel properties already receiving in-room entertainment services, the current provider may have certain informational and installation cost advantages compared to outside competitors.

      On Command anticipates that it will face substantial competition in obtaining new contracts with major hotel chains. The Company believes that hotels view the provision of in-room on-demand entertainment and information services both as a revenue source and as a source of competitive advantage because sophisticated hotel guests are increasingly demanding a greater range of quality entertainment and information alternatives. At the same time, On Command believes that certain major hotel chains have awarded contracts based primarily on the level and nature of financial and other incentives offered by the service provider. While On Command believes it will continue to enter into contractual arrangements that are attractive to both On Command and its hotel customers, its competitors may attempt to maintain or gain market share at the expense of profitability. On Command may not always be willing or able to match incentives provided by its competitors.

      The communications industry is subject to rapid technological change. New technological developments could adversely affect On Command’s operations unless the Company is able to provide equivalent services at competitive prices.

      The Communications Act of 1934, as amended by the Cable Communications Policy Act of 1984, the Cable Television Consumer Protection and Competition Act of 1992 and the Telecommunications Act of 1996, governs the distribution of video programming by cable, satellite or over-the-air technology, through regulation by the Federal Communications Commission (“FCC”). However, because the Company’s video distribution systems do not use any public rights of way, they are not classified as cable systems and are subject to minimal regulation. Thus, the FCC does not directly regulate the pay-per-view or guest programming provided by the Company to hotel guests.

      The Internet-based services offered by the Company potentially may be affected by various laws and governmental regulations. There are currently few laws or regulations directly applicable to access to or commerce on commercial online services or the Internet. However, because of the increasing popularity and use of commercial online services and the Internet, a number of laws and regulations may be adopted with respect to commercial online services and the Internet. For example, the Internet Tax Freedom Act, which was extended through November 1, 2003, placed a moratorium on new state and local taxes on Internet access and commerce. Other Internet-related laws and regulations may cover issues such as user privacy, defamatory speech, copyright infringement, pricing and characteristics and quality of products and services. The adoption of such laws or regulations in the future may slow the growth of commercial online services and the Internet, which could in turn cause a decline in the demand for the Company’s Internet-based services and products or otherwise have an adverse effect on the Company. Moreover, the applicability to commercial online services and the Internet of existing laws governing issues such as property ownership, libel, personal privacy and taxation is uncertain and could expose the Company to liability.

      Although the FCC generally does not directly regulate the services provided by the Company, the regulation of video distribution and communications services is subject to the political process and has been in constant flux over the past decade. Further material changes in the law and regulatory requirements must be anticipated and there can be no assurance that the Company’s business will not be adversely affected by future legislation or new regulations.

      The Company is required to have performance licenses to the extent that its services utilize copyrighted music. The Company has one agreement in place and is negotiating a second agreement with organizations that represent rights holders. In addition, certain programming distributed by the Company is acquired

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      The Company holds a number of patents and patent licenses covering various aspects of its pay-per-view and interactive systems primarily related to the OCV® video system. The patents expire between 2007 and 2015. With the rate of technological development currently being experienced, a patent’s utility and value may diminish before the end of its respective term. Currently, the Company is pursuing patent protection of elements of the OCX® and Roommate^TM video systems. In connection with a negotiated settlement agreement with LodgeNet in 1998, the Company and LodgeNet have cross-licensed certain of each other’s patented technology and have also agreed not to engage in patent litigation against one another through 2003.

      The Company holds United States trademarks for all significant names that it uses, including “Blue Box®” “On Command®”, “OCV®”, “SpectraVision®” and “OCX®.” The federal registration of these trademarks expires between 2004 and 2011 if not renewed.

      The Company has trademark applications pending in the United States Patent and Trademark Office for the “Roommate^TM”, “MiniMate^TM” and “TeleMate^TM” trademarks.

      At December 31, 2002 the Company provided services to approximately 99,000 international rooms located primarily in Canada and Mexico. On Command’s operations in foreign markets involve certain risks that are not associated with the Company’s operations in the United States, including availability of programming, government regulation, currency fluctuations, language barriers, differences in signal transmission formats, local economic and political conditions and restriction on foreign ownership and investment.

      As a result of transactions that occurred in the first quarter of 2001 and the third quarter of 2002, the Company has disposed of its controlling interests in all of its Asia-Pacific subsidiaries and most of its European subsidiaries. For additional information concerning these transactions and for financial information concerning the Company’s geographic territories, see notes 4, 5 and 13 to the accompanying consolidated financial statements of the Company.

      On Command sells systems to certain other providers of in-room entertainment including Allin Interactive, which is licensed to install the Company’s equipment on cruise ships; Techlive Limited, formerly known as On Command Europe Limited, which is licensed to use the Company’s system to provide service in Europe and the Middle East; and e-ROOM CORPORATION (“e-ROOM”), formerly known as MagiNet Corporation, which is licensed to use the Company’s system to provide service in the Asia marketplace. In addition, IMN sells in-room digital music systems and licenses software to Hospitality, and licenses content to Hospitality and LodgeNet.

      The amount of revenue realized by the Company each month is affected by a variety of factors, including among others, hotel occupancy rates, business and leisure travel patterns, general economic conditions, changes in the number of rooms served, the number of business days in a month, and holidays. With the exception of December, which is generally the Company’s lowest month for revenue, the Company typically does not experience significant variations in its monthly revenue that can be attributed solely to seasonal factors.

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      As of December 31, 2002, On Command employed a total of 620 persons. None of the Company’s employees are represented by a labor union. The Company has experienced no work stoppages and believes employee relations are good.

      The Company has two leases, which expire in June 2005 and May 2006, for approximately 25,700 square feet and 7,500 square feet, respectively, for its corporate headquarters in Denver, Colorado. The Company also has a lease that expires in February 2008 for 76,972 square feet of light manufacturing and storage space in Denver, Colorado. The Company has another lease, which expires in June 2004, for approximately 131,000 square feet of leased office, light manufacturing and storage space in San Jose, California, a portion of which has been subleased and the majority of the remainder of which the Company is attempting to sublease. The Company has a number of other small leases for small parcels of property throughout the United States, Canada and Mexico. The Company’s properties are suitable and adequate for the Company’s business operations.

      The Company’s legal proceedings are set forth below:

	The Company has received a series of letters from Acacia Media Technologies Corporation regarding a portfolio of patents owned by Acacia. Acacia has alleged that its patents cover certain activities performed by the Company and has proposed that the Company take a license under those patents. The Company is reviewing Acacia’s patents and believes there are substantial arguments that Acacia’s claims lack merit.
	The Company is a defendant, and may be a potential defendant, in other lawsuits and claims arising in the ordinary course of its business. While the outcomes of such claims, lawsuits, or other proceedings cannot be predicted with certainty, management expects that such liability, to the extent not provided for by insurance or otherwise, will not have a material adverse effect on the financial condition of the Company

      At the Company’s annual meeting of stockholders held on December 20, 2002, the following matters were voted upon and approved by the stockholders of the Company:

	Election of the following to the Company’s board of directors: (i) Kenneth G. Carroll (27,592,830 votes For and 2,472,452 votes Withheld); (ii) William R. Fitzgerald (27,671,318 votes For and 2,393,964 votes Withheld); (iii) Paul A. Gould (30,034,236 votes For and 31,046 votes Withheld); (iv) Mark K. Hammond (29,970,770 votes For and 94,512 votes Withheld); (v) Gary S. Howard (29,921,961 votes For and 143,321 votes Withheld); (vi) Christopher Sophinos (27,669,150 votes For and 2,396,132 votes Withheld); and (vii) J. David Wargo (29,922,576 votes For and 142,706 votes Withheld).
	A proposal to ratify the appointment of KPMG LLP as independent auditors for the Company for the year ending December 31, 2002 (29,891,120 votes For, 170,892 votes Against and 3,270 Abstentions).

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PART II

      Through February 5, 2003, the Company’s common stock (“Company Common Stock”) and Series A and B warrants were traded on the National Market System of the Nasdaq Stock Market, Inc. (the “Nasdaq National Market”) under the symbols ONCO, ONCOW and ONCOZ, respectively. As of February 6, 2003, the Company’s securities ceased to be included on Nasdaq and became eligible for quotation on the OTC Bulletin Board under the symbols ONCO, ONCOW and ONCOZ, respectively. The following table sets forth the high and low last sale prices for the Company Common Stock, Series A warrants and Series B warrants for the periods indicated, as reported on the Nasdaq Stock Market’s National Market.

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      As of December 31, 2002, there were 30,854,489 outstanding shares of Company Common Stock, 1,424,875 issued and outstanding Series A warrants and 2,619,979 issued and outstanding Series B warrants. As of December 31, 2002 there were 360 holders of record of Company Common Stock, 16 holders of record of Series A warrants and 264 holders of record of Series B warrants (which amounts do not include the number of stockholders whose shares are held of record by banks or brokerage houses but include each such institution as one stockholder). The Company has never paid dividends on any class of its equity securities. On Command’s management does not intend to pay any cash dividends on Company Common Stock in the foreseeable future. Rather, it is expected that On Command will retain any earnings to finance its operations and growth. In addition, On Command’s $275,000,000 revolving credit facility (“Revolving Credit Facility”) contains a restriction on the Company’s ability to pay dividends or make other distributions. The Company’s Transfer Agent and Registrar is the Bank of New York, located at 101 Barclay Street, New York, New York.

      The financial data set forth below, except hotel and room data, was derived from the audited consolidated financial statements of the Company and should be read in connection with the consolidated financial statements and related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included below. The consolidated statement of operations data for each of the three years in the period ended December 31, 2002 and the consolidated balance sheet data at December 31, 2002 and 2001 are derived from the audited financial statements included elsewhere herein. The consolidated statements of operations data for the two years ended December 31, 1999 and 1998, and the consolidated balance sheet data for December 31, 2000, 1999 and 1998, are derived from audited consolidated financial statements not included herein.

(1)	The 2002 net loss includes impairment of cost investments of $6,060,000. The 2001 net loss includes impairment of cost investments of $19,639,000, relocation and restructuring expenses of $17,041,000 and a loss on litigation settlement of $3,700,000. The 2000 net loss includes a loss on litigation settlement of

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	$4,764,000. For additional information, see notes 5 and 15 to the accompanying consolidated financial statements of the Company.

(2)	The decreases in rooms in 2002 and 2001 are due to dispositions, the loss of rooms to competitors and the discontinuance of service to certain non-profitable rooms. For additional information, see notes 4, 5, and 12 to the accompanying consolidated financial statements of the Company.

Critical Accounting Policies

      The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Listed below are the accounting policies that the Company believes are critical to its financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported. All of these accounting policies, estimates and assumptions, as well as the resulting impact to the Company’s financial statements, have been discussed with the Company’s audit committee.

      Carrying Value of Long-lived Assets. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, the Company periodically reviews the carrying amounts of property and equipment to determine whether current events and circumstances indicate that such carrying amounts may not be recoverable. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment adjustment is to be recognized. Such adjustment is measured by the amount that the carrying value of such asset exceeds its estimated fair value. The Company generally measures estimated fair value by considering quoted market prices, sales prices for similar assets, or by discounting estimated future cash flows. Considerable management judgment is necessary to estimate the undiscounted cash flows and fair values of assets, accordingly, actual results could vary significantly from such estimates. At December 31, 2002, the Company concluded that its long-lived assets were not impaired based on an analysis of estimated undiscounted cash flows. A significant decline in the estimated undiscounted cash flows of the Company’s long-lived assets could cause the Company to recognize an impairment charge.

      Carrying Value of Goodwill. In accordance with Statement of Financial Accounting Standards No. 142, Accounting for Goodwill and Other Intangible Assets, (“Statement No. 142”) the Company evaluates, on at least an annual basis, the carrying amount of goodwill to determine whether current events and circumstances indicate that such carrying amount may not be recoverable. To accomplish this, the Company compares the fair value of its reporting units to their carrying amounts. If the carrying value of a reporting unit were to exceed its fair value, the Company would perform the second step of the impairment test. In the second step, the Company would compare the implied fair value of the reporting unit’s goodwill to its carrying amount and any excess would be charged to operations. Considerable management judgment is necessary to estimate the fair values of assets and liabilities. Accordingly, actual results could vary significantly from such estimates. At December 31, 2002, the Company concluded that its goodwill was not impaired based on an assessment of estimated fair values. The fair values used in such assessment were based on the market price of Company Common Stock.

Material Changes in Results of Operations

      Revenue consists primarily of fees collected from hotels for in-room services provided to hotel guests by the Company. Services provided by the Company to hotel guests include pay-per-view movies, free-to-guest television programming, video games, Internet service, short subject products and digital music. The Company also earns revenue from the sale of video and music systems to third parties and the sale of video equipment to

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      Net room revenue decreased $1,616,000 or 0.7% during 2002, as compared to 2001. The decrease in net room revenue during 2002 is attributable to the net effect of (i) a decrease attributable to a lower volume of pay-per-view buys; (ii) an increase attributable to higher average rates for certain pay-per-view products; (iii) a $4,428,000 increase in the aggregate revenue derived from short subject, digital music and television-based Internet products; and (iv) a $1,164,000 increase in free-to-guest programming revenue. The Company believes that most of the decrease in pay-per-view buys is attributable to a decline in occupancy rates, as further discussed below. A 3.3% reduction in the average number of rooms served by the Company during 2002 also contributed to the decrease in pay-per-view buys. The decline in the average number of rooms served by the Company is attributable to (i) the disposition of certain hotel rooms (as further described in notes 4 and 5 to the accompanying consolidated financial statements); (ii) the loss of rooms to competitors; and (iii) the discontinuance of service to certain non-profitable hotels.

      Overall hotel occupancy rates declined 1.0% during 2002, as compared to 2001. In addition, occupancy rates for hotels in the top 25 markets, as defined by Smith Travel Research, declined 1.8% over the same period. Since the Company derives a significant portion of its revenue from hotels located in the top 25 markets, the Company believes that the occupancy rate for this segment is the best indicator of the impact changes in hotel occupancy are having on the Company’s business. Hotel occupancy rates are outside of the Company’s control, and changes in hotel occupancy rates can have a significant impact on the Company’s results of operations.

      During 2002, hotels owned, managed or franchised by Marriott International, Inc. (“Marriott”), Hilton Hotels Corporation (“Hilton”), Six Continents Hotels, Inc. (“Six Continents”), Hyatt Hotel Corporation (“Hyatt”), and Starwood Hotels and Resorts Worldwide, Inc. (“Starwood”) accounted for 30%, 16% 12%, 7% and 7%, respectively, of the Company’s net room revenue. Accordingly, hotels owned, managed or franchised by the Company’s five largest hotel chain customers accounted for 72% of the Company’s total net room revenue during 2002. The loss of any of these hotel chain customers, or the loss of a significant number of other hotel chain customers, could have a material adverse effect on the Company’s results of operations and financial condition.

      As further discussed below, the Hilton master contract has expired, and Hilton has signed a new master contract with a competitor of the Company. In addition, the Company does not have master contracts with either Starwood or Six Continents, and the Hyatt master contract provides for the simultaneous expiration of the Company’s contractual relationships with all of the individual hotels that are subject to the Hyatt master contract as of December 31, 2004. At December 31, 2002 the Company provided entertainment services to approximately 178,000 rooms in hotels that are owned, managed or franchised by Starwood or Six Continents. Agreements with respect to approximately 54% of such Starwood and Six Continents rooms have already expired, or will expire by December 31, 2004. At December 31, 2002, approximately 39,000 or 61% of the Company’s Starwood rooms were located in Sheraton or Four Points hotels that, depending on whether such hotels are owned, managed or franchised by Starwood, may be covered by a master contract with a competitor of the Company upon the expiration of such hotels’ contracts with the Company. The Company is actively pursuing master agreements with Hyatt and Six Continents, and with Starwood with respect to the Starwood brands that are not already covered by a competitor’s contract. In certain cases, the Company is also pursuing direct contractual relationships with individual hotels that are owned, managed or franchised by these hotel chains. No assurance can be given that the Company will be successful in executing master or individual hotel contracts. Due to the significant cost involved in changing the proprietary video equipment installed in hotels, the Company expects that, regardless of the expiration dates of master contracts or individual contracts with hotels, the Company will continue to be the provider of in-room entertainment services for individual hotels that are not under contract until such time as a competitor’s equipment can be installed. For this and other reasons, the Company does not anticipate that it will cease earning revenue from all of its Hyatt rooms on December 31, 2004 in the event that a new master contract has not been executed by that date.

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      In October 2000, Hilton announced that it would not be renewing its master contract with the Company. As a result, hotels owned, managed or franchised by Hilton are currently subject to a master contract between Hilton and a competitor of the Company. Accordingly, the Company anticipates that hotels owned by Hilton will not renew their contracts as they expire. On the other hand, hotels that are managed or franchised by Hilton are not precluded from renewing their contracts with the Company, and, although no assurance can be given, the Company anticipates that certain of those hotels will choose to renew. At December 31, 2002, the Company provided service to approximately 126,200 rooms in 534 hotels that are owned, managed or franchised by Hilton. The majority of these rooms are located in managed or franchised hotels that are not owned by Hilton. Through December 31, 2002, the Company’s contracts with 71 of the aforementioned 534 hotels (20,400 rooms) had expired and service to these hotels is currently provided under monthly or other short-term renewals. The Company’s individual contracts with the remaining 463 Hilton hotels (105,800 rooms) expire at various dates through 2010, with 56% of those rooms expiring by 2005. During 2002, the Company entered into new contracts, or renewed existing contracts, with respect to 7,000 rooms that were franchised by Hilton, and 2,600 rooms that were managed by Hilton. Over time, the Company anticipates that the revenue it derives from hotels that are owned, managed or franchised by Hilton will decrease. However, due to the uncertainties involved, the Company is currently unable to predict the amount and timing of the revenue decreases.

      Video system and equipment and other revenue increased $604,000 or 5.4% during 2002, as compared to 2001. Such increases are primarily attributable to the net effect of (i) a $1,811,000 increase in sales of the Company’s music systems; and (ii) a $1,018,000 decrease in sales of the Company’s video systems and equipment.

      Direct costs consist primarily of fees paid to movie and other content providers, hotel commissions, direct costs associated with the Company’s Internet product, and costs associated with video and music systems sold to other providers.

      Content fees, commissions and other in-room service costs increased $2,416,000 or 2.1% during 2002, as compared to 2001. Such increase represents the net effect of (i) a $4,083,000 increase in free-to-guest programming costs; (ii) a $2,074,000 reduction in Internet direct costs; (iii) a $1,783,000 increase in hotel commissions; and (iv) a $1,329,000 decrease attributable to the third quarter 2002 reversal of accruals deemed no longer needed for their originally intended purpose. The increase in free-to-guest programming costs is primarily the result of higher rates from programming suppliers. Hotel commissions, as a percentage of total net room revenue, increased slightly during 2002, as compared to 2001. In the aggregate, content fees, commissions and other in-room service costs represented 50.8% and 49.3% of total net room revenue during 2002 and 2001, respectively. Certain of the Company’s content fees and other in-room service costs do not vary with room revenue and occupancy rates.

      Video system, equipment and other costs decreased $810,000 or 11.0% during 2002, as compared to 2001. Such decreases are primarily attributable to the net effect of (i) a $1,756,000 decrease associated with the lower sales of video systems and equipment to third parties; and (ii) a $683,000 increase associated with higher sales of music systems.

      The Company is a party to various agreements with programming suppliers that permit the Company to distribute movies and programming networks. The Company expects that the cost of such movies and programming networks will increase in future periods as contracts expire and renewals are negotiated. Certain of the Company’s contracts with hotel customers limit the amount of any cost increases that can be passed on to any such hotels. Any cost increases that the Company is not able to pass on to its customers would result in increased pressure on the Company’s operating margins.

      Operations support expense includes the labor, materials and overhead costs associated with the repair, maintenance and support of video systems and other room service equipment. Operations support expense

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      Research and development expense decreased $1,536,000 or 27.4% during 2002, as compared to 2001. The decrease is primarily attributable to a reduction in internal and external labor costs devoted to research and development projects. A significant portion of the Company’s research and development expenses during 2001 related to the development of the Roommate version of the OCX video platform that was launched in November 2001. During 2002, research and development expenses were related to smaller projects that are intended to enhance current platforms.

      Selling, general and administrative expense decreased $3,355,000 or 13.6% during 2002, as compared to 2001. Such changes represent the net effect of (i) reductions in labor and overhead costs attributable to a May 2001 corporate restructuring and other cost saving measures; and (ii) additional labor costs associated with an employee incentive plan that was initiated in 2002. The percentage of total net revenue that is represented by selling, general and administrative expense was 8.9% and 10.3% during 2002 and 2001, respectively.

      Depreciation and amortization expense decreased $4,767,000 or 5.7% during 2002, as compared to 2001. Such decrease in depreciation and amortization is primarily the result of the Company’s adoption of Statement No. 142, which, as further described in note 2 to the accompanying consolidated financial statements, required the Company to cease recording goodwill amortization effective January 1, 2002. Depreciation remained relatively constant during the 2002 and 2001 periods as reductions to the Company’s depreciable asset base attributable to (i) assets becoming fully depreciated, and (ii) asset dispositions (as further described in notes 4 and 5 to the accompanying consolidated financial statements) were largely offset by increases attributable to capital expenditures.

      The Company recorded impairment charges of $8,850,000 during 2002, including a loss of $5,103,000 relating to the sale of its European operations, and a loss of $1,411,000 relating to a transaction in which certain equipment was transferred to STSN, Inc. (“STSN”). For a description of such transactions, see notes 4 and 5 to the accompanying consolidated financial statements. The Company also recorded other charges aggregating $2,336,000 and $709,000 during 2002 and 2001, respectively. Such charges are comprised of amounts related to obsolete materials and equipment, and losses on various dispositions of property and equipment, and other assets.

      The Company recorded aggregate relocation and restructuring expense of $17,041,000 during 2001. This item includes costs related to the relocation of the Company’s headquarters from San Jose, California to Denver, Colorado, costs associated with the Company’s exit from certain leased premises in San Jose, California, and severance costs related to a May 2001 corporate restructuring plan. The costs attributable to the relocation include severance, stay bonuses, hiring costs, moving and travel costs, contract labor, and redundant labor and overhead costs. The Company completed the relocation of its headquarters during 2001. For additional information, see note 15 to the accompanying consolidated financial statements.

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      Interest expense decreased $5,261,000 or 27.2% during 2002, as compared to 2001. The decrease in interest expense is attributable to a lower weighted average interest rate and a decrease in weighted average borrowings outstanding under the Revolving Credit Facility.

      Impairment of cost investments was $6,060,000 and $19,639,000 during 2002 and 2001, respectively. The 2002 amount represents the Company’s fourth quarter write-off of its remaining investment in STSN, Inc. (“STSN”). The 2001 amount includes a $16,539,000 writedown of the Company’s investment in STSN, a $2,000,000 writedown of the Company’s investment in e-ROOM and a $1,100,000 writedown of the Company’s investment in STS Hotel Net, Inc. The foregoing impairments were recorded to reflect other than temporary declines in the estimated fair values of such investments. For additional information, see note 5 to the accompanying consolidated financial statements.

      The loss on settlement of litigation of $3,700,000 in 2001 relates to the settlement of the litigation with e-ROOM. For additional information, see note 5 to the accompanying consolidated financial statements.

      The Company’s income tax expense of $444,000 and $368,000 during 2002 and 2001, respectively, represents taxes in certain foreign, state and local jurisdictions. The Company’s reported income tax expense differs from the expected benefit that would result by applying the statutory rates to the Company’s pre-tax losses primarily because the Company is only able to realize income tax benefits for financial reporting purposes to the extent that the Company generates taxable income, or to the extent that tax benefits (i) represent refunds due to the Company or (ii) offset recorded income tax liabilities. For financial reporting purposes, all of the Company’s income tax liabilities had been fully offset by income tax benefits at December 31, 2002 and 2001, respectively. For additional information, see note 9 to the accompanying consolidated financial statements of the Company.

      As a result of the factors described above, the Company’s net loss decreased from $85,716,000 during 2001 to $42,607,000 during 2002. The Company is attempting to improve its operating results by increasing revenue while containing, and wherever possible, reducing expenses and capital expenditures. Specifically, the Company plans to increase revenue by (i) developing and, to the extent economically feasible, implementing new technologies that will enhance the Company’s ability to manage its existing products and/or allow the Company to introduce new or more technologically advanced systems or products; (ii) retaining existing hotel customers and selectively increasing the number of rooms in the Company’s traditional target market (generally hotels with 150 or more rooms); (iii) expanding the Company’s target market by marketing the MiniMate platform to smaller hotels (generally hotels with less than 150 rooms) and lower cost hotels; and (iv) selectively increasing prices. The Company initiated cost reduction and containment efforts in 2001, and the Company expects to continue to focus on all available opportunities to reduce or contain costs for the foreseeable future. In this regard, the Company believes vendor and customer relationships, outsourcing, and new technologies, such as the Company’s new satellite distribution system, are among the areas that will provide opportunities for cost reduction and containment during 2003 and future periods. The Company intends to contain and reduce capital expenditures by continuing its efforts to more effectively manage and deploy capital with a view towards improving the Company’s return on its capital expenditures. The Company cannot presently predict the amount of increased revenue, decreased costs or other benefits that might result from its efforts to improve operating results. Furthermore, the Company’s ability to accomplish its operating objectives is dependent to a degree on hotel occupancy rates and other factors outside of its control. No assurance can be given that the Company will be able to significantly increase its revenue base or reduce its

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      The Company’s total net revenue during 2001 and 2000 was $239,409,000 and $265,380,000, respectively. The $25,971,000 or 9.8% decrease in total net revenue during 2001, as compared to 2000, is primarily attributable to a $20,681,000 or 8.3% decrease in net room revenue. The decrease in net room revenue during 2001 is due to the net effect of (i) a decrease attributable to a lower volume of pay-per-view buys; (ii) an increase attributable to higher average rates for certain pay-per-view products; (iii) a $3,201,000 increase in the aggregate revenue derived from short subjects, television-based Internet and other new products; and (iv) a $1,296,000 increase in free-to-guest programming revenue. The Company believes that most of the decrease in pay-per-view buys is attributable to a decline in hotel occupancy rates, as further discussed below. A 3.7% reduction in the average number of rooms served by the Company in 2001, as compared to 2000, also contributed to the decrease in pay-per-view buys. The decline in the average number of rooms served by the Company is primarily attributable to a March 1, 2001 transaction in which the Company transferred approximately 35,000 rooms to e-ROOM in connection with the settlement of certain litigation. In addition, the Company lost rooms to competitors and discontinued service in certain non-profitable rooms during 2001.

      Overall hotel occupancy rates declined 5.7% during 2001, as compared to 2000. In addition, occupancy rates for hotels in the top 25 markets, as defined by Smith Travel Research, declined 7.8% over the same period. For additional information concerning the impact of hotel occupancy rates on the Company’s operations, see “2002 vs. 2001 — Revenue” above.

      During 2001, hotels owned, managed or franchised by Marriott, Hilton, Six Continents, Starwood, and Hyatt accounted for 27%, 19%, 12%, 8% and 7% respectively, of the Company’s net room revenue. Accordingly hotels owned, managed or franchised by the Company’s five largest hotel chains accounted for 73% of the Company’s total net room revenue during 2001. The loss of any of these customers, or the loss of a significant number of other hotel chain customers, could have a material adverse effect on the Company’s results of operations and financial condition. For a discussion of the status of the Company’s relationships with its significant hotel chain customers, see “2002 vs. 2001 — Revenue” above.

      The $5,290,000 or 32.1% decline in video system sales and other revenue during 2001, as compared to 2000, is primarily attributable to (i) a $3,900,000 decrease due to the inclusion of non-recurring license fee revenue in the 2000 amount; and (ii) a $820,000 decrease in video system and equipment sales. The non-recurring license fee revenue represents a payment received during 2000 for licensing rights to the Company’s technologies.

      Content fees, commissions and other in-room service costs decreased by $3,813,000 or 3.3% during 2001, as compared to 2000. Such decrease represents the net effect of (i) a $10,633,000 aggregate reduction in hotel commissions, license fee royalties and video duplication and distribution costs; (ii) a $4,270,000 increase in free-to-guest programming costs; and (iii) a $1,535,000 aggregate increase in the direct costs associated with the Company’s television-based Internet and short subject products. Such increases and decreases include an overall net decrease of approximately $3,000,000 resulting from the disposition of the Company’s Asian operations during the first quarter of 2001. The decreases in hotel commissions and license fee royalties are largely the result of decreases in corresponding revenue amounts. The increases in free-to-guest programming costs are the primarily result of higher rates from programming suppliers. In the aggregate, content fees, commissions, and other in-room service costs represented 49.3% and 46.8% of total net room revenue during 2001 and 2000, respectively. Certain of the Company’s content fees and other direct in-room service costs do not vary with room revenue and occupancy rates.

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      Operations support expense was $30,738,000 and $31,245,000 during 2001 and 2000, respectively. The slight decrease from 2000 to 2001 is primarily attributable to a decrease in the number of rooms served by the Company during 2001, as compared to 2000.

      Research and Development expense decreased $3,134,000 or 35.9% from 2000 to 2001. Such decrease is primarily attributable to cost savings that resulted from a reduction in internal and external labor costs devoted to research and development projects. A significant portion of the Company’s research and development expenses during 2000 related to the development of the Roommate version of the OCX video platform that was launched in 2001.

      Selling, general and administrative expense decreased $707,000 or 2.8% from 2000 to 2001. Such decrease is primarily attributable to lower labor and overhead costs resulting from a May 2001 corporate restructuring and other cost savings measures. The percentage of total net revenue that was represented by selling, general and administrative expense was 10.3% and 9.6% during 2001 and 2000, respectively.

      The Company experienced a slight decrease in depreciation and amortization expense during 2001, as compared to 2000. Such decrease represents the net effect of (i) increases resulting from capital expenditures and (ii) decreases associated with the disposition of the Company’s Asia-Pacific subsidiaries to e-ROOM during the first quarter of 2001, and assets becoming fully depreciated.

      The Company recorded impairment charges of $709,000 and $1,123,000 during 2001 and 2000, respectively. Such charges are comprised of amounts related to obsolete materials and equipment, and losses on various dispositions of property and equipment and other assets.

      Relocation and restructuring expense was $17,041,000 and $6,108,000 during 2001 and 2000, respectively. All of the 2000 amount and $12,132,000 of the 2001 amount relates to the relocation of the Company’s headquarters from San Jose, California to Denver, Colorado. The costs attributable to this relocation include severance, stay bonuses, hiring costs, moving and travel costs, contract labor, and redundant labor and overhead costs. The Company completed the relocation of its headquarters during 2001. The 2001 amount also includes $2,212,000 of severance costs related to a May 2001 restructuring plan that resulted in a staffing reduction of approximately 50 employees, and $2,697,000 of future lease obligations (net of estimated sublease income) associated with the Company’s exit during the fourth quarter of 2001 from certain leased premises in San Jose, California.

      Interest expense increased $2,236,000 or 13.0% during 2001, as compared to 2000. Such increase represents the net effect of an increase in the Company’s weighted average borrowings and a decrease in the weighted average interest rate.

      Impairment of cost investments was $19,639,000 and $900,000 during 2001 and 2000, respectively. The 2001 amount includes a $16,539,000 writedown of the Company’s investment in STSN, Inc. (“STSN”), a $2,000,000 writedown of the Company’s investment in e-ROOM and a $1,100,000 writedown of the

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      The loss on settlement of litigation of $3,700,000 and $4,764,000 during 2001 and 2000 relates to the settlement of the litigation with e-ROOM. For additional information, see note 5 to the accompanying consolidated financial statements.

      The Company’s income tax expense of $368,000 and $423,000 during 2001 and 2000, respectively, represents taxes in certain foreign, state and local jurisdictions. The Company’s reported income tax expense differs from the expected benefit that would result by applying the statutory rates to the Company’s pre-tax losses primarily because the Company is only able to realize income tax benefits for financial reporting purposes to the extent that the Company generates taxable income, or to the extent that tax benefits (i) represent refunds due to the Company or (ii) offset recorded income tax liabilities. For financial reporting purposes, all of the Company’s income tax liabilities had been fully offset by income tax benefits at December 31, 2001 and 2000, respectively. For additional information, see note 9 to the accompanying consolidated financial statements of the Company.

      As a result of the factors described above, the Company’s net loss increased from $39,043,000 in 2000 to $85,716,000 in 2001. As discussed in greater detail above under “2002 vs. 2001 — Net Loss” above, the Company is attempting to improve its operating results by increasing revenue while containing, and wherever possible, reducing expenses and capital expenditures.

      During 2002, the Company used $61,740,000 of cash provided by operating activities to fund the $55,855,000 used by its investing activities, and the $4,033,000 used by its financing activities. The Company’s investing activities included $54,391,000 of capital expenditures. The Company’s financing activities included net repayments of the Revolving Credit Facility in the amount of $2,000,000. For additional information, see the accompanying consolidated statements of cash flows.

      At December 31, 2002, the Company’s Revolving Credit Facility, as amended in 2001, provided for aggregate borrowings of $275,000,000. Borrowings under the Revolving Credit Facility are due and payable in July 2004. The Company had $13,367,000 of remaining availability under the Revolving Credit Facility at December 31, 2002. The Company’s ability to draw additional funds under the Revolving Credit Facility is subject to the Company’s continued compliance with applicable financial covenants.

      At December 31, 2002, the maximum leverage ratio permitted under the Revolving Credit Facility was 4.25, and the Company’s actual leverage ratio was 3.99. The maximum leverage ratio permitted under the Revolving Credit Facility at March 31, 2003 is 3.50. Although the Company is in compliance with the leverage ratio covenant at December 31, 2002, the Company believes that it would not have been in compliance with such covenant at March 31, 2003. In March 2003, the Company reached agreement with its bank lenders to postpone until June 29, 2003 the step-down of the leverage ratio covenant from 4.25 to 3.50. The Company is also seeking to restructure the Revolving Credit Facility to, among other matters, extend the maturity date to December 31, 2007. It is anticipated that any closing of the restructuring of the Revolving Credit Facility will be contingent upon the contribution of $40,000,000 by Liberty or one of its affiliates to the Company to be used to repay principle due, and permanently reduce lender commitments, pursuant to the restructured Revolving Credit Facility. The terms of the proposed Liberty contribution (including the

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      Revolving loans extended under the Revolving Credit Facility bear interest at LIBOR plus a spread that may range from 1.10% to 2.75% depending on certain operating ratios of the Company (3.94% effective borrowing rate at December 31, 2002). In addition, a facility fee ranging from 0.15% to 0.50% per annum is charged on the Revolving Credit Facility, depending on certain operating ratios of the Company. The Revolving Credit Facility contains customary covenants and limitations, most notably the inclusion of restrictions on the Company’s ability to pay dividends or make other distributions, and restrictions on the Company’s ability to make capital expenditures. In addition, the Company is required to maintain leverage and interest coverage ratios. The Company was in compliance with such covenants at December 31, 2002. Substantially all of the Company’s assets are pledged as collateral for borrowings under the Revolving Credit Facility.

      During 2001, the Company issued to Ascent Entertainment Group, Inc. (“Ascent”) Series B Cumulative Redeemable Preferred Stock, par value $.01 per share (the “Series B Preferred Stock”), Series C Cumulative Redeemable Preferred Stock, par value $.01 per share (the “Series C Preferred Stock”) and Series D Cumulative Convertible Redeemable Preferred Stock, par value $.01 per share (“Series D Preferred Stock”) in exchange for aggregate net cash proceeds of $84,926,000. The Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are classified as mandatorily redeemable preferred stock within the accompanying balance sheet due to the fact that, under certain circumstances and subject to certain restrictions, Ascent could require the Company to redeem such mandatorily redeemable preferred stock. Although no assurance can be given, the Company does not anticipate that any such redemption will be required for the foreseeable future. Accumulated and unpaid dividends on the Company’s Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock aggregated $12,922,000 at December 31, 2002. Such dividends have been added to the liquidation preference of the applicable preferred stock issuance since the Company has not paid any cash dividends since issuance. The Company does not intend to pay cash dividends on any of its preferred stock issuances for the foreseeable future.

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      Information concerning the timing of the Company’s required payments due under various contractual obligations as of December 31, 2002 is summarized below (amounts in thousands):

(1)	For additional information concerning the redemption previsions of the mandatory redeemable preferred stock, see note 7 to the accompanying consolidated financial statements of the Company.

      In connection with a first quarter 2001 transaction, the Company agreed that e-ROOM would have the option during the 15-day period beginning on March 1, 2003 to cause the Company to repurchase all, but not less than all, of the 275,000 shares of Company Common Stock issued to e-ROOM at a price of $15 per share. During the fourth quarter of 2002, the Company repurchased 119,500 of such shares for an aggregate price of $1,344,000 or $11.25 per share. The $448,000 excess of the repurchase obligation, calculated at $15 per share, over the aggregate price paid to repurchase such shares has been reflected as an adjustment to net loss attributable to common stockholders in the accompanying consolidated statements of operations. In connection with this transaction, the parties agreed to postpone until March 1, 2004 the date on which the Company can be required to repurchase 119,500 shares of the remaining shares subject to repurchase. The Company is not precluded from repurchasing such shares at an earlier date. The repurchase price for such shares will be $15 per share, plus an adjustment factor calculated from March 1, 2003 to the date of repurchase, at a rate of 8% per annum. Subsequent to December 31, 2002, the date on which the remaining 36,000 shares will first become subject to repurchase by the Company was postponed until March 1, 2004. The repurchase price for such shares will remain at $15 per share.

      On February 28, 2001, the Company acquired a controlling interest in Hotel Digital Network, Inc. (“Hotel Digital Network”). In connection with such acquisition, the Company entered into a stockholders’ agreement (the “HDN Stockholders’ Agreement”) with the then controlling stockholder of Hotel Digital Network (the “HDN Stockholder”). The HDN Stockholders’ Agreement provides the HDN Stockholder with the right during each of the 30-day periods beginning on March 1, 2003 and 2004 to require the Company to exchange shares of Company Common Stock for all, but not less than all, of the HDN common shares held by the HDN Stockholder. On March 20, 2003, the HDN Stockholder exercised such right. The HDN Stockholders’ Agreement also provides the Company with the right during the 30-day period beginning on March 1, 2006 to require the HDN Stockholder to exchange all, but not less than all, of his HDN common shares for shares of Company Common Stock. The number of shares of Company Common Stock to be issued in any such exchanges will be determined based on the then market value of Company Common Stock, and the then fair value of HDN common stock, each as determined in accordance with the HDN Stockholder’s Agreement. At December 31, 2002, the Company held 85.9%, and the HDN Stockholder held 13.3% of the outstanding HDN common stock. Based on the Company’s current assessment of values, the Company does not expect that the settlement of this obligation will have a material impact on its capitalization, financial condition or results of operations.

      Historically, the Company has required external financing to fund the cost of installing and upgrading video systems in hotels. However, during 2002 the Company was able to manage its operations and capital expenditures such that the Company was able to rely on internally generated funds and existing sources of liquidity to finance its installation and upgrade activities. During 2003 and future periods, the Company

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Recent Accounting Pronouncements

      During 2003 and 2002, the Financial Accounting Standards Board issued a number of new Statements of Financial Accounting Standards. For information concerning the anticipated effect that such pronouncements will have on the Company’s consolidated financial statements, see note 2 to the accompanying consolidated financial statements.

      The Company is exposed to market risk from changes in interest rates, which could impact its results of operations and financial condition, particularly the Company’s interest expense and cash flow. The Company does not hedge this exposure. Revolving loans extended under the Revolving Credit Facility generally bear interest at a variable rate based on LIBOR and certain operating ratios of the Company. At December 31, 2002, the outstanding borrowings under the Revolving Credit Facility were $261,633,000. Exclusive of facility fees, the effective borrowing rate on amounts outstanding under the Revolving Credit Facility was 3.94% at December 31, 2002. Assuming no increase or decrease in the amount outstanding, a hypothetical 1% increase (or decrease) in interest rates at December 31, 2002 would increase (or decrease) the Company’s annual interest expense and cash outflow by approximately $2,616,000.

      On Command’s foreign operations are located primarily in Canada and Mexico. On Command believes the risks of foreign exchange rate fluctuations on its present operations are not material to On Command’s overall financial condition. However, On Command will consider using foreign currency contracts, swap arrangements, or other financial instruments designed to limit exposure to foreign exchange rate fluctuations, if deemed prudent.

      The consolidated financial statements of the Company are filed under this item beginning on page II-14.

      None.

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

      We have audited the accompanying consolidated balance sheets of On Command Corporation (an indirect consolidated subsidiary of Liberty Media Corporation) and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of On Command Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

      The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 6 to the consolidated financial statements, at December 31, 2002, the maximum leverage ratio permitted under the Company’s debt facility was 4.25, and the Company’s actual leverage ratio was 3.99. Because the maximum leverage ratio permitted at March 31, 2003 steps down to 3.50, the Company believes that it would not have been in compliance with such covenant at March 31, 2003 had it not reached agreement with its bank lenders to postpone, until June 29, 2003, the step down of the leverage ratio from 4.25 to 3.50. The Company is seeking to restructure the debt facility and such restructuring is contingent on certain events, which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in note 6. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

      As discussed in note 2 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002.

	KPMG LLP

Denver, Colorado

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ON COMMAND CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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ON COMMAND CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

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ON COMMAND CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS