LIBERTY SATELLITE & TECHNOLOGY INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 0-21317
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LIBERTY SATELLITE & TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)

STATE OF DELAWARE 84-1299995
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)

12300 LIBERTY BOULEVARD 80112
ENGLEWOOD, COLORADO (Zip Code)
(Address of principal executive offices)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Series A Common Stock, par value $1.00 per share
Series B Common Stock, par value $1.00 per share

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

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

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
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. /X/

The aggregate market value of the voting stock held by nonaffiliates of
Liberty Satellite & Technology, Inc. computed by reference to the last sales
price of such stock, as of the close of trading on June 28, 2002, was
approximately $14,822,000.

The number of shares outstanding of Liberty Satellite & Technology, Inc.'s
common stock as of February 28, 2003 was:

Series A Common Stock--14,304,794 shares; and
Series B Common Stock--34,765,055 shares.

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LIBERTY SATELLITE & TECHNOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

(A) GENERAL DEVELOPMENT OF BUSINESS

GENERAL. Liberty Satellite & Technology, Inc. ("LSAT", and together with
its consolidated subsidiaries, the "Company") is a majority-owned subsidiary of
Liberty Media Corporation ("Liberty Media"). At December 31, 2002, Liberty Media
owned 85.6% of LSAT's common stock, and 100% of LSAT's preferred stock, which
ownership interests collectively represented 97.6% of the overall voting power
of LSAT's common and preferred securities. LSAT's primary operating subsidiary
is On Command Corporation, which provides in-room, on-demand entertainment and
information services to hotels, motels and resorts. In addition, LSAT pursues
strategic opportunities worldwide in the distribution of Internet data and other
content via satellite and related businesses. Currently, the Company conducts
its business through strategic investments in, and contractual arrangements
with, various entities that operate, or are developing, satellite and
terrestrial wireless networks for broadband distribution of Internet access,
video programming, streaming media and other data. Most of the businesses with
which the Company has strategic relationships are in developmental stages and
operate at substantial losses. There can be no assurances that such businesses
will continue to be able to fund such losses or that their development plans
will be achieved.

Since its formation in 1996, the Company has undergone a number of
significant changes in its business. In order to help the reader to understand
the financial information presented herein, following is a brief description of
the business of LSAT and its predecessors since 1996, as well as certain
material transactions affecting the Company during such period.

THE SPIN-OFF. LSAT was incorporated in Delaware in November 1996 under the
name TCI Satellite Entertainment, Inc. Prior to the Spin-off (as defined below),
the Company was wholly owned by Tele-Communications, Inc. ("TCI") (which was
acquired by AT&T Corp. in 1999 and subsequently by Comcast Corporation (formerly
AT&T Comcast Corporation) in 2002). Among its other businesses, TCI, through
various subsidiaries, was engaged in distributing
PRIMESTAR-Registered Trademark- satellite television services, a medium power
digital satellite service. The Company was formed to own and operate certain
businesses constituting TCI's collective interest in the digital satellite
business. On December 4, 1996, TCI distributed, as a dividend, all of the issued
and outstanding LSAT common stock to the holders of TCI's then outstanding TCI
Group tracking stock (the "Spin-off").

PRIMESTAR BY TCI. From December 1996 through March 1998, LSAT marketed and
distributed the PRIMESTAR-Registered Trademark- programming service under the
brand names "PRIMESTAR By TCI" and "PRIMESTAR By TSAT" and owned an aggregate
21% partnership interest in PRIMESTAR Partners L.P. (now known as Phoenixstar
Partners L.P.) ("Primestar Partners"). Primestar Partners owned and operated the
PRIMESTAR-Registered Trademark- service, which was the second largest digital
satellite business and the eighth largest multichannel video programming
distribution business in the U.S., measured by the number of subscribers at
December 31, 1998. In addition, the Company, through its wholly-owned
subsidiary, Tempo Satellite, Inc. ("Tempo"), held a construction permit (the
"FCC License") issued by the Federal Communications Commission ("FCC"),
authorizing construction of a high power direct broadcast satellite ("DBS")
system. Tempo was a party to a satellite construction agreement (the "Satellite
Construction Agreement") with Space Systems/Loral, Inc. ("Loral") pursuant to
which Tempo arranged for the construction of two high power direct broadcast
satellites (the "Tempo Satellites"). In March 1997, one of the Tempo Satellites
("Tempo DBS-1") was launched into geosynchronous orbit. The other Tempo
Satellite ("Tempo DBS-2") served as a ground spare for Tempo DBS-1.

THE PRIMESTAR ROLL-UP. Effective April 1, 1998, a business combination (the
"Primestar Roll-up") was consummated whereby LSAT contributed and transferred to
PRIMESTAR, Inc. (now known as Phoenixstar, Inc.) ("Phoenixstar") substantially
all of LSAT's assets and liabilities in exchange

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for shares of Phoenixstar common stock representing approximately 37% of the
outstanding shares of common equity of Phoenixstar and approximately 38% of the
combined voting power of such common equity. In addition, the business of
Primestar Partners and the business of distributing the
PRIMESTAR-Registered Trademark- programming service of each of the other
partners in Primestar Partners was consolidated into Phoenixstar.

As a result of the Primestar Roll-up, LSAT became a holding company, with no
substantial assets or liabilities other than (i) 100% of the outstanding capital
stock of Tempo, (ii) its ownership interest in Phoenixstar, and (iii) its rights
and obligations under certain agreements with Phoenixstar and others.

THE HUGHES TRANSACTIONS. In 1999, LSAT, Tempo, Phoenixstar and Primestar
Partners sold to Hughes Electronics Corporation ("Hughes"), a subsidiary of
General Motors Corporation, (i) Tempo DBS-1 and Tempo DBS-2 (ii) Tempo's FCC
License and (iii) Phoenixstar's rights to use Tempo's DBS system for aggregate
consideration of $500 million including assumed liabilities (the "Hughes High
Power Transaction").

In a separate transaction (the "Hughes Medium Power Transaction") completed
on April 28, 1999 (the "Hughes Closing Date"), Phoenixstar sold to Hughes,
Phoenixstar's medium-power DBS business and assets for $1.1 billion in cash plus
14.613 million shares of General Motors Class H common stock ("GM Hughes
Stock"). Phoenixstar used the cash proceeds from Hughes to repay its bank and
public debt.

In connection with their approval of the Hughes Medium Power Transaction and
other transactions, the stockholders of Phoenixstar approved the payment to LSAT
of 4,221,921 shares of GM Hughes Stock (the "Phoenixstar Payment"). In
consideration of the Phoenixstar Payment, the Company agreed to approve the
Hughes Medium Power Transaction and Hughes High Power Transaction (the "Hughes
Transactions") as a stockholder of Phoenixstar, to modify certain agreements to
facilitate the Hughes High Power Transaction, and to issue Phoenixstar a share
appreciation right (the "LSAT GMH SAR") with respect to the shares of GM Hughes
Stock received as the Phoenixstar Payment. The LSAT GMH SAR granted Phoenixstar
the right to any market price appreciation in such GM Hughes Stock during the
one-year period following the date of issuance, over an agreed strike price of
$15.67. The Company agreed to forgo any liquidating distribution or other
payment that may be made in respect of the outstanding shares of Phoenixstar
upon any dissolution and winding-up of Phoenixstar, or otherwise in respect of
Phoenixstar's existing equity and to transfer its shares in Phoenixstar to the
other Phoenixstar stockholders. Effective May 10, 2000, the Company sold
2,400,000 shares of GM Hughes Stock and used a portion of the cash proceeds to
satisfy the LSAT GMH SAR liability.

LIBERTY 2000 TRANSACTIONS. On March 16, 2000, the Company completed two
transactions with Liberty Media (the "Liberty 2000 Transactions"). Pursuant to
the terms of the first transaction, the Company acquired from Liberty Media its
beneficial interest in 5,084,745 shares of Sprint Corporation PCS Group common
stock ("Sprint PCS Stock"), in exchange for (i) Series A 12% Cumulative
Preferred Stock of the Company with a liquidation value of $150,000,000 and
(ii) Series B 8% Cumulative Convertible Voting Preferred Stock ("Series B
Preferred Stock") of the Company with a liquidation value of $150,000,000. The
Series B Preferred Stock is convertible into Series B Common Stock of the
Company at a conversion price of $88.40 per share, subject to adjustment. The
shares of Series B Preferred Stock have super voting rights, which gave Liberty
Media voting control over the Company. Accordingly, since March 16, 2000, LSAT
has been a consolidated subsidiary of Liberty Media.

Pursuant to the terms of the second transaction, the Company and Liberty
Media formed a joint venture, Liberty Satellite, LLC, a Delaware limited
liability company ("LSAT LLC"), to hold and manage interests in entities engaged
globally in the distribution of Internet data and other content via satellite
and related businesses. Liberty Media contributed cash and its interests in XM
Satellite Radio Holdings, Inc., Wildblue Communications, Inc., LSAT Astro LLC
and the Sky Latin America satellite

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businesses in exchange for an 89.41% ownership interest in LSAT LLC. The Company
contributed its interest in GM Hughes Stock, subject to the LSAT GMH SAR, and
certain other assets, in exchange for a 10.59% managing ownership interest in
LSAT LLC.

In a related transaction, which was also consummated on March 16, 2000, the
Company paid Liberty Media $60,000,000 in the form of an unsecured promissory
note in exchange for a 13.99% ownership interest in LSAT Astro LLC ("LSAT
Astro"), a limited liability company whose assets included an approximate 31.5%
interest in ASTROLINK International LLC and $250,000,000 in cash. The remaining
86.01% of LSAT Astro was contributed by Liberty Media to LSAT LLC, as indicated
above.

LSAT LLC AND ASCENT ENTERTAINMENT TRANSACTION. On August 16, 2001, the
Company entered into two interrelated purchase agreements with Liberty Media and
certain of its subsidiaries and affiliates. Both agreements were amended in
November 2001 and January 2002. One agreement provided for the Company's
acquisition of certain subsidiaries of Liberty Media that collectively held the
89.41% ownership interest in LSAT LLC not already owned by LSAT in exchange for
25,298,379 shares of the Company's Series B Common Stock. The second purchase
agreement provided for the Company's acquisition of 100% of the capital stock of
Ascent Entertainment Group, Inc. ("Ascent Entertainment") from a subsidiary of
Liberty Media in exchange for 8,701,621 shares of the Company's Series B Common
Stock. Ascent Entertainment's primary operating subsidiary is On Command
Corporation (together with its subsidiaries, "On Command"), which provides
in-room, on-demand video entertainment and information services to hotels,
motels and resorts, primarily in the United States. The foregoing transaction
(the "LSAT LLC and Ascent Entertainment Transaction") closed on April 1, 2002.

FORWARD LOOKING STATEMENTS. 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. To the extent that such
statements are not recitations of historical fact, such statements constitute
forward-looking statements which, by definition, involve risks and
uncertainties. Where, in any forward-looking statement, the Company expresses an
expectation or belief as to future results or events, such expectation or belief
is expressed in good faith and believed to have a reasonable basis, but there
can be no assurance that the statement of expectation or belief will result or
be achieved or accomplished. The following include some but not all of the
factors that could cause actual results or events to differ materially from
those anticipated:

- General economic and business conditions, particularly trends in the
telecommunications, travel and entertainment industries;

- The regulatory and competitive environment of the industries in which the
Company, and the entities in which it has interests, operate;

- Uncertainties inherent in new business strategies, product launches,
development plans and investments, including the Company's proposed
investments in ASTROLINK International LLC and Wildblue
Communications, Inc., and On Command's strategy to expand its target
market to include smaller hotels;

- Uncertainties associated with the Company's contingent obligations with
respect to its investments in satellite television operators in Latin
America;

- The acquisition, development and/or financing of telecommunications
networks and services;

- 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;

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- Uncertainties inherent in On Command's efforts to renew or enter into
agreements on acceptable terms with its significant hotel chain customers
and their owned, managed and franchised hotels;

- On Command's ability to access quality movies, programming networks and
other content on acceptable terms;

- The potential impact that any negative publicity, lawsuits, or boycotts by
opponents of mature-themed programming content distributed by On Command
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 On Command's ability to make mature-themed programming content
available over its video systems;

- Competitive threats posed by rapid technological changes;

- The development, provision and marketing of On Command's new platforms,
such as the Roommate-TM- and MiniMate-TM- platforms, and customer
acceptance, usage rates, and profitability of such platforms;

- The development and provision of new services, such as On Command's
television-based Internet service, short subject, video game and digital
music products, and customer acceptance and usage rates of such services;

- Uncertainties inherent in On Command's future operating results and
capital expenditure requirements;

- Uncertainties inherent in On Command'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;

- The ability of On Command to restructure or refinance its revolving credit
facility;

- The ability of LSAT and On Command to secure long-term financing on
acceptable terms; 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 Annual Report. The Company expressly disclaims any obligation
or undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.

(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company has two operating segments: "On Command" and "Other". Financial
information related to the Company's operating segments is included in the notes
to the accompanying consolidated financial statements.

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(C) NARRATIVE DESCRIPTION OF BUSINESS

PRINCIPLE SUBSIDIARIES AND STRATEGIC RELATIONSHIPS

The following table sets forth information concerning the Company's
significant subsidiaries and business affiliates. Ownership percentages in the
table are approximate, calculated as of February 1, 2003, and, where applicable
and except where otherwise noted, assume conversion of the Company's ownership
interest to common equity.

ON COMMAND CORPORATION

GENERAL

On Command is a leading provider (in terms of revenue and number of rooms
served) of in-room, video entertainment and information services to hotels,
motels and resorts. At December 31, 2002, On Command 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. A hotel,
motel or resort is collectively referred to herein as a "hotel." At March 1,
2003, LSAT, through Ascent Entertainment, controlled approximately 74% of the
outstanding On Command Common Stock and approximately 80% of the total voting
power associated with On Command's equity securities.

INDUSTRY BACKGROUND

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

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music, Internet connectivity, guest programming of select pay cable channels and
an increasing array of interactive programs and information services. 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 as of December 31, 2002.
Based on the current storage capacities of On Command's most technologically
advanced systems, and improvements in the storage capacities of those systems
that are expected to occur in 2003 and future periods, On Command expects that
the average number of programming titles available to guests will increase over
time. Changes in technology have also led to the ability to provide a number of
on-demand interactive services such as Internet services, games, digital music,
guest folio review, automatic checkout, survey completion and guest messaging.
The market for in-room entertainment and information is characterized as a
highly competitive environment among several industry-dedicated companies and a
number of new entrants including cable companies, satellite distribution
companies, telecommunications companies, laptop connectivity companies and
others.

OPERATING AND GROWTH STRATEGY

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 On Command plans to increase revenue by
(i) developing and, to the extent economically feasible, implementing new
technologies that will enhance On Command's ability to manage its existing
systems or products and/or allow On Command to introduce new or more
technologically advanced products; (ii) retaining existing hotel customers and
selectively increasing the number of rooms in On Command's traditional target
market (generally hotels with 150 or more rooms); (iii) expanding On Command'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. On Command initiated cost reduction and
containment efforts in 2001, and On Command expects to continue to focus on all
available opportunities to reduce or contain costs for the foreseeable future.
In this regard, On Command believes vendor and customer relationships,
outsourcing, and new technologies, such as On Command's new satellite
distribution system, are among the areas that will provide opportunities for
cost reduction and containment during 2003 and future periods. On Command
intends to contain and reduce capital expenditures by continuing its efforts to
more effectively manage and deploy capital with a view towards improving On
Command's return on its capital expenditures. On Command'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 On Command
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 On Command's revenue base, On Command will not experience proportionate
changes in its expenses since many of On Command's expenses do not vary with
hotel occupancy rates.

VIDEO SYSTEMS

OCX-Registered Trademark- Video System

The OCX-Registered Trademark- video system is a multimedia platform that, in
most cases, incorporates digital content storage and playback. The
OCX-Registered Trademark- video system currently is capable of providing
interactive multimedia menus, high-speed television-based Internet service,
Playstation-Registered Trademark- 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-Registered Trademark-
video system, marketed under the name Roommate-TM-. This new version expands
upon the basic architecture of the OCX-Registered Trademark- video system,
allowing On Command to take advantage of general cost reductions in hardware
technology while preserving its investment in its Site Manager software. 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- system whenever a new video system is
required to be installed in new and existing hotels with 150 or more rooms.

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During the fourth quarter of 2002, On Command 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, On Command has
concluded that the MiniMate-TM- system was ready to be deployed, and On Command
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 On Command's OCX-Registered Trademark- 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-Registered Trademark- systems. This video system, which On Command 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-Registered Trademark- 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-Registered Trademark- 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 On Command
began deploying in 2003. On Command is currently studying different alternatives
that might allow On Command 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.

At December 31, 2002, the OCX-Registered Trademark- video system was
installed in 291,000 rooms, including 85,000 with Roommate-TM- systems, and
47,000 with OCX.i systems.

While the OCX-Registered Trademark- 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-Registered Trademark- video games, digital music and a rich
interactive multimedia user interface. With the OCX-Registered Trademark- 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-Registered Trademark- 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 On Command to economically implement the electronic delivery
of digital content through On Command's satellite distribution system.

On Command is continually upgrading its video systems with the overall
objective of maximizing revenue, while minimizing expenses and capital
expenditures. During 2002, On Command upgraded 26,000 OCX-Registered Trademark-
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. On Command plans to install similar upgrades in an
estimated 116,000 OCX-Registered Trademark- rooms during 2003. During 2003, On
Command also plans to upgrade all of its OCX-Registered Trademark- 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 On Command's satellite distribution system. Wherever possible, On
Command will install both of the above-described OCX-Registered Trademark-
upgrades contemporaneously.

During 2003, On Command also plans to deploy a new graphical interface that
will provide for an enhanced menu in all of its OCX-Registered Trademark-
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.

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OCV-Registered Trademark- Video System

The On Command video system (the "OCV-Registered Trademark- or Blue
Box-Registered Trademark- video system") is On Command's original platform, and
the predecessor to the OCX-Registered Trademark- video system. At December 31,
2002, the OCV-Registered Trademark- video system was installed in approximately
562,000 rooms. The OCV-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark- video system's information system is capable of
generating regular reports of guests' entertainment selections, permitting the
OCV-Registered Trademark- 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-Registered Trademark- video system provides more copies of the most
popular programming to hotels. The OCV-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark- system is not compatible with the satellite
distribution system that On Command began deploying in 2003. As a result, On
Command is currently studying different alternatives that might allow On Command
to economically convert to a compatible digital content storage sub-system in
its OCV-Registered Trademark- systems. No specific timeframe for this conversion
has been set.

During 2002, On Command upgraded approximately 61,000
OCV-Registered Trademark- 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. On Command plans to install similar upgrades in an estimated
78,000 OCV-Registered Trademark- rooms during 2003. On Command's experience has
been that the installation of this upgrade typically results in increases in
room revenue.

Other Video Systems

The SpectraVision-Registered Trademark- 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-Registered Trademark- video system generally offers fewer
movie choices than the OCX-Registered Trademark- or OCV-Registered Trademark-
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-Registered Trademark- and Video Now video systems
utilize older technologies, and On Command expects that the number of hotels
served by the SpectraVision-Registered Trademark- and Video Now video systems
will decrease significantly during 2003, and will be phased-out completely over
the next several years. In general, On Command 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

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system, if the return on invested capital is projected to be adequate. During
the year ended December 31, 2002, the SpectraVision-Registered Trademark- and
Video Now video systems generated less than 3% of On Command's total net
revenue.

CONTENT DISTRIBUTION

On Command uses several methods to distribute content to On Command'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, On Command 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
On Command's proprietary equipment installed at hotels. On Command expects to
convert all of its OCX-Registered Trademark- 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. On Command is currently
studying different alternatives that might provide for the economic
implementation of satellite delivery for films and videos to hotels that use
OCV-Registered Trademark- and OCX.i video systems, and no specific time frame
for this application of satellite delivery has been set. On Command'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 On Command's ability to more actively manage the content that is
available in hotel rooms.

SERVICES

Pay-Per-View Movie Services

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 On Command's
most technologically advanced systems, and improvements in the storage
capacities of those systems that are expected to occur in 2003 and future
periods, On Command 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,
On Command 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 On Command. Although On Command expects that the
cost of mature-themed content will increase as a result of this new arrangement,
On Command 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

I-9

perform editing and production services that On Command 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.

Short Subjects

In addition to movies, On Command provides short video programming options
to the hotel guest. This content includes HBO-Registered Trademark-'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. On Command'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 On
Command. Future growth of rooms in which On Command's short subject service is
available is expected to come from those hotels where On Command can expect to
earn an adequate return on its invested capital.

Internet Services

OCX-Registered Trademark- 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 room. 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, On Command 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. On Command 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. On Command 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-Registered Trademark- platform. During the first quarter of
2003, On Command renewed a similar arrangement with Gannett Co., Inc. to
continue to offer USA TODAY-Registered Trademark- NewsCenter iTV content to
guests. On Command plans to continue to seek out additional arrangements that
will allow On Command to expand the amount of pre-formatted interactive content
that is available through On Command's television-based Internet service. In
addition to the software and content improvements, On Command has also improved
the functionality of the latest versions of its television remote controls and
wireless keyboards. 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

I-10

related to the service. At December 31, 2002, On Command's television-based
Internet product was available to 235,000 or 26% of the total rooms served by On
Command. Future growth of rooms in which On Command's Internet service is
available is expected to come from those hotels where connectivity is available
at a reasonable price, and where On Command can expect to earn an adequate
return on its investment in the required in-room equipment and other capital
requirements.

Digital Music

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 On Command as Music On
Command-Registered Trademark-, is available on certain OCX-Registered Trademark-
and upgraded OCV-Registered Trademark- 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 On Command. On Command plans to continue to install and market
Music On Command-Registered Trademark- in 2003. On Command, 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-Registered Trademark- is available is expected to
occur in those hotels where On Command can expect to earn an adequate return on
its invested capital.

Game Services

At December 31, 2002, On Command's video game service was available to
390,000 or 44% of the total rooms served by On Command. On Command's
Roommate-TM-, OCX-Registered Trademark- and OCV-Registered Trademark- video
systems support PlayStation-Registered Trademark- games. On Command's video
systems, however, do not support Playstation-Registered Trademark-2 games. There
are on average 8 to 12 game titles available in most rooms in which video games
are offered. Guests typically pay $6.99 per hour to play the games. On Command
does not expect significant growth during 2003 in the number of hotel rooms
equipped with On Command's video game service as new installations will be
limited to only those hotels (primarily resort hotels) where historical
experience would suggest that On Command will earn an adequate return on its
invested capital. On Command pays its video game suppliers a flat software fee.
In addition, suppliers receive a percentage of net revenue generated from the
service.

Free-To-Guest Programming Services

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-Registered Trademark-, HBO-Registered Trademark-, Turner Services, USA,
STARZ!-Registered Trademark-, 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 On
Command'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 On
Command'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 On Command's free-to-guest
programming. During the fourth quarter of 2002, On Command executed a new agency
agreement with DIRECTV, and amended its existing transport agreement with

I-11

DIRECTV. On Command's agreements with DIRECTV and other suppliers expire on
various dates ranging from 2003 to 2008. Agreements with respect to certain of
the programming carried by On Command's video systems have expired, and On
Command is operating under letter agreements or other arrangements until new
arrangements are finalized.

On Command 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 On Command 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 On
Command's rates. Certain of On Command'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) On Command's
projected growth rates for free-to-guest programming revenue. Although On
Command is working with programming suppliers and taking other actions to
mitigate future cost increases, there is no assurance that On Command will be
able to limit the growth in its free-to-guest programming costs to rates that
are less than or equal to On Command'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, On Command will experience
pressure on its operating margins. On Command's ability to pass increases in
programming costs on to hotels is limited by certain of On Command's contracts
with hotels.

Other Hotel and Guest Services

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 On Command'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.

SALES AND MARKETING

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 the past since most of the
hotels in these categories are under contract with On Command or its
competitors. Therefore, On Command has broadened its strategy for obtaining new
hotel customers to target both smaller hotels and lower cost hotels. Management
anticipates that the lower costs and flexibility associated with the
MiniMate-TM- version of On Command's OCX-Registered Trademark- system will make
marketing to smaller hotels and lower cost hotels more economically attractive
than in the past. On Command began marketing the MiniMate-TM- platform during
the fourth quarter of 2002. Under On Command's current marketing plan, hotels
will enter into agreements that will provide for (i) the purchase by the hotels
of the MiniMate-TM- system; (ii) the licensing of the hotels to use On Command's
proprietary software, and (iii) the performance of video system maintenance
services by On Command. Hotels that purchase the MiniMate-TM- platform will
receive a contractual percentage of the net margin generated by the MiniMate-TM-
video system. No assurance can be given that that MiniMate-TM- system will be
successfully marketed to smaller hotels, or that On Command will be successful
in the execution of its strategy to use the MiniMate-TM- system to broaden its
target market.

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 On Command's ability to manage its existing
products and/or allow On Command 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, On Command upgraded certain of its
OCX-Registered Trademark- and OCV-Registered Trademark- video systems to provide
a full-motion video and audio promotional screen, and On Command's plans to
implement this upgrade for additional OCX-Registered Trademark- and
OCV-Registered Trademark- systems during 2003. During 2003, On Command also
plans to deploy a new graphical interface that will provide for an enhanced menu
in all of its OCX-Registered Trademark- systems that use a digital content
storage sub-system.

I-12

HOTEL CONTRACTS

For some of On Command's large customers, On Command 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 On Command'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, On Command'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 On Command's master
contracts provide for the simultaneous expiration of On Command's contractual
relationships with all of the individual hotels that are subject to such a
master contract. In the case of hotels that are not covered by master contracts,
On Command generally executes contracts separately with each hotel. On Command'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, in the case of the
recently introduced MiniMate-TM- system, On Command'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 forms of capital assistance and, to a lesser extent, provide
television maintenance services to hotels during the respective terms of the
applicable contracts. However, On Command generally seeks to avoid entering into
new contracts or renewals that require On Command to provide capital assistance
or television maintenance services unless other terms of the contract make it
economical for On Command to do so.

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. On Command's
contracts with hotels typically set forth the terms governing On Command's
provision of free-to-guest programming as well. Depending on the contract, On
Command may or may not be the exclusive provider of free-to-guest programming,
and in cases where On Command is not the exclusive provider, certain of On
Command's contracts require On Command to make payments to hotels to subsidize
the cost to the hotels of using another free-to-guest programming provider. Most
of On Command'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 On
Command's free-to-guest service has been less than the aggregate cost to On
Command of the corresponding programming during each of the past three years. On
Command is currently working with its programming vendors and hotels to mitigate
the shortfall. In this regard, as On Command enters into new contracts, or
renews existing contracts, with hotels, On Command 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 On Command's video systems. The amount of the commission varies
depending on the overall economics of the applicable contract and

I-13

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
On Command's equipped rooms have expired, or are scheduled to expire, if not
renewed, during the two-year period ending December 31, 2004.

MARKETS AND CUSTOMERS

On Command currently provides entertainment and information services to
hotels that are associated with major hotel chains, management companies and
independent hotels including Marriott-Registered Trademark-,
Hilton-Registered Trademark-, Six Continents-TM-, Starwood,
Hyatt-Registered Trademark-, Wyndham Hotels and Resorts-Registered Trademark-,
Radisson-Registered Trademark-, 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.

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

SIGNIFICANT CUSTOMERS

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 On Command's net room revenue. Accordingly,
hotels owned, managed or franchised by On Command's five largest hotel chain
customers accounted for 72% of On Command'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
On Command's results of operations and financial condition.

On March 21, 2001, On Command and Marriott entered into a definitive master
agreement pursuant to which On Command distributes its services in hotel rooms
owned or managed by Marriott. In addition, On Command 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, On
Command is seeking to increase the number of Marriott rooms it serves.

I-14

As further discussed below, the Hilton master contract has expired, and
Hilton has signed a new master contract with a competitor of On Command. In
addition, On Command does not have master contracts with either Starwood or Six
Continents, and the Hyatt master contract provides for the simultaneous
expiration of On Command'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, On Command 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 On Command'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 On Command upon the expiration of such hotels'
contracts with On Command. On Command 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, On Command 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 On Command 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, On Command expects that,
regardless of the expiration dates of master contracts or individual contracts
with hotels, On Command 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, On Command 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.

In October 2000, Hilton announced that it would not be renewing its master
contract with On Command. As a result, hotels owned, managed or franchised by
Hilton are currently subject to a master contract between Hilton and a
competitor of On Command. Accordingly, On Command 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 On Command, and, although no assurance can be given, On
Command anticipates that certain of those hotels will choose to renew. At
December 31, 2002, On Command 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, On Command'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. On Command'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, On Command 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, On Command anticipates that the revenue it derives
from hotels that are owned, managed or franchised by Hilton will decrease.
However, due to the uncertainties involved, On Command is currently unable to
predict the amount and timing of the revenue decreases.

TECHNOLOGY--RESEARCH AND DEVELOPMENT

On Command 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 On Command to add system enhancements as they
become commercially available and economically viable. The high speed, two-way
digital communications capability of OCX-Registered Trademark- video systems
enables On Command to provide

I-15

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.

On Command'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 On Command's systems generally use industry
standard interfaces, On Command can often economically integrate new
technologies as they become viable.

On Command is in the process of developing applications of Internet Protocol
("IP") technology for use in On Command's video systems. No assurance can be
made that On Command will be successful in developing economically viable
applications of IP technology.

PATENTS, TRADEMARKS AND COPYRIGHTS

On Command holds a number of patents and patent licenses covering various
aspects of its pay-per-view and interactive systems primarily related to the
OCV-Registered Trademark- 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, On Command is pursuing patent protection of elements of the
OCX-Registered Trademark- and Roommate-TM- video systems. In connection with a
negotiated settlement agreement with LodgeNet in 1998, On Command 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.

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

On Command has trademark applications pending in the United States Patent
and Trademark Office for the "Roommate-TM-", "MiniMate-TM-" and "TeleMate-TM-"
trademarks.

LICENSEES AND OTHER SYSTEM SALES

On Command sells systems to certain other providers of in-room entertainment
including Allin Interactive, which is licensed to install On Command's equipment
on cruise ships; Techlive Limited, formerly known as On Command Europe Limited,
which is licensed to use On Command'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 On Command'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.

SEASONALITY

The amount of revenue realized by On Command 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 On Command's lowest month for revenue,
On Command typically does not experience significant variations in its monthly
revenue that can be attributed solely to seasonal factors.

SPRINT CORPORATION PCS GROUP

At December 31, 2002, LSAT LLC held beneficial interests with respect to
5,084,745 shares of Sprint Corporation PCS Group common stock ("Sprint PCS
Stock") (NYSE: PCS) and certain derivative financial instruments related to
those shares. In March 2003, the Company received aggregate proceeds of
approximately $149 million in connection with the sale of a portion of its
shares

I-16

of Sprint PCS Stock and the settlement of a portion of its interests in the
Sprint PCS Stock equity collar. In April 2003, the Company expects to receive
additional proceeds of approximately $154 million in connection with the sale of
its remaining Sprint PCS Stock and the settlement of its remaining interests in
the Sprint PCS Stock equity collar.

SKY LATIN AMERICA

LSAT LLC has a 10% interest in each of three Latin American satellite
television operators, together known as Sky Latin America, serving Mexico,
Brazil, Colombia and Chile. Sky Latin America offers entertainment and services
via satellite to households through its various owned and affiliated
distribution platforms worldwide. The Sky Latin America entities distribute
their programming primarily via direct-to-home or DTH platforms, allowing their
subscribers to access a variety of channels covering general entertainment,
music, movies, sports, kids, news, documentaries and education genres with their
television remote controls. Other major investors in Sky Latin America include
News Corporation, Grupo Televisa and Globo Comunicacoes e Particpacoes
("GloboPar"). The Company has severally guaranteed certain obligations of the
Sky Latin America entities. During the fourth quarter of 2002, GloboPar ceased
funding certain of the Sky Latin America entities.

WILDBLUE COMMUNICATIONS, INC.

Wildblue Communications, Inc. ("Wildblue") was established to build a
Ka-band satellite network to provide broadband data communications services to
homes and small offices in North America and Latin America. Other strategic
investors in Wildblue include Gemstar-TV Guide International, Inc., Kleiner
Perkins Caufield & Byers, TRW, Inc., EchoStar Communications Corp., and Telesat
Canada.

In December 2002, the Company announced that it has agreed to increase its
investment in Wildblue. Currently, the Company has an approximate 16% ownership
interest in Wildblue. Under the new agreement, the Company will invest
$58 million in return for senior preferred stock and warrants of Wildblue. As
also agreed, other existing and new investors will invest $98 million in
Wildblue for a total new investment of $156 million. Upon closing of the
transaction, of which no assurance can be given, the Company will be the largest
shareholder with an ownership interest of approximately 32% and a voting
interest of approximately 37%. The closing of the transaction is subject to
certain conditions, and is expected to occur in the second quarter of 2003.
Assuming the Wildblue transaction is consummated as described above, of which no
assurance can be given, Wildblue currently expects to launch its satellite in
the fourth quarter of 2003 and begin providing broadband data services in the
second or third quarter of 2004.

In connection with the aforementioned additional investment in Wildblue, the
Company entered into a put agreement with KPCB Holdings, Inc. ("KPCB"), another
investor in Wildblue. Pursuant to this put agreement and in the event the
parties make additional investments in Wildblue, KPCB will have the right to put
its interest in Wildblue to the Company and another investor in Wildblue for
$10,000,000, the amount KPCB has agreed to invest in Wildblue at the closing of
the Wildblue transaction. The Company and such other investor are each
responsible for $5,000,000 of the aggregate $10,000,000 put obligation. The put
may be exercised at any time within four years from the closing of the Wildblue
transaction.

ASTROLINK INTERNATIONAL LLC

The Company owns an approximate 31.5% ownership interest in Astrolink.
Astrolink, a developmental stage entity, was originally established to build a
global telecom network using Ka-band geostationary satellites to provide
broadband data communications services. Astrolink's original business plan
required substantial financing. During the fourth quarter of 2001, certain of
the members of Astrolink informed Astrolink that they did not intend to provide
any of Astrolink's remaining required

I-17

financing. In light of this decision, Astrolink and the Astrolink members
considered several alternatives with respect to Astrolink's proposed business
plan.

During the second quarter of 2002, LSAT signed a non-binding letter of
intent with the other Astrolink members in connection with the proposed
restructuring of Astrolink. In January 2003, the Company announced that it had
reached agreement with the other members of Astrolink in connection with such
proposed restructuring ("the Astrolink Restructuring"). Under the agreement (the
"Astrolink Restructuring Agreement"), the Company will acquire substantially all
of the assets of Astrolink. Astrolink simultaneously signed agreements with
Lockheed Martin Corporation and Northrop Grumman Space & Mission Systems Corp.
for completion of two satellites. The parties also reached agreement on the
settlement of all claims related to the previous termination of Astrolink's
major procurement contracts and all other major third party creditor claims. The
closing of the Company's acquisition of the Astrolink business is subject to the
Company obtaining satisfactory funding for the business from additional
investors, third party sources of financing, or firm capacity commitments from
prospective customers. The closing is also subject to regulatory approvals and
other closing conditions. Subject to satisfaction of these closing conditions,
the closing is expected to occur on or before October 31, 2003.

If the closing occurs, the Company will pay approximately $43 million in
cash and will issue approximately $3 million in value of Series A Common Stock
as total consideration for the Astrolink assets, including certain existing
satellite and launch contracts, and the settlement of all claims against
Astrolink. In addition, the Company will provide additional interim funding for
Astrolink pending closing. If the transactions are consummated, Liberty Media
will make a capital contribution to the Company in an amount equal to 10% of the
estimated fair value of Liberty Media's equity holdings in the Company at the
time of closing, up to a maximum commitment of $55 million, in exchange for
shares of the Company's Series B Common Stock.

The Company currently plans to pursue a revised operating plan for the new
Astrolink system, taking into account financial and market factors. The revised
operating plan currently contemplates launching one or two Ka-band satellites to
provide enterprise customers in up to two of North America, Europe or Asia, with
virtual private networks and related advanced services, and to provide various
government agencies with a solution to their expanding needs for bandwidth.

In the event the Astrolink Restructuring is not consummated due to lack of
financing or other closing conditions, the Company anticipates that Astrolink
will be liquidated and the Company will receive $7.8 million as prescribed in
the Astrolink Restructuring Agreement.

HUGHES ELECTRONICS CORPORATION

Hughes (NYSE: GMH), a subsidiary of General Motors Corporation, provides
digital television entertainment, satellite services and satellite-based private
business networks. At December 31, 2002, LSAT LLC owned 1,821,921 shares of GM
Hughes Stock.

XM SATELLITE RADIO HOLDINGS, INC.

XM Satellite Radio Holdings (Nasdaq: XMSR) offers approximately 100 national
audio channels from two satellites directly to vehicle, home and portable
radios. At December 31, 2002, LSAT LLC owned 1.0 million shares of XM Satellite
Radio Holdings.

COMPETITION

LSAT COMPETITION

LSAT pursues strategic opportunities worldwide in the distribution of
Internet data and other content via satellite and related businesses. Currently,
LSAT conducts its business through strategic investments in, and contractual
arrangements with, various entities that operate, or are developing,

I-18

satellite and terrestrial wireless networks for broadband distribution of
Internet access, video programming, streaming media and other data. Most of the
businesses with which LSAT has strategic relationships are in the development
stage and operate at substantial losses. There can be no assurances that such
businesses will continue to be able to fund such losses or that their
development plans will be achieved.

The broadband communications industry experiences intense competition in
worldwide markets among numerous global competitors, including some of the
world's largest and best known companies. LSAT and those entities in which LSAT
has made strategic investments will face competition from other satellite
providers, cable television providers, "wireless cable" providers, DSL (digital
subscriber line) providers, traditional narrowband Internet access providers,
proprietary on-line services and other telecommunications companies and service
providers. Many of such competitors and potential competitors have substantially
greater capital and financial resources, brand recognition, marketing resources,
and/or technological capabilities than LSAT, and many have substantial existing
customer bases and established relationships with content providers,
distributors and/or retail outlets. Such advantages may increase the ability of
such actual and potential competitors to compete successfully against LSAT and
its strategic investments.

LSAT expects that significant competitive factors will include price,
service quality and reliability, signal latency, susceptibility to "rain fade"
and other forms of interference, geographic service areas or "footprints," ease
of use, breadth of features and service offerings, the ability to bundle
complementary services, the availability of vendor financing for antennas,
receivers and other customer premises equipment, brand recognition and
time-to-market.

LSAT believes that competition in its industry will increase as the FCC
grants additional licenses in existing frequency ranges and as new technologies
are developed and deployed.

ON COMMAND COMPETITION

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., (iii) direct
broadcast satellite services, such as DirecTV and the DISH Network,
(iv) television networks and programmers, such as ABC, NBC, CBS, FOX,
HBO-Registered Trademark-, STARZ!-Registered Trademark-, 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.

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.

I-19

On Command anticipates that it will face substantial competition in
obtaining new contracts with major hotel chains. On Command 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
On Command is able to provide equivalent services at competitive prices.

REGULATORY MATTERS

LSAT REGULATORY MATTERS

FCC REGULATION. The FCC is the government agency with primary authority in
the United States to regulate the use of radio spectrum, including both
satellite and terrestrial applications. LSAT does not directly hold any FCC
licenses or other authorizations, and cannot directly acquire, own, construct or
operate a satellite system without an appropriate license, construction permit
or other authorization issued by the FCC for such purpose. In addition, most
microwave and other terrestrial radio operations also require FCC authorization.
The FCC has promulgated numerous regulations governing the construction,
ownership and operation of satellite and terrestrial radio systems. Wireless
communications companies must comply with all such regulations applicable to
their operations, and if they violate such regulations, the FCC can impose
sanctions such as fines, loss or modification of authorizations, and/or the
denial of applications for new authorizations or for renewal of existing
authorizations.

Certain terrestrial wireless systems utilize un-licensed radio frequencies
for communicating between the antenna serving an individual community and
subscribers in that community. However, such systems are nevertheless subject to
FCC regulation and may utilize other frequencies that require authorizations for
other purposes (such as satellite earth stations or microwave communications
between a head end and community antennas). Service providers that use
unlicensed spectrum are also subject to interference from other permitted users
of such spectrum in their service areas, and may be subject to restrictions on
amplification and other limitations.

Construction of a Ka-band satellite system requires an appropriate
construction permit from the FCC. Such permits are subject to time limits and
requirements that the permittee exercise due diligence toward the construction
and deployment of the permitted system within such time limits. Licenses for
Ka-band satellites are issued for an initial ten-year term commencing once the
satellite is successfully placed into orbit and its operations fully conform to
the terms and conditions of the license. Upon the expiration of the license for
each Ka-band satellite, the licensee must apply for renewal of the license.
Astrolink and Wildblue have been granted five and two FCC permits, respectively.
However, Astrolink has applied to return two of its permits and Wildblue has
applied to return one of its permits. Such permits require Astrolink and
Wildblue to meet terms and conditions and comply with FCC regulations. If they
do not meet the FCC terms and conditions, their FCC permits could expire, be
revoked, modified, or may or may not be renewed.

INVESTMENT COMPANY ACT. The Investment Company Act requires companies that
are engaged primarily in the business of investing, reinvesting, owning, holding
or trading in securities, or that fail certain numerical tests regarding the
composition of their assets and their sources of income and that

I-20

are not primarily engaged in a business other than investing, reinvesting,
owning, holding or trading in securities, to register as "investment companies."
Various substantive restrictions are imposed on investment companies by the
Investment Company Act.

LSAT is primarily engaged in a business other than investing, reinvesting,
owning, holding or trading securities, and does not intend to be an investment
company within the meaning of the Investment Company Act. However, as LSAT is a
holding company with ownership interests in other entities, some of which
represent less than 50% of the voting equity of such entities, there is a risk
that LSAT could be deemed to have become an inadvertent investment company
within the meaning of the Investment Company Act. If LSAT is required to
register as an investment company under the Investment Company Act, LSAT would
become subject to substantial regulation of its capital structure, management,
operations, transactions with "affiliated persons," as defined in the Investment
Company Act, and other matters. If LSAT were deemed to be an investment company
subject to regulation under the Investment Company Act and did not register
under that Act, it would be in violation of the Investment Company Act and would
be prohibited from engaging in business or selling its securities and could be
subject to civil and criminal actions for doing so. In addition, LSAT's
contracts would be voidable and a court could appoint a receiver to take control
of LSAT and liquidate it. Therefore, LSAT's classification as an investment
company subject to regulation under the Investment Company Act could materially
adversely affect its business, results of operations and financial condition.

ON COMMAND REGULATORY MATTERS

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 FCC. However, because On Command'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 On Command to hotel guests.

The Internet-based services offered by On Command 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
On Command's Internet-based services and products or otherwise have an adverse
effect on On Command. 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 On Command to
liability.

Although the FCC generally does not directly regulate the services provided
by On Command, 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 On Command's business will not be
adversely affected by future legislation or new regulations.

On Command is required to have performance licenses to the extent that its
services utilize copyrighted music. On Command has one agreement in place and is
negotiating a second agreement

I-21

with organizations that represent rights holders. In addition, certain
programming distributed by On Command is acquired pursuant to agreements that
require performance licenses to be obtained by On Command's suppliers. IMN has
separate performance licenses in place with two groups that represent rights
holders, one of which is on an interim basis, and is attempting to negotiate a
third license. Music performance licensing rights have been the subject of
industry-wide arbitration and/or litigation for a number of years. Depending
upon the outcome of on-going proceedings and On Command's negotiations, the
performance license fees for such distribution may increase over the course of
time.

OTHER

Compliance with federal, state and local provisions that have been enacted
or adopted regulating the discharge of material into the environment or
otherwise relating to the protection of the environment has had no material
effect upon the capital expenditures, results of operations or competitive
position of the Company.

As of December 31, 2002, LSAT had 4 employees, and On Command had 620
employees.

ITEM 2. PROPERTIES.

LSAT owns no real estate. LSAT subleases office space from Liberty Media in
Englewood, Colorado. LSAT believes that such office space is adequate for its
business operations for the foreseeable future.

On Command 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. On Command also has a lease that
expires in February 2008 for 76,972 square feet of light manufacturing and
storage space in Denver, Colorado. On Command 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 On Command is
attempting to sublease. On Command has a number of other small leases for small
parcels of property throughout the United States, Canada and Mexico. On
Command's properties are suitable and adequate for On Command's business
operations.

ITEM 3. LEGAL PROCEEDINGS.

There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject, except as follows:

In a civil action entitled DANIEL BOONE, OZARK HEARTLAND ELECTRONICS, INC.
V. RADIO SHACK, ET AL, the plaintiff alleged that the Company and other
defendants (i) entered into a vertical resale price maintenance agreement
with Radio Shack, in violation of Section 1 of the Sherman Act, and
(ii) tortiously interfered with plaintiff's contractual relationship with
Radio Shack when they requested that Radio Shack terminate plaintiff's right
to market PRIMESTAR-Registered Trademark- products. On February 1, 2001, the
Eighth Circuit Court of Appeals affirmed an earlier ruling by the District
Court granting summary judgment in favor of each of the Defendants and
dismissing the suit. The plaintiff filed a Petition for Rehearing, which was
denied by the Eighth Circuit Court of Appeals on March 4, 2002. The
plaintiff had until June 3, 2002 to file a petition for certiorari with the
United States Supreme Court, but did not do so. As a result, this matter has
concluded, and it will not be reported in future filings.

On Command 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 On Command
and has proposed that On Command take a license under

I-22

those patents. On Command 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.

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

At the Company's annual meeting of stockholders held on November 6, 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:

Ratification of the appointment of KPMG LLP as the Company's independent
auditors for the year ended December 31, 2002 (437,487,406 votes "For", 48,312
votes "Against", and 42,845 Abstentions).

I-23

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Through April 1, 2002, shares of the Series A common stock ("Series A Common
Stock") and Series B common stock ("Series B Common Stock") of Liberty Satellite
and Technology, Inc. ("LSAT", and together with its consolidated subsidiaries,
the "Company") traded over-the-counter on the OTC Bulletin Board under the
symbols "LSATA" and "LSATB", respectively. Following an April 1, 2002 reverse
stock split, shares of Series A Common Stock and Series B Common Stock began
trading under the symbols "LSTTA" and "LSTTB", respectively. Historically,
shares of Series B Common Stock have had low trading volume due to a relatively
low number of shares held in the public float. The following table sets forth
the range of high and low bid prices in U.S. dollars of shares of Series A
Common Stock and Series B Common Stock for the periods indicated. The prices are
interdealer prices, do not include retail markups, markdowns, or commissions and
may not represent actual transactions.

As of December 31, 2002, there were approximately 2,918 and 137 record
holders of the Series A Common Stock and Series B Common Stock, respectively
(which amounts do not include the number of shareholders whose shares are held
of record by banks, brokerage houses or other institutions, but include each
such institution as one shareholder).

The Company has not paid cash dividends on its Series A Common Stock and
Series B Common Stock and has no present intention of so doing. Payment of cash
dividends, if any, in the future will be determined by the LSAT's Board of
Directors in light of its earnings, financial condition and other relevant
considerations.

On April 1, 2002, LSAT issued 34,000,000 shares of Series B Common Stock
valued at $204,000,000 to Liberty Media Corporation ("Liberty Media") in
exchange for (i) the capital stock of certain subsidiaries of Liberty Media that
collectively held the 89.41% of Liberty Satellite, LLC not already owned by LSAT
and (ii) 100% of the capital stock of Ascent Entertainment Group, Inc. ("Ascent
Entertainment"). The issuance was made in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 (the "Act")
for transactions by an issuer not involving a public offering.

On July 1, 2002, LSAT issued 1,970,580 shares of Series A Common Stock to
Liberty Media. Such issuance was made in lieu of a cash payment of dividends on
LSAT's Series A 12% Cumulative Preferred Stock ("Series A Preferred Stock") and
LSAT's Series B 8% Cumulative Convertible Voting Preferred Stock ("Series B
Preferred Stock") for the quarters ended December 31, 2001 and March 31, 2002
and was valued at $15,000,000. The foregoing issuance was made pursuant to the
private placement exemption from the Act afforded by Section 4(2) of the Act.

II-1

On August 1, 2002, LSAT issued 2,349,697 shares of Series A Common Stock to
Liberty Media. Such issuance was made in lieu of a cash payment of dividends on
LSAT's Series A and Series B Preferred Stock for the quarter ended June 30, 2002
and was valued at $7,500,000. The foregoing issuance was made pursuant to the
private placement exemption from the Act afforded by Section 4(2) of the Act.

ITEM 6. SELECTED FINANCIAL DATA

Selected financial data related to the Company's financial condition and
results of operations for the five years ended December 31, 2002 are summarized
as follows. Such information should be read in conjunction with the accompanying
consolidated financial statements of the Company and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" included
elsewhere herein.

- ------------------------

(1) Pursuant to a roll-up transaction that was consummated on April 1, 1998,
LSAT contributed and transferred to PRIMESTAR, Inc. (now known as
Phoenixstar, Inc.) all of its assets and liabilities

II-2

except for assets and liabilities related to the high power direct broadcast
satellite system then being constructed by Tempo Satellite, Inc., a
wholly-owned subsidiary of the Company.

(2) On April 1, 2002, the Company consummated a transaction (the "LSAT LLC and
Ascent Entertainment Transaction"), whereby the Company acquired from
Liberty Media (i) certain subsidiaries of Liberty Media that collectively
held the 89.41% of Liberty Satellite, LLC ("LSAT LLC") not already owned by
LSAT and (ii) 100% of the capital stock of Ascent Entertainment Group, Inc.
("Ascent Entertainment"). Due to the fact that the Company, LSAT LLC and
Ascent Entertainment are all under the common control of Liberty Media, the
LSAT LLC and Ascent Entertainment Transaction has been accounted for in a
manner similar to a pooling-of-interests. As such, the Company's
consolidated financial statements have been restated to include LSAT LLC and
Ascent Entertainment as wholly-owned subsidiaries of LSAT, effective with
the respective March 2000 dates that Liberty Media acquired control of such
entities.

(3) The 2001 amount includes charges and losses aggregating $417,202,000
relating to the Company's indirect investment in ASTROLINK International
LLC.

(4) The 2002 amount includes charges aggregating $105,250,000 to reflect
nontemporary declines in the fair value of the Company's indirect investment
in various 10% investees that operate satellite television systems in Latin
America ("Sky Latin America"). The 2001 amount includes charges aggregating
$56,483,000 to reflect nontemporary declines in the fair value of the
Company's indirect investment in Wildblue Communications, Inc.

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

RECENT TRANSACTIONS

LSAT LLC AND ASCENT ENTERTAINMENT TRANSACTION. On August 16, 2001, the
Company entered into two interrelated purchase agreements with Liberty Media and
certain of its subsidiaries and affiliates with respect to the LSAT LLC and
Ascent Entertainment Transaction. Both agreements were amended in November 2001
and January 2002. One agreement provided for the Company's acquisition of
certain subsidiaries of Liberty Media that collectively held the 89.41%
ownership interest in LSAT LLC not already owned by the Company in exchange for
25,298,379 shares of Series B Common Stock of the Company. The second purchase
agreement provided for the Company's acquisition of 100% of the capital stock of
Ascent Entertainment from a subsidiary of Liberty Media in exchange for
8,701,621 shares of Series B Common Stock of the Company. Ascent Entertainment's
primary operating subsidiary is On Command Corporation ("On Command"). The LSAT
LLC and Ascent Entertainment Transaction closed on April 1, 2002. At
December 31, 2002, Liberty Media owned 85.6% of the Company's outstanding common
stock, and 100% of the Company's preferred stock, which ownership interests
collectively represented 97.6% of the overall voting power of the Company's
common and preferred securities.

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

As a result of the LSAT LLC and Ascent Entertainment Transaction, LSAT's
primary operating subsidiary is On Command. At December 31, 2002, LSAT, through
its ownership interest in Ascent

II-3

Entertainment, owned approximately 70% of the outstanding On Command common
stock ("On Command Common Stock") and 100% of certain series of On Command's
preferred stock, which ownership interests collectively represented
approximately 76% of the voting power associated with On Command's common and
preferred securities. Subsequent to December 31, 2002, the Company's ownership
interest in the outstanding On Command Common Stock increased to approximately
74%, and the Company's overall voting power in On Command increased to
approximately 80%. On Command develops, assembles, installs, and operates
proprietary video systems. On Command's primary distribution system allows hotel
guests to select, on an on-demand basis, motion pictures on computer-controlled
television sets located in their hotel rooms. On Command also provides, under
long-term contracts, in-room viewing of select cable channels and other
interactive services to hotels and businesses. The interactive services include
video games, Internet offerings, digital music and various hotel and guest
services. At December 31, 2002, approximately 89% of On Command's equipped rooms
were located in the United States, with the balance located primarily in Canada
and Mexico.

In addition to On Command's operations, the Company pursues strategic
opportunities worldwide in the distribution of Internet data and other content
via satellite and related business. The Company is actively seeking to develop
and/or acquire operating businesses related to, or complementary with, such
strategy.

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

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. The
following descriptions of the Company's critical accounting policies with
respect to long-lived assets and goodwill relate primarily to the Company's "On
Command" operating segment, and the descriptions with respect to investments and
derivatives relate primarily to the Company's "Other" operating segment.

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 and amortizable intangible assets 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

II-4

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 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 assets 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. 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 On Command's
Common Stock.

CARRYING VALUE OF INVESTMENTS. The Company's cost and equity method
investments comprise a significant portion of its total assets at December 31,
2002 and 2001. The Company accounts for these investments pursuant to Statement
of Financial Accounting Standards No. 115, Statement 142 and Accounting
Principles Board Opinion No. 18. These accounting principles require the Company
to periodically evaluate its investments to determine if decreases in fair value
below its cost bases are other than temporary or "nontemporary." If a decline in
fair value is determined to be nontemporary, the Company is required to reflect
such decline in its consolidated statement of operations. Nontemporary declines
in fair value of cost investments are recognized on a separate line in the
consolidated statement of operations, and nontemporary declines in fair value of
equity method investments are included in share of losses of affiliates in the
consolidated statement of operations.

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

The Company's evaluation of the fair value of its investments and any
resulting impairment charges are determined as of the most recent balance sheet
date. Changes in fair value subsequent to the balance sheet date due to the
factors described in the preceding paragraph are possible. Subsequent decreases
in fair value will be recognized in the Company's statement of operations in the
period in which they occur to the extent such decreases are deemed to be
nontemporary. Subsequent increases in fair value will be recognized in the
Company's consolidated statement of operations upon disposition of the
investment.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS. The Company uses various derivative
instruments, including equity collars and put spread collars, to manage fair
value risk associated with certain of its investments. The Company accounts for
these derivative instruments pursuant to Statement of Financial Accounting
Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

II-5

("Statement 133"). Statement 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. Changes in derivatives designated
as cash flow hedges are recorded in other comprehensive income. Changes in
derivatives designated as fair value hedges and changes in derivatives not
designated as hedges are included in realized and unrealized gains (losses) on
derivative instruments in the statement of operations.

The Company uses the Black-Scholes model to estimate the fair value of its
derivative instruments. The Black-Scholes model incorporates a number of
variables in determining such fair values, including expected volatility of the
underlying security and an appropriate discount rate. The Company obtains a
volatility rate from an independent source at the inception of the derivative
instrument based on the expected volatility of the underlying security over the
term of the derivative instrument. The volatility assumption is generally
evaluated annually to determine if it should be adjusted. The Company selects a
discount rate at the inception of the derivative instrument and updates such
rate each reporting period based on an estimate of the discount rate at which
the derivative instrument could be settled. Considerable management judgment is
required in estimating the Black-Scholes variables. Actual results upon
settlement or unwinding of the Company's derivative instruments may differ
materially from these estimates.

For long-term derivatives, changes in the Company's assumptions regarding
(1) the volatility rates of the underlying securities and (2) the risk free
interest rate would have the most significant impact on the valuation of its
derivatives. Due to the short-term nature of the Company's derivatives (all
expire within 15 months of December 31, 2002), changes in these assumptions
would not have had a significant impact upon the December 31, 2002 valuations.

RESULTS OF OPERATIONS

As noted above, the Company's consolidated results of operations include
Ascent Entertainment and its majority-owned subsidiary On Command since
March 2000. Accordingly, and unless otherwise noted below, increases in the
Company's revenue and expenses from 2000 to 2001 are due in part to the
inclusion of Ascent Entertainment and On Command for a full year in 2001, as
compared to nine months in 2000.

REVENUE

IN-ROOM ENTERTAINMENT REVENUE

Revenue from On Command's in-room entertainment services consists primarily
of fees collected from hotels for in-room services provided to hotel guests by
On Command ("room revenue"). Services provided by On Command to hotel guests
include pay-per-view movies and short subjects, free-to-guest programming, video
games, Internet service and digital music. On Command also earns revenue from
the sale of video and music systems to third parties and the sale of video
equipment to hotels, from other sources ("system and equipment sales and other
entertainment revenue"). Total in-room entertainment revenue (comprised of room
revenue, and system and equipment sale and other entertainment revenue)
decreased $1,012,000 or less than one percent during 2002 and increased
$38,993,000 or 19.5% during 2001.

Net room revenue decreased $1,616,000 or less than 1% during 2002, as
compared to 2001. The decrease in net room revenue during 2002 is primarily
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; and (iii) a $4,428,000 increase in the aggregate
revenue derived from short subject, digital music and television-based Internet
products. On Command believes that most of the decrease in pay-per-view buys is
attributable to a decline in occupancy rates, as further discussed below. A 3.3%
reduction in the average number of rooms served by On Command during 2002 also
contributed to the decrease in pay-per-view buys. The decline in the average
number of rooms served by On Command is attributable to (i) the disposition of
certain hotel rooms; (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 On Command
derives a significant portion of its revenue from hotels located in the top 25
markets, On Command believes that the occupancy rate for this segment is the
best indicator of the impact changes in hotel occupancy are having on On
Command's business. Hotel occupancy rates are outside of On Command's control,
and changes in hotel occupancy rates can have a significant impact on On
Command's results of operations.

II-6

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 On Command's net room revenue. Accordingly,
hotels owned, managed or franchised by On Command's five largest hotel chain
customers accounted for 72% of On Command'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
On Command'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 On Command. In
addition, On Command does not have master contracts with either Starwood or Six
Continents, and the Hyatt master contract provides for the simultaneous
expiration of On Command'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, On Command 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 On Command'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 On Command upon the expiration of such hotels'
contracts with On Command. On Command 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, On Command 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 On Command 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, On Command expects that,
regardless of the expiration dates of master contracts or individual contracts
with hotels, On Command 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, On Command 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.

In October 2000, Hilton announced that it would not be renewing its master
contract with On Command. As a result, hotels owned, managed or franchised by
Hilton are currently subject to a master contract between Hilton and a
competitor of On Command. Accordingly, On Command 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 On Command, and, although no assurance can be given, On
Command anticipates that certain of those hotels will choose to renew. At
December 31, 2002, On Command 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, On Command'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. On Command'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, On Command 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, On Command anticipates that the revenue it derives
from hotels that are owned, managed or franchised by Hilton will decrease.
However, due to the uncertainties involved, On Command is currently unable to
predict the amount and timing of the revenue decreases.

II-7

The Company's consolidated financial statements reflect an increase in
in-room entertainment revenue from 2000 to 2001 due to the inclusion of On
Command's operating results for only nine months during the 2000 period.
However, On Command's in-room entertainment revenue actually decreased by 9.8%
from 2000 to 2001 on a full-year basis. Such full-year decrease represents the
net effect of (i) a lower volume of pay-per-view buys; (ii) an increase
attributable to higher average rates for certain pay-per-view products; (iii) a
decrease associated with the inclusion of non-recurring license fee revenue in
the full year 2000 amount; and (iv) an increase in the aggregate revenue derived
from short subject, television-based Internet and other new products. On Command
believes that most of the decrease in pay-per-view buys is due to a decline in
occupancy rates. 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.

OTHER REVENUE

Other revenue is primarily comprised of revenue generated by Ascent Network
Services during the 2001 and 2000 periods. Ascent Entertainment sold Ascent
Network Services to Ascent Media on September 4, 2001.

OPERATING COSTS

IN-ROOM ENTERTAINMENT OPERATING COSTS

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

In-room entertainment operating costs decreased $9,100,000 or 5.8% during
2002, as compared to 2001. Such decrease represents the net effect of (i) a
decrease associated with certain changes to On Command's operational structure
and other cost savings measures, including the outsourcing of certain call
center and warehouse management functions; (ii) a $4,083,000 increase in
free-to-guest programming costs; (iii) a $2,074,000 reduction in Internet direct
costs; (iv) a $1,783,000 increase in hotel commissions; (v) a $1,329,000
decrease attributable to the third quarter 2002 reversal of accruals deemed no
longer needed for their originally intended purpose, and (vi) various other
individually insignificant items. The increase in free-to-guest programming
costs is primarily the result of higher rates from programming suppliers.
Certain of On Command's content fees and other in-room service costs do not vary
with room revenue and occupancy rates.

The Company's consolidated financial statements reflect an increase in
in-room entertainment operating costs from 2000 to 2001 due to the inclusion of
On Command's operating results for only nine months during the 2000 period.
However, On Command's in-room entertainment operating costs actually decreased
by 4.8% from 2000 to 2001 on a full-year basis. Such full-year decrease
represents the net effect of (i) reductions in hotel commissions, license fee
royalties and video duplication and distribution costs; (ii) increases in
free-to-guest programming costs; and (iii) increases in the direct costs
associated with On Command's television-based Internet and short subject
products. Such increases and decreases include an overall net decrease resulting
from the disposition of On Command's Asian operations during the first quarter
of 2001. The decreases in hotel commissions and license fee royalties on a
full-year basis are largely the result of decreases in corresponding revenue
amounts.

On Command is a party to various agreements with programming suppliers that
permit On Command to distribute movies and programming networks. On Command
expects that the cost of such movies and programming networks will increase in
future periods as contracts expire and renewals are

II-8

negotiated. Certain of On Command'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 On Command is not able to pass on to its customers would result
in increased pressure on On Command's operating margins.

OTHER OPERATING COSTS

Other operating costs are primarily comprised of costs incurred by Ascent
Network Services during the 2001 and 2000 periods. Ascent Entertainment sold
Ascent Network Services to Ascent Media on September 4, 2001.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expense decreased $30,811,000 or 51.9%
during 2002, as compared to 2001. Costs associated with On Command's 2001
relocation and restructuring activities, together with the cost savings that
resulted from such activities, accounted for approximately $15,000,000 of such
decrease. The remaining decrease is attributable to other reductions in the
selling, general and administrative expenses incurred by Ascent Entertainment.
Such other reductions in Ascent Entertainment expenses are primarily
attributable to (i) the elimination of expenses as a result of the September 4,
2001 sale of Ascent Network Services to Ascent Media and (ii) the inclusion of
$7,746,000 in the 2001 amount related to Ascent Entertainment's 2001 repurchase
of 2,245,155 shares of On Command Common Stock from the then chief executive
officer of On Command.

Selling, general and administrative expenses increased $33,426,000 or 128.7%
from 2000 to 2001. Such increase is due to increases in Ascent Entertainment's
expenses as a result of (i) the inclusion of Ascent Entertainment in the
Company's consolidated financial statements for a full 12 month in 2001, as
compared to nine months in 2000; (ii) an $8,236,000 increase in On Command's
relocation and restructuring costs from 2000 to 2001; and (ii) a $7,746,000
increase in the 2001 amount related to Ascent Entertainment's 2001 repurchase of
2,245,155 shares of On Command Common Stock from the then chief executive
officer of On Command.

STOCK COMPENSATION

LSAT records estimated stock compensation pursuant to the intrinsic value
method of Accounting Principles Board Opinion No. 25. Such estimate is subject
to future adjustment based upon the market value of the underlying common stock.
Since none of LSAT's outstanding stock appreciation rights ("SARs") were
in-the-money at December 31, 2002 or 2001, LSAT recorded no compensation expense
with respect to SARs during 2002 and 2001. The adjustment to stock compensation
expense in 2000 is the result of a decrease in the Company's liability for SARs.
The stock compensation expense recorded during 2002 and 2001 is attributable to
restricted stock awards granted in February 2001.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization decreased $38,926,000 or 22.6% during 2002, as
compared to 2001. Such decrease in depreciation and amortization is primarily
the result of the Company's adoption of Statement 142, which, among other
things, required the Company to cease recording goodwill amortization effective
January 1, 2002. Depreciation remained relatively constant during the 2002 and
2001 periods as reductions to On Command's depreciable asset base attributable
to (i) assets becoming fully depreciated, and (ii) asset dispositions were
largely offset by increases attributable to capital expenditures.

Depreciation and amortization increased $37,014,000 or 27.4% during 2001, as
compared to 2000. The majority of such increase is attributable to the inclusion
of Ascent Entertainment in the Company's consolidated financial statements for a
full 12 months in 2001, as compared to nine months in 2000. The application of
purchase accounting in connection with the March 2000 acquisition of Ascent

II-9

Entertainment also contributed to the increase. On a full-year basis, the
depreciation incurred by On Command during 2001 and 2000 remained relatively
constant.

ASSET IMPAIRMENTS AND OTHER CHARGES

On Command 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. On Command also recorded other charges aggregating
$2,336,000, $709,000 and $1,634,000 during 2002, 2001 and 2000 respectively,
related to obsolete materials and equipment, and losses on various dispositions
of property and equipment and other assets.

INTEREST INCOME

The Company recognized interest income of $2,174,000, $12,967,000 and
$21,066,000 during 2002, 2001 and 2000, respectively. The 2002 income was earned
primarily on certain bonds that were purchased by LSAT LLC in August 2001. Such
bonds are included with the Company's investment in Sky Latin America. The 2001
and 2000 income was earned primarily on the cash and cash equivalent balances
maintained by Ascent Entertainment and LSAT Astro LLC ("LSAT Astro"), a
subsidiary of the Company. The majority of Ascent Entertainment's cash and cash
equivalent balances were utilized to redeem the Ascent Entertainment Senior
Secured Discount Notes on December 31, 2001, and all of LSAT Astro's cash and
cash equivalent balances were utilized to fund the capital calls during 2001 and
2000 of ASTROLINK International LLC ("Astrolink"), LSAT Astro's 31.5%-owned
investee.

INTEREST EXPENSE

During 2002, 2001 and 2000, the Company recognized interest expense of
$18,530,000, $47,477,000 and $34,843,000, respectively. The decrease in interest
expense from 2001 to 2002 represents the combined effect of a decrease in the
Company's weighted average debt balance and a decrease in interest rates. The
reduction in the Company's weighted average debt balance is primarily due to the
December 31, 2001 redemption of the Ascent Entertainment Senior Secured Discount
Notes. The increase in interest expense from 2000 to 2001 is primarily due to
the inclusion of Ascent Entertainment in the Company's consolidated financial
statements for a full 12 months in 2001, as compared to nine months in 2000.

SHARE OF LOSSES OF AFFILIATES

During 2002, 2001 and 2000, the Company's share of losses of affiliates
aggregated $13,705,000, $424,247,000 and $7,251,000, respectively. The 2002
amount is primarily related to losses arising from LSAT LLC's investment in
Aerocast.com, Inc. ("Aerocast"). In 2002, LSAT LLC determined that its
investment in Aerocast experienced a nontemporary decline in value that resulted
in a $7,072,000 write-off of the remaining carrying value of its investment in
Aerocast. Such write-off is included in LSAT LLC's share of Aerocast's 2002
losses. The 2001 amount includes $417,202,000 of losses and charges arising from
LSAT Astro's investment in Astrolink. Due to the Company's fourth quarter 2001
determination that LSAT Astro's investment in Astrolink should be reduced to a
fair value that assumes the liquidation of Astrolink, LSAT Astro wrote-off its
remaining $249,868,000 investment in Astrolink during the fourth quarter of
2001. Previously, the Company had taken a $155,000,000 writedown on this
investment during the second quarter of 2001. Since LSAT Astro's investment in
Astrolink was reduced to zero at December 31, 2001, LSAT Astro's share of
Astrolink's losses in 2002 has been limited to the amounts loaned to Astrolink
by the Company during 2002. Subsequent to December 31, 2002, the Company entered
into an agreement that, among other matters, provides for the recapitalization
of Astrolink, subject to certain conditions. The 2000 amount includes the

II-10

Company's share of Astrolink's losses for 10 months, and the Company's share of
Aerocast's losses for 6 months.

NONTEMPORARY DECLINES IN FAIR VALUES OF INVESTMENTS

Nontemporary declines in fair values of investments aggregated $163,881,000,
$96,438,000 and $9,860,000 during 2002, 2001 and 2000, respectively, and are
comprised of the following.

UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS

Unrealized gains (losses) on financial instruments during 2002, 2001 and
2000 aggregated $2,393,000, $38,891,000 and ($14,426,000), respectively. The
details of such gains (losses) are as follows:

During 2002 and 2001, the Company had designated its equity collars as fair
value hedges. Pursuant to Statement 133, the equity collars were recorded on the
balance sheet at fair value, and changes in the fair value of the equity collars
and of the hedged security were recognized in earnings. Effective December 31,
2002, the Company elected to no longer designate its equity collars as fair
value hedges. This election had no impact on the Company's financial position or
results of operations on December 31, 2002. However, subsequent to December 31,
2002, changes in the fair value of the hedged securities that previously had
been reported in earnings will now be reported as a component of other
comprehensive income on the Company's balance sheet. Changes in the fair value
of the equity collars will continue to be reported in earnings.

LOSS ON EXTINGUISHMENT OF DEBT

The $14,322,000 loss on extinguishment of debt during 2001 resulted from the
December 31, 2001 redemption of the Ascent Senior Secured Discount Notes.

GM HUGHES STOCK TRANSACTIONS

In May 2000, the Company sold 2,400,000 shares of General Motors Corporation
Class H common Stock ("GM Hughes Stock") for net cash proceeds of $74,243,000
and used $65,721,000 of such net

II-11

cash proceeds to satisfy a GM Hughes Stock share appreciation right. The
$36,643,000 gain recognized by the Company on the sale of GM Hughes Stock was
more than offset by the $65,721,000 loss recognized on the satisfaction of the
GM Hughes Stock share appreciation right.

INCOME TAXES

The Company recognized income tax benefits of $35,621,000, $35,652,000 and
$28,450,000 during 2002, 2001, and 2000, respectively. The 2002 benefit includes
a $5,666,000 tax refund received by LSAT as a result of a change in tax law that
occurred during the first quarter of 2002. Such change resulted in the
elimination of restrictions on the use of net operating loss carryforwards to
offset alternative minimum tax liabilities. The 2002, 2001 and 2000 income tax
benefits also include deferred tax benefits associated with losses recognized by
the Company. The Company has recognized such losses to the extent that the tax
effect of such losses offsets the Company's deferred income tax liability. At
December 31, 2002, the Company's deferred tax liability was $14,558,000. The
Company is only able to recognize income tax benefits for financial reporting
purposes to the extent that such benefits offset recorded income tax liabilities
or the Company generates taxable income. In connection with the consummation of
the LSAT LLC and Ascent Entertainment Transaction, LSAT and Liberty Media
entered into a Tax Liability Allocation and Indemnification Agreement, and LSAT
assumed an intercompany tax liability owed by Ascent Entertainment to Liberty
Media pursuant to a separate Tax Liability Allocation and Indemnification
Agreement. Since April 1, 2002, the Company and its 80%-or-more owned
subsidiaries have been included in Liberty Media's consolidated tax return.

MINORITY INTERESTS IN LOSSES OF CONSOLIDATED SUBSIDIARIES

The minority interests' share of losses of consolidated subsidiaries
aggregated $165,000, $34,346,000 and $15,078,000 during 2002, 2001, and 2000,
respectively. Such amounts primarily represent the minority interests' share of
On Command's net losses. The decrease from 2001 to 2002 is primarily
attributable to a change in how On Command's losses are allocated between Ascent
Entertainment and the minority interest holders. During the first quarter of
2002, the cumulative losses allocated by Ascent to the On Command minority
interests reduced to zero Ascent's carrying amount for the minority interests in
On Command's equity. Since the On Command minority interest holders have no
obligation to make further contributions to On Command, 100% of On Command's
losses for periods subsequent to March 31, 2002 have been, and will be in future
periods, allocated to Ascent unless and to the extent that the On Command
minority interest holders make additional investments in On Command's equity.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

Pursuant to the transitional provisions of Statement 142, the Company
recorded a $105,837,000 reduction of goodwill in 2002. Such goodwill was
originally recorded in connection with the March 2000 Ascent Entertainment
acquisition. In accordance with Statement 142, this goodwill reduction has been
recorded as the cumulative effect of an accounting change.

NET LOSS

As a result of the factors described above, the Company incurred net losses
of $343,874,000, $602,263,000 and $116,959,000 during 2002, 2001 and 2000,
respectively.

LIQUIDITY AND CAPITAL RESOURCES

LSAT is a holding company that does not generate positive cash flow at the
LSAT level. The only subsidiary of LSAT that generates significant revenue is On
Command. Due to covenant restrictions contained in the On Command Revolving
Credit Facility, LSAT is generally not entitled to the cash

II-12

resources or cash generated by the operations of On Command. The sources of
liquidity available to LSAT at the LSAT level are described below.

On a consolidated basis, the Company used cash provided by operating
activities of $62,820,000, cash and cash equivalents on hand of $22,342,000 and
cash provided by financing activities of $4,777,000 to fund investing activities
of $89,939,000 during 2002. The Company's investing activities included
$54,397,000 of capital expenditures and $31,304,000 of investments and advances
to affiliates.

LSAT LLC's revolving credit facility, as amended, (the "PCS Loan Facility")
provides for maximum borrowings of $303,000,000. The PCS Loan Facility is
secured by the Company's interest in the Sprint Corporation PCS Group common
stock ("Sprint PCS Stock") and the Sprint PCS Stock equity collar. Interest
accrues at the 30 day LIBOR (1.44% at December 31, 2002) and is payable monthly.
The Company expects that all amounts due under the PCS Loan Facility will be
repaid in April 2003 with proceeds received upon the sale of its Sprint PCS
Stock and the settlement of its interests in the Sprint PCS Stock equity collar.

In March 2000, LSAT received a 13.99% ownership interest in LSAT Astro in
exchange for a $60,000,000 note payable to Liberty Media. Interest on the note
accrued at the 3 month LIBOR plus 2% (3.74% at December 31, 2002). Interest
payments were due semi-annually on the first day of March and September. At
December 31, 2002, the unpaid principal on the note was $48,411,000 and the
accrued interest on the note was $614,000. All amounts due under the note
payable to Liberty Media were repaid in March 2003.

In August 2002, the LSAT Board of Directors authorized the Company's
purchase of up to 3,000,000 of Series A and Series B Common Stock in open market
purchases. The timing of purchases, prices paid and actual number of shares of
common stock purchased will depend on market conditions and the direction of
management. During 2002, LSAT purchased 24,900 shares of Series A Common Stock
for aggregate cash consideration of $53,000 pursuant to this share buy back
program.

In March 2000, LSAT issued 150,000 shares of Series A Preferred Stock, and
150,000 shares of Series B Preferred Stock to Liberty Media in exchange for
shares of Sprint PCS Stock. On the date of issuance, each such series of
preferred stock had an aggregate stated value of $150,000,000. The Series A
Preferred Stock and Series B Preferred Stock, which were each issued at a
discount to their stated values, are redeemable at the option of Liberty Media
on or after April 1, 2020 at a price equal to stated value plus all accrued and
unpaid dividends. The Company may elect to use cash, Series A Common Stock or a
combination thereof to satisfy such dividend requirements through March 2003.
Subsequent to March 31, 2003, dividends are required to be paid in cash. During
2002, the Company issued 4,320,277 shares of Series A Common Stock, and paid
$7,500,000 in cash, in satisfaction of dividends accrued through September 30,
2002. Accrued and unpaid dividends on the Series A Preferred Stock and Series B
Preferred Stock aggregated $7,500,000 as of December 31, 2002. Such accrued
dividends were satisfied through the issuance of 3,221,787 shares of Series A
Common Stock during the first quarter of 2003.

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

II-13

During the second quarter of 2002, LSAT signed a non-binding letter of
intent with the other Astrolink members in connection with the proposed
restructuring of Astrolink. In January 2003, the Company announced that it had
reached agreement with the other members of Astrolink in connection with such
proposed restructuring (the "Astrolink Restructuring"). Under the agreement (the
"Astrolink Restructuring Agreement"), the Company will acquire substantially all
of the assets of Astrolink. Astrolink simultaneously signed agreements with
Lockheed Martin Corporation and Northrop Grumman Space & Mission Systems Corp.
for completion of two satellites. The parties also reached agreement on the
settlement of all claims related to the previous termination of Astrolink's
major procurement contracts and all other major third party creditor claims. The
closing of the Company's acquisition of the Astrolink business is subject to the
Company obtaining satisfactory funding for the business from additional
investors, third party sources of financing, or firm capacity commitments from
prospective customers. The closing is also subject to regulatory approvals and
other closing conditions. Subject to satisfaction of these closing conditions,
the closing is expected to occur on or before October 31, 2003.

If the closing occurs, the Company will pay approximately $43 million in
cash and will issue approximately $3 million in value of Series A Common Stock
as total consideration for the Astrolink assets, including certain existing
satellite and launch contracts, and the settlement of all claims against
Astrolink. In addition, the Company will provide additional interim funding for
Astrolink pending closing. If the transactions are consummated, Liberty Media
will make a capital contribution to the Company in an amount equal to 10% of the
estimated fair value of Liberty Media's equity holdings in the Company at the
time of closing, up to a maximum commitment of $55 million, in exchange for
shares of the Company's Series B Common Stock.

The Company currently plans to pursue a revised operating plan for the new
Astrolink system, taking into account financial and market factors. The revised
operating plan currently contemplates launching Ka-band satellites to provide
enterprise customers in North America with virtual private networks and related
advanced services, and to provide various government agencies with a solution to
their expanding needs for bandwidth.

In the event the Astrolink Restructuring is not consummated due to lack of
financing or other closing conditions, the Company anticipates that Astrolink
will be liquidated and the Company will receive $7.8 million dollars as
prescribed in the Astrolink Restructuring Agreement.

In December 2002, the Company announced that it has agreed to increase its
investment in Wildblue Communications, Inc. ("Wildblue"). Currently, the Company
has an approximate 16% ownership interest in Wildblue. Under the new agreement,
the Company will invest $58 million in return for senior preferred stock and
warrants of Wildblue. As also agreed, other existing and new investors will
invest $98 million in Wildblue for a total new investment of $156 million. Upon
closing of the transaction, of which no assurance can be given, the Company will
be the largest shareholder with an ownership interest of approximately 32% and a
voting interest of approximately 37%. The closing of the transaction is subject
to certain conditions, and is expected to occur in the second quarter of 2003.
Assuming the Wildblue transaction is consummated as described above, of which no
assurance can be given, Wildblue currently expects to launch its satellite in
the fourth quarter of 2003 and begin providing broadband data services in the
second or third quarter of 2004.

In connection with the aforementioned additional investment in Wildblue, the
Company entered into a put agreement with KPCB Holdings, Inc. ("KPCB"), another
investor in Wildblue. Pursuant to this put agreement and in the event the
parties make additional investments in Wildblue, KPCB will have the right to put
its interest in Wildblue to the Company and another investor in Wildblue for
$10,000,000, the amount KPCB has agreed to invest in Wildblue at the closing of
the Wildblue transaction. The Company and such other investor are each
responsible for $5,000,000 of the aggregate $10,000,000 put obligation. The put
may be exercised at any time within four years from the closing of the Wildblue
transaction.

II-14

As a result of the consummation of the LSAT LLC and Ascent Entertainment
Transaction, Liberty Media no longer has a direct ownership interest in LSAT
LLC, and has no obligation to provide funding to LSAT LLC. Accordingly, the
primary sources of liquidity expected to be available at the LSAT level during
2003 are the (i) proceeds of approximately $149 million received in March 2003
upon the sale of a portion of the Company's Sprint PCS Stock and the settlement
of a portion of its interests in the Sprint PCS Stock equity collar;
(ii) proceeds of approximately $154 million to be received upon the expected
April 2003 sale of the Company's remaining Sprint PCS Stock and settlement of
its remaining interests in the Sprint PCS Stock equity collar; and
(iii) $9,741,000 of cash and cash equivalents held by LSAT at December 31, 2002.
As noted above, the Company has used, or intends to use, approximately
$163 million of such Sprint proceeds to repay in full all amounts due under the
PCS Loan Facility and the note payable to Liberty Media in March and
April 2003. The Company believes that the remaining proceeds of approximately
$140 million, together with the cash and cash equivalents held at the LSAT
level, will be sufficient to fund LSAT's expected cash requirements during 2003,
exclusive of the proposed investment in Astrolink, which investment, as further
described above, will be funded primarily by a capital contribution from Liberty
Media. LSAT's liquidity requirements during 2003 are expected to include
(i) its proposed investment in Wildblue, if consummated; (ii) its preferred
stock dividend requirements; (iii) its capital contributions to Sky Latin
America, and its interim funding commitments to Astrolink. LSAT does not expect
Ascent Entertainment or its principal operating subsidiary, On Command, to
provide any of LSAT's financial resources during 2002. The financial resources
and requirements of On Command are described below.

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

Revolving loans extended under the On Command Revolving Credit Facility bear
interest at the LIBOR plus a spread that may range from 1.10% to 2.75% depending
on certain operating ratios of On Command (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 On Command Revolving Credit Facility, depending on
certain operating ratios of On Command. The On Command Revolving Credit Facility
contains customary covenants and agreements, most notably the inclusion of
restrictions on On Command's ability to pay dividends or make other
distributions, and restrictions on On Command's ability to make capital
expenditures. In addition, On Command is required to maintain leverage and
interest coverage ratios. On Command was in compliance with such covenants at
December 31, 2002. Substantially all of On Command's assets are pledged as
collateral for borrowings under the On Command Revolving Credit Facility.

At December 31, 2002, the maximum leverage ratio permitted under the On
Command Revolving Credit Facility was 4.25, and On Command's actual leverage
ratio was 3.99. The maximum leverage ratio permitted under the On Command
Revolving Credit Facility at March 31, 2003 is 3.50. Although On Command is in
compliance with the leverage ratio covenant at December 31, 2002, On Command
believes that it would not have been in compliance with such covenant at
March 31, 2003. In March 2003, On Command 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. On Command is also seeking to restructure the On
Command 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 On Command Revolving Credit Facility will be contingent
upon the contribution of $40,000,000 by Liberty Media or one of its affiliates
to On Command to be used to repay principle due, and permanently reduce lender
commitments, pursuant to the restructured On Command Revolving Credit Facility.
The terms of the

II-15

proposed Liberty Media contribution (including the securities or other
consideration to be received by Liberty Media or its affiliate in exchange for
such contribution) have not yet been agreed upon, and no assurance can be given
that Liberty Media or its affiliate will contribute $40,000,000 to On Command,
as contemplated by the terms of the proposed restructuring. In the event On
Command determines that it is unlikely that the proposed restructuring of the On
Command Revolving Credit Facility will close on or before June 29, 2003, On
Command anticipates that it would seek a further postponement of the step-down
of the leverage ratio covenant, and would continue to seek to refinance or
restructure the On Command Revolving Credit Facility. In the event that a
restructuring or refinancing is not completed by the date that the leverage
ratio is reduced to 3.50, On Command anticipates that a default would occur
under the terms of the On Command Revolving Credit Facility. Upon the occurrence
of a default, if left uncured, the bank lenders would have various remedies,
including terminating their revolving loan commitment, declaring all outstanding
loan amounts including interest immediately due and payable, and exercising
their rights against their collateral which consists of substantially all of On
Command's assets. No assurance can be given that On Command will be able to
successfully restructure or refinance the On Command Revolving Credit Facility
on terms acceptable to On Command, or that On Command will be able to avoid a
default under the On Command Revolving Credit Facility. In light of the
foregoing circumstances, On Command's independent auditors have included an
explanatory paragraph in their audit report that addresses the ability of On
Command to continue as a going concern.

In connection with a first quarter 2001 transaction, On Command agreed that
e-ROOM Corporation ("e-ROOM") would have the option during the 15 day period
beginning on March 1, 2003 to cause On Command to repurchase all, but not less
than all, of the 275,000 shares of On Command Common Stock issued to e-ROOM at a
price of $15 per share. During the fourth quarter of 2002, On Command
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 a decrease to intangible assets in the accompanying
consolidated balance sheets. In connection with this transaction, the parties
agreed to postpone until March 1, 2004 the date on which On Command can be
required to repurchase 119,500 of the remaining shares subject to repurchase. On
Command 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 On Command was
postponed until March 1, 2004. The repurchase price for such shares will remain
at $15 per share.

On February 28, 2001, On Command acquired a controlling interest in the
common stock of Hotel Digital Network, Inc. ("HDN"). In connection with such
acquisition, On Command 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 On Command to exchange shares of On Command
Common Stock for all, but not less than all, of the Hotel Digital Network common
shares held by the HDN Stockholder. On March 20, 2003, the HDN Stockholder
exercised such right. The HDN Stockholders' Agreement also provides On Command
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 Hotel Digital
Network common shares for shares of On Command Common Stock. The number of
shares of On Command Common Stock to be issued in any such exchanges will be
determined based on the then market value of On Command Common Stock and the
then fair value of Hotel Digital Network common stock, each as determined in
accordance with the HDN Stockholders' Agreement. At December 31, 2002, On
Command held 85.9%, and the HDN Shareholder held 13.3% of the outstanding Hotel
Digital Network common stock. Based on On Command's current assessment of
values, On Command does not expect that the settlement of

II-16

this obligation will have a material impact on its capitalization, financial
condition or results of operations.

Historically, On Command has required external financing to fund the cost of
installing and upgrading video systems in hotels. However, during 2002 On
Command was able to manage its operations and capital expenditures such that On
Command 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, On Command intends to continue to focus its efforts on
increasing revenue while containing, and wherever possible, reducing expenses
and capital expenditures. Assuming On Command meets its operating and capital
expenditure targets for 2003, On Command expects that it will be able to rely on
cash provided by operations, existing availability under the Revolving Credit
Facility, and existing cash and cash equivalent balances to fund its capital
expenditures and other anticipated liquidity requirements during 2003. On
Command's operating plan for 2003 is based in part on the assumption that hotel
occupancy rates will increase modestly from 2002 to 2003. To the extent that On
Command was to experience a revenue shortfall or any other unfavorable variance
from its 2003 operating plan, On Command would seek to reduce expenses and/or
capital expenditures to compensate for any such shortfall or unfavorable
variance. Accordingly, On Command believes, although no assurance can be given,
that it will not require additional sources of liquidity to fund its capital
expenditures and anticipated liquidity requirements during 2003. Notwithstanding
the foregoing, On Command anticipates that it would require additional external
financing to (i) fund any significant new growth initiatives or unanticipated
liquidity requirements; or (ii) refinance the Revolving Credit Facility, if
necessary (as discussed above). No assurance can be given that On Command will
not be required to seek external financing during 2003, and if external
financing is required, no assurance can be given that any such financing would
be available on terms acceptable to On Command or at all.

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

Liberty Media International, Inc., ("Liberty International") a subsidiary of
Liberty Media, and other investors in the Sky Latin America businesses have
severally guaranteed obligations due under certain transponder agreements and
equipment lease agreements through 2018. The Company has indemnified Liberty
International with respect to Liberty International's obligations under these
guarantees. At December 31, 2002, the portions of the remaining undiscounted
obligations due under such transponder agreements and equipment lease agreements
that were severally guaranteed by Liberty International aggregated approximately
$107,906,000 and $7,000,000, respectively. During the fourth quarter of 2002,
Globo Comunicacoes e Participacoes ("GloboPar"), an investor in three of the Sky
Latin America entities, announced that it was reevaluating its capital
structure. Since that time, GloboPar has not provided any funding to the three
Sky Latin America entities in which it is an investor. In the case of one such
entity, Sky Multi-Country Partners ("Sky Multi-Country"), the Company and the
other investors in Sky Multi-Country have each entered into a Forbearance
Agreement with respect to Sky Multi-Country's obligations under a Transponder
Services Agreement with PamAmSat Corporation (successor-in-interest to PamAmSat
International, Inc.) ("PamAmSat"). Pursuant to the Forbearance Agreement,
PamAmSat will forbear from enforcing its rights under the Transponder Services
Agreement through April 30, 2003, provided that it receives at least 70% of the
fees due under the Transponder Services Agreement. Through March 15, 2003, the
Company and the other investors in Sky Multi-Country have collectively funded at
least 70% of the fees due under the Transponder Services Agreement. At
December 31, 2002, the aggregate obligations of Sky Multi-Country that were
severally guaranteed by Liberty International were $40,667,000. Sky
Multi-Country

II-17

funds another Sky Latin America entity in which GloboPar is an investor. At
December 31, 2002, the aggregate obligations of this entity that are severally
guaranteed by Liberty International were $7,000,000. In the case of Sky Brasil
Servicos Limitada ("Sky Brasil"), another entity in which GloboPar is an
investor, an investor other than the Company had previously agreed in July 2002
to assume up to $50,000,000 of GloboPar's funding obligations through 2003 in
exchange for increased ownership and governance rights. At December 31, 2002,
the aggregate obligations of Sky Brasil that are severally guaranteed by Liberty
International were $41,360,000. As detailed above, the three entities in which
GloboPar is an investor account for approximately $89,027,000 of the aggregate
obligations guaranteed by Liberty International at December 31, 2002. To the
extent that the Company or other investors do not fully assume GloboPar's
funding obligations, any funding shortfall could lead to defaults under
applicable transponder agreements and equipment lease agreements. With respect
to the equipment lease agreements, default also includes bankruptcy, debt
default, or material adverse change in the business or financial condition of
any guarantor that materially adversely affects the ability of any such
guarantor to perform its obligations under the guarantee. In the event any such
defaults were to occur, the default provisions of the applicable agreements
would determine the ultimate amount to be paid by the Company. The Company
believes that the maximum amount of the Company's aggregate exposure under the
default provisions of the various agreements is not in excess of the
undiscounted remaining obligations guaranteed by the Company, as set forth
above. The Company cannot currently predict if, and to what extent, it will be
required to perform under any of such guarantees.

In connection with the LSAT LLC and Ascent Entertainment Transaction, the
Company assumed an intercompany income tax liability owed by Ascent
Entertainment to Liberty Media pursuant to a tax liability allocation and
indemnification agreement. At December 31, 2002, the amount owed by Ascent
Entertainment to Liberty Media pursuant to this agreement was $8,409,000. Such
amount, which is non-interest bearing, includes $36,568,000 that is due on
demand to Liberty Media, and $28,159,000 that is payable to the Company by
Liberty Media if, and to the extent, that tax benefits generated by Ascent
Entertainment are utilized to reduce Liberty Media's taxable income.

Effective September 29, 2000, LSAT LLC acquired a 1% managing common
interest in a joint venture ("IB2 LLC") from a subsidiary of Liberty
Digital, Inc. ("Liberty Digital") for $652,000. Liberty Digital, a consolidated
subsidiary of Liberty Media, retained a preferred interest (the "Preferred
Interest") in IB2 LLC, which owns approximately 360,000 shares of iBEAM
Broadcasting Corp. ("iBEAM") common stock ("iBEAM Stock"). The Preferred
Interest had an initial liquidation value of $64,574,000 and is entitled to a
return of 9%, compounded annually. As part of the transaction, LSAT LLC granted
Liberty Digital the right to put the Preferred Interest to LSAT LLC for a
purchase price equal to $26,000,000 (the value of iBEAM Stock on September 29,
2000) plus a 9% return, compounded annually (the "iBEAM Put Option"). LSAT LLC
has the right to call Liberty Digital's Preferred Interest at a price equal to
the initial liquidation value plus a return of 9%, compounded annually. Both the
iBEAM Put Option and call option are exercisable on September 29, 2008. Under
certain limited circumstances, including iBEAM's bankruptcy, LSAT LLC can force
Liberty Digital to exercise the iBEAM Put Option prior to September 29, 2008.
During the fourth quarter of 2001, iBEAM filed for bankruptcy under Chapter 11
of the Bankruptcy Code. As a result of such bankruptcy filing, the Company began
carrying the iBEAM Put Option liability at an amount ($31,052,000 at
December 31, 2002), which represents the iBEAM Put Option purchase price to LSAT
LLC plus an accrued return to Liberty Digital of 9%, compounded annually. The
Company anticipates that future losses with respect to the iBEAM Put Option will
be limited to Liberty Digital's 9% return on the iBEAM Put Option liability.

II-18

Information concerning the timing of the Company's required payments due
under various contractual obligations at December 31, 2002 is summarized below:

- ------------------------

(1) The Company expects to repay all amounts due under the PCS Loan Agreement in
April 2003 with proceeds received upon the sale of its Sprint PCS Stock and
the settlement of its Sprint PCS Stock equity collar.

(2) All amounts due under the note payable to Liberty Media were repaid in
March 2003.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("Statement 146"). In October 2002,
the FASB issued Statement of Financial Accounting Standards No. 147,
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, AN AMENDMENT OF FASB STATEMENT
NOS. 72 AND 144 AND FASB INTERPRETATION NO. 9 ("Statement No. 147"). In
December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE--AN
AMENDMENT OF FASB STATEMENT NO. 123 ("Statement No. 148"). The adoption of
Statement Nos. 146, 147 and 148 is not expected to have, a material impact on
the Company's financial condition, results of operations or cash flows.

In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS
NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34 ("FIN 45"). FIN
45 elaborates on the disclosures to be made by a guarantor in its financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions in FIN
45 are effective for all guarantees issued or modified after December 31, 2002.
The Company does not believe that the implementation of FIN 45 will have a
material impact on its financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51 ("FIN 46"). FIN
46 addresses consolidation of variable interest entities which have
characteristics described in the pronouncement. In general, if an entity is
considered a variable interest entity ("VIE"), the party that has the most
exposure to economic risks and potential rewards from the VIE is required to
consolidate the VIE. The consolidation requirements of FIN 46 apply to all VIE's
created after January 31, 2003. In addition, by July 1, 2003, the consolidation

II-19

requirements must be applied to all VIE's in existence prior to February 1,
2003. Based on the Company's preliminary analysis, the Company does not believe
that the implementation of FIN 46 will have a material impact on its financial
condition or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 2002, the Company had $422,547,000 of variable-rate
liabilities with a weighted-average interest rate of 3.25%. Accordingly, the
Company is exposed to interest rate risk. To date, the Company has not entered
into any derivative instruments to manage its interest rate exposure. Assuming
no increase or decrease in the amount outstanding, a hypothetical 100 basis
point increase (or decrease) in interest rates at December 31, 2002 would
increase (or decrease) the Company's annual interest expense and cash outflows
by approximately $4,225,000. In March 2003, the Company repaid $48,411,000 of
the outstanding principle amount of its variable-rate liabilities at
December 31, 2002, and the Company expects to repay an additional $112,503,000
in April 2003.

The Company is exposed to changes in stock prices primarily as a result of
its holdings in publicly traded securities. The Company uses equity collars and
a put spread collar to hedge market risk with respect to certain of its publicly
traded securities. At December 31, 2002, the aggregate fair market value of the
Company's publicly traded securities (excluding the fair value of related hedge
instruments) was $48,532,000 ($22,271,000 of which represents the fair value of
the Sprint PCS Stock). At December 31, 2002, the fair value of the Company's
equity collars was $306,052,000 ($280,559,000 of which represents the fair value
of the Sprint PCS Stock equity collar), and the fair value of the Company's put
spread collar was $20,004,000. At December 31, 2002, the fair market value of
the GM Hughes Stock that is the subject of the put spread collar was
$19,495,000. Among other things, the GM Hughes put spread collar (i) provides
the Company with the right to require a counterparty to purchase shares of GM
Hughes Stock for a weighted average price of $26.64 per share in October 2003;
and (ii) provides a counterparty with the right to require the Company to
repurchase shares of GM Hughes Stock for a weighted average price of $14.80 per
share in October 2003. At December 31, 2002, the per share market value of GM
Hughes Stock was $10.70. In addition, the Company owned $4,076,000 of publicly
traded securities at December 31, 2002 that were not hedged.

On Command's foreign operations are located primarily in Canada and Mexico.
In addition, the Sky Latin America entities operate satellite television systems
in Mexico, Brazil, Chile and Colombia. The Company has a 10% beneficial interest
in each of the Sky Latin America businesses. The Company believes the risks of
foreign exchange rate fluctuations on its present operations are not material to
the Company's overall financial condition. However, the Company will consider
using foreign currency contracts, swap arrangements, or other financial
instruments designed to limit exposure to foreign exchange rate fluctuations, if
deemed prudent.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements of the Company are filed under this item beginning
on page II-21.

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

None.

II-20

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Liberty Satellite & Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Liberty
Satellite & Technology, Inc. and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of operations, comprehensive loss,
stockholders' equity, 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 Liberty
Satellite & Technology, Inc. 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.

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
February 12, 2003, except as to notes 9 and
21 to the consolidated financial statements,
which are as of March 28, 2003

II-21

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2002 AND 2001

(continued)

II-22

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

CONSOLIDATED BALANCE SHEETS (CONTINUED)

DECEMBER 31, 2002 AND 2001

See accompanying notes to consolidated financial statements.

II-23

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

See accompanying notes to consolidated financial statements

II-24

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See accompanying notes to consolidated financial statements

II-25

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

II-26

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See accompanying notes to consolidated financial statements.

II-27

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See accompanying notes to consolidated financial statements.

II-28

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001 AND 2000

(1) BASIS OF PRESENTATION

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

At December 31, 2002, Liberty Media owned 85.6% of the Company's outstanding
common stock, and 100% of the Company's preferred stock, which ownership
interests collectively represented 97.6% of the overall voting power of the
Company's common and preferred securities. At December 31, 2002, LSAT, through
its ownership interest in Ascent Entertainment, owned approximately 70% of the
outstanding On Command common stock ("On Command Common Stock") and 100% of
certain series of On Commands' preferred stock, which ownership interests
collectively represented approximately 76% of the voting power associated with
On Command's common and preferred securities. Subsequent to December 31, 2002,
the Company's ownership interest in the outstanding On Command Common Stock
increased to approximately 74%, and the Company's overall voting power in On
Command increased to approximately 80%.

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

II-29

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

- ------------------------

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

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

CONTRIBUTION OF SPRINT PCS STOCK AND FORMATION OF LSAT LLC. On March 16,
2000, the Company completed two transactions with Liberty Media. Pursuant to the
terms of the first transaction, the Company acquired a beneficial interest in
5,084,745 shares of Sprint Corporation PCS Group common stock ("Sprint PCS
Stock") with an aggregate market value on the closing date of $300,000,000 in
exchange for 150,000 shares of LSAT Series A Preferred Stock with a liquidation
value of $150,000,000 and 150,000 shares of LSAT Series B Preferred Stock
("Series B Preferred Stock") with a liquidation value of $150,000,000. The
shares of Series B Preferred Stock have super voting rights, which gave Liberty
Media voting control over the Company. Accordingly, since March 16, 2000, the
Company has been a consolidated subsidiary of Liberty Media.

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

II-30

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

LIBERTY MEDIA'S ACQUISITION OF ASCENT ENTERTAINMENT. On March 28, 2000,
Liberty Media completed its cash tender offer for the outstanding common stock
of Ascent Entertainment at a price of $15.25 per share. Approximately, 85% of
the outstanding common shares of Ascent Entertainment were tendered in the
offer, and Liberty Media paid approximately $385,000,000. On June 8, 2000,
Liberty Media completed its acquisition of 100% of Ascent Entertainment for an
additional $67,000,000. The total purchase price for the acquisition was
$452,000,000. Liberty Media accounted for such transaction using the purchase
method of accounting. The following pro forma information for the year ended
December 31, 2000 was prepared assuming Liberty Media's acquisition of Ascent
Entertainment had occurred on January 1, 2000. These pro forma amounts are not
necessarily indicative of operating results that would have occurred if the
acquisition of Ascent Entertainment had occurred on January 1, 2000 (amounts in
thousands, except per share amount):

Revenue..................................................... $ 288,309
Net loss.................................................... $(152,597)
Pro forma basic and diluted loss per share.................. $ (4.39)

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
LSAT and all subsidiaries where it exercises a controlling financial interest
through the ownership of a majority voting interest. All significant
inter-company transactions have been eliminated.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents.

RECEIVABLES

Receivables are reflected net of an allowance for doubtful accounts of
$1,087,000 and $1,640,000 at December 31, 2002 and 2001, respectively. The
allowance is based on historical collection trends and management's judgment of
the collectibility of the Company's accounts receivable. These collection
trends, as well as prevailing and anticipated economic conditions, are routinely
monitored by management, and any adjustments required are reflected in current
operations.

II-31

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INVESTMENTS

All marketable equity securities held by the Company are classified as
available-for-sale and are carried at estimated fair value. Unrealized holding
gains and losses on securities classified as available-for-sale are carried net
of taxes as a component of accumulated other comprehensive earnings in
stockholders' equity. Realized gains and losses are determined on a
specific-identification basis. Other investments in which the ownership
interests are less than 20% and are not considered marketable securities are
carried at cost, subject to other-than-temporary impairment.

For those investments in affiliates in which the Company has the ability to
exercise significant influence, the equity method of accounting is used. Under
this method, the investment, originally recorded at cost, subject to
other-than-temporary impairment, is adjusted to recognize the Company's share of
net earnings or losses of the affiliates as they occur rather than as dividends
or other distributions are received, limited to the extent of the Company's
investment in, and advances and commitments to the investee. The Company's share
of net earnings or losses of affiliates includes the amortization of the
difference between the Company's investment and its share of the net assets of
the investee when such difference is attributable to amortizable assets.
Recognition of gains on sales of properties to affiliates accounted for under
the equity method is deferred in proportion to the Company's ownership interest
in such affiliates.

Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional securities by such subsidiary or equity investee, are recognized as
increases to or reductions of additional paid-in capital in the consolidated
statements of stockholders' equity.

The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other than temporary or
"nontemporary". The Company considers a number of factors in its determination
including (i) the financial condition, operating performance and near term
prospects of the investee; (ii) the reason for the decline in fair value, be it
general market, industry specific or investee specific conditions; (iii) the
length of time that the fair value of the investment is below the Company's
carrying value; (iv) changes in valuation subsequent to the balance sheet date
and (v) the Company's intent and ability to hold the investment for a period of
time sufficient to allow for a recovery in fair value. If the decline in
estimated fair value is deemed to be nontemporary, a new cost basis of the
security is established at the then estimated fair value. In situations where
the fair value of an asset is not evident due to a lack of public market price
or other factors, management uses its best estimates and assumptions to arrive
at the estimated fair value of such an asset. The Company's assessment of the
foregoing factors involves a high degree of judgment and includes significant
estimates and assumptions. Writedowns of cost investments are included in the
consolidated statements of operations as nontemporary declines in fair values of
investments. Writedowns of equity method investments are included in share of
losses of affiliates.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

LSAT accounts for its derivative instruments pursuant to Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES ("Statement 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
as a fair value hedge, the changes in the fair value of the

II-32

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in other
comprehensive earnings and are recognized in the consolidated statement of
operations when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized in earnings. If the
derivative is not designated as a hedge, changes in the fair value of the
derivative are recognized in earnings.

The Company has entered into equity collars and put spread collars with
respect to certain securities held by the Company. The Company uses these
derivatives to manage fair value risk associated with the related investments.
During 2001 and 2002, the Company's equity collars were designated as fair value
hedges. Effective December 31, 2002, the Company elected to no longer designate
its equity collars as fair value hedges. Such election had no effect on the
Company's financial position or results of operations on December 31, 2002.
Subsequent to December 31, 2002, changes in the fair value of the Company's
available-for-sale securities that previously had been reported in earnings due
to the designation of equity collars as fair value hedges will be reported as a
component of other comprehensive earnings on the Company's consolidated balance
sheet. Changes in the fair value of the equity collars will continue to be
reported in earnings.

The Company uses the Black-Scholes model to estimate the fair value of its
derivative instruments. The Black-Scholes model incorporates a number of
variables in determining such fair values, including expected volatility of the
underlying security and an appropriate discount rate. The Company obtains a
volatility rate from an independent source at the inception of the derivative
instrument based on the expected volatility of the underlying security over the
term of the derivative instrument. The volatility assumption is generally
evaluated annually to determine if it should be adjusted. The Company selects a
discount rate at the inception of the derivative instrument and updates such
rate each reporting period based on an estimate of the discount rate at which
the derivative instrument could be settled. Considerable management judgment is
required in estimating the Black-Scholes variables. Actual results upon
settlement or unwinding of derivative instruments may differ significantly from
these estimates.

Derivative instruments are generally not used for speculative purposes. The
derivative instruments may involve elements of credit and market risk in excess
of amounts recognized in the financial statements. The Company monitors its
positions and the credit quality of counter-parties, consisting primarily of
major financial institutions and does not expect nonperformance by any
counter-party.

For derivatives designated either as fair value or cash flow hedges, changes
in the time value of the derivatives are excluded from the assessment of hedge
effectiveness and are recognized in earnings. The Company currently does not
have any cash flow hedges. Hedge ineffectiveness, determined in accordance with
Statement 133, had no impact on earnings for the years ended December 31, 2002
and 2001.

II-33

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost less accumulated depreciation.
Video systems in service consist of equipment, related costs of assembling and
costs of installation at hotel locations. Depreciation is calculated on a
straight-line basis using the remaining terms of the applicable hotel contracts
for video systems, and the shorter of capital lease terms or estimated useful
lives for all remaining depreciable assets. The original terms of the Company's
hotel contracts generally range from five to seven years. Support equipment,
vehicles and leasehold improvements generally are depreciated using estimated
lives of five years. Repairs and maintenance costs that do not significantly
extend the life of the asset are charged to operations. Gains or losses are
recognized upon the retirement, impairment or disposal of assets.

INTANGIBLE ASSETS SUBJECT TO AMORTIZATION

The Company's intangible asset associated with hotel contracts represents
the amount assigned to On Command's contractual relationships with its hotel
customers, and such intangible asset represents the Company's only intangible
asset with a finite useful life. This intangible asset is being amortized over
three years, the estimated weighted average remaining life of such contractual
relationships at the March 28, 2000 date that Liberty Media acquired control of
Ascent Entertainment. Accordingly, the Company's hotel contracts intangible
asset will be fully amortized at March 31, 2003. Amortization of this intangible
asset aggregated $54,334,000, 54,333,000 and 40,750,000 during December 31,
2002, 2001 and 2000, respectively.

IMPAIRMENT 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, and
amortizable intangible assets 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.

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

II-34

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

necessary to estimate the fair values of assets and liabilities. Accordingly,
actual results could vary significantly from such estimates.

Under Statement No. 142, which the Company adopted January 1, 2002, the
Company no longer amortizes goodwill. Prior to the adoption of Statement 142,
goodwill was amortized over the expected periods to be benefited, generally
20 years. Adjusted net loss and pro forma loss per common share for 2001 and
2000, exclusive of amortization expense related to goodwill are as follows
(amounts in thousands, except per share amounts):

INTERNALLY DEVELOPED SOFTWARE

On Command capitalizes certain internally developed software costs in
accordance with AICPA Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. Internally developed
software that is integral to the On Command video systems is classified within
video systems in the accompanying consolidated balance sheet. All other
internally developed software is included in other assets. Amortization or
depreciation commences when the software is ready for its intended use. Software
is generally amortized or depreciated over five years. Capitalized costs
primarily include internal salaries and wages of individuals dedicated to the
development of internal use software. On Command capitalized software
development costs of $4,865,000, $4,218,000 and $4,088,000 during 2002, 2001 and
2000, respectively.

FOREIGN CURRENCY TRANSLATION

All balance sheet accounts of foreign subsidiaries whose functional currency
is not the United States ("U.S.") dollar are translated into U.S. dollars at the
current exchange rate as of the end of the accounting period. Results of
operations are translated at average currency exchange rates. The resulting
translation adjustment is recorded as a separate component of accumulated other
comprehensive earnings in stockholders' equity.

Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses,
which are reflected in the combined statements of operations as unrealized
(based on the applicable period end translation) or realized upon settlement of
the transactions. Such realized and unrealized gains and losses were not
material to the accompanying consolidated financial statements.

II-35

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The impact of exchange rate fluctuations on intercompany accounts between On
Command and its foreign subsidiaries is reported as a component of other
comprehensive income so long as the intercompany accounts are determined to be
of a long-term investment nature.

REVENUE RECOGNITION

The Company recognizes pay-per-view revenue at the time of viewing, net of
estimated denials. Revenue from other guest room services is recognized in the
period that services are delivered. Revenue from the sale of video systems is
recognized when the terms of the sales agreement are fixed, the equipment is
shipped, there are no future obligations, and collectibility is reasonably
assured.

STOCK BASED-COMPENSATION

The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, ("APB Opinion No. 25") and related interpretations, to
account for its fixed plan stock options. Under this method, compensation
expense for stock options or awards that are fixed is required to be recognized
over the vesting period only if the current market price of the underlying stock
exceeds the exercise price on the date of grant. Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
("Statement 123") established accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans. As allowed by Statement 123, the Company has elected to continue to apply
the intrinsic value-based method of accounting prescribed by APB Opinion
No. 25, and has adopted the disclosure requirement of Statement 123, as amended
by Statement of Financial Accounting Standards No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE--AN AMENDMENT OF FASB
STATEMENT NO. 123 ("Statement 148"). The following table illustrates the effects
on net loss and loss per share if the Company had applied the fair value
recognition provisions of Statement 123 to stock-based employee compensation.

The grant-date fair values underlying the foregoing calculations are based
on the Black-Scholes option-pricing model. With respect to options granted by
LSAT, the key assumptions used in the model for purposes of these calculations
include the following: (a) a discount rate equal to the one-year Treasury Bill
rate; (b) an 85% volatility rate; (c) the 10-year option term; (d) the closing
price of the Series A Common Stock on the date of grant; and (e) an expected
dividend rate of zero. With respect

II-36

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to options granted by On Command, the key assumptions used in the model include
the following: (a) a discount rate equal to the one-year Treasury Bill rate at
the date of grant; (b) volatility rates of 86.3% for 2002 grants, 71.8% for 2001
grants, 47.7% for 2000 grants, 45.9% for 1999 grants and 25% for all grants in
all prior periods; (c) expected option lives of 5 or 5.5 years; (d) the closing
price of the On Command Common Stock on the date of grant; and (e) an expected
dividend rate of zero.

INCOME TAXES

The Company accounts for its income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per share is measured as the earnings or loss
attributable to common stockholders divided by the weighted average outstanding
common shares for the period. Net earnings (loss) is reduced (increased) by
preferred stock dividends and accretion to arrive at earnings (loss)
attributable to common stockholders. Diluted earnings per share is similar to
basic earnings per share but presents the dilutive effect on a per share basis
of potential common shares (e.g., convertible securities, options, etc.) as if
they had been converted at the beginning of the periods presented, or at
original issuance date, if later. Potential dilutive common shares that have an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from diluted earnings per share.

The loss per common share for 2002, 2001 and 2000 is based on 43,337,100,
41,430,500 and 32,703,300 weighted average shares outstanding during the
respective periods. Potential common shares were not included in the computation
of diluted EPS because their inclusion would be anti-dilutive. At December 31,
2002 and 2001, the number of potential common shares was approximately 2,170,300
and 2,159,200, respectively. Such potential common shares consist of stock
options to acquire shares of the Company's Series A Common Stock and securities
that were convertible into 1,696,717 shares of the Company's Series B Common
Stock at each of December 31, 2002 and 2001. The foregoing potential common
share amounts do not take into account the assumed number of shares that would
be repurchased by the Company upon the exercise of stock options.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("Statement 146"). In October 2002,
the FASB issued Statement of Financial Accounting Standards No. 147,
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, AN AMENDMENT OF FASB STATEMENT
NOS. 72 AND 144 AND FASB INTERPRETATION NO. 9 ("Statement No. 147"). In
December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE--AN
AMENDMENT OF FASB STATEMENT NO. 123 ("Statement No. 148"). The adoption of
Statement Nos. 146, 147 and 148 is not expected to have, a material impact on
the Company's financial condition, results of operations or cash flows.

II-37

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS
NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34 ("FIN 45"). FIN
45 elaborates on the disclosures to be made by a guarantor in its financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions in FIN
45 are effective for all guarantees issued or modified after December 31, 2002.
The Company does not believe that the implementation of FIN 45 will have a
material impact on its financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51 ("FIN 46"). FIN
46 addresses consolidation of variable interest entities which have
characteristics described in the pronouncement. In general, if an entity is
considered a variable interest entity ("VIE"), the party that has the most
exposure to economic risks and potential rewards from the VIE is required to
consolidate the VIE. The consolidation requirements of FIN 46 apply to all VIE's
created after January 31, 2003. In addition, by July 1, 2003 the consolidation
requirements must be applied to all VIE's in existence prior to February 1,
2003. Based on the Company's preliminary analysis, the Company does not believe
that the implementation of FIN 46 will have a material impact on its financial
condition or results of operations.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities, as well as the reported amounts of revenue
and expenses. Significant estimates are involved in the determination of the
fair value of derivative instruments, the allowance for doubtful accounts
receivable, asset impairments and the estimated useful lives of video systems,
property and equipment and intangible assets, and the amounts in certain accrued
liabilities. Actual results may vary significantly from these estimates.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year presentation.

(3) SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS

Cash paid for interest was $14,616,000, $25,733,000 and $15,659,000 during
2002, 2001 and 2000, respectively. Cash paid for income taxes was $5,845,000 in
2001 and was not material during 2002 and 2000.

II-38

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Significant non-cash investing and financing activities are as follows:

2000
Acquisition of Ascent Entertainment:
Fair value of assets acquired........................... $(933,894)
Net liabilities assumed................................. 459,543
Minority interest in consolidated subsidiaries.......... 69,931
Issuance of Series B Common Stock....................... 453,737
---------
Cash acquired......................................... $ 49,317
=========
Cash received in transactions with Liberty Media:
Value of investments received........................... $(632,293)
Debt issued............................................. 60,000
Deferred tax liability assumed.......................... 114,628
Redeemable preferred stock issued....................... 185,372
Issuance of Series B Common Stock....................... 521,913
---------
$ 249,620
=========

For descriptions of certain other non-cash investing and financing
activities, see notes 6, 8 and 14.

(4) TRANSACTIONS WITH LIBERTY MEDIA AND OTHER RELATED PARTIES

TRANSACTIONS WITH LIBERTY MEDIA AND AFFILIATES

On March 16, 2000, the Company received a 13.99% ownership interest in LSAT
Astro in exchange for a $60,000,000 note payable to Liberty Media. Interest on
the note accrued at the 3 month LIBOR plus 2% (3.74% at December 31, 2002).
Interest payments were due semi-annually on the first day of March and
September. At December 31, 2002, the unpaid principal on the note was
$48,411,000 and the accrued interest on the note was $614,000.

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

II-39

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

In connection with the LSAT LLC and Ascent Entertainment Transaction, the
Company assumed an intercompany income tax liability owed by Ascent
Entertainment to Liberty Media pursuant to a tax liability allocation and
indemnification agreement with terms similar to the agreement described above.
At December 31, 2002, the amount owed by Ascent Entertainment to Liberty Media
pursuant to this agreement was $8,409,000. Such amount, which is non-interest
bearing, includes $36,568,000 that is due on demand to Liberty Media, and
$28,159,000 that is payable to the Company by Liberty Media if, and to the
extent, that tax benefits generated by Ascent Entertainment are utilized to
reduce Liberty Media's taxable income.

EXPENSE ALLOCATIONS AND REIMBURSEMENTS. Liberty Media allocates rent,
salaries, benefits and certain other general and administrative expenses to the
Company. Although there is no written agreement with Liberty Media for these
allocations, the Company believes the allocated amounts to be reasonable. The
aggregate allocations from Liberty Media were $303,000, $329,000 and $200,000
during 2002, 2001 and 2000, respectively. In addition, the Company reimburses
Liberty Media for certain expenses paid by Liberty Media on behalf of the
Company. Amounts owed to Liberty Media pursuant to these arrangements
($1,585,000 at December 31, 2002) are non-interest bearing and are generally
paid on a monthly basis.

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

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

ASCENT MEDIA SATELLITE SERVICES. Effective October 1, 2002, On Command
entered into a short-term agreement with Ascent Media pursuant to which Ascent
Media supplied On Command with uplink and satellite transport services at a cost
of $120,000 through December 31, 2002. On Command had been utilizing the
services to test the satellite delivery of content updates to On Command's
downlink sites at various hotels. On Command has completed its testing of
satellite delivery and the parties have

II-40

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

executed a Content Preparation and Distribution Services Agreement, dated
March 24, 2003, to be effective April 1, 2003, which will provide for uplink and
satellite transport services for a period of five years. The long-term agreement
also provides for Ascent Media to supply On Command with content preparation
services at a negotiated rate for a period of five years at On Command's
request. On Command is also negotiating an agreement with a wholly-owned
subsidiary of Ascent Media for the installation by such subsidiary of satellite
equipment at On Command's downlink sites at hotels for a set fee per
installation completed.

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

Due to the related party nature of the transaction, the fair value of the
iBEAM Put Option on the iBEAM Closing Date has been reflected as a reduction of
redeemable preferred stock in the accompanying consolidated financial
statements. Similarly, the cash paid for LSAT LLC's interest in IB2 LLC has been
reflected as a direct charge to additional paid-in capital.

During the fourth quarter of 2001, iBEAM filed for bankruptcy under Chapter
11 of the Bankruptcy Code. As a result of such bankruptcy filing, the Company
began carrying the iBEAM Put Option liability at an amount ($31,052,000 at
December 31, 2002) which represents the iBEAM Put Option purchase price to LSAT
LLC plus an accrued return to Liberty Digital of 9%, compounded annually. The
Company anticipates that future losses with respect to the iBEAM Put Option will
be limited to Liberty Digital's 9% return on the iBEAM Put Option liability.

Changes in the fair market value of the iBEAM Put Option subsequent to
September 29, 2000 have been recognized as unrealized gains (losses) on
financial instruments in the Company's consolidated statements of operations.
During 2002, 2001 and 2000, the Company recorded unrealized gains (losses) of
$2,564,000, $3,241,000 and ($19,423,000), respectively, related to the iBEAM Put
Option.

TRANSACTIONS WITH OTHER RELATED PARTIES

PHOENIXSTAR MANAGEMENT AGREEMENT. Effective February 1, 2000, the Company
entered into a management agreement with Phoenixstar, Inc. (formerly known as
PRIMESTAR, Inc.) ("Phoenixstar") pursuant to which the company is managing
Phoenixstar's affairs in exchange for a monthly management fee. Prior to 1999,
the Company beneficially owned 37% of Phoenixstar's outstanding shares. In
connection with certain other transactions that closed in 1999, the Company
agreed to forego any liquidating distribution or other payment that may be made
in respect of the outstanding shares of Phoenixstar upon any dissolution and
winding-up of Phoenixstar, or otherwise in respect of Phoenixstar's equity, and
to transfer its shares in Phoenixstar to the other Phoenixstar stockholders.

II-41

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Management fees from Phoenixstar aggregated $420,000, $420,000 and $445,000 in
2002, 2001 and 2000, respectively. In addition, the Company allocates certain
general and administrative expenses, such as office rent and computer support to
Phoenixstar. Under the current management agreement, expense allocations have
been limited to $5,000 per month since February 2001. Such allocations
aggregated $60,000, $54,000 and $169,000 during 2002, 2001 and 2000,
respectively, and are reflected as a reduction of general and administrative
expenses in the accompanying consolidated statements of operations.

(5) INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD

The following table reflects the carrying amounts of investments accounted
for using the equity method:

The following table reflects the Company's share of losses of affiliates
(including nontemporary declines in fair values of investments):

ASTROLINK

The Company owns an approximate 31.5% ownership interest in Astrolink.
Astrolink, a developmental stage entity, was originally established to build a
global telecom network using Ka-band geostationary satellites to provide
broadband data communications services. Astrolink's original business plan
required substantial financing. During the fourth quarter of 2001, certain of
the members of Astrolink informed Astrolink that they did not intend to provide
any of Astrolink's remaining required financing. In light of this decision,
Astrolink and the Astrolink members considered several alternatives with respect
to Astrolink's proposed business plan.

During the second quarter of 2002, LSAT signed a non-binding letter of
intent with the other Astrolink members in connection with the proposed
restructuring of Astrolink. In January 2003, the Company announced that it had
reached agreement with the other members of Astrolink in connection with such
proposed restructuring ("the Astrolink Restructuring"). Under the agreement (the
"Astrolink Restructuring Agreement"), the Company will acquire substantially all
of the assets of Astrolink. Astrolink simultaneously signed agreements with
Lockheed Martin Corporation and Northrop Grumman Space & Mission Systems Corp.
for completion of two satellites. The parties also reached

II-42

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

agreement on the settlement of all claims related to the previous termination of
Astrolink's major procurement contracts and all other major third party creditor
claims. The closing of the Company's acquisition of the Astrolink business is
subject to the Company obtaining satisfactory funding for the business from
additional investors, third party sources of financing, or firm capacity
commitments from prospective customers. The closing is also subject to
regulatory approvals and other closing conditions. Subject to the satisfaction
of these closing conditions, the closing is expected to occur on or before
October 31, 2003.

If the closing occurs, the Company will pay approximately $43 million in
cash and will issue approximately $3 million in value of Series A Common Stock
as total consideration for the Astrolink assets, including certain existing
satellite and launch contracts, and the settlement of all claims against
Astrolink. In addition, the Company will provide additional interim funding for
Astrolink pending closing. If the transactions are consummated, Liberty Media
will make a capital contribution to the Company in an amount equal to 10% of the
estimated fair value of Liberty Media's equity holdings in the Company at the
time of closing, up to a maximum commitment of $55 million, in exchange for
shares of the Company's Series B Common Stock.

The Company currently plans to pursue a revised operating plan for the new
Astrolink system, taking into account financial and market factors. The revised
operating plan currently contemplates launching one or two Ka-band satellites to
provide enterprise customers in up to two of North America, Europe or Asia with
virtual private networks and related advanced services, and to provide various
government agencies with a solution to their expanding needs for bandwidth.

In the event the Astrolink Restructuring is not consummated due to lack of
financing or other closing conditions, the Company anticipates that Astrolink
will be liquidated and the Company will receive $7.8 million as prescribed in
the Astrolink Restructuring Agreement.

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

Since LSAT Astro's investment in Astrolink was reduced to zero at
December 31, 2001, LSAT Astro's share of Astrolink's losses since December 31,
2001 has been limited to the amounts loaned to Astrolink by the Company during
the year ended December 31, 2002 ($1,447,000).

II-43

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Summarized unaudited financial information for Astrolink for the periods in
which Astrolink was owned by LSAT LLC is as follows:

AEROCAST

LSAT LLC owns an approximate 45.5% ownership interest in Aerocast. During
the fourth quarter of 2002, the Company recorded a $7,072,000 charge to reduce
the carrying value of LSAT LLC's investment in Aerocast to zero. Such charge is
included in the Company's share of Aerocast's losses for the year ended
December 31, 2002.

II-44

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Summarized unaudited financial information for Aerocast for the periods in
which Aerocast was owned by LSAT LLC is as follows:

(6) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS

Investments in available-for-sale securities and other cost investments are
summarized as follows:

- ------------------------

* Denotes an investment carried as an available-for-sale security.

II-45

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SKY LATIN AMERICA

Represents the aggregate book basis of a number of different satellite
television operators located in Mexico, Brazil, Chile and Colombia. LSAT LLC has
a 10% beneficial interest in each of the Sky Latin America businesses.

During 2002, the Company recorded aggregate losses of $105,250,000 to
reflect nontemporary declines in the value of LSAT LLC's investment in Sky Latin
America.

SPRINT PCS STOCK

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

GM HUGHES

The Company, through LSAT LLC, holds 1,821,921 shares of GM Hughes Stock and
accounts for such shares as available-for-sale. During 2002, the Company
recorded a $9,049,000 loss to recognize a nontemporary decline in the fair value
of its GM Hughes Stock.

Effective May 10, 2000, the Company sold 2.4 million shares of GM Hughes
Stock for net cash proceeds of $74,243,000 (after fees and commissions of
$717,000), and recognized a gain on sale of $36,643,000. The Company paid
$65,721,000 of such cash proceeds to Phoenixstar to satisfy a stock appreciation
right, and recognized a loss of $65,721,000.

XMSR

At December 31, 2002, LSAT LLC owned 1,000,000 shares of XMSR Class A common
stock, representing an ownership interest of less than 1%. The closing stock
price of XMSR Class A common stock on December 31, 2002 was $2.69 per share.

On June 27, 2001, LSAT LLC entered into an agreement to loan 1,000,000
shares of XMSR to a third party. The obligation to return those shares is
secured by cash collateral equal to 100% of the market value of that stock,
which was $2,690,000 at December 31, 2002. Such cash collateral is reported as
restricted cash in the accompanying consolidated balance sheet with the offset
being reflected as a liability. During the period of the loan, which is
terminable by either party at any time, the cash collateral is to be
marked-to-market daily. Interest accrues on the cash collateral for the benefit
of LSAT LLC at the rate of .15% per annum. As of December 31, 2002, 1,000,000
shares of XMSR had been lent under this agreement. The loan has no stated
maturity date.

OTHER

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

In December 2002, the Company announced that it has agreed to increase its
investment in Wildblue Communications, Inc. ("Wildblue"). Currently, the Company
has an approximate 16% ownership interest in Wildblue. Under the new agreement,
the Company will invest $58 million in return for senior preferred stock and
warrants of Wildblue. As also agreed, other existing and new investors will
invest $98 million in Wildblue for a total new investment of $156 million. Upon
closing of the transaction, of which no assurance can be given, the Company will
be the largest shareholder with an ownership interest of approximately 32% and a
voting interest of approximately 37%. The closing of

II-46

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the transaction is subject to certain conditions, and is expected to occur in
the second quarter of 2003. Assuming the Wildblue transaction is consummated as
described above, of which no assurance can be given, Wildblue currently expects
to launch its satellite in the fourth quarter of 2003 and begin providing
broadband data services in the second or third quarter of 2004.

In connection with the aforementioned additional investment in Wildblue, the
Company entered into a put agreement with KPCB Holdings, Inc. ("KPCB") another
investor in Wildblue. Pursuant to this put agreement and in the event the
parties make additional investments in Wildblue, KPCB will have the right to put
its interest in Wildblue to the Company and another investor in Wildblue for
$10,000,000, the amount KPCB has agreed to invest in Wildblue at the closing of
the Wildblue transaction. The Company and such other investor are each
responsible for $5,000,000 of the aggregate $10,000,000 put obligation. The put
may be exercised at any time within four years from the closing of the Wildblue
transaction.

During the first quarter of 2001, On Command completed a transaction that
resulted in On Command's acquisition of a 7.5% interest in e-ROOM and the
settlement of certain litigation. To acquire the 7.5% interest and settle the
litigation, On Command (i) contributed its Asia-Pacific subsidiaries to e-ROOM
and transferred On Command's intercompany receivables from such subsidiaries to
e-ROOM; (ii) issued 275,000 shares of Company Common Stock to e-ROOM; and
(iii) paid $1,000,000 to e-ROOM. Due to the existence of the repurchase
obligation, described below, On Command valued the equity issued to e-ROOM at
$15 per share. The excess of the value assigned to the consideration paid to
e-ROOM over the then estimated $5,298,000 fair value of the 7.5% interest in
e-ROOM received by On Command has been reflected as loss on settlement of
litigation in the accompanying consolidated statements of operations. On
Command's original estimate of the litigation loss resulted in a $4,764,000
charge during the fourth quarter of 2000. An additional charge of $3,700,000 was
recorded during the first quarter of 2001 to reflect a change in the estimate of
the amount of On Command's intercompany receivables to be transferred to e-ROOM.
During the fourth quarter of 2001, On Command recorded a $2,000,000 impairment
charge to reflect an other than temporary decline in the estimated fair value of
its investment in e-ROOM.

On Command also agreed that e-ROOM would have the option during the 15 day
period beginning on March 1, 2003 to cause On Command to repurchase all, but not
less than all, of the 275,000 shares of Company Common Stock issued to e-ROOM at
a price of $15 per share. During the fourth quarter of 2002, On Command
repurchased 119,500 of such shares for an aggregate price of $1,344,000 or
$11.25 per share. In connection with this transaction, the parties agreed to
postpone until March 1, 2004 the date on which On Command can be required to
repurchase 119,500 of the remaining shares subject to repurchase. On Command 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 On Command was postponed until
March 1, 2004. The repurchase price for such shares will remain at $15 per
share.

NONTEMPORARY DECLINES IN FAIR VALUES OF INVESTMENTS

During 2002, 2001 and 2000, the Company determined that certain investments
experienced other-than-temporary declines in value. As a result, the cost bases
of such investments were adjusted to

II-47

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

their respective estimated fair values. Such adjustments resulted in losses
aggregating $163,881,000, $96,438,000 and $9,860,000 in 2002, 2001 and 2000,
respectively, and are comprised of the following:

Investments in available-for-sale securities are summarized below. The
unrealized holding gains and losses are in addition to the unrealized gains and
losses recognized in the consolidated statements of operations.

(7) DERIVATIVE INSTRUMENTS

The Company's derivative instruments are comprised of the following:

II-48

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

LSAT LLC has entered into a put spread collar with a financial institution
with respect to the Company's shares of GM Hughes Stock. The collar
(i) provides LSAT LLC with a put option that gives it the right to require its
counterparty to buy 1,821,921 shares of GM Hughes Stock from LSAT LLC in three
tranches in October 2003 for a weighted average price of $26.64, and
(ii) provides the counterparty with a put option that gives it the right to
require LSAT LLC to repurchase the shares of GM Hughes Stock for a weighted
average price of $14.80. LSAT LLC simultaneously sold a call option giving the
counterparty the right to buy the same shares of stock from LSAT LLC in three
tranches in October 2003 for a weighted average price of $54.32 per share. The
put and call options for this collar were equally priced, resulting in no cash
receipts or payments.

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

Unrealized gains (losses) on financial instruments during 2002, 2001 and
2000 aggregated $2,393,000, $38,891,000 and ($14,426,000), respectively. The
details of such gains (losses) are as follows:

II-49

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) ACQUISITIONS AND DISPOSITIONS

In July 2002, On Command consummated the sale (the "OCE Sale") of its 70%
majority shareholdings in On Command Europe Limited ("OCE") to Techlive Limited
("Techlive"), the owner of the remaining 30% interest in OCE. Proceeds from the
sale, net of cash transferred, aggregated $1,135,000. As a result of the
consummation of the OCE Sale, On Command recorded a $5,103,000 impairment loss
during the second quarter of 2002 to reduce the carrying value of OCE's
long-lived assets to the fair value indicated by the OCE Sale. During the third
quarter of 2002, OCE's remaining net assets, including a $930,000 cumulative
foreign currency translation loss, were written-off against the net proceeds
received, resulting in no material impact to the Company's net loss for the
period.

Effective July 6, 2000, Ascent Entertainment sold its sports-related
businesses, which were comprised of the Denver Nuggets basketball team, the
Colorado Avalanche hockey team and Ascent Arena Company, the owner and operator
of the Pepsi Center, to an unrelated third party for cash consideration of
$267,661,000 and the assumption of $136,200,000 in non-recourse debt. In
connection with Liberty Media's acquisition of Ascent Entertainment on
March 28, 2000, net assets of the sport-related businesses were treated as
assets held for sale. Accordingly, the net assets of the sports-related
businesses were recorded at their estimated net realizable value, and no gain or
loss was recognized by Liberty Media in connection with the disposition of these
businesses. The operating results of the sports-related businesses from
March 28, 2000 through July 6, 2000, which were excluded from Liberty Media's
operating results and treated as an adjustment of the net realizable value of
the sports-related businesses, were not material.

(9) DEBT

Debt is summarized as follows:

- ------------------------

(a) At December 31, 2002, On Command's revolving credit facility, as amended in
2001, (the "On Command Revolving Credit Facility") provided for aggregate
borrowings of $275,000,000. Borrowings under the On Command Revolving Credit
Facility are due and payable in July 2004. On Command had $13,367,000 of
remaining availability under the On Command Revolving Credit Facility at
December 31, 2002. On Command's ability to draw additional funds under the
On Command Revolving Credit Facility is subject to On Command's continued
compliance with applicable financial covenants.

Revolving loans extended under the On Command Revolving Credit Facility bear
interest at the London Interbank Offering Rate ("LIBOR") plus a spread that
may range from 1.10% to 2.75%

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LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

depending on certain operating ratios of On Command (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 On Command Revolving Credit
Facility, depending on certain operating ratios of On Command. The On
Command Revolving Credit Facility contains customary covenants and
agreements, most notably the inclusion of restrictions on On Command's
ability to pay dividends or make other distributions, and restrictions on On
Command's ability to make capital expenditures. In addition, On Command is
required to maintain minimum leverage and interest coverage ratios. On
Command was in compliance with such covenants at December 31, 2002.
Substantially all of On Command's assets are pledged as collateral for
borrowings under the On Command Revolving Credit Facility.

At December 31, 2002, the maximum leverage ratio permitted under the On
Command Revolving Credit Facility was 4.25, and On Command's actual leverage
ratio was 3.99. The maximum leverage ratio permitted under the On Command
Revolving Credit Facility at March 31, 2003 is 3.50. Although On Command is
in compliance with the leverage ratio covenant at December 31, 2002, On
Command believes that it would not have been in compliance with such
covenant at March 31, 2003. In March 2003, On Command 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. On Command is also seeking to
restructure the On Command 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 On Command Revolving Credit
Facility will be contingent upon the contribution of $40,000,000 by Liberty
Media or one of its affiliates to On Command to be used to repay principle
due, and permanently reduce lender commitments, pursuant to the restructured
On Command Revolving Credit Facility. The terms of the proposed Liberty
Media contribution (including the securities or other consideration to be
received by Liberty Media or its affiliate in exchange for such
contribution) have not yet been agreed upon, and no assurance can be given
that Liberty Media or its affiliate will contribute $40,000,000 to On
Command, as contemplated by the terms of the proposed restructuring. In the
event On Command determines that it is unlikely that the proposed
restructuring of the On Command Revolving Credit Facility will close on or
before June 29, 2003, On Command anticipates that it would seek a further
postponement of the step-down of the leverage ratio covenant, and would
continue to seek to refinance or restructure the On Command Revolving Credit
Facility. In the event that a restructuring or refinancing is not completed
by the date that the leverage ratio is reduced to 3.50, On Command
anticipates that a default would occur under the terms of the On Command
Revolving Credit Facility. Upon the occurrence of a default, if left
uncured, the bank lenders would have various remedies, including terminating
their revolving loan commitment, declaring all outstanding loan amounts
including interest immediately due and payable, and exercising their rights
against their collateral which consists of substantially all of On Command's
assets. No assurance can be given that On Command will be able to
successfully restructure or refinance the On Command Revolving Credit
Facility on terms acceptable to On Command, or that On Command will be able
to avoid a default under the On Command Revolving Credit Facility. In light
of the foregoing circumstances, On Command's independent auditors have
included an explanatory paragraph in their audit report that addresses the
ability of On Command to continue as a going concern.

(b) LSAT LLC's revolving credit facility, as amended, provides for maximum
borrowings of $303,000,000 (the "PCS Loan Facility"). The PCS Loan Facility
is secured by LSAT LLC's interest in shares of Sprint PCS Stock and by the
Sprint PCS Stock equity collar. Interest accrues at the 30 day LIBOR (1.44%
at December 31, 2002) and is payable monthly.

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LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Ascent Entertainment's Senior Secured Discount Notes (the "Ascent
Entertainment Senior Notes"), which were scheduled to mature on December 15,
2004, were originally sold at a discount. The terms of the Ascent Entertainment
Senior Notes required no cash interest payments prior to December 15, 2002. On
November 30, 2001, Ascent gave notice that it had elected to redeem the Ascent
Entertainment Senior Notes effective December 31, 2001 at a price of 105.9375%
of the accreted value of the Ascent Entertainment Senior Notes. This price
represented $948.63 per $1,000 principal amount, or an aggregate of
approximately $213,000,000, including accrued interest. Ascent Entertainment
recognized a loss of $14,322,000 in connection with such redemption.

The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for the same remaining maturities. Due to its variable rate nature,
the fair value of the Company's debt approximated its carrying value at
December 31, 2002.

Annual maturities of the Company's debt for each of the next five years are
as follows (amounts in thousands):

(10) MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES

ON COMMAND

GENERAL

During the first quarter of 2002, the cumulative losses allocated by Ascent
Entertainment to the On Command minority interests reduced to zero Ascent
Entertainment's carrying amount for the minority interests in On Command's
equity. Since the On Command minority interest holders have no obligation to
make further contributions to On Command, 100% of On Command's losses for
periods subsequent to March 31, 2002 have been, and will be in future periods,
allocated to Ascent Entertainment unless and to the extent that the On Command
minority interest holders make additional investments in On Command's equity.

ON COMMAND WARRANTS

At December 31, 2002, warrants ("On Command Warrants") issued by On Command
to purchase 7,494,854 shares of On Command Common Stock at a purchase price of
$15.27 per share were outstanding. The outstanding On Command Warrants, which
include 1,424,875 Series A Warrants, 2,619,979 Series B Warrants and 3,450,000
Series C Warrants, expire on October 7, 2003. The Series A Warrants provide only
for a cashless exercise that allows the holder to use the excess of the fair
market value of On Command Common Stock over the $15.27 exercise price as a
currency to acquire shares of On Command Common Stock. The exercise price for
the Series B and Series C Warrants is to be paid with cash. At December 31,
2002, Ascent Entertainment held 1,123,792 Series A Warrants and 40

II-52

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Series B Warrants. The On Command Warrants are included in minority interests in
equity of consolidated subsidiaries in the accompanying consolidated balance
sheets.

ON COMMAND SERIES A PREFERRED STOCK

On August 8, 2000, On Command issued 13,500 shares of Series A, $.01 par
value Convertible Participating Preferred Stock ("On Command Series A Preferred
Stock"), to the former Chairman and Chief Executive Officer of On Command in
exchange for a $21,080,000 promissory note and a $13,500 cash payment. The On
Command Series A Preferred Stock is initially convertible into an aggregate of
1,350,000 shares of On Command Common Stock. The price of the On Command
Series A Preferred Stock was $1,562.50 per share. The On Command Series A
Preferred Stock participates in any dividends paid to the holders of On Command
Common Stock but otherwise is not entitled to receive any dividends. The On
Command Series A Preferred Stock has a liquidation preference of $.01 per share,
and will also participate with the On Command Common Stock in any liquidating
distributions on an as-converted basis. The holder of the Series A Preferred
Stock votes with the holders of the On Command Common Stock as a single class
and is entitled to one vote per share. The promissory note is secured by the On
Command Series A Preferred Stock or proceeds thereon and the former Chairman and
Chief Executive Officer's personal obligations under such promissory note are
limited to 25% of the principal amount of the note, plus accrued interest
thereon. The note may not be prepaid and interest on the note accrues at a rate
of 7% per annum, compounded quarterly. The right to transfer the Series A
Preferred Stock is restricted. The On Command Series A Preferred Stock is
included in minority interests in equity of consolidated subsidiaries in the
accompanying consolidated balance sheets.

(11) REDEEMABLE PREFERRED STOCK

On March 16, 2000, the Company issued 150,000 shares of Series A Cumulative
Preferred Stock ("Series A Preferred Stock") and 150,000 shares of Series B
Preferred Stock to Liberty Media in exchange for shares of Sprint PCS Stock.

SERIES A CUMULATIVE PREFERRED STOCK

The Series A Preferred Stock accrues dividends at 12% per annum at all times
prior to April 1, 2005, 11% on and after April 1, 2005 and prior to April 1,
2010, and 10% on and after April 1, 2010. Such dividends are payable the last
day of each March, June, September and December. Prior to April 1, 2003,
dividends may be paid, at the option of the Company, in cash, shares of
Series A Common Stock of the Company, or a combination of both. Subsequent to
March 31, 2003, dividends are payable in cash. Dividends not paid are added to
the liquidation preference on such date and remain a part of the liquidation
preference until such dividends are paid. In the event of a default, the
dividend rate will be equal to the dividend rate then in effect plus 2%. Subject
to certain specified exceptions, the Company is prohibited from paying dividends
on any shares, parity securities or junior securities during any period in which
the Company is in arrears with respect to payment of dividends on Series A
Preferred Stock.

The holder of Series A Preferred Stock is not entitled to vote on any
matters submitted to a vote of the shareholders of the Company, except as
required by law and other limited exceptions.

The liquidation preference of each share of the Series A Preferred Stock is
equal to the stated value per share of $1,000 plus all accrued and unpaid
dividends.

II-53

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Series A Preferred Stock is redeemable at the option of the Company, in
whole or from time to time in part, on any business day after April 1, 2020 at a
redemption price per share equal to the liquidation preference of such share on
the applicable redemption date. If less than all outstanding shares are to be
redeemed, shares will be redeemed ratably from the holders. On or after
April 1, 2020, the Series A Preferred Stock is redeemable at the option of the
holder for cash.

SERIES B CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK

The Series B Preferred Stock accrues dividends at the rate of 8% per annum.
Such dividends are payable the last day of each March, June, September and
December. Prior to April 1, 2003, dividends may be paid, at the option of the
Company, in cash, shares of Series A Common Stock of the Company, or a
combination of both. Subsequent to March 31, 2003, dividends are payable in
cash. Dividends not paid are added to the liquidation preference on such date
and remain a part of the liquidation preference until such dividends are paid.
In the event of a default, the dividend rate will be 10% per annum. Subject to
certain specified exceptions, the Company is prohibited from paying dividends on
any shares, parity securities or junior securities during any period in which
the Company is in arrears with respect to payment of dividends on Series B
Preferred Stock.

In addition to voting rights required by law, each share of Series B
Preferred Stock will be entitled to vote together with holders of the Series A
and Series B Common Stock as a single class upon all matters upon which holders
of Series A and Series B Common Stock are entitled to vote. In any such vote,
the holders of Series B Preferred Stock will be entitled to 558 votes per share
held. The Series B Preferred Stock is redeemable at the option of the Company
after April 1, 2005. At any date on or after April 1, 2020, the Series B
Preferred Stock is redeemable at the option of the holder for cash.

The liquidation preference of each share of the Series B Preferred Stock as
of any date of determination is equal to the stated value per share of $1,000
plus all accrued and unpaid dividends.

Each share of the Series B Preferred Stock is initially convertible into
11.31145 shares of Series B Common Stock. Such conversion rate was calculated as
the liquidation value of such shares divided by $88.406 and is adjustable based
on the adjusted liquidation value at the date of conversion.

Accrued dividends on the Series A Preferred Stock and Series B Preferred
Stock aggregated $7,500,000 at December 31, 2002.

Both the Series A and Series B Preferred Stock were issued at a discount
from the stated values of such shares. Therefore, the Company is accreting both
the Series A Preferred Stock and the Series B Preferred Stock up to the
respective redemption values over the period from the issuance date to the
redemption date using the effective interest method. Accretion on the Series A
and Series B Preferred Stock aggregated $6,120,000, $6,120,000 and $4,634,000
during 2002, 2001 and 2000 respectively. Such accretion has been accounted for
as a direct charge to additional paid-in capital and has been included in the
calculation of loss attributable to common shareholders.

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LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) STOCKHOLDERS' EQUITY

PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares of preferred stock. The
preferred stock may be issued from time to time as determined by the Company's
Board of Directors (the "LSAT Board"), without stockholder approval. Such
preferred stock may be issued in such series and with such designations,
preferences, conversion or other rights voting powers, qualifications,
limitations, or restrictions as shall be stated or expressed in a resolution or
resolutions providing for the issue of such series adopted by the LSAT Board.

COMMON STOCK

The Series A Common Stock has one vote per share and the Series B Common
Stock has ten votes per share. Each share of Series B Common Stock is
convertible, at the option of the holder, into one share of Series A Common
Stock.

On December 4, 1996, (the "Spin-off Date"), Tele-Communications, Inc.
("TCI") (now a part of Comcast Corporation) distributed (the "Spin-off"), as a
dividend, all of the issued and outstanding LSAT common stock to the holders of
TCI's then outstanding TCI Group tracking stock. In connection with the
Spin-off, TCI and the Company entered into a "Share Purchase Agreement" to sell
to each other from time to time, at the then current market price, shares of
Series A TCI Group common stock and Series A Common Stock, respectively, as
necessary to satisfy their respective obligations after the Spin-off Date under
certain stock options and SARs held by their respective employees and
non-employee directors. At December 31, 2002, shares of Series A Common Stock
were reserved for issuance pursuant to options to purchase approximately 92,725
shares of Series A Common Stock that were held by current and former employees
of TCI pursuant to the Share Purchase Agreement. Such options, which have
expiration dates ranging from 2003 to 2005, include 10,579 options with an
exercise price of $8.40 per share, and 82,146 options with exercise prices
ranging from $174.70 to $237.60 per share.

In August 2002, the LSAT Board of Directors authorized the Company's
purchase of up to 3,000,000 of Series A and Series B Common Stock in open market
purchases. The timing of purchases, prices paid and actual number of shares of
common stock purchased will depend on market conditions and the direction of
management. During 2002, LSAT purchased 24,900 shares of Series A Common Stock
for aggregate cash consideration of $53,000 pursuant to this share buy back
program.

At December 31, 2002, a total of 380,820 shares of Series A Common Stock
were reserved for issuance pursuant to outstanding stock options and restricted
stock awards. In addition, 1,696,717 shares of Series B Common Stock are
reserved for issuance upon conversion of the Series B Preferred Stock, and one
share of Series A Common Stock is reserved for each outstanding share of
Series B Common Stock.

(13) STOCK COMPENSATION

LSAT STOCK OPTIONS

The Liberty Satellite & Technology 1996 Stock Incentive Plan (the "LSAT 1996
Plan"), as amended, provides for awards to be made in respect of a maximum of
520,000 shares of Series A Common Stock (subject to certain anti-dilution
adjustments). Awards may be made as grants of stock

II-55

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

options, stock appreciation rights ("SARs"), restricted shares, stock units,
performance awards or any combination thereof (collectively, "Awards"). Awards
may be made to employees and to consultants and advisors to the Company who are
not employees. Shares of Series A Common Stock that are subject to Awards that
expire, terminate or are annulled for any reason without having been exercised
(or deemed exercised, by virtue of the exercise of a related SAR), or are
forfeited prior to becoming vested, will return to the pool of such shares
available for grant under the LSAT 1996 Plan.

Options granted to certain key employees and officers of LSAT pursuant to
the LSAT 1996 Plan generally vest over a 5-year period beginning on the date of
the grant, first becomes exercisable as to 25% on the second anniversary of the
date of grant and become exercisable as to an additional 25% on each of the
third, fourth and fifth anniversaries of the date of grant. Such options expire
10 years from the date of grant.

In June 1996, the Board of Directors of TCI (the "TCI Board") authorized TCI
to permit certain of its executive officers to acquire equity interests in
certain of TCI's subsidiaries. In connection therewith, the TCI Board approved
the acquisition by each of two then executive officers of TCI who were not
employees of the Company (the "TCI Officers"), of 1.0% of the net equity of the
Company. The TCI Board also approved the acquisition by an individual who was
then the chief executive officer and a director of the Company (the "Company
Officer"), of 1.0% of the net equity of the Company and the acquisition by a
then executive officer of certain TCI subsidiaries who was also then a director,
but not an employee, of the Company (the "TCI Subsidiary Officer"), of 0.5% of
the net equity of the Company. The TCI Board determined to structure such
transactions as grants by the Company to such persons of options to purchase
shares of Series A Common Stock representing 1.0% (in the case of each of the
TCI Officers and the Company Officer) and 0.5% (in the case of the TCI
Subsidiary Officer) of the shares of Series A Common Stock and Series B Common
Stock issued and outstanding on the Spin-off Date, determined immediately after
giving effect to the Spin-off, but before giving effect to any exercise of such
options (the "Spin-off Date Options").

Spin-off Date Options to purchase 232,427 shares of Series A Common Stock at
a per share price of $88.60 were granted on the Spin-off Date. In
February 1999, 66,408 of the Spin-off Date Options were cancelled. The remaining
Spin-off Date Options are fully vested at December 31, 2002 and expire
February 1, 2006.

Pursuant to the terms of the Spin-off, and (in the case of the TCI Officers
and the TCI Subsidiary Officer) in partial consideration for the capital
contribution made by TCI to the Company in connection with the Spin-off, the
Company agreed, effective as of the Spin-off Date, to bear all obligations under
such options and to enter into stock option agreements with respect to such
options with each of the TCI Officers, the Company Officer and the TCI
Subsidiary Officer.

The TCI Satellite Entertainment, Inc. 1997 Nonemployee Director Stock Option
Plan (the "LSAT DSOP") provides for the grant to each person that is a member of
the LSAT Board and is not an employee of the Company, its subsidiaries or its
affiliates, of options to purchase 5,000 shares of Series A Common Stock.
Options issued pursuant to the LSAT DSOP vest and become exercisable over a
three-year period from the date of grant and expire 10 years from the date of
grant.

II-56

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table presents the number, weighted-average exercise price and
weighted-average grant-date fair value of the Spin-off Date Options and options
to buy Series A Common Stock granted pursuant to the LSAT 1996 Plan and the LSAT
DSOP.

The outstanding options at December 31, 2002, which had a weighted-average
remaining contractual life of approximately five years, included 15,000 options
with an exercise price of $26.00 per share and 344,070 options with exercise
prices ranging from $71.25 to $119.38 per share.

The respective estimated grant-date fair values of the options noted above
are based on the Black-Scholes model and are stated in current annualized
dollars on a present value basis. The key assumptions used in the model for
purposes of these calculations include the following: (a) a discount rate equal
to the one-year Treasury Bill rate; (b) an 85% volatility rate; (c) the 10-year
option term; (d) the closing price of the Series A Common Stock on the date of
grant; and (e) an expected dividend rate of zero.

ON COMMAND STOCK OPTIONS

On Command adopted the 1996 Key Employee Stock Option Plan (the "On Command
1996 Plan") under which employees may be granted incentive or non-statutory
stock options for the purchase of On Command Common Stock. In addition,
restricted stock purchases, performance awards, stock payment or appreciation
rights or deferred stock may be granted under the On Command 1996 Plan. A total
of 3,000,000 shares were initially reserved for the On Command 1996 Plan. The On
Command 1996 Plan expires in 2006. In June 2000, the Board of Directors approved
an amendment to the On Command 1996 Plan to increase the number of shares
reserved under the On Command 1996 Plan to 5,250,000.

II-57

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The exercise price of options granted is set by On Command's Board of
Directors. Incentive stock options are granted at no less than fair market value
on the date of grant. Options generally expire in ten years, vest over a
five-year period and are exercisable in installments of 20% one year from the
date of grant and 20% annually thereafter. Unvested options generally are
cancelled upon termination of employment.

1997 NON-EMPLOYEE DIRECTORS STOCK PLAN

The On Command 1997 Non-Employee Directors Stock Plan, as amended, (the "On
Command Directors Plan") authorized the granting of an annual award of 400
shares of On Command Common Stock and, pursuant to an amendment adopted in 1999,
a one-time non-qualified option to purchase 50,000 shares of On Command Common
Stock (an "On Command Independent Director Option") to each On Command
independent director. The aggregate number of shares of On Command Common Stock
which may be issued upon exercise of On Command Independent Directors Options
granted under the On Command Directors Plan plus the number of shares which may
be awarded pursuant to the On Command Directors Plan will not exceed 696,800,
subject to adjustment to reflect events such as stock dividends, stock splits,
recapitalizations, mergers or reorganizations of or by On Command. Effective
December 2002, On Command's Board of Directors adopted a new compensation plan
for independent directors that eliminates the equity component set forth in the
On Command Directors Plan. Subject to the terms and conditions of the plan, the
stock options were granted at no less than fair market value on the date of
grant. The options generally expire in ten years, vest over a three-year period
and are exercisable in installments of 25% after the first and second years, and
the remaining 50% after the third year. During 2002, no options were granted
pursuant to the Directors Plan. In 2001 and 2000, options granted pursuant to
the On Command Directors Plan aggregated 50,000 and 200,000, respectively.

II-58

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following is a summary of activity under the On Command 1996 Plan and
the On Command Directors Plan:

The following table summarizes information about On Command's fixed stock
options outstanding at December 31, 2002:

The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its stock options, and accordingly, compensation expense has been recognized
for its stock options in the accompanying financial statements using the
intrinsic value method. The adjustment to stock compensation of $3,115,000 in
2000 resulted from a decrease in LSAT's liability for SARs.

II-59

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OTHER

Effective February 1, 2001, certain key employees of the Company were
granted, pursuant to the LSAT 1996 Plan, an aggregate of 21,750 restricted
shares of Series A Common Stock. Such shares vest 25% on February 1, 2003, and
vest an additional 25% on each of February 1, 2004, 2005 and 2006. Compensation
expense with respect to the restricted shares aggregated $292,000 and $268,000
during 2002 and 2001, respectively.

(14) TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS

LSAT

In September 2000, an executive officer, who was the Company's Chief
Executive Officer and President until his resignation on October 8, 2001,
purchased a 1.83% common stock interest in a subsidiary of Liberty Media for
$400,000. Such subsidiary owned an indirect interest in LSAT LLC. Liberty Media
and the executive officer entered into a shareholders agreement in which the
executive officer could require Liberty Media to purchase, after five years, all
or part of his common stock interest in the subsidiary, in exchange for Liberty
Media common stock, at its then fair value. In addition, Liberty Media had the
right to purchase, in exchange for Liberty Media common stock, the executive
officer's common stock interest for fair market value at any time. On
October 10, 2001, Liberty Media purchased the executive officer's 1.83% common
stock interest in the subsidiary for $425,000.

During 2000, a then director of the Company exercised stock options to buy
5,000 shares of Series A Common Stock of the Company. Such options had an
exercise price of $65.00 per share, and the market price of Series A Common
Stock at the time of such exercise was $110.00. Simultaneously with such
exercise, the Company purchased from the director 2,954 shares of Series A
Common Stock for an aggregate purchase price of $325,000, which represented the
director's aggregate exercise price. Such shares are reflected as treasury
shares in the Company's consolidated statement of stockholders' equity.

During 2000, two executive officers of the Company, received loans in the
principal amounts of $136,000 and $135,000, respectively, to be used solely for
the purpose of satisfying tax liabilities related to the lapse of restrictions
on shares of common stock awarded under the LSAT 1996 Plan. Through
December 31, 2001, the loans accrued interest at an annual rate of 6.41%. In
addition, each of the loans originally provided for principal and interest to be
payable upon the occurrence of certain events and in no event later than
December 1, 2001. During the first quarter of 2002, the Company agreed to extend
the maturity dates of the loans to December 31, 2003, and lower the annual
interest rates of the loans to 4% per annum. Consistent with the terms of the
original loans, interest payments may be deferred by the borrowers until
maturity. Each loan is secured in each case by 2,500 shares of the Company's
Series A Common Stock and are otherwise nonrecourse to the borrowers. As of
December 31, 2002, the balances outstanding on the loans including accrued
interest, were $155,000 and $154,000 respectively, and such balances were
reflected as reductions of stockholders' equity in the accompanying consolidated
balance sheets. Effective April 27, 2001, one of the executive officers became
the President of On Command. Since that date, On Command has been responsible
for 100% of such executive's compensation.

II-60

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ASCENT ENTERTAINMENT

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

ON COMMAND

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

On Command had made arrangements for the use of an airplane owned by a
limited liability company of which On Command's former Chairman of the Board and
Chief Executive Officer is the sole member. When that airplane was used for
purposes related to the conduct of On Command's business, On Command reimbursed
the limited liability company for such use at market rates. The aggregate amount
paid for this service in 2001 was approximately $190,000. This arrangement was
terminated in June 2001.

On August 3, 1998, On Command loaned a Senior Vice President of On Command
$175,000 in connection with such Senior Vice President's relocation. Interest on
the loan accrued at an annual interest rate of 6.34%. Interest accrued annually
but was not payable by the Senior Vice President until the last payment was made
on the loan in accordance with the terms of the loan agreement. All principal
amounts due under the loan were to be paid in three equal payments on
December 31, 2002, 2003 and 2004. As of December 31, 2002, the outstanding
balance on the loan to the Senior Vice President including accrued interest, was
approximately $206,000. On February 5, 2003, all amounts outstanding under this
loan were repaid in full.

II-61

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(15) INCOME TAXES

LSAT and its 80%-or-more owned subsidiaries have been included in Liberty
Media's consolidated tax return since April 1, 2002. As of December 31, 2002, On
Command was a separate taxpayer and was not included in Liberty Media's
consolidated tax return. In connection with the LSAT LLC and Ascent
Entertainment Transaction, the Company and Liberty Media entered into a Tax
Liability Allocation and Indemnification Agreement, and the Company assumed an
intercompany income tax liability owed by Ascent Entertainment to Liberty Media.
See note 4.

Income tax benefit (expense) for 2002, 2001 and 2000 consists of:

Income tax benefit (expense) differs from the amounts computed by applying
the federal income tax rate of 35% as a result of the following:

II-62

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2002 and 2001 are presented below:

The valuation allowance for deferred tax assets as of December 31, 2002 and
2001 was $414,179,000 and $346,791,000, respectively. Such balances increased
$67,388,000 and $189,714,000 from December 31, 2001 and 2000, respectively.

The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits attributable to
deductible temporary differences will be realized to the extent of future
reversals of existing taxable temporary differences.

At December 31, 2002, the Company had capital and net operating loss carry
forwards for income tax purposes aggregating approximately $544,201,000 which,
if not utilized to reduce taxable income in future periods, expire as follows
(amounts in thousands):

Current federal and state tax laws include substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Accordingly, the Company's ability to
utilize net operating loss and tax credit carryforwards may be limited as a
result of such restrictions. Such a limitation could result in the expiration of
carryforwards before they are utilized.

II-63

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company and TCI entered into a tax sharing agreement (the "TCI Tax
Sharing Agreement") dated June 1997, to confirm that (i) neither the Company nor
any of its subsidiaries has any obligation to indemnify TCI or the TCI
shareholders for any tax resulting from the Spin-off failing to qualify as a
tax-free distribution pursuant to Section 355 of the Internal Revenue Code of
1986 (the "Code"); (ii) TCI is obligated to indemnify the Company and its
subsidiaries for any taxes resulting from the Spin-off failing to qualify as a
tax-free distribution pursuant to Section 355 of the Code; (iii) to the best
knowledge of TCI, the Company's total payment obligation under the TCI Tax
Sharing Agreement could not reasonably be expected to exceed $5,000,000.

(16) EMPLOYEE BENEFIT PLANS

On Command is the sponsor of the On Command 401(k) Saving Plan, which
provides employees an opportunity to create a retirement fund by contributing up
to 15% of their eligible earnings in several different mutual funds. On Command,
by annual resolution of On Command's Board of Directors, generally contributes
up to 50% of the amount contributed by employees up to a maximum matching
contribution of 4% of the participating employee's wages. Matching contributions
made by On Command were approximately $798,000, $971,000 and $1,068,000 for
2002, 2001 and 2000, respectively.

In August 1997, On Command adopted the Employee Stock Purchase Plan (the "On
Command ESP Plan") which is intended to qualify under Section 423 of the
Internal Revenue Code. Under the terms of the On Command ESP Plan, On Command
employees can purchase On Command Common Stock at a 10% discount from the market
value on the purchase date. As of December 31, 2002, all shares authorized for
issuance pursuant to the On Command ESP Plan had been purchased by On Command
employees.

(17) CONCENTRATION OF RISK

The Company invests its cash in high-credit quality institutions. These
instruments are short-term in nature and, therefore, bear minimal credit risk.

On Command generates the majority of its revenue from the guest usage of
proprietary video systems in various hotels located primarily throughout the
United States, Canada and Mexico. On Command performs periodic credit
evaluations of its installed hotel locations and generally requires no
collateral while maintaining allowances for potential credit losses.

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 On Command's total net room revenue.
Accordingly, hotels owned, managed or franchised by On Command's five largest
hotel chain customers accounted for 72% of On Command'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 On Command. In
addition, On Command does not have master contracts with either Starwood or Six
Continents, and the Hyatt master contract provides for the simultaneous
expiration of On Command's contractual relationships with all of the individual
hotels

II-64

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

that are subject to the Hyatt master contract as of December 31, 2004. At
December 31, 2002, On Command 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 On Command'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 On Command upon the expiration of such hotels'
contracts with On Command. On Command 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, On Command 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 On Command 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, On Command expects that,
regardless of the expiration dates of master contracts or individual contracts
with hotels, On Command 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, On Command 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.

In October 2000, Hilton announced that it would not be renewing its master
contract with On Command. As a result, hotels owned, managed or franchised by
Hilton are currently subject to a master contract between Hilton and a
competitor of On Command. Accordingly, On Command 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 On Command, and, although no assurance can be given, On
Command anticipates that certain of those hotels will choose to renew. At
December 31, 2002, On Command 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, On Command'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. On Command'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, On Command 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, On Command anticipates that the revenue it derives
from hotels that are owned, managed or franchised by Hilton will decrease.
However, due to the uncertainties involved, On Command is currently unable to
predict the amount and timing of the revenue decreases.

During 2001, Marriott, Hilton and Six Continents accounted for 27%, 19% and
12%, respectively of On Command's net room revenue. During 2000, Marriott,
Hilton and Six Continents accounted for 24%, 20% and 11%, respectively of On
Command's net room revenue.

II-65

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(18) COMMITMENTS AND CONTINGENCIES

COMMITMENTS

The Company leases office space and certain equipment pursuant to
noncancelable operating leases. Rental expense under such agreements amounted to
$3,737,000, $4,914,000 and $3,967,000 for 2002, 2001 and 2000, respectively.

Future minimum annual payments under non-cancelable operating leases at
December 31, 2002 are as follows (amounts in thousands):

The foregoing future minimum payment amounts include $1,590,000 of future
payments provided for in certain On Command restructuring accruals. Such
reserves are included in other accrued liabilities and other long term
liabilities in the accompanying consolidated balance sheets.

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

In certain cases, On Command has entered into master contracts whereby On
Command has agreed to purchase televisions and/or provide other forms of capital
assistance and, to a lesser extent, provide television maintenance services to
hotels during the respective terms of the applicable contracts.

In connection with the first quarter 2001 acquisition of Hotel Digital
Network, Inc. ("HDN"), On Command 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 On Command to exchange shares of
On Command 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 On Command 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 On Command Common Stock. The number of shares of On Command Common
Stock to be issued in any such exchanges will be determined based on the then
market value of On Command Common Stock and the then fair value of HDN common
stock, each as determined in accordance with the HDN Stockholders' Agreement. At
December 31, 2002, On Command held 85.9%, and the HDN Stockholder held 13.3% of
the outstanding HDN common stock. Based on On Command's current assessment of
values, On Command does not expect that the settlement of this obligation will
have a material impact on its capitalization, financial condition or results of
operations.

II-66

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CONTINGENCIES

Liberty Media International, Inc. ("Liberty International"), a subsidiary of
Liberty Media, and other investors in the Sky Latin America businesses have
severally guaranteed obligations due under certain transponder agreements and
equipment lease agreements through 2018. The Company has indemnified Liberty
International with respect to Liberty International's obligations under these
guarantees. At December 31, 2002, the portions of the remaining undiscounted
obligations due under such transponder agreements and equipment lease agreements
that were severally guaranteed by Liberty International aggregated approximately
$107,906,000 and $7,000,000, respectively. During the fourth quarter of 2002,
Globo Comunicacoes e Participacoes ("GloboPar"), an investor in three of the Sky
Latin America entities, announced that it was reevaluating its capital
structure. Since that time, GloboPar has not provided any funding to the three
Sky Latin America entities in which it is an investor. In the case of one such
entity, Sky Multi-Country Partners ("Sky Multi-Country"), the Company and the
other investors in Sky Multi-Country have each entered into a Forbearance
Agreement with respect to Sky Multi-Country's obligations under a Transponder
Services Agreement with PamAmSat Corporation (successor-in-interest to PamAmSat
International, Inc.) ("PamAmSat"). Pursuant to the Forbearance Agreement,
PamAmSat will forbear from enforcing its rights under the Transponder Services
Agreement through April 30, 2003, provided that it receives at least 70% of the
fees due under the Transponder Services Agreement. Through March 15, 2003, the
Company and the other investors in Sky Multi-Country have collectively funded at
lease 70% of the fees due under the Transponder Service Agreement. At
December 31, 2002, the aggregate obligations of Sky Multi-Country that were
severally guaranteed by Liberty International were $40,667,000. Sky
Multi-Country funds another Sky Latin America entity in which GloboPar is an
investor. At December 31, 2002, the aggregate obligations of this entity that
are severally guaranteed by Liberty International were $7,000,000. In the case
of Sky Brasil Servicos Limitada ("Sky Brasil"), another entity in which GloboPar
is an investor, an investor other than the Company had previously agreed in
July 2002 to assume up to $50,000,000 of GloboPar's funding obligations through
2003 in exchange for increased ownership and governance rights. At December 31,
2002, the aggregate obligations of Sky Brasil that are severally guaranteed by
Liberty International were $41,360,000. As detailed above, the three entities in
which GloboPar is an investor account for approximately $89,027,000 of the
aggregate obligations guaranteed by Liberty International at December 31, 2002.
To the extent that the Company or other investors do not fully assume GloboPar's
funding obligations, any funding shortfall could lead to defaults under
applicable transponder agreements and equipment lease agreements. With respect
to the equipment lease agreements, default also includes bankruptcy, debt
default, or material adverse change in the business or financial condition of
any guarantor that materially adversely affects the ability of any such
guarantor to perform its obligations under the guarantee. In the event any such
defaults were to occur, the default provisions of the applicable agreements
would determine the ultimate amount to be paid by the Company. The Company
believes that the maximum amount of the Company's aggregate exposure under the
default provisions of the various agreements is not in excess of the
undiscounted remaining obligations guaranteed by the Company, as set forth
above. The Company cannot currently predict if, and to what extent, it will be
required to perform under any of such guarantees.

On Command 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 On Command and has
proposed that On Command take a license under those patents. On Command is
reviewing Acacia's patents and believes there are substantial arguments that
Acacia's claims lack merit.

II-67

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(19) INFORMATION ABOUT OPERATING SEGMENTS

LSAT identifies its reportable segments as those consolidated subsidiaries
that represent 10% or more of its combined revenue, net earnings or loss, or
total assets and those equity method affiliates whose share of earnings or
losses represent 10% or more of its pre-tax earnings or loss. Subsidiaries and
affiliates not meeting this threshold are aggregated together for segment
reporting purposes. The segment presentation for prior periods has been
conformed to the current period segment presentation.

For the year ended December 31, 2002, LSAT had two operating segments: "On
Command" and "Other." On Command provides in-room, on-demand video entertainment
and information services to hotels, motels and resorts primarily in the United
States and is majority owned and consolidated by LSAT. "Other" includes LSAT's
non-consolidated investments, corporate and other consolidated businesses not
representing separately reportable segments.

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

II-68

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

II-69

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

II-70

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES

(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(21) SUBSEQUENT EVENTS

In March 2003, the Company received proceeds of approximately $149 million
upon the sale of a portion of its Sprint PCS Stock and the settlement of a
portion of its interests in the Sprint PCS Stock equity collar. The Company used
approximately $48 million of such proceeds to repay all amounts due under its
note payable to Liberty Media. In April 2003, the Company expects to receive
additional proceeds of approximately $154 million in connection with the sale of
its remaining Sprint PCS Stock and the settlement of its remaining interests in
the Sprint PCS Stock equity collar. The Company expects to use approximately
$115 million of such proceeds to repay all amounts due under the PCS Loan
Facility.

II-71

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following lists the directors and executive officers of Liberty
Satellite and Technology, Inc. ("LSAT," and together with its consolidated
subsidiaries, the "Company"), their birth dates, a description of their business
experience and positions held with the Company, as of February 1, 2003, unless
otherwise noted.

III-1

The directors of the Company will hold office until the next annual meeting
of stockholders of the Company and until their successors are duly elected and
qualified. The executive officers named above will serve in such capacities
until the next annual meeting of the Company's Board of Directors (the "LSAT
Board"), or until their respective successors have been duly elected and have
been qualified, or until their earlier death, resignation, disqualification or
removal from office.

The Company's charter provides for a Board of Directors of not less than
three members. The exact number of directors is fixed by resolution of the LSAT
Board.

There are no family relations by blood, marriage or adoption, of first
cousin or closer, among the above named individuals.

III-2

During the past five years, none of the persons named above has had any
involvement in such legal proceedings as would be material to an evaluation of
his ability or integrity.

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater-than-ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.

Based solely on review of the copies of Forms 3, 4 and 5 and amendments
thereto furnished to the Company with respect to its most recent fiscal year, or
written representations that no Forms 5 were required, the Company believes
that, during the year ended December 31, 2002, its officers, directors and
greater-than-ten-percent beneficial owners complied with all Section 16(a)
filing requirements.

ITEM 11. EXECUTIVE COMPENSATION

(a) SUMMARY COMPENSATION TABLE

The following table is a summary of all forms of compensation paid by the
Company to the officer named therein for services rendered in all capacities to
the Company for the fiscal years ended December 31, 2002, 2001 and 2000.

- ------------------------

(1) Mr. Carroll began receiving compensation from the Company on February 1,
2000. Accordingly, the 2000 compensation information included in the table
represents eleven months of employment.

(2) Effective February 1, 2001, Mr. Carroll was granted 7,500 restricted shares
of the Company's Series A common stock ("Series A Common Stock"). Such
shares vested 25% on February 1, 2003, and will vest an additional 25% on
February 1, 2004, 2005 and 2006.

(3) Pursuant to the Company's 1996 Stock Incentive Plan (the "LSAT 1996 Plan")
and effective August 10, 2001, Mr. Carroll was granted an aggregate of
15,000 options to acquire shares of Series A Common Stock at a purchase
price of $26.00.

(4) Includes LSAT contributions to the Liberty Media 401(k) Savings Plan (the
"Liberty 401(k) Savings Plan") beginning in April 2000. Mr. Carroll is fully
vested in such plan.

Since April 2000, LSAT employees have been eligible to participate in the
Liberty 401(k) Savings Plan. The Liberty 401(k) Savings Plan provides employees
with an opportunity to save for retirement. The Liberty 401(k) Savings Plan
participants may contribute up to 10% of their pre-tax compensation and/or up to
10% of their post-tax compensation. Liberty 401(k) Savings contributes a
matching contribution of 100% of the participants' contributions. Participant
contributions to the Liberty 401(k) Savings Plan are fully vested upon
contribution.

III-3

Generally, participants acquire a vested right in Liberty 401(k) Savings
Plan contributions as follows:

Directors who are not employees of Liberty Media are ineligible to
participate in the Liberty 401(k) Savings Plan. Under the terms of the Liberty
401(k) Savings Plan, employees are eligible to participate after three months of
service.

(b) OPTION GRANTS IN LAST FISCAL YEAR

No stock options were granted during the year ended December 31, 2002 to the
named executive officer of the Company.

(c) AGGREGATED LSAT OPTION/STOCK APPRECIATION RIGHT ("SAR") EXERCISES AND
FISCAL YEAR-END LSAT

OPTION/SAR VALUES

The following table provides, for the executive named in the Summary
Compensation Table, information on (i) the exercise during the year ended
December 31, 2002, of options/SARs with respect to shares of Series A Common
Stock, (ii) the number of shares of Series A Common Stock represented by
unexercised options/SARs owned by him at December 31, 2002, and (iii) the value
of those options/ SARs as of the same date.

(d) COMPENSATION OF DIRECTORS

Members of the LSAT Board who are also full-time employees of the Company or
Liberty Media, or any of their respective subsidiaries, do not receive any
additional compensation for their services as directors. Directors who are not
full-time employees of the Company or Liberty Media, or any of their respective
subsidiaries, receive a retainer of $30,000 per year. Directors are generally
not separately compensated for service on committees. All members of the LSAT
Board are reimbursed for expenses incurred to attend any meeting of the LSAT
Board or any committee thereof. In addition, the TCI Satellite
Entertainment, Inc. 1997 Nonemployee Director Stock Option Plan (the "LSAT
DSOP") provides for the grant to each person that is a member of the LSAT Board
and is not an employee of the Company, its subsidiaries or its affiliates, of
options to purchase 5,000 shares of Series A Common Stock. Such grant of options
is made at the time a person first becomes an LSAT director. The LSAT DSOP
provides that the per share exercise price of each option granted under the LSAT
DSOP will be equal to the fair market value of the Series A Common Stock on the
date such option is granted. In

III-4

general, fair market value is determined by reference to the last sale price for
shares of Series A Common Stock on the date of grant.

During the first quarter of 2002, Messrs. Allan M. Angelich, John W. Goddard
and J. Curt Hockemeier, each received $7,500 for their service during the fourth
quarter of 2001 on a special committee formed by the LSAT Board to review and
evaluate Liberty Media's October 12, 2001 proposal to acquire all of the Company
common stock not already owned by Liberty Media.

(e) ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS

The members of the Company's compensation committee are Messrs. Alan M.
Angelich, William H. Berkman and John. W. Goddard, each a director of the
Company. None of the members of the compensation committee are or were officers
of the Company or any of its subsidiaries or any other person that would
constitute a compensation committee interlock with the Company.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table lists stockholders (excluding any directors or officers
of the Company) believed by the Company to be the beneficial owners of more than
five percent of the outstanding voting securities as of December 31, 2002 based
upon filings pursuant to Section 13(d) or (g) under the Securities Exchange Act
of 1934, as amended. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock issuable
upon exercise or conversion of options, warrants and convertible securities that
were exercisable or convertible on or within 60 days after December 31, 2002,
are deemed to be outstanding and to be beneficially owned by the person holding
the options, warrants or convertible securities for the purpose of computing the
percentage ownership of the person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Voting power
in the table is computed with respect to a general election of directors. So far
as is known to the Company, the persons indicated below have sole voting and
investment power with respect to the shares indicated as believed to be owned by
them except as otherwise stated in the notes to the table.

- ------------------------

* Less than one percent.

III-5

(1) Based on 150,000 shares of the Series B Preferred Stock ("Series B Preferred
Stock"), 11,078,834 shares of Series A Common Stock and 34,765,055 shares of
Series B Common Stock outstanding as of December 31, 2002.

(2) Does not include 1,696,717 shares of Series B common stock ("Series B Common
Stock") issuable upon conversion of the Series B Preferred Stock.

(3) Based upon a Schedule 13D jointly filed on November 5, 2002 by Michael M.
Kellen, an individual, DEF Associates N.V., a corporation incorporated in
Saint Maarten under the laws of the Netherlands Antilles, Arnhold and S.
Bleichroeder Holdings, Inc., a New York corporation ("A&SB Holdings"), and
Arnhold and S. Bleichroeder Advisers, Inc., a New York corporation ("A&SB
Advisers") and a wholly-owned subsidiary of A&SB Holdings. The foregoing
persons are hereinafter referred to collectively as the A&SB Reporting
Persons. DEF Associates owns 200,000 shares. Each of A&SB Advisers, by
reason of its investment advisory relationship with DEF Associates, and A&SB
Holdings, by reason of its controlling ownership of A&SB Advisers, may be
deemed to own the 200,000 shares owned by DEF Associates. DEF Associates,
A&SB Advisers and A&SB Holdings share the power to direct the vote and the
disposition of 200,000 shares. While the beneficial ownership of the A&SB
Reporting Persons amounts to less than five percent of the outstanding
shares of Series A common stock, their beneficial ownership is related to,
and reported on, the same Schedule 13D for Michael Kellen's beneficial
ownership of shares of Series A common stock. For a further discussion of
Mr. Kellen's relationship to the A&SB Reporting Persons, please see
note (4) to this table below.

(4) Based upon the Schedule 13D jointly filed on November 5, 2002 by the A&SB
Reporting Persons. A Senior Vice President and Director of A&SB Holdings,
Mr. Kellen, in his individual capacity, has discretionary investment
management authority with respect to certain assets of the funds advised by
A&SB Advisers, including the 200,000 shares held by DEF Associates.
Mr. Kellen, therefore, may also be deemed to beneficially own such 200,000
shares. Mr. Kellen also beneficially owns 397,740 shares of Series A common
stock through certain discretionary accounts under his management.
Mr. Kellen has the shared power to direct the vote and the disposition of
597,740 shares.

(b) SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth information with respect to the ownership by
each director and each of the named executive officers of LSAT and by all
directors and executive officers of LSAT as a group of shares of Series A Common
Stock and Series B Common Stock. In addition, the table sets forth information
with respect to the ownership of such individuals of shares of On Command common
stock ("On Command Common Stock"), and of Liberty Media Series A common stock
("Liberty Media Series A Common Stock") and Liberty Media Series B common stock
("Liberty Media Series B Common Stock"). Liberty Media owns a controlling
interest in LSAT, and LSAT owns a controlling interest in On Command.

III-6

The following information is given as of December 31, 2002 and, in the case
of percentage ownership information, is based on 11,078,834 shares of Series A
Common Stock, 34,765,055 shares of Series B Common Stock, 30,854,489 shares of
On Command common stock, 2,476,953,566 shares of Liberty Media Series A Common
Stock, and 212,044,128 shares of Liberty Media Series B Common Stock,
outstanding on that date. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of common stock
issuable upon exercise or conversion of options, warrants and convertible
securities that were exercisable or convertible on or within 60 days after
December 31, 2002, are deemed to be outstanding and to be beneficially owned by
the person holding the options, warrants or convertible securities for the
purpose of computing the percentage ownership of the person, but are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person. Voting power in the table is computed with respect to a general
election of directors. So far as is known to the Company, the persons indicated
below have sole voting and investment power with respect to the shares indicated
as believed to be owned by them, except as indicated in the notes to the table.

III-7

- ------------------------

* Less than one percent.

(1) Assumes the exercise in full of options to purchase 3,333 shares granted
pursuant to the Company's Nonemployee Director Stock Option Plan, all of
which are exercisable on or within 60 days after December 31, 2002.

(2) Assumes the exercise in full of stock options granted in tandem with SARs
to purchase 500 shares, all of which are exercisable on or within 60 days
after December 31, 2002.

(3) Includes 349,307 restricted shares, none of which was vested at
December 31, 2002.

(4) Assumes the exercise in full of options to purchase 25,640 shares of
Liberty Media Series A Common Stock and 7,922,930 shares of Liberty Media
Series B Common Stock, all of which are exercisable on or within 60 days
after December 31, 2002. Mr. Bennett also has the right to convert options
to purchase Liberty Media Series B Common Stock into options to purchase
Liberty Media Series A Common Stock.

(5) Includes 22,287 shares held by the Liberty 401(k) Savings Plan for the
benefit of Mr. Bennett.

III-8

(6) Includes 1,246,580 shares owned by Hilltop Investments, Inc. which is
jointly owned by Mr. Bennett and his wife, Mrs. Deborah Bennett.

(7) Includes 12 shares of Series A Common Stock held by trusts for the benefit
of Mr. Berkman's brother's children. Mr. Berkman is the trustee of two of
the trusts.

(8) Assumes the exercise in full of options to purchase 1,306,121 shares, all
of which are exercisable on or within 60 days after December 31, 2002.

(9) Assumes the exercise in full of options to purchase 611,274 shares, all of
which are exercisable on or within 60 days after December 31, 2002.

(10) Includes 6,168 shares held by the Liberty 401(k) Savings Plan for the
benefit of Mr. Fitzgerald.

(11) Includes 140 shares of Series A Common Stock, 142 shares of Series B
Common Stock, 83,136 shares of Liberty Media Series A Common Stock and
72,772 shares of Liberty Media Series B Common Stock held in trusts in
which Mr. Goddard is a beneficial owner.

(12) Assumes the exercise in full of options to purchase 5,000 shares granted
pursuant to the Company's Nonemployee Director Stock Option Plan, all of
which are exercisable on or within 60 days after December 31, 2002.

(13) Includes 1,603 shares held by a long-term 401(k) savings plan for the
benefit of Mr. Hockemeier.

(14) Assumes the exercise in full of Company stock options to purchase 49,965
shares, all of which are exercisable on or within 60 days after
December 31, 2002. Also includes 2,549 shares held by trusts of which
Mr. Howard is beneficial owner as trustee for his children.

(15) Includes 291,089 restricted shares held by a Grantor Retained Annuity
Trust, none of which were vested at December 31, 2002.

(16) Assumes the exercise in full of options to purchase 4,173,183 shares, all
of which are exercisable on or within 60 days after December 31, 2002.

(17) Includes 40,623 shares held by the Liberty 401(k) Savings Plan for the
benefit of Mr. Howard.

(18) Includes 314,376 shares held by a Grantor Retained Annuity Trust.

(19) Includes 12,284 shares owned directly by Mr. Howard's wife, Mrs. Leslie D.
Howard, and 185,120 shares owned by Mrs. Leslie D. Howard that are held by
a Grantor Retained Annuity Trust, as to which shares Mr. Howard has
disclaimed beneficial ownership.

(20) Assumes the exercise in full of Company stock options to purchase 31,465
shares, all of which are exercisable on or within 60 days after
December 31, 2002. Also includes 7,500 restricted shares issued in
February 2001, 25% of which vest within 60 days of December 31, 2002.

(21) Includes 4,721 shares held by the Liberty 401(k) Savings Plan for the
benefit of Mr. Carroll

III-9

(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

The following table sets forth information as of December 31, 2002 with
respect to securities authorized for issuance under the Company's equity
compensation plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

GENERAL. Liberty owns a controlling interest in the Company. For so long as
Liberty continues to indirectly control more than 50% of the outstanding voting
stock of the Company, it will be able, among other things, to approve any
corporate action requiring stockholder approval, by a majority or plurality,
including the election of directors and, amendments to the Company's Amended and
Restated Certificate of Incorporation and Bylaws, without the consent of the
other stockholders of the Company. In addition, through its representation on
the Board of Directors, Liberty is able to influence certain decisions,
including decisions with respect to the Company's dividend policy, the Company's
access to capital (including the decision to incur additional indebtedness or
issue additional shares of common or preferred stock), mergers or other business
combinations involving the Company, the acquisition or disposition of assets by
the Company and any change in control of the Company.

DIVIDENDS ON PREFERRED STOCK HELD BY LIBERTY MEDIA. In accordance with the
terms of the Series A Preferred Stock and Series B Preferred Stock, through
March 31, 2003, the Company has the right to issue shares of Series A Common
Stock in satisfaction of its dividend liability. During the year ended
December 31, 2002, the Company issued 4,320,277 shares of Series A Common Stock,
representing a $13,500,000 dividend obligation under the terms of the Series A
Preferred Stock and a $9,000,000 dividend obligation under the terms of
Series B Preferred Stock. During the same period, cash dividends on the
Series A Preferred Stock and Series B Preferred Stock have aggregated $4,500,000
and $3,000,000, respectively.

PROMISSORY NOTE WITH LIBERTY MEDIA. On March 16, 2000, the Company paid
Liberty Media $60,000,000 in the form of an unsecured promissory note in
exchange for a 13.99% ownership interest in LSAT Astro LLC. Interest on the note
accrued interest at the 3 month LIBOR plus 2% (3.74% at December 31, 2002).
Interest payments were due semi-annually on the first day of March and
September. As of December 31, 2002, the unpaid principal balance on the note was
$48,411,000 and accrued interest under this note was $614,000. Interest expense
on the note for the year ended December 31, 2002 was $1,992,000. All amounts due
under this note were repaid in March 2003.

III-10

LSAT LLC AND ASCENT ENTERTAINMENT TRANSACTION. On August 16, 2001, the
Company entered into two interrelated purchase agreements with Liberty Media and
certain of its subsidiaries and affiliates. Both agreements were amended in
November 2001 and January 2002. One agreement provided for the Company's
acquisition of certain subsidiaries of Liberty Media that collectively held the
aggregate 89.41% ownership interest in Liberty Satellite, LLC ("LSAT LLC") not
already owned by LSAT in exchange for 25,298,379 shares of Series B Common Stock
of the Company. The second purchase agreement provided for the Company's
acquisition of 100% of the capital stock of Ascent Entertainment from a
subsidiary of Liberty Media in exchange for 8,701,621 shares of Series B Common
Stock of the Company. Ascent Entertainment's primary operating subsidiary is On
Command, which provides in-room, on-demand video entertainment and information
services to hotels, motels and resorts, primarily in the United States. The
foregoing transaction (the "LSAT LLC and Ascent Entertainment Transaction")
closed on April 1, 2002.

Concurrently with the closing of the LSAT LLC and Ascent Entertainment
Transaction, Liberty Media contributed to the Company, as part of those
transactions and for no additional consideration, promissory notes issued by
LSAT LLC due to subsidiaries of Liberty Media, with an aggregate principal
balance of $18,552,000. Interest expense on these notes was $404,000 during the
first quarter of 2002.

REGISTRATION RIGHTS AGREEMENT BETWEEN THE COMPANY AND LIBERTY MEDIA. The
Company and Liberty Media are parties to a registration rights agreement, dated
as of March 16, 2000, whereby Liberty Media and its affiliates have at any time,
the right to request that the Company register under the Securities Act of 1933,
as amended, (the "Securities Act") any and all of the shares of Series A Common
Stock and Series B Common Stock (collectively, "LSAT Common Stock") or shares of
the Company's capital stock that are convertible into shares of LSAT Common
Stock, owned by them, subject to the terms and conditions thereunder. Liberty
Media and its affiliates also have certain "piggy-back" registration rights,
whereby anytime the Company proposes to register shares of the Company's capital
stock under the Securities Act, Liberty Media and its affiliates have the right
to include their shares of the Company's capital stock in such registration. In
general, the Company will bear the expenses incurred in connection with the
registration and distribution of shares of the LSAT Common Stock owned by
Liberty Media and its affiliates. The Company and Liberty Media entered into an
amendment to this registration rights agreement to include thereunder the shares
of Series B Common Stock that Liberty Media and its affiliates acquired as a
result of the consummation of the LSAT LLC and Ascent Entertainment
Transactions.

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

Changes in the fair market value of the Put Option subsequent to
September 29, 2000 were recognized as unrealized gains and losses on financial
instruments in the Company's consolidated statements of operations. During the
year ended December 31, 2002, the Company recorded an unrealized loss of
$2,564,000 related to the Put Option.

III-11

During the fourth quarter of 2001, iBEAM filed for bankruptcy under Chapter
11 of the Bankruptcy Code. As a result of such bankruptcy filing, the Company
began carrying amount the Put Option liability at an amount ($31,052,000 at
December 31, 2002), which represents the Put Option purchase price to LSAT LLC
plus an accrued return to Liberty Digital of 9%, compounded annually.

EXECUTIVE OFFICER LOANS. Messrs. Carroll and Sophinos, executive officers
of the Company, received loans in the principal amounts of $136,000 and
$135,000, respectively, to be used solely for the purpose of satisfying tax
liabilities related to the lapse of restrictions on shares of common stock
awarded under the Company's 1996 Stock Incentive Plan. Through December 31,
2001, the loans accrued interest at an annual rate of 6.41%. In addition, each
of the loans originally provided for principal and interest to be payable upon
the occurrence of certain events and in no event later than December 1, 2001.
During the first quarter of 2002, the Company agreed to extend the maturity
dates of the loans to December 31, 2003, and lower the annual interest rates of
the loans to 4% per annum. Consistent with the terms of the original loans,
interest payments may be deferred by the borrowers until maturity. Each loan is
secured in each case by 2,500 shares of Series A Common Stock and are otherwise
nonrecourse to the borrowers. As of December 31, 2002, the balances outstanding
on the loans to Messrs. Carroll and Sophinos, including accrued interest, were
$155,000 and $154,000 respectively. Effective April 27, 2001, Mr. Sophinos
became the President of On Command. Since that date, On Command has been
responsible for 100% of Mr. Sophinos' compensation.

EXPENSE ALLOCATIONS FROM LIBERTY MEDIA. Liberty Media allocates rent,
salaries, benefits and certain other general and administrative expenses to the
Company. Although there is no written agreement with Liberty Media for these
services, the Company believes the allocated amounts to be reasonable. The
aggregate amount allocated pursuant to this arrangement was $303,000 during
2002. In addition, the Company reimburses Liberty Media for certain expenses
paid by Liberty Media on behalf of the Company. Amounts owed to Liberty Media
pursuant to these arrangements ($1,585,000 at December 31, 2002) are
non-interest bearing and are generally paid on a monthly basis.

ASCENT MEDIA SATELLITE SERVICES. Effective October 1, 2002, On Command
entered into a short-term agreement with Ascent Media pursuant to which Ascent
Media supplied On Command with uplink and satellite transport services at a cost
of $120,000 through December 31, 2002. On Command had been utilizing the
services to test the satellite delivery of content updates to On Command's
downlink sites at various hotels. On Command has completed its testing of
satellite delivery and the parties have executed a Content Preparation and
Distribution Services Agreement, dated March 24, 2003, to be effective April 1,
2003, which will provide for uplink and satellite transport services for a
monthly fee of approximately $36,000, subject to adjustment, for a period of
five years. The long-term agreement also provides for Ascent Media to supply On
Command with content preparation services at a negotiated rate for a period of
five years at On Command's request. On Command is also negotiating an agreement
with a wholly-owned subsidiary of Ascent Media for the installation by such
subsidiary of satellite equipment at On Command's downlink sites at hotels for a
set fee per installation completed.

TAX LIABILITY ALLOCATION AND INDEMNIFICATION AGREEMENT BETWEEN LIBERTY MEDIA
AND THE COMPANY. In connection with the LSAT LLC and Ascent Entertainment
Transaction, the Company and Liberty Media entered into a Tax Liability
Allocation and Indemnification Agreement whereby the Company will be obligated
to make a cash payment to Liberty Media in each year that the Company (taken
together with any of its subsidiaries) has taxable income. The amount of the
payment will be equal to the amount of the taxable income of the Company and its
subsidiaries (determined as if the Company and its subsidiaries filed a separate
return) multiplied by the highest applicable corporate tax rate. In the event
that (1) the Company and its subsidiaries, when treated as a separate group, has
a net operating loss or deduction or is entitled to a tax credit for a
particular year; and (2) Liberty Media is able to use such loss, deduction or
credit to reduce its tax liability, the Company will be entitled to a credit
against current and future payments to Liberty Media under the agreement. If the
Company

III-12

disaffiliates itself with Liberty Media and the members of Liberty Media's
affiliated group prior to the time that the Company is able to use such credit,
the Company will be entitled to a payment from Liberty Media at the earlier of
the time that (1) the Company and its subsidiaries show they could have used the
net operating loss or net tax credit to reduce their own separately computed tax
liability or (2) the voting power of the stock of the Company held by Liberty
Media and the members of its affiliated group drops below 20%.

In addition, under the proposed Tax Liability Allocation and Indemnification
Agreement, the Company will have the opportunity to participate in the defense
of claims of the Internal Revenue Service that might affect its liability under
the agreement, and to participate in tax refunds paid to Liberty Media where
such refunds are due in part to the Company's operations.

In connection with the LSAT LLC and Ascent Entertainment Transaction, the
Company assumed an intercompany income tax liability owed by Ascent
Entertainment to Liberty Media pursuant to a tax liability allocation and
indemnification agreement with terms similar to the agreement describe above. At
December 31, 2002, the amount owed by Ascent Entertainment to Liberty Media
pursuant to this agreement was $8,409,000. Such amount, which is non-interest
bearing, includes $36,568,000 that is due on demand to Liberty Media, and
$28,159,000 that is payable to the Company by Liberty Media if, and to the
extent, that tax benefits generated by Ascent are utilized to reduce Liberty
Media's taxable income.

ITEM 14. CONTROLS AND PROCEDURES

The Company's acting president and chief financial officer (the "Executive")
conducted an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures, as defined in Exchange Act
Rule 13(a)-14(c), as of a date within 90 days prior to the filing of this annual
report on Form 10-K. Based on this evaluation, the Executive concluded that the
Company's disclosure controls and procedures were effective as of the date of
that evaluation. There have been no significant changes in the Company's
disclosure controls and procedures or in other factors that could significantly
affect these controls subsequent to the date on which the Executive completed
this evaluation.

III-13

PART IV.

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K

(A) (1) FINANCIAL STATEMENTS

Included in Part II of this Report:

(A) (2) FINANCIAL STATEMENT SCHEDULES

Included in Part IV of this Report:

(1) Separate Financial Statements for ASTROLINK International LLC:

IV-1

(A) (3) EXHIBITS

The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:

IV-2

10.4 Option Agreement, dated as of December 4, 1996, by and
between the Company and Gary S. Howard*.(b)

10.5 Option Agreement, dated as of December 4, 1996, by and
between the Company and Larry E, Romrell*.(b)

10.6 Option Agreement, dated as of December 4, 1996, by and
between the Company and David P. Beddow*.(b)

10.7 Share Purchase Agreement dated as of December 4, 1996,
between TCI and the Company.(b)

10.8 Option Agreement dated as of December 4, 1996, between TCI
and the Company.(b)

10.9 TCI Satellite Entertainment, Inc. 1997 Nonemployee Director
Plan*.(d)

10.10 Asset Purchase Agreement by and among Hughes Electronics
Corporation, PRIMESTAR, Inc., PRIMESTAR Partners L.P.,
Tempo Satellite, Inc. and the Stockholders of PRIMESTAR
listed herein, dated as of January 22, 1999.(e)

10.11 Asset Purchase Agreement among PRIMESTAR, Inc., PRIMESTAR
Partners L.P., PRIMESTAR MDU, Inc., the Stockholders of
PRIMESTAR, Inc. listed herein and Hughes Electronics
Corporation dated as of January 22, 1999.(e)

10.12 PRIMESTAR Payment Agreement dated as of January 22, 1999
among TCI Satellite Entertainment, Inc., PRIMESTAR, Inc.,
the Funding Parties and Paragon Communications.
Incorporated by reference to Phoenixstar, Inc.'s Current
Report on Form 8-K, dated May 13, 1999. (Commission File
No. 0-23883).

10.13 Promissory Note, dated March 16, 2000, between TCI Satellite
Entertainment, Inc. (now known as Liberty Satellite &
Technology, Inc.) and Liberty Media Corporation.
Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.
(Commission File No. 0-21317).

10.14 Amended and Restated Loan Agreement by and between Liberty
PCS Trust and DLJ Cayman Islands, LCD dated November 3,
2000. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
(Commission File No. 0-21317).

10.15 Purchase Agreement by and among LSAT, Liberty AEG, Inc. and
Liberty Media dated August 16, 2001.(f)

10.16 First Amendment to the Purchase Agreement by and among LSAT,
Liberty AEG, Inc. and Liberty Media dated November 30,
2001.(f)

10.17 Second Amendment to the Purchase Agreement by and among
LSAT, Liberty AEG, Inc. and Liberty Media dated February
7, 2002.(f)

10.18 LSAT LLC Purchase Agreement by and among LMC/LSAT Holdings,
Inc., Liberty Brazil DTH Inc., Liberty Mexico DTH Inc.,
Liberty Multicountry DTH, Inc., Liberty International DTH,
Inc., Liberty Latin Partners, Inc., LSAT and Liberty Media
dated August 16, 2001.(f)

10.19 First Amendment to the LSAT LLC Purchase Agreement by and
among LMC/LSAT Holdings, Inc., Liberty Brazil DTH Inc.,
Liberty Mexico DTH Inc., Liberty Multicountry DTH, Inc.,
Liberty International DTH, Inc., Liberty Latin Partners,
Inc., LSAT and Liberty Media dated November 20, 2001.(f)

IV-3

10.20 Second Amendment to the LSAT LLC Purchase Agreement by and
among LMC/LSAT Holdings, Inc., Liberty Brazil DTH Inc.,
Liberty Mexico DTH Inc., Liberty Multicountry DTH, Inc.,
Liberty International DTH, Inc., Liberty Latin Partners,
Inc., LSAT and Liberty Media dated February 7, 2002.(f)

10.21 Tax Liability Allocation and Indemnification Agreement dated
as of April 1, 2002 between Liberty Media and LSAT filed
herewith.

10.22 Subscription Agreement, dated as of December 9, 2002,
between Wildblue Communications, Inc. and Liberty
Satellite & Technology, Inc. filed herewith.

10.23 Subscription Agreement, dated as of December 9, 2002,
between Wildblue Communications, Inc. and Liberty
Satellite & Technology, Inc. filed herewith.

10.24 Agreement of Stockholders, dated as of December 9, 2002,
among Wildblue Communications, Inc. and the stockholders
listed therein filed herewith.

10.25 Supplemental Stockholders Agreement, dated as of January 31,
2003, between Liberty Satellite & Technology, Inc. and
IntelSat USA Sales Corp. filed herewith.

10.26 Master Agreement Regarding Restructuring of ASTROLINK
International LLC, dated as of January 17, 2003, by and
among Liberty Satellite & Technology, Inc. and the other
parties named therein filed herewith.

10.27 Contribution Agreement, dated as of January 17, 2003, by and
among Liberty Satellite & Technology, Inc., Liberty Media
Corporation and ASTROLINK International LLC filed
herewith.

10.28 Master Services Agreement, dated as of August 3, 1993, by
and between Marriott International, Inc., Marriott Hotel
Services, Inc. and On Command Video Corporation
(confidential treatment granted) (Incorporated by
reference to Exhibit 10.6 to the Registration Statement on
Form S-1 (File No. 33-98502) of Ascent Entertainment
Group, Inc.).

10.29 Service Agreement, dated March 21, 2001, between On Command
Corporation and Marriott International, Inc. (composite
version) (confidential treatment requested) (Incorporated
by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001 of On
Command Corporation, Commission File No. 00-21315).

10.30 Hilton Hotels Corporation-On Command Video Agreement, dated
April 27, 1993, by and between Hilton Hotels Corporation
and On Command Video Corporation (confidential treatment
granted) (Incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-4 (File No. 333-10407) of
On Command Corporation).

10.31 Credit Agreement, dated as of July 18, 2000, by and among On
Command Corporation, the lenders party thereto, Toronto
Dominion (Texas), Inc., Fleet National Bank, Bank of
America, N.A., and the Bank of New York. (Incorporated by
reference to Exhibit 10.16 of the Annual Report on
Form 10-K/A for the year ended December 31, 2000 of On
Command Corporation).

10.32 Amendment No. 1, dated as of March 27, 2001, to the Credit
Agreement, dated as of July 18, 2000, by and among On
Command Corporation, the lenders party thereto, Toronto
Dominion (Texas), Inc., Fleet National Bank, Bank of
America, N.A., and the Bank of New York. (Incorporated by
reference to Exhibit 10.17 of the Annual Report on
Form 10-K/A for the year ended December 31, 2000 of On
Command Corporation).

IV-4

10.33 Amendment No. 2 dated as of November 14, 2001, to the Credit
Agreement, by and among On Command Corporation, Toronto
Dominion (Texas), Inc. Fleet National Bank, Bank of
America, the Bank of New York Company and the Bank of New
York. (Incorporated by reference to Exhibit 10.16 of the
Annual Report of Form 10-K for the year ended
December 31, 2001 of On Command Corporation).

21 Subsidiaries of the Registrant filed herewith.

23.1 Consent of KPMG LLP filed herewith.

23.2 Consent of KPMG LLP filed herewith.

99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 filed herewith.

- ------------------------

* Indicates compensatory plan or arrangement.

(a) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 (Commission File No. 0-21317).

(b) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (Commission File No. 0-21317).

(c) Incorporated by reference to the Company's Registration Statement on Form 10
filed with the Securities and Exchange Commission ("SEC") on November 15,
1996 (Registration No. 0-21317).

(d) Incorporated by reference to PRIMESTAR, Inc.'s Registration Statement on
Form S-4 filed with the SEC on February 9, 1998 (Registration No.
333-45835).

(e) Incorporated by reference to the Company's Current Report on Form 8-K, dated
February 1, 1999.

(f) Incorporated by reference to the Company's definitive proxy materials filed
with the SEC on February 11, 2002.

(B) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 2002:

IV-5

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Members
ASTROLINK International LLC:

We have audited the accompanying consolidated balance sheets of ASTROLINK
International LLC and subsidiaries (a development stage limited liability
company) as of December 31, 2001 and 2002, and the related consolidated
statements of operations, Members' equity, and cash flows for each of the years
in the three-year period ended December 31, 2002, and for the period from
April 22, 1999 (date of inception) through 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.

As discussed in notes 1 and 4 to the consolidated financial statements,
during October 2001, certain of the Company's Members announced that they would
not provide additional funding beyond those amounts previously committed. On
January 17, 2003, one of the Company's Members reached an agreement with the
other Members to acquire substantially all of the assets of the Company and all
contractual claims were settled. The agreement is expected to close by
October 31, 2003, and is dependent upon achieving additional financing and
regulatory approval.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ASTROLINK
International LLC and subsidiaries (a development stage limited liability
company) as of December 31, 2001 and 2002 and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2002, and the period from April 22, 1999 (date of inception)
through 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 3 to the consolidated financial statements, to date the Company has not
generated any revenue and is dependent upon additional equity and/or debt
financing or firm commitments from prospective customers to complete
construction and launch of its intended satellite system, which raises
substantial doubt about its ability to continue as a going concern. The
Company's plans with respect to these matters are also described in note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ KPMG LLP

McLean, Virginia
March 14, 2003

IV-6

ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2001 AND 2002

See accompanying notes to consolidated financial statements.

IV-7

ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

IV-8

ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY

See accompanying notes to consolidated financial statements.

IV-9

ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

IV-10

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2002

(1) NATURE OF THE BUSINESS

ASTROLINK International LLC (the Company) was formed on April 22, 1999 in
the State of Delaware as a Limited Liability Company for the purpose of engaging
in one or more telecommunications businesses and all incidental activities. The
Company was formed by Lockheed Martin Global Telecommunications, Inc. (LMGT) (a
wholly owned subsidiary of Lockheed Martin Corporation (LMC)). The Company's
initial Members were LMGT, TRW Inc. (TRW), and Telespazio, S.p.A. through
Telespazio Luxembourg, S.A. (Telespazio). Liberty Media Group, through LSAT
Astro LLC (LMG), became a Member in December 1999. The Company was originally
formed to establish and operate a worldwide, digital, Ka-band telecommunications
system consisting initially of four geosynchronous satellites and a space and
ground control system to provide worldwide multimedia interactive broadband
telecommunications services (the original ASTROLINK System-TM-).

During 2001, certain of the Company's investors indicated that they would
not provide additional funding to the Company beyond those amounts previously
subscribed for. On January 17, 2003, one of the Company's Members reached an
agreement (the Master Agreement) with the other Members in connection with the
proposed restructuring of the Company. Under the Master Agreement and related
agreements, the Member will acquire substantially all of the assets of the
Company and all contractual claims of certain Members, affiliates of the Members
and certain other parties were settled. The closing of the agreement is expected
by October 31, 2003 and is dependent upon achieving additional financing and
regulatory approval, see note 4.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of ASTROLINK
International LLC and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated. Members are
generally not liable for debts, obligations or liabilities of the Company.

(B) DEVELOPMENT STAGE ENTERPRISE

The Company's consolidated financial statements are presented as those
of a development stage enterprise, as prescribed by Statement of Financial
Accounting Standards (SFAS) No. 7, ACCOUNTING AND REPORTING BY DEVELOPMENT
STAGE ENTERPRISES.

(C) CASH AND CASH EQUIVALENTS

The Company considers short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents at December 31, 2001 and 2002 consist primarily of investments
in U.S. government obligations, and amounted to approximately $1,266,000 and
$0, respectively. These investments are stated at amortized cost, which
approximated the fair value due to the highly liquid nature and short
maturities of the underlying securities.

IV-11

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

(D) RESTRICTED CASH

During 2001, the Company established a trust fund to pay severance to
terminated employees in accordance with the Company's severance pay plans,
as approved by the Company's Board of Directors. Restricted cash in the
trust fund at December 31, 2001 and 2002 amounted to $7,243,206 and
$2,165,723, respectively, and was comprised of money market investments.

(E) FURNITURE AND EQUIPMENT

Property and equipment, including equipment with an original cost of
$2,054,000 contributed by LMC and LMGT in July 1999, are carried at
historical cost less accumulated depreciation and amortization. Depreciation
and amortization is calculated using the straight-line method over the
following estimated useful lives:

Furniture and fixtures.................... 5 years
Machinery, equipment, and computer
hardware and software................... 3 years
Shorter of estimated life or remaining
Leasehold improvements.................... term

(F) SYSTEM UNDER CONSTRUCTION

The Company has been in the process of designing and developing its
broadband telecommunications service via a Ka-band satellite
telecommunications system. System under construction includes all costs
incurred related to the construction of the space and ground components of
the original ASTROLINK System-TM-. Depreciation expense will be recognized
on a satellite-by-satellite basis as the satellites are placed into service
following delivery of each satellite to its mission orbit. Depreciation
expense related to the ground components will commence with the placement
into service of such components. To date, no satellites have been completed
and launched, nor have the ground components been completed.

(G) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, (SFAS No. 144) provides a single accounting model for long-lived
assets to be disposed of. SFAS No. 144 also changes the criteria for
classifying an asset as held for sale; and broadens the scope of businesses
to be disposed of that qualify for reporting as discontinued operations and
changes the timing of recognizing losses on such operations. The Company
adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did
not affect the Company's financial statements.

In accordance with SFAS No. 144, long-lived assets, such as property and
equipment, and purchased intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which
the carrying amount of the asset exceeds the fair value of the asset. Assets
to be disposed of would be separately presented in the balance sheet and
reported at

IV-12

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

the lower of the carrying amount or fair value less costs to sell, and are
no longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.

Goodwill and intangible assets not subject to amortization are tested
annually for impairment, and are tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount exceeds
the asset's fair value.

Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, ACCOUNTING FOR IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.

(H) INTANGIBLE ASSETS

Intangible assets represent the contracts, agreements, and licenses
related to the space component of the original ASTROLINK System-TM- which
were contributed by LMGT in partial consideration for its Class A units.
These intangible assets will be amortized on a straight-line basis over
seven years, commencing with the placement of the satellites into service.

In the first quarter of 2002, the Company adopted the provisions SFAS
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 142). SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144.

Upon adoption of SFAS No. 142, the Company was also required to reassess
the useful lives and residual values of all of its intangible assets, and
make any necessary amortization period or impairment adjustments. Impairment
is measured as the excess of carrying value over the fair value of an
intangible asset with an indefinite life. The Company determined that the
carrying amounts of its intangible assets were not impaired and the useful
lives were appropriate upon adoption of SFAS No. 142.

(I) FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
(SFAS No. 107) requires disclosures of fair value information about
financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. SFAS No. 107 excludes
certain financial instruments and all non-financial instruments from these
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. The carrying
amounts reported in the consolidated balance sheets approximates the fair
value for cash and cash equivalents, restricted cash, prepaid and other
current assets, value added tax receivable, accounts payable, and accrued
expenses. The accounts payable to Members, Member advances, and accrued
contract terminations were settled as part of the Master Agreement.

IV-13

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

(J) INCOME TAXES

As a limited liability company, the Company is not subject to U.S.
federal income taxes directly. Rather, each holder of Class A Units of the
Company (each Member) is subject to U.S. federal income taxation based on
its ratable portion of the Company's income or loss. Certain of the
Company's subsidiaries are subject to tax in various jurisdictions; however,
the subsidiaries had no taxable income through December 31, 2002.

(K) UNIT-BASED COMPENSATION

At December 31, 2002, the Company had one unit-based employee
compensation plan, which is described more fully in note 10. The Company
accounts for the plan under the recognition and measurement principles of
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. No unit-based employee compensation cost is reflected in
net loss, as all options granted under the plan had an exercise price equal
to the estimated market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net loss if the Company
had applied the fair value recognition provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to unit-based employee
compensation.

(L) MANAGEMENT ESTIMATES

The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, including the recoverability of the
system under construction and the amounts of contract termination
liabilities, at the date of the consolidated financial statements and the
reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.

(M) FOREIGN CURRENCY

All balance sheet accounts of foreign operations are translated into
U.S. dollars at the year-end rate of exchange and statements of operations
items are translated at the weighted average exchange rates for the year.
Gains and losses from foreign currency transactions, such as those resulting
from the settlement of foreign receivables or payables, are included in the
consolidated statements of operations.

IV-14

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2002

(N) OTHER COMPREHENSIVE INCOME

The Company has engaged in no transactions during the years ended
December 31, 2000, 2001, and 2002 that would be classified as other
comprehensive income.

(O) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

On January 1, 2001, the Company adopted SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES and SFAS No. 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITY,
AN AMENDMENT OF SFAS 133. SFAS Nos. 133 and 138 require that all derivative
instruments be recorded on the balance sheet at their respective fair
values. The Company has reviewed its contracts and has no derivative
instruments and does not engage in hedging activities.

(P) RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS (SFAS No. 143). SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development, and/or
normal use of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS
No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have
a material effect on the Company's consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS
NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS
(SFAS No. 145). SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends SFAS
No. 13 to require sale-leaseback accounting for certain lease modifications that
have economic effects similar to sale-leaseback transactions. The provisions of
the Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No. 13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 is not expected to have a material
effect on the Company's consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES (SFAS No. 146). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, LIABILITY
RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN
ACTIVITY. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The adoption of SFAS No. 146 is not expected to have a material
effect on the Company's consolidated financial statements.

IV-15

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, AN INTERPRETATION OF FASB STATEMENTS
NO. 5, 57 AND 107 AND A RESCISSION OF FASB INTERPRETATION NO. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after
December 31, 2002 and are not expected to have a material effect on the
Company's financial statements. The disclosure requirements are effective for
consolidated financial statements of annual periods ending after December 15,
2002.

In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION--TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT
NO. 123. This Statement amends FASB Statement No. 123 to provide alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to these consolidated financial
statements.

In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For nonpublic enterprises, such as the Company,
with a variable interest in a variable interest entity created before
February 1, 2003, the Interpretation is applied to the enterprise no later than
the end of the first annual reporting period beginning after June 15, 2003. The
application of this Interpretation is not expected to have a material effect on
the Company's financial statements. The Interpretation requires certain
disclosures in financial statements issued after January 31, 2003 if it is
reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective.

(3) LIQUIDITY

To date, the Company has devoted all of its efforts to developing,
constructing and marketing the original ASTROLINK System-TM-. Through
December 31, 2002, the Company has generated no revenue and has an accumulated
deficit of approximately $1.0 billion. The reduced-scale operating plan
discussed in note 4 will require substantial additional financing to complete
the construction and launch of the two satellites and to market and distribute
the satellite-based services. Management's plans are to fund the remaining
satellite construction and launch and operations with equity investments from
additional investors, third-party sources of financing, or firm capacity
commitments from prospective customers, (see note 4(b)). Currently, economic
uncertainties exist regarding the successful acquisition of additional equity or
debt financing or firm commitments from prospective customers and the attainment
of positive cash flows from the Company's reduced-scale operating plan. These
factors individually, or in the aggregate, could have an adverse effect on the
Company's financial condition and future operating results and create an
uncertainty as to the Company's ability to continue as a going

IV-16

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

concern. The consolidated financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as a going
concern.

(4) BUSINESS DEVELOPMENTS AND PROPOSED RECONSTITUTION OF THE COMPANY

(A) CESSATION OF FURTHER FUNDING FROM MEMBERS, CONTRACT TERMINATIONS AND
RELATED ACTIONS

On October 25, 2001, LMGT advised the Company and publicly stated that it
would not provide additional funding to the Company beyond those amounts
previously subscribed for. Subsequent to that date, TRW made a similar
announcement.

As a result of these announcements, the Company terminated substantially all
of its major procurement contracts for the original ASTROLINK System-TM-,
including those with Members or Member-affiliates (see notes 6 and 11). The
Company terminated these contracts "for convenience", which is permitted by the
terms of the contracts. Also, in accordance with the terms of those contracts,
the parties are to determine payments due, if any, in connection with the
termination, which amounts are subject to review and, in some cases, negotiation
by the parties before final settlement. As of December 31, 2001, based on
termination claims received from the various contractors, Company estimates, and
the terms of each contract, the Company accrued approximately $174,015,988 to
recognize the estimated termination liability for these contracts. Of that
amount, approximately $127,362,988 relates to contracts with Members or
Member-affiliates.

In December 2001, the Company's Board of Directors established a plan to
terminate all of the Company's employees and established a trust fund to pay
severance to terminated employees in accordance with the Company's severance pay
plans. Restricted cash in the trust fund at December 31, 2001 and 2002 amounted
to approximately $7,243,000 and $2,166,000, respectively. Through December 31,
2001 and 2002, the Company made severance payments of approximately $2,446,000
and $5,145,000, respectively, to the terminated employees. Additionally, some
employees forfeited their severance rights in 2002 in the amount of $913,000 and
the plan was amended in 2002 to cancel the terminations of the remaining
employees, which resulted in a reduction of the accrual of approximately
$1,226,000. As of December 31, 2001 and 2002, the severance accrual was
approximately $7,934,000 and $680,000, respectively. Severance costs are
included in general and administrative expenses in the accompanying consolidated
statements of operations for the years ended December 31, 2001 and 2002.

On March 6, 2002, the Company filed a Demand for Arbitration with the
American Arbitration Association to initiate arbitration under the provisions of
one of its procurement contracts with an affiliate of a Member. The Demand for
Arbitration results from a dispute as to the Company's rights resulting from the
termination of the contract by the Company in November 2001. In connection with
the settlement of claims pursuant to the Master Agreement, this arbitration was
terminated.

(B) PROPOSED RECONSTITUTION OF THE COMPANY

On January 22, 2003, Liberty Satellite & Technology, Inc. (Liberty
Satellite), an affiliate of LMG announced that it had entered into the Master
Agreement with Lockheed Martin Corporation, Northrop Grumman Space & Mission
Systems Corp. (formerly TRW, Inc.) (Northrop Grumman), Telespazio S.p.A and
certain of their affiliates in connection with the proposed restructuring of the
Company.

IV-17

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

Under the Master Agreement, Liberty Satellite will acquire substantially all
of the assets of the Company. The Company simultaneously signed agreements with
Lockheed Martin and Northrop Grumman for completion of two satellites. The
parties also reached agreement on the settlement of all claims related to the
previous termination of the Company's major procurement contracts and all other
major third-party creditor claims. The closing of Liberty Satellite's
acquisition of the Company's business is subject to regulatory approvals and
other closing conditions, including Liberty Satellite obtaining satisfactory
funding for the business from additional investors, third party sources of
financing, or firm capacity commitments from prospective customers. Closing is
expected to occur on or before October 31, 2003.

If the closing occurs, Liberty Satellite will pay approximately $43 million
in cash and will issue approximately $3 million in value of Series A common
stock as total consideration for the Company's assets, including certain
existing satellite and launch contracts, and the settlement of all claims
against the Company. In addition, Liberty Satellite will provide additional
interim funding for the Company pending the closing.

Liberty Satellite currently plans to pursue a revised operating plan for the
new Astrolink System-TM-, taking into account current financial and market
factors. The revised operating plan currently envisions launching two Ka-band
satellites to provide enterprise customers with virtual private networks and
related advanced services, as well as their use in fulfilling the expanding
needs for bandwidth by various government agencies.

If the closing under the Master Agreement does not occur, the Company will
pursue an orderly liquidation in accordance with the terms of the Master
Agreement.

Effective January 17, 2003, Northrop Grumman's Class A units were redeemed
and retired by the Company under the terms of the Master Agreement for $500,000
in cash contributed by other Members and $1,000,000 in assets. Whether the
closing of the Master Agreement occurs or if the Company enters a orderly
liquidation, certain Members' Class A units are to be redeemed and retired under
the terms of the Master Agreement.

(C) WRITE-DOWN RELATING TO SYSTEM UNDER CONSTRUCTION ASSET

As a result of the Company's reduced-scale operating plan, it has written
down all capitalized costs except those costs necessary to support the new plan
as discussed above. Charges relating to these costs were approximately
$728,495,000 for the year ended December 31, 2001.

In accordance with SFAS No. 144, the Company also assessed whether the costs
incurred and capitalized associated with the current reduced-scale operating
plan had been further impaired during 2002. Based on the Company's projected
undiscounted cash flows from this plan, and after considering the estimated
costs to complete construction and launch of the reduced-scale system as well as
the risk of availability of adequate additional financing and likelihood of
customer acceptance of the services from the new Astrolink System-TM-,
management does not believe that the costs incurred and capitalized associated
with the reduced-scale system, have been impaired as of December 31, 2002.

IV-18

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

(D) RISKS AND UNCERTAINTIES RELATING TO THE RECONSTITUTION AND REDUCED-SCALE
OPERATING PLAN

The completion of the reconstitution is subject to numerous conditions,
including obtaining adequate financing, or firm capacity commitments from
prospective customers and receipt of governmental approvals, which involve
substantial risks and uncertainties. In addition, the Company's development
effort relating to the reduced-scale operating plan involves substantial risks
and uncertainties. Future operating results will be subject to significant
business, economic, regulatory, technological, and competitive uncertainties and
contingencies, including the ability to obtain and maintain the necessary
licenses and other approvals to operate the network and provide services. These
factors individually or in the aggregate could have an adverse effect on the
Company's financial condition and future operating results. In addition, the
Company will require substantial additional financing before construction is
completed, see note 3. Failure to obtain the required long-term financing will
prevent the Company from realizing its objective of operating its Ka-band
telecommunications system. There can be no assurance that the Company will be
successful in its efforts to reconstitute the development, construction and
implementation of the reduced-scale operating plan, or that it will be able to
obtain the necessary financing to complete and operate the system even if the
reconstitution plan, as described above, is implemented.

(5) MEMBERS' EQUITY

On July 20, 1999, LMGT purchased 42,000,000 Class A units for an aggregate
purchase price of $420,000,000. During 1999, 2000 and 2001, LMGT paid all
amounts in accordance with this commitment.

Also on July 20, 1999, Northrop Grumman and Telespazio each purchased
25,000,000 Class A units for a purchase price of $250,000,000. Northrop Grumman
subscribed to purchase an additional 510,000 Class A units on December 13, 1999,
for a purchase price of $5,100,000. During 1999, 2000, and 2001, Northrop
Grumman and Telespazio each paid all amounts of their respective commitments.

On December 31, 1999, LMG purchased 42,500,000 Class A units for an
aggregate purchase price of $425,000,000. In 1999, 2000 and 2001, LMG paid all
amounts in accordance with this commitment.

On January 17, 2003, Northrop Grumman's Class A units were redeemed and
retired by the Company under the terms of the Master Agreement, see note 4(b).

(6) TRANSACTIONS AND COMMITMENTS WITH MEMBERS

(A) SATELLITE PURCHASE AND LAUNCH SERVICES CONTRACTS WITH MEMBERS

During 1999, 2000, and 2001, the Company entered into a series of contracts
with a Member and certain of its affiliates for the procurement of four
satellites, launch services, and a satellite control facility with related
services, training and documentation. The total original aggregate commitment
under the agreements was approximately $1,826,235,000, before considering the
terminations discussed in note 4. The amounts under the contracts were due
partly in monthly payments and partly upon the completion of certain milestones.
During the years ended December 31, 2000 and 2001, the Company paid
approximately $348,521,000 and $300,942,000, respectively, to the Member under
the terms of these contracts. No payment was made in 2002 due to the termination
of such contracts in 2001. At

IV-19

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

December 31, 2001 and 2002, $26,771,000 was payable to the Member under the
original terms of these contracts. In accordance with the terms of the Master
Agreement at closing, the Company will receive a refund of $8,314,000 for its
prepaid launch costs paid to an affiliate of a Member, which is included in
prepaid and other current assets in the consolidated balance sheets.

(B) GROUND SEGMENT AND TELEMETRY, TRACKING AND COMMAND PRODUCTS, AND
SERVICES CONTRACTS

On April 29, 1999, the Company entered into two contracts with a Member for
obtaining certain satellite ground segment and telemetry, tracking and command
products, and services. The total original aggregate commitment under these
contracts, as amended, was approximately $511,500,000, before considering the
terminations discussed in note 4. This amount was due upon the completion of
certain milestones. During the years ended December 31, 2000 and 2001, the
Company paid approximately $81,400,000 and $135,242,000, respectively, to the
Member under the terms of the contracts. No payment was made in 2002 due to the
termination of such contracts in 2001. At December 31, 2001 and 2002,
approximately $13,001,000 was payable to the Member.

(C) OPERATIONS AND MAINTENANCE CONTRACTS

On July 27, 2001, the Company entered into two contracts with a Member for
obtaining certain operations and maintenance services for the ASTROLINK
System-TM- for 15 years. Amounts due under these contracts are billed on a time
and materials basis. During the year ended December 31, 2001, the Company paid
approximately $1,315,000 to the Member under the terms of the contracts. No
payment was made in 2002 due to the termination of such contracts in 2001. At
December 31, 2001 and 2002, approximately $776,000 was payable to the Member.

(D) SATELLITE APPLICATIONS INTERFACE CONTRACTS

During 1999 and 2000, the Company entered into contracts with a Member for
obtaining a satellite applications interface and payload emulators. The total
original commitment under the agreements was approximately $34,525,000 with an
option to purchase up to $1,525,000 in additional support services, before
considering the terminations discussed in note 4. The amounts were due upon the
completion of certain milestones or the delivery of optional support services.
During the years ended December 31, 2000 and 2001, the Company paid
approximately $18,220,000 and $12,666,000, respectively, to the Member under the
terms of the contracts. No payment was made in 2002 due to the termination of
such contracts in 2001. At December 31, 2001 and 2002, approximately $1,146,000
was payable to the Member under the original terms of the contracts.

(E) SETTLEMENTS OF CLAIMS UNDER PROCUREMENT CONTRACTS WITH MEMBERS

As of January 17, 2003, all claims related to the previous termination of
the Company's procurement contracts with its Members and certain of their
affiliates were settled under the Master Agreement. During January 2003, the
Company entered into two contracts with a Member and a Member-affiliate for the
completion of two satellite payloads, two spacecraft, and provision of one
launch. The total aggregate commitment under the agreements is approximately
$272,000,000. The amounts under the contracts are due partly in periodic
payments and partly upon completion of certain milestones.

IV-20

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

(F) MEMBER ADVANCES

During 2002, the Company received $2,387,721 from its Members in the form of
loans bearing interest at 10%, of which $800,000 was secured by all of the
assets of the Company with the exception of any work in process under any system
procurement contract unless it constituted proceeds from the procurement
contract. The Company incurred $110,836 in interest during 2002 under these
advances.

(7) PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 2001 and
2002:

During 2002, the Company disposed of the majority of its headquarters'
furniture and fixtures and leasehold improvements as a direct result of Company
downsizing, resulting in a loss on disposal of approximately $804,000.

(8) EMPLOYEE BENEFIT PLAN

On July 20, 1999, the Company adopted a profit sharing and savings plan (the
Plan) under Section 401(k) of the Internal Revenue Code. This Plan allows
eligible employees to defer up to 20% of their annual compensation, subject to
IRS rules and applicable limits to the Plan. During the years ended
December 31, 2000, 2001 and 2002, the Company contributed 4% of each employee's
annual compensation to the Plan, which amounted to approximately $345,000,
$555,000, and $93,000, respectively.

IV-21

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2002

(9) LEASES

The Company has a non-cancelable operating lease for property that will
expire in 2016. The future minimum lease payments under the lease as of
December 31, 2002 are:

Year ending December 31:
2003...................................................... $ 96,000
2004...................................................... 96,000
2005...................................................... 96,000
2006...................................................... 96,000
2007 and thereafter....................................... 896,000
----------
$1,280,000
==========

Rent expense for the years ended December 31, 2000, 2001, and 2002 was
approximately $1,545,000, $1,656,000, and $733,000, respectively.

(10) UNIT OPTIONS

The Company has a unit option plan that provides for the granting of options
to employees of the Company to purchase Class B units. The Class B units are
non-voting and are convertible into any class of securities that become
registered during an initial public offering. The options vest over a five-year
period and expire ten years after the date of grant. As of December 31, 2001 and
2002, the Company had reserved 8,512,704 units for issuance under the option
plan.

The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee unit options rather than the alternative fair value
accounting method allowed by SFAS No. 123. APB No. 25 provides that compensation
expense under variable plan accounting applicable to junior option plans is
based upon the difference, if any, between the exercise price and the fair value
of the Company's units when it becomes probable that the conversion of the
non-voting units to the voting class will occur. SFAS No. 123 requires companies
that continue to follow APB No. 25 to

IV-22

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

provide pro forma disclosure of the impact of applying the fair value method of
SFAS No. 123. The following table summarizes unit option activity:

There were 754,700 and 610,941 options exercisable at December 31, 2001 and
2002, respectively. There were 5,946,499 units available for future grants as of
December 31, 2002. The weighted average exercise price of unit options granted
during the year ended December 31, 2000 and 2001 was $10.00. The weighted
average remaining contractual life of the Company's unit options was
approximately eight years at December 31, 2002.

Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee unit
options under the fair value method. The weighted average fair value of unit
options granted during 2000 and 2001 was $2.56 and $2.00, respectively, per
share using the Black-Scholes option pricing model with the following
assumptions: expected dividend yield 0%, volatility 0%, average risk free
interest rate 4.51%--6.01%, and expected life of five years. For purposes of the
pro forma disclosures, the estimated fair value of the unit options is amortized
to expense over the unit options' vesting period. Had compensation expense for
the unit options granted to employees been determined based on the fair value of
the related unit options at the grant dates in accordance with SFAS No. 123, the
Company's net loss for the years ended December 31, 2000, 2001 and 2002 would
have increased by the pro forma amount indicated below:

IV-23

ASTROLINK INTERNATIONAL LLC

(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001 AND 2002

(11) OTHER CONTRACTUAL COMMITMENTS AND RELATED TERMINATIONS

During 2000 and 2001, the Company entered into contracts with third-party
contractors for the development and manufacture of end-user terminals and
service provider gateway terminals. Amounts under the contracts were due upon
the completion of certain milestones. As described in note 4, the Company
terminated all of its construction and related contracts during 2001. During the
years ended December 31, 2000 and 2001, the Company paid approximately
$1,500,000 and $16,000,000, respectively, to the contractors under the terms of
these contracts. At December 31, 2001 and 2002, approximately $4,675,000 was
payable to the contractors under the original terms of these contracts. The
Company has accrued an additional $46,653,000 related to the termination of
these contracts. During January 2003, all claims from third party contractors
for the development and manufacture of terminals were settled in consideration
of payments made by a Member.

As of December 31, 2002, the Company was subject to a legal proceeding and
claim relating to a software license agreement that arose in the ordinary course
of its operations that had not been finally adjudicated. The amount at issue in
this proceeding was $1,200,000, all of which was accrued for as of December 31,
2001. As of January 17, 2003, and in connection with the Master Agreement, the
dispute was settled in consideration of a payment of $350,000 by the Company to
the software vendor and the proceeding was dismissed. In December 2002, the
Company reduced its accrual for the settlement by $850,000, which is included in
the consolidated statements of operations.

(12) VALUE ADDED TAX (VAT) REFUND DISPUTE

In 2001, in accordance with Italian law, the Company's Italian subsidiary
submitted a written request for a refund of value added tax (VAT) that has been
paid to the Italian government in connection with work performed in Italy on the
original Astrolink System-TM-. In 2002, the Italian VAT authority provided a
partial refund of VAT of approximately $450,000 and is currently disputing the
remaining refund petition of approximately $7,726,000. The Italian VAT authority
has also threatened other actions against the Company in connection with the VAT
refund request. The Company believes that the Italian government's position is
without merit and that the collectibility of the remaining VAT receivable is
probable (although the timing is uncertain). Therefore, no reserve has been
established over the VAT receivable at December 31, 2002. However, there can be
no assurance that the resolution of this dispute will not result in the
write-off of some portion, or all, of the VAT receivable.

IV-24

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

LIBERTY SATELLITE & TECHNOLOGY, INC.

By: /s/ KENNETH G. CARROLL
------------------------------------------------
Name: Kenneth G. Carroll
Title: ACTING PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER

Dated March 28, 2003

Pursuant to the Securities Exchange Act of 1934, this report has been signed
by the following persons on behalf of the Registrant and in the capacities and
on the date indicated:

IV-25

CERTIFICATION

I, Kenneth G. Carroll, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: March 28, 2003

/s/ KENNETH G. CARROLL
- --------------------------------------------
Kenneth G. Carroll
ACTING PRESIDENT, CHIEF FINANCIAL OFFICER AND
TREASURER

IV-26

EXHIBIT INDEX

Listed below are the exhibits which are filed as a part of the Report
(according to the number assigned to them in Item 601 of Regulation S-K):

10.5 Option Agreement, dated as of December 4, 1996, by and
between the Company and Larry E, Romrell*.(b)

10.6 Option Agreement, dated as of December 4, 1996, by and
between the Company and David P. Beddow*.(b)

10.7 Share Purchase Agreement dated as of December 4, 1996,
between TCI and the Company.(b)

10.8 Option Agreement dated as of December 4, 1996, between TCI
and the Company.(b)

10.9 TCI Satellite Entertainment, Inc. 1997 Nonemployee Director
Plan*.(d)

10.10 Asset Purchase Agreement by and among Hughes Electronics
Corporation, PRIMESTAR, Inc., PRIMESTAR Partners L.P.,
Tempo Satellite, Inc. and the Stockholders of PRIMESTAR
listed herein, dated as of January 22, 1999.(e)

10.11 Asset Purchase Agreement among PRIMESTAR, Inc., PRIMESTAR
Partners L.P., PRIMESTAR MDU, Inc., the Stockholders of
PRIMESTAR, Inc. listed herein and Hughes Electronics
Corporation dated as of January 22, 1999.(e)

10.12 PRIMESTAR Payment Agreement dated as of January 22, 1999
among TCI Satellite Entertainment, Inc., PRIMESTAR, Inc.,
the Funding Parties and Paragon Communications.
Incorporated by reference to Phoenixstar, Inc.'s Current
Report on Form 8-K, dated May 13, 1999. (Commission File
No. 0-23883).

10.13 Promissory Note, dated March 16, 2000, between TCI Satellite
Entertainment, Inc. (now known as Liberty Satellite &
Technology, Inc.) and Liberty Media Corporation.
Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.
(Commission File No. 0-21317).

10.14 Amended and Restated Loan Agreement by and between Liberty
PCS Trust and DLJ Cayman Islands, LCD dated November 3,
2000. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
(Commission File No. 0-21317).

10.15 Purchase Agreement by and among LSAT, Liberty AEG, Inc. and
Liberty Media dated August 16, 2001.(f)

10.16 First Amendment to the Purchase Agreement by and among LSAT,
Liberty AEG, Inc. and Liberty Media dated November 30,
2001.(f)

10.17 Second Amendment to the Purchase Agreement by and among
LSAT, Liberty AEG, Inc. and Liberty Media dated February
7, 2002.(f)

10.18 LSAT LLC Purchase Agreement by and among LMC/LSAT Holdings,
Inc., Liberty Brazil DTH Inc., Liberty Mexico DTH Inc.,
Liberty Multicountry DTH, Inc., Liberty International DTH,
Inc., Liberty Latin Partners, Inc., LSAT and Liberty Media
dated August 16, 2001.(f)

10.19 First Amendment to the LSAT LLC Purchase Agreement by and
among LMC/LSAT Holdings, Inc., Liberty Brazil DTH Inc.,
Liberty Mexico DTH Inc., Liberty Multicountry DTH, Inc.,
Liberty International DTH, Inc., Liberty Latin Partners,
Inc., LSAT and Liberty Media dated November 20, 2001.(f)

10.20 Second Amendment to the LSAT LLC Purchase Agreement by and
among LMC/LSAT Holdings, Inc., Liberty Brazil DTH Inc.,
Liberty Mexico DTH Inc., Liberty Multicountry DTH, Inc.,
Liberty International DTH, Inc., Liberty Latin Partners,
Inc., LSAT and Liberty Media dated February 7, 2002.(f)

10.21 Tax Liability Allocation and Indemnification Agreement dated
as of April 1, 2002 between Liberty Media and LSAT filed
herewith.

10.22 Subscription Agreement, dated as of December 9, 2002,
between Wildblue Communications, Inc. and Liberty
Satellite & Technology, Inc. filed herewith.

10.23 Subscription Agreement, dated as of December 9, 2002,
between Wildblue Communications, Inc. and Liberty
Satellite & Technology, Inc. filed herewith.

10.24 Agreement of Stockholders, dated as of December 9, 2002,
among Wildblue Communications, Inc. and the stockholders
listed therein filed herewith.

10.25 Supplemental Stockholders Agreement, dated as of January 31,
2003, between Liberty Satellite & Technology, Inc. and
IntelSat USA Sales Corp. filed herewith.

10.26 Master Agreement Regarding Restructuring of ASTROLINK
International LLC, dated as of January 17, 2003, by and
among Liberty Satellite & Technology, Inc. and the other
parties named therein filed herewith.

10.27 Contribution Agreement, dated as of January 17, 2003, by and
among Liberty Satellite & Technology, Inc., Liberty Media
Corporation and ASTROLINK International LLC filed
herewith.

10.28 Master Services Agreement, dated as of August 3, 1993, by
and between Marriott International, Inc., Marriott Hotel
Services, Inc. and On Command Video Corporation
(confidential treatment granted) (Incorporated by
reference to Exhibit 10.6 to the Registration Statement on
Form S-1 (File No. 33-98502) of Ascent Entertainment
Group, Inc.).

10.29 Service Agreement, dated March 21, 2001, between On Command
Corporation and Marriott International, Inc. (composite
version) (confidential treatment requested) (Incorporated
by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001 of On
Command Corporation, Commission File No. 00-21315).

10.30 Hilton Hotels Corporation-On Command Video Agreement, dated
April 27, 1993, by and between Hilton Hotels Corporation
and On Command Video Corporation (confidential treatment
granted) (Incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-4 (File No. 333-10407) of
On Command Corporation).

10.31 Credit Agreement, dated as of July 18, 2000, by and among On
Command Corporation, the lenders party thereto, Toronto
Dominion (Texas), Inc., Fleet National Bank, Bank of
America, N.A., and the Bank of New York. (Incorporated by
reference to Exhibit 10.16 of the Annual Report on
Form 10-K/A for the year ended December 31, 2000 of On
Command Corporation).

10.32 Amendment No. 1, dated as of March 27, 2001, to the Credit
Agreement, dated as of July 18, 2000, by and among On
Command Corporation, the lenders party thereto, Toronto
Dominion (Texas), Inc., Fleet National Bank, Bank of
America, N.A., and the Bank of New York. (Incorporated by
reference to Exhibit 10.17 of the Annual Report on
Form 10-K/A for the year ended December 31, 2000 of On
Command Corporation).

10.33 Amendment No. 2 dated as of November 14, 2001, to the Credit
Agreement, by and among On Command Corporation, Toronto
Dominion (Texas), Inc. Fleet National Bank, Bank of
America, the Bank of New York Company and the Bank of New
York. (Incorporated by reference to Exhibit 10.16 of the
Annual Report of Form 10-K for the year ended
December 31, 2001 of On Command Corporation).

21 Subsidiaries of the Registrant filed herewith.

23.1 Consent of KPMG LLP filed herewith.

23.2 Consent of KPMG LLP filed herewith.

99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 filed herewith.