LIBERTY SATELLITE & TECHNOLOGY INC - 10-Q Quarterly Report

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

F O R M 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 0-21317

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

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

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

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

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 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 / /

The number of shares outstanding of Liberty Satellite & Technology, Inc.'s
common stock as of July 31, 2003 was:

Series A common stock--14,278,206 shares; and
Series B common stock--34,765,055 shares.

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

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(continued)

I-1

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

CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-2

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-3

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-4

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

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-5

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-6

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003
(UNAUDITED)

(1) BASIS OF PRESENTATION

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

LSAT is a consolidated subsidiary of Liberty Media Corporation ("Liberty
Media"). At June 30, 2003, Liberty Media owned approximately 87% of LSAT's
outstanding common stock, which, when considered with LSAT redeemable preferred
stock owned by Liberty Media, represented approximately 98% of LSAT's
outstanding voting power. The Company's primary operating subsidiary is On
Command Corporation ("On Command"), which provides in-room, on-demand video
entertainment and informational services to hotels, motels and resorts. At
June 30, 2003, LSAT, indirectly controlled approximately 74% 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 80% of On Command's outstanding voting power.

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

These interim condensed consolidated financial statements are unaudited. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) have been made that are necessary to present fairly the financial
position of the Company as of June 30, 2003 and the results of its operations
for the three and six months ended June 30, 2003 and 2002. The results of
operations for any interim period are not necessarily indicative of the results
for the entire year. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
thereto included in the Company's December 31, 2002 Annual Report on Form 10-K.

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

Certain prior period amounts have been reclassified for comparability with
the 2003 presentation.

(2) TRANSACTIONS WITH LIBERTY MEDIA AND OTHER RELATED PARTIES

PROPOSALS BY LIBERTY MEDIA TO ACQUIRE LSAT AND ON COMMAND PUBLICLY-HELD
STOCK

On April 1, 2003, the Company announced that it had received an expression
of interest from Liberty Media regarding the possibility of Liberty Media
acquiring all the issued and outstanding shares of LSAT that Liberty Media does
not already own. As proposed by Liberty Media, LSAT stockholders would receive
0.2131 of a share of Liberty Media Series A common stock for each share of LSAT
common stock held. The transaction would be taxable to LSAT stockholders.

I-7

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

LSAT's Board of Directors has established a committee of independent
directors to consider the proposal from Liberty Media. The committee has engaged
independent legal counsel and financial advisors, and has authority, among other
things, to review and evaluate the terms and conditions of the proposed
transaction, to determine whether the proposed transaction is in the best
interests of the Company and its public stockholders, to negotiate with Liberty
Media, and to accept, reject or seek to modify the proposed transaction. Any
transaction between LSAT and Liberty Media would be subject to negotiation,
execution and delivery of definitive documentation relating thereto and any
closing conditions provided for in such documentation.

On April 2, 2003, On Command announced that it had received an expression of
interest from Liberty Media regarding the possibility of Liberty Media acquiring
all the issued and outstanding shares of On Command that Liberty Media (through
its subsidiaries) does not already own. As proposed by Liberty Media, On Command
stockholders would receive 0.0787 of a share of Liberty Media Series A common
stock for each share of On Command Common Stock held. The transaction would be
taxable to On Command stockholders.

On Command's Board of Directors has established a committee of independent
directors to consider the proposal from Liberty Media. The committee has engaged
independent legal counsel and financial advisors, and has authority, among other
things, to review and evaluate the terms and conditions of the proposed
transaction, to determine whether the proposed transaction is in the best
interests of On Command and its public stockholders, to negotiate with Liberty
Media, and to accept, reject or seek to modify the proposed transaction. Any
transaction between On Command and Liberty Media would be subject to
negotiation, execution and delivery of definitive documentation relating thereto
and any closing conditions provided for in such documentation.

TRANSACTIONS WITH LIBERTY MEDIA AND AFFILIATES

NOTE PAYABLE. On March 26, 2003, LSAT used a portion of the proceeds from
the delivery of 2,500,000 shares of Sprint Corporation PCS Group common stock
and the termination of a related equity collar to repay a note payable to
Liberty Media with a principal balance of $48,411,000 and an accrued interest
balance of $115,000.

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

I-8

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In addition, under the tax liability allocation and indemnification
agreement, LSAT will have the opportunity to participate in the defense of
claims of the Internal Revenue Service that might affect its liability under the
agreement, and to participate in tax refunds paid to Liberty Media where such
refunds are due in part to LSAT's operations. Through June 30, 2003, the Company
has recorded a $2,814,000 intercompany receivable from Liberty Media pursuant to
this agreement.

At June 30, 2003, Ascent Entertainment, Inc., a wholly-owned subsidiary of
LSAT, ("Ascent Entertainment") owed Liberty Media $8,409,000 pursuant to a
separate tax liability allocation and indemnification agreement. Such amount,
which is non-interest bearing, represents the net effect of $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 $227,000 during each of the six
month periods ended June 30, 2003 and 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 ($168,000
at June 30, 2003) are non-interest bearing and are generally paid on a monthly
basis.

PUT OPTION LIABILITY. Effective September 29, 2000, Liberty Satellite LLC
("LSAT LLC"), a subsidiary of LSAT, 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.

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 ($32,418,000
at June 30, 2003), 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 condensed consolidated statements of
operations. During the six months ended June 30, 2003 and 2002, the Company
recorded unrealized losses of $1,367,000 and $1,254,000, respectively, related
to the iBEAM Put Option.

I-9

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ASCENT MEDIA SATELLITE SERVICES. Since October 1, 2002, Ascent Media
Group, Inc., a consolidated subsidiary of Liberty ("Ascent Media") has provided
uplink and satellite transport services to the Company for a negotiated monthly
fee. Beginning in April 2003, Ascent also began installing satellite equipment
at On Command's downlink sites at hotels. During the six months ended June 30,
2003, Ascent Media charged the Company $217,000 for such services. The terms for
the above-described services are set forth in a Content Preparation and
Distribution Services Agreement that covers the five-year period beginning on
April 1, 2003. Ascent Media also may supply the Company with content preparation
services at a negotiated rate during the term of the agreement. No content
preparation services have been provided through June 30, 2003.

TRANSACTIONS WITH OTHER RELATED PARTIES

PHOENIXSTAR MANAGEMENT AGREEMENT. Effective February 1, 2000, the Company
entered into a management agreement with Phoenixstar, 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 transactions that
closed in 1999, 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 equity, and to transfer its shares in Phoenixstar to
the other Phoenixstar stockholders. Management fees from Phoenixstar aggregated
$210,000 for each of the six-month periods ended June 30, 2003 and 2002. 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 are limited to $5,000 per month. Such
allocations aggregated $30,000 during each of the six-month periods ended
June 30, 2003 and 2002, and are reflected as a reduction of general and
administrative expenses in the accompanying condensed consolidated statements of
operations.

(3) RECENT ACCOUNTING PRONOUCEMENTS

In May 2003, the Financial Accounting Standards Board issued STATEMENT
NO. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY ("Statement No. 150"). Statement No. 150 provides
guidance as to whether certain financial instruments are required to be
classified as liabilities, subject to its recognition and measurement
provisions. Generally, Statement No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
adopted the provisions of Statement No.150 on July 1, 2003. The adoption of
Statement No. 150 is not expected to have a material effect on the Company's
consolidated financial statements.

(4) LOSS PER COMMON SHARE

The loss per common share is based on 49,043,300 and 48,581,500 weighted
average shares outstanding for the three and six months ended June 30, 2003,
respectively; and 41,523,600 and 41,524,200 weighted average shares outstanding
for the three and six months ended June 30, 2002, respectively. Potential common
shares were not included in the computation of diluted loss per share because
their inclusion would have been anti-dilutive. At June 30, 2003, the number of
potential common shares was approximately 2,170,000. Such potential common
shares consist of stock options to acquire shares of LSAT Series A common stock
("Series A Common Stock") and securities that are convertible into 1,696,717
shares of LSAT Series B common stock ("Series B Common Stock') at

I-10

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2003. The foregoing potential common share amounts do not take into
account the assumed number of shares that may be repurchased by the Company upon
the exercise of stock options.

(5) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash paid for interest was $7,538,000 and $8,333,000 for the six months
ended June 30, 2003 and 2002, respectively. Cash paid for income taxes was not
significant during these periods.

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

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

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

SPRINT PCS GROUP

The Company accounted for its investment in Sprint Corporation PCS Group
common stock ("Sprint PCS Stock") as an available-for-sale security. On
March 26, 2003, the Company delivered 2,500,000 shares of Sprint PCS Stock in
connection with the settlement of a portion of the Sprint PCS Stock equity
collar. The Company received cash proceeds of $149,263,000 upon such settlement.
On April 9, 2003, the Company delivered all of its remaining 2,584,745 shares of
Sprint PCS Stock in connection with the settlement of the remaining portion of
the Sprint PCS Stock equity collar and received cash proceeds of $154,323,000.

XMSR

LSAT LLC currently owns 1,000,000 shares or approximately 1% of the
outstanding XMSR Class A common stock.

On June 27, 2001, LSAT LLC entered into an agreement to lend 1,000,000
shares of XMSR to a third party. The obligation of such third party to return
those shares to LSAT LLC is secured by cash collateral equal to 100% of the
market value of that stock, which was $10,990,000 at June 30, 2003. Such cash
collateral is reported as restricted cash in the accompanying condensed
consolidated balance sheet. During the period of the loan, which is terminable
by either party at any time, the cash collateral is to be marked-to-market
daily. Interest accrues on the cash collateral for the benefit of LSAT LLC at
the rate of 0.15% per annum. As of June 30, 2003, 1,000,000 shares of XMSR had
been lent under this agreement. The loan has no stated maturity date.

I-11

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MAGINET CORPORATION, FORMERLY E-ROOM CORPORATION ("MAGINET")

In connection with a first quarter 2001 acquisition of a 7.5% interest in
MagiNet and the settlement of certain litigation, On Command agreed that MagiNet
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 MagiNet 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. On March 1, 2003, 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. Subsequent to June 30, 2003, MagiNet agreed to assign
the above-described 36,000 shares to the Company in exchange for a $540,000
credit against the cost of equipment to be purchased by MagiNet from the Company
through March 1, 2004. To the extent that MagiNet has not used all of such
credit by March 1, 2004, the remaining credit will be settled in cash.

NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS

During the three months ended June 30, 2003 and 2002, the Company recorded
losses of $4,412,000 and $58,948,000, respectively, to reflect nontemporary
declines in the value of its investment in Sky Latin America.

UNREALIZED HOLDING GAIN AND LOSSES

Unrealized holding gains and losses related to investments in
available-for-sale securities that are included in accumulated other
comprehensive earnings are summarized below. Such amounts are in addition to the
unrealized gains and losses recognized in LSAT's condensed consolidated
statements of operations.

(7) INVESTMENT IN WILDBLUE COMMUNICATIONS, INC.

In December 2002, the Company announced that it had agreed to increase its
investment in WildBlue Communications, Inc. ("WildBlue"). On April 21, 2003,
pursuant to the terms of the new agreement, the Company invested $58 million in
return for senior preferred stock and warrants of WildBlue, which increased its
ownership interest from approximately 16% to approximately 32%. Concurrently,
other existing and new investors invested $98 million in WildBlue for a total
new investment of $156 million. As a result of this transaction, the Company
began using the equity method

I-12

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to account for its investment in WildBlue. Previously, the Company had carried
such investment at cost, subject to other-than-temporary impairment. WildBlue
currently expects to launch its satellite in the first half of 2004 and begin
the phased introduction of broadband data services in late 2004 or early 2005.

In connection with such additional investments in WildBlue, the Company
entered into a put agreement with KPCB Holdings, Inc. ("KPCB"), one of the
existing WildBlue investors that participated in the recent round of financing.
Pursuant to this put agreement, KPCB has the right to sell its entire interest
in WildBlue to the Company and another WildBlue investor for $10,000,000, the
amount KPCB invested in WildBlue in the recent financing round. 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. The estimated fair value of
the put obligation at June 30, 2003 ($1,516,000) is included in other
liabilities in the accompanying condensed consolidated balance sheet.

(8) DERIVATIVE INSTRUMENTS

The estimated fair values of the Company's derivative instruments are as
follows:

Prior to the consummation of the settlement transactions described below,
the Company owned, through its interest in a trust, a beneficial interest in
5,084,745 shares of Sprint PCS Stock, as well as a beneficial interest in an
equity collar between the trust and a financial institution with respect to
5,084,745 shares of Sprint PCS Stock. On March 26, 2003, the Company delivered
2,500,000 shares of Sprint PCS Stock in connection with the settlement of a
portion of the Sprint PCS Stock equity collar. The Company received cash
proceeds of $149,263,000 upon such settlement. On April 9, 2003, the Company
delivered all of its remaining 2,584,745 shares of Sprint PCS Stock in
connection with the settlement of the remaining portion of the Sprint PCS Stock
equity collar and received cash proceeds of $154,323,000.

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.

I-13

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

Prior to January 1, 2003, 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
condensed consolidated balance sheet. Changes in the fair value of the equity
collars will continue to be reported in earnings.

Realized and unrealized gains (losses) on financial instruments are as
follows:

(9) DEBT

Debt is summarized as follows:

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(a) On Command's revolving credit facility, as amended, (the "On Command
Revolving Credit Facility") provided for aggregate borrowings of
$275,000,000 at June 30, 2003. Borrowings under the On Command Revolving
Credit Facility are due and payable in July 2004. On Command had
$9,367,000 of remaining availability under the On Command Revolving
Credit

I-14

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Facility at June 30, 2003. 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 Offered Rate ("LIBOR") plus a
spread that may range from 1.125% to 3.50% depending on certain operating
ratios of On Command (4.83% effective borrowing rate at June 30, 2003).
In addition, a facility fee ranging from 0.375% 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. In addition, On Command is required to maintain leverage
and interest coverage ratios. On Command was in compliance with such
covenants at June 30, 2003, as then in effect. Substantially all of On
Command's assets are pledged as collateral for borrowings under the On
Command Revolving Credit Facility.

On March 28, 2003, On Command and its bank lenders amended the On Command
Revolving Credit Facility to postpone until June 30, 2003 the step down
of the leverage ratio covenant of the On Command Revolving Credit
Facility from 4.25 to 3.50. On June 27, 2003, a similar amendment was
executed to postpone such step down until October 1, 2003. Accordingly,
the maximum leverage ratio permitted under the On Command Revolving
Credit Facility at June 30, 2003 was 4.25, and On Command's actual
leverage ratio was 4.20 as of such date. On Command and its bank lenders
executed an Amended and Restated Credit Agreement on April 17, 2003, and
an amendment thereto on June 27, 2003 (as amended, the "Amended and
Restated Credit Agreement"). The effectiveness of the Amended and
Restated Credit Agreement is contingent upon the contribution of
$40,000,000 by Liberty Media or one of its subsidiaries (collectively,
the "Liberty Media Group") to On Command to be used to repay principal
due, and permanently reduce lender commitments, pursuant to the Amended
and Restated Credit Agreement. However, the Liberty Media Group has no
obligation to make any contribution to On Command, and there can be no
assurance that any such contribution will be made or, if made, what the
form or terms would be. After the proposed reduction of lender
commitments, the Amended and Restated Credit Agreement would constitute a
$235,000,000 senior secured credit facility, consisting of a $50,000,000
revolving credit facility and a $185,000,000 term loan facility. The term
loan would be subject to scheduled amortizations commencing
September 30, 2003, and both facilities would mature on December 31,
2007. If it does not earlier become effective, and if it is not otherwise
amended, the Amended and Restated Credit Agreement will terminate on
September 30, 2003.

Although On Command is in compliance with the leverage ratio covenant of
its existing On Command Revolving Credit Facility at June 30, 2003, and
On Command expects to be in compliance with such covenant at
September 30, 2003, On Command believes that it will be out of compliance
with such covenant at December 31, 2003 if the Amended and Restated
Credit Agreement does not become effective by that date. If the Amended
and Restated Credit Agreement has not become effective by, or is
otherwise terminated prior to, December 31, 2003, On Command anticipates
that it will request a further amendment to its existing On Command
Revolving Credit Facility to postpone the step down of the leverage ratio
covenant. It is uncertain whether On Command's lenders would agree to
such a further amendment and what terms might be imposed by the lenders
in connection with such further

I-15

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

amendment. In the event that the Amended and Restated Credit Agreement
does not become effective by the date that the leverage ratio is reduced
to 3.50, On Command anticipates that a default would occur under 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 On Command's assets. No assurance can be given that the
Amended and Restated Credit Agreement will become effective. In addition,
if the Amended and Restated Credit Agreement does not become effective,
no assurance can be given that On Command will be able to successfully
restructure or refinance its existing On Command Revolving Credit
Facility on terms acceptable to On Command, or that On Command will be
able to avoid a default under its existing On Command Revolving Credit
Facility. In light of the uncertainties with respect to the restructuring
of the On Command Revolving Credit Facility, On Command's independent
auditors included an explanatory paragraph in their audit report on the
December 31, 2002 consolidated financial statements of On Command stating
in part that "On Command is seeking to restructure the debt facility and
such restructuring is contingent on certain events, which raises
substantial doubt about On Command's ability to continue as a going
concern."

The Company has classified all borrowings outstanding under the On
Command Revolving Credit Facility as current liabilities in its June 30,
2003 condensed consolidated balance sheet due to the fact that an
amendment was obtained from its lenders that allowed On Command to meet
its leverage ratio covenant at June 30, 2003. In the absence of such
amendment, On Command would not have been in compliance with the leverage
ratio covenant under the On Command Revolving Credit Facility at
June 30, 2003. As the amendment postponed the step down of the leverage
ratio covenant for a period of less than 12 months, the Company has
classified the debt as current in accordance with EMERGING ISSUES TASK
FORCE ISSUE NO. 86-30, CLASSIFICATION OF OBLIGATIONS WHEN A VIOLATION IS
WAIVED BY A CREDITOR, and STATEMENT OF FINANCIAL STANDARDS NO. 6,
CLASSIFICATION OF SHORT-TERM OBLIGATIONS TO BE REFINANCED. Although On
Command has the intent to refinance the On Command Revolving Credit
Facility with long-term borrowings under the Amended and Restated Credit
Agreement, On Command does not now have the unilateral ability to
complete the conditions precedent to the effectiveness of the Amended and
Restated Credit Agreement.

(b) LSAT LLC's revolving credit facility, as amended, provided for maximum
borrowings of $303,000,000 (the "PCS Loan Facility"). On April 9, 2003,
the Company used $114,651,000 of the proceeds received from the
settlement of the Sprint PCS Stock equity collar to repay all principal
and accrued interest due under the PCS Loan Facility. In connection with
such repayment, the PCS Loan Facility was canceled.

The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issues or on the current rates offered
to the Company for debt of the same remaining maturities. Due to its
variable rate nature, the fair value of the Company's debt approximated its
carrying value at June 30, 2003.

(10) STOCK 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")

I-16

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and related interpretations, to account for its fixed plan stock options. Under
this method, compensation expense for stock options or awards that are fixed
generally 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 No. 123") established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by Statement No. 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
requirements of Statement No. 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. 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 No. 123 to stock-based employee compensation (amounts in thousands
except per share amounts).

(11) SIGNIFICANT CUSTOMERS

During the six months ended June 30, 2003, hotels owned, managed or
franchised by Marriott International, Inc. ("Marriott"), Hilton Hotels
Corporation ("Hilton"), InterContinental Hotel Group (formerly Six Continents
Hotels, Inc.) ("InterContinental"), Hyatt Hotel Corporation ("Hyatt"), and
Starwood Hotels and Resorts Worldwide, Inc. ("Starwood") accounted for 33%, 14%,
11%, 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 the six months ended June 30, 2003. 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 Command's master contract with Hilton expired in April 2000, and in
October 2000, Hilton announced that it would not be renewing such master
contract. As a result, domestic 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 domestic hotels owned by
Hilton will not renew their contracts with On Command as they expire. However,
domestic 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 domestic hotels will choose
to renew with On Command. At June 30, 2003, On Command provided service to
approximately 117,000 rooms in 506 domestic hotels that are owned, managed or
franchised

I-17

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

by Hilton. The majority of these rooms are located in managed or franchised
hotels that are not owned by Hilton. Through June 30, 2003, On Command's
contracts with 65 of the aforementioned 506 hotels (16,000 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 441
domestic Hilton hotels (101,000 rooms) expire at various dates through 2010,
with 46% of those rooms expiring by 2005. Since January 2002, On Command has
entered into new contracts, or renewed existing contracts, with respect to 9,300
domestic rooms that were franchised by Hilton, and 2,600 domestic rooms that
were managed by Hilton. The net room revenue derived from domestic hotels that
were owned, managed, or franchised by Hilton decreased approximately 18% during
the six months ended June 30, 2003, as compared to the corresponding prior year
period. Over time, On Command anticipates that the revenue it derives from
hotels that are owned, managed or franchised by Hilton will continue to
decrease. However, due to the uncertainties involved, On Command is currently
unable to predict the amount and timing of the revenue decreases.

On Command does not have master contracts with either Starwood or
InterContinental, and On Command's master contract with Hyatt 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 June 30, 2003, On Command provided entertainment services
to approximately 60,000 rooms in hotels that are owned, managed or franchised by
Hyatt, and approximately 176,000 rooms in hotels that are owned, managed or
franchised by Starwood or InterContinental. Agreements with respect to
approximately 45% of such Starwood and InterContinental rooms have already
expired, or will expire by December 31, 2004. At June 30, 2003, approximately
37,000 or 59% 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 InterContinental, with
Starwood with respect to the Starwood brands that are not already covered by a
competitor's contract, and with Hyatt for the period after December 31, 2004.

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. However, 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.

(12) COMMITMENTS AND CONTINGENCIES

COMMITMENTS

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 minimum payments and per room rates that escalate as the
number of rooms receiving the programming decreases.

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.

I-18

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 provided
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, and in May 2003, On Command acquired all of the HDN Stockholder's
interests in Hotel Digital Network common stock for cash and certain other
consideration, which in the aggregate was not material to On Command's financial
condition. Such acquisition, which did not require the issuance of any shares of
On Command Common Stock, represented the final settlement of On Command's
purchase obligation under the HDN Stockholders Agreement.

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 of Sky Latin America 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 June 30, 2003, 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 $103,980,000 and $5,757,000,
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 refrained from enforcing its rights under
the Transponder Services Agreement through April 30, 2003, so long as it
received at least 70% of the fees due under the Transponder Services Agreement.
Through July 31, 2003, the Company and the other investors in Sky Multi-Country
have collectively funded at least 70% of the fees due under the Transponder
Service Agreement. The parties are currently finalizing an agreement that would
extend the term of the Forbearance Agreement to October 31, 2003, subject to
certain conditions. At June 30, 2003, the aggregate obligations of Sky
Multi-Country that were severally guaranteed by Liberty International were
$39,080,000. Sky Multi-Country partially funds another Sky Latin America entity
in which GloboPar is an investor. At June 30, 2003, the aggregate obligations of
this entity that are severally guaranteed by Liberty International were
$5,757,000. 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 June 30, 2003, the aggregate obligations of Sky Brasil that are
severally guaranteed by Liberty International were $40,040,000.

As detailed above, the three entities in which GloboPar is an investor
account for approximately $84,877,000 of the aggregate obligations guaranteed by
Liberty International at June 30, 2003. To the

I-19

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 ("Acacia") 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
has reviewed Acacia's patents and believes there are substantial arguments that
Acacia's claims lack merit.

The Company has contingent liabilities related to 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 the amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.

(13) INFORMATION ABOUT OPERATING SEGMENTS

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

For the six months ended June 30, 2003, LSAT had two operating segments: "On
Command" and "Other." On Command provides in-room, on-demand entertainment and
information services to hotels, motels and resorts primarily in the United
States and is majority-owned and consolidated by LSAT. "Other" includes LSAT's
non-consolidated investments and corporate.

LSAT evaluates performance and allocates resources to its subsidiaries and
affiliates based in part 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. Operating cash flow should not
be considered 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.

I-20

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

NOTES TO CONDENSED 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:

I-21

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

GENERAL

The following discussion and analysis provides information concerning the
financial condition and results of operations of the Company and should be read
in conjunction with the accompanying condensed consolidated financial statements
of the Company, as well as the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.

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

- General economic and business conditions, 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 LSAT's recent investment in
WildBlue, its proposed investment in ASTROLINK International LLC, and On
Command's strategy to expand its target market to include smaller hotels;

- Uncertainties inherent in the completion and successful launch of
WildBlue's satellite;

- 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 actual or threatened terrorist
attacks and national security responses thereto, wars, contagious diseases
such as severe acute respiratory syndrome or other events might have on
such occupancy rates and travel patterns;

- 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;

I-22

- Uncertainties regarding the acceptance and buy rates for mature-themed
programming content distributed by On Command;

- Competitive threats posed by rapid technological changes;

- The development, provision and marketing of On Command's new platforms and
services, and customer acceptance, usage rates, and profitability of such
platforms and services;

- 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;

- Uncertainties inherent in the ability of On Command to satisfy the
conditions for the effectiveness of the Amended and Restated Credit
Agreement (including the required $40,000,000 contribution from the
Liberty Media Group) on a timely basis, and if not satisfied, the ability
of On Command to restructure or refinance the On Command Revolving Credit
Facility;

- The ability of LSAT to secure long-term financing on acceptable terms; and

- Other factors discussed in this Report.

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

MATERIAL CHANGES IN RESULTS OF OPERATIONS

REVENUE

IN-ROOM ENTERTAINMENT REVENUE

On Command's in-room entertainment revenue 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, the sale of video
equipment to hotels, and from other sources ("other entertainment revenue").

In-room entertainment revenue, comprised of room revenue and other
entertainment revenue, decreased $2,110,000 or 1.8% during the six months ended
June 30, 2003, as compared to the corresponding prior year period. The decrease
in net in-room entertainment revenue during the six-month 2003 period 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 (iii) a $2,066,000 increase in
the aggregate revenue derived from short subject, digital music and
television-based Internet products; (iv) a $1,395,000 increase in free-to-guest

I-23

programming revenue that is primarily the result of rate increases; and (v) a
$951,000 decrease in other entertainment revenue. On Command believes that the
decrease in pay-per-view buys is attributable to the combined effect of (i) a
decrease in buy rates for mature-themed pay-per-view products; (ii) a decrease
in occupancy rates (as further discussed below); (iii) a change in occupancy
mix; and (iv) a reduction in the average number of rooms served by On Command.
The 4.1% decline in the average number of rooms served by On Command during the
2003 period is attributable to (i) the sale of On Command's European operations;
(ii) the loss of rooms to competitors; and (iii) the discontinuance of service
to certain non-profitable hotels. In-room entertainment revenue decreased
$1,447,000 or 2.4% during the three months ended June 30, 2003, as compared to
the corresponding prior year period. The decrease in in-room entertainment
revenue during the three-month period generally is attributable to the same
factors that are described above with respect to the six-month period.

Overall hotel occupancy rates, as reported by Smith Travel Research,
declined 1.5% during the six months ended June 30, 2003, as compared to the
corresponding prior year period. In addition, occupancy rates for hotels in the
top 25 markets, as reported by Smith Travel Research, declined 1.7% 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.

During the six months ended June 30, 2003, hotels owned, managed or
franchised by Marriott, Hilton, Six Continents, Hyatt, and Starwood accounted
for 33%, 14%, 11%, 7% and 7%, respectively, of On Command's total net room
revenue. 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. For
additional information concerning On Command's relationships with its
significant customers, see note 11 to the accompanying condensed consolidated
financial statements.

OPERATING COSTS

During the six months ended June 30, 2003 and 2002, the Company's operating
costs were entirely comprised of On Command's 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 increased $736,000 or 1.9% during the
three months ended June 30, 2003, and decreased $598,000 or less than 1% during
the six months ended June 30, 2003, as compared to the corresponding prior year
periods. Such fluctuations include (i) increases in (a) royalties associated
with mature-themed pay-per-view movies, (b) duplication and distribution costs
(c) costs associated with other entertainment revenue and (d) hotel commissions;
and (ii) decreases due to (a) lower occupancy costs and other cost saving
measures related to On Command's field operations and (b) the sale of On
Command's European operations in July 2002. The increases in mature-themed
royalties are the result of an increase in the quality and quantity of
mature-themed movies available through the Company's video systems due to the
initiation of a new vendor relationship in March 2003 and increases in the
capacity of certain of the Company's video systems. The increase in system
duplication and distribution expense is due to an increase in the quantity of
videocassettes duplicated and shipped and an increase in the frequency of title
exchanges. The decrease in costs associated with other entertainment revenue is
attributable to the combined effect of lower music and video system sales and
improved margins on video system sales. Free-to-guest programming costs remained
relatively

I-24

constant during the 2003 and 2002 periods as higher rates from programmers were
offset by cost savings resulting from the optimization of certain channel
line-ups and changes in certain distribution agreements. Certain of On Command's
content fees and other in-room service costs do not vary with room revenue and
occupancy rates.

On Command is a party to various agreements 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 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.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expense increased $835,000 or 13.4% and
$602,000 or 4.7% during the three and six months ended June 30, 2003,
respectively, as compared to the corresponding prior year periods. Such
increases are attributable primarily to individually insignificant increases in
various components of this line item offset in part by reductions in the amounts
accrued by On Command for employee bonuses.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization decreased $14,109,000 or 42.0% and $15,254,000
or 22.7% during the three and six months ended June 30, 2003, respectively, as
compared to the corresponding prior year periods. Such decreases include
$13,583,000 related to the amortization of the Company's intangible asset
related to On Command's hotel contracts. Such intangible asset became fully
depreciated on March 31, 2003. The remaining decreases represent the net effect
of reductions to On Command's depreciable asset base that were only partially
offset by increases attributable to capital expenditures. The decrease in On
Command's depreciable asset base is attributable to (i) assets becoming fully
depreciated or amortized, and (ii) asset dispositions.

ASSET IMPAIRMENTS AND OTHER CHARGES

On Command recorded impairment and other charges of $1,256,000 and
$7,650,000 during the six months ended June 30, 2003 and 2002, respectively. The
2002 amount includes a loss of $5,103,000 related to the July 2002 sale of On
Command's European operations, and a loss of $1,411,000 relating to a
transaction in which certain equipment was transferred to STSN, Inc. The 2003
charges and the remaining 2002 charges are comprised of amounts related to
obsolete materials and equipment, and losses on various dispositions of property
and equipment, and other assets.

INTEREST EXPENSE

Interest expense decreased $1,785,000 or 37.8% and $2,363,000 or 24.1%
during the three and six months ended June 30, 2003, respectively, as compared
to the corresponding prior year periods. The decrease in interest expense during
the 2003 periods is primarily attributable to a reduction in the Company's
weighted average debt balance as a result of the repayment of $163,371,000 of
debt during March and April 2003. Decreases in the Company's weighted average
interest rate and increases in the amortization of On Command's deferred
financing fees also contributed to the variances between the 2003 and 2002
periods.

SHARE OF LOSSES OF AFFILIATES

During the six months ended June 30, 2003 and 2002, the Company's share of
losses of affiliates aggregated $208,000 and $3,358,000, respectively. The 2003
losses relate to the Company's investment

I-25

in WildBlue, and $2,711,000 of the 2002 losses relate to the Company's
investment in Aerocast.com, Inc. ("Aerocast"). As the Company wrote-off its
remaining investment in Aerocast during the fourth quarter of 2002, and as the
Company has no obligation to make further investments in Aerocast, the Company
no longer uses the equity method to account for its investment in Aerocast.

REALIZED AND UNREALIZED LOSSES ON FINANCIAL INSTRUMENTS

Realized and unrealized gains (losses) on financial instruments are as
follows:

Prior to January 1, 2003, 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
condensed consolidated balance sheet. Changes in the fair value of the equity
collars will continue to be reported in earnings.

NONTEMPORARY DECLINES IN FAIR VALUES OF INVESTMENTS

During the three months ended June 30, 2003 and 2002, the Company recorded
losses of $4,412,000 and $58,948,000, respectively, to reflect nontemporary
declines in the value of its investment in Sky Latin America.

INCOME TAXES

The Company recognized income tax benefits of $8,189,000 and $6,712,000
during the six months ended June 30, 2003 and 2002, 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 2003 and 2002
income tax benefits also include deferred tax benefits associated with losses
recognized by the Company. At June 30, 2003, The Company's deferred tax
liability was $10,595,000. 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.
Since April 1, 2002, the Company and its 80%-or-more owned subsidiaries have
been included in Liberty Media's consolidated tax return, and the Company and
Liberty Media have entered into a Tax Liability Allocation and Indemnification
Agreement. For additional information, see note 2 to the accompanying condensed
consolidated financial statements.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

Pursuant to the transitional provisions of Statement of Financial Accounting
Standards No. 142, ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
("Statement No. 142"), the Company recorded a $105,837,000 reduction of goodwill
in 2002. Such goodwill was originally recorded by Liberty Media in

I-26

connection with the March 2000 Ascent Entertainment acquisition. In accordance
with Statement No. 142, this goodwill reduction has been recorded as the
cumulative effect of an accounting change.

MATERIAL CHANGES IN FINANCIAL CONDITION

LSAT is a holding company that does not generate positive cash flow at the
LSAT parent 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 generally is not entitled to the cash resources
or cash generated by the operations of On Command. The sources of liquidity
available to LSAT at the LSAT parent level are described below.

On a consolidated basis, the Company used cash provided by operating
activities of $18,617,000 and cash provided by investing activities of
$209,972,000 to fund financing activities of $158,419,000 and a $70,170,000
increase in cash and cash equivalents. The Company's investing activities
included $303,586,000 of proceeds received in connection with the disposition of
the Company's Sprint PCS Stock and the related equity collar, as further
described below.

CORPORATE

In March 2003, the Company settled a portion of its Sprint PCS Stock equity
collar by delivering 2,500,000 shares of Sprint PCS Stock to the counterparty.
In return, the Company received $149,263,000 in cash. The Company used
$48,526,000 of such proceeds to repay all principal and accrued interest due
under its note payable to Liberty Media. In April 2003, the Company settled the
remaining portion of its Sprint PCS Stock equity collar by delivering all of its
remaining 2,584,745 shares of Sprint PCS Stock to the counterparty. The Company
received cash proceeds of $154,323,000 in connection with such settlement. Also
in April 2003, the Company used $114,651,000 of the cash proceeds from the
settlement of the Sprint PCS Stock equity collar to repay all principal and
accrued interest due under the PCS Loan Facility. In connection with such
repayment, the PCS Loan Facility was cancelled. The net impact of the foregoing
transactions was a $140,409,000 increase to LSAT's cash and cash equivalents.

In March 2000, the Company acquired an approximate 31.5% ownership interest
in ASTROLINK International LLC ("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, the Company signed a non-binding letter
of intent with the other members of Astrolink in connection with a 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"). As a part of the
Astrolink Restructuring, Astrolink redeemed the interest of one member in
January 2003 and another member in April 2003. As a result of such redemptions,
the Company's ownership interest in Astrolink has increased to 50.3%, and the
ownership interest of the other remaining member has increased to 49.7%.
Notwithstanding the Company's ownership interest in Astrolink, the Company does
not have a controlling financial interest in Astrolink due to the significant
participatory rights of the other remaining Astrolink member. Accordingly, the
Company will continue to use the equity method to account for its investment in
Astrolink.

Under the agreement (the "Astrolink Restructuring Agreement"), the Company
would acquire substantially all of the assets of Astrolink, subject to the
closing conditions and other terms and conditions provided for therein.
Astrolink simultaneously signed agreements with Lockheed Martin

I-27

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 the satisfaction of these closing conditions, the closing
is expected to occur on or before October 31, 2003. The United States Federal
Communications Commission granted its approval with respect to the the Astrolink
Restructuring on May 22, 2003.

If the closing occurs, the Company would pay approximately $43 million in
cash and would 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, pursuant to the Astrolink Restructing Agreement, the
Company agreed to provide additional interim funding for Astrolink pending
closing. If the transactions are consummated, Liberty Media would 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.

If the Astrolink Restructuring is not consummated due to lack of financing
or other closing conditions, the Company would receive $7.8 million in exchange
for its ownership interest in Astrolink and for all notes evidencing interim
loans made by the Company to Astrolink as prescribed in the Astrolink
Restructuring Agreement.

In March 2000, LSAT issued 150,000 shares of Series A 12% Cumulative
Preferred Stock ("Series A Preferred Stock") and 150,000 shares of Series B 8%
Cumulative Convertible Voting Preferred Stock ("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. Subsequent to March 31, 2003, all
dividends on the Series A Preferred Stock and Series B Preferred Stock, which
aggregate $7,500,000 each quarter, are to be paid in cash. Accrued and unpaid
dividends on the Series A Preferred Stock and Series B Preferred Stock
aggregated $15,000,000 at June 30, 2003.

Effective September 29, 2000, LSAT LLC acquired a 1% managing common
interest in IB2 LLC from a subsidiary of Liberty Digital for $652,000. Liberty
Digital retained a Preferred Interest in IB2 LLC, which owns approximately
360,000 shares of iBEAM Stock. The Preferred Interest had an initial liquidation
value of $64,574,000 and is entitled to a return of 9%, compounded annually. As
part of the transaction, LSAT LLC granted Liberty Digital the right to put the
Preferred Interest to LSAT LLC for a purchase price equal to $26,000,000 (the
value of iBEAM Stock on September 29, 2000) plus a 9% return, compounded
annually (the "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

I-28

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 ($32,418,000 at June 30, 2003), 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.

LSAT's primary sources of liquidity for the remainder of 2003 include its
unrestricted cash and cash equivalent balances ($80,742,000 at June 30, 2003)
and proceeds to be received during the fourth quarter of 2003 in connection with
the settlement of certain derivative instruments. The Company believes that such
sources of liquidity will be sufficient to fund LSAT's expected cash
requirements during the remainder of 2003. LSAT's liquidity requirements during
the remainder of 2003 are expected to include (i) its preferred stock dividend
requirements; (ii) its capital contributions to Sky Latin America; (iii) its
interim funding commitments to Astrolink; and (iv) its operating deficit. In
addition, in the event the Astrolink Restructuring closes, as discussed above,
the Company would be required to fund a $43 million cash investment, and Liberty
Media would be required to make a capital contribution to the Company. The
amount and form of any such Liberty Media capital contribution have not yet been
determined. LSAT does not expect Ascent Entertainment or its principal operating
subsidiary, On Command, to provide any of LSAT's financial resources during
2003. The financial resources and requirements of On Command are described
below.

ON COMMAND

The On Command Revolving Credit Facility, as amended, provided for aggregate
borrowings of $275,000,000 at June 30, 2003. Borrowings under the On Command
Revolving Credit Facility are due and payable in July 2004. On Command had
$9,367,000 of remaining availability under the On Command Revolving Credit
Facility at June 30, 2003. 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 LIBOR plus a spread that may range from 1.125% to 3.50%
depending on certain operating ratios of On Command (4.83% effective borrowing
rate at June 30, 2003). In addition, a facility fee ranging from 0.375% 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. In addition, On Command is required to maintain leverage and
interest coverage ratios. On Command was in compliance with such covenants at
June 30, 2003, as then in effect. Substantially all of On Command's assets are
pledged as collateral for borrowings under the On Command Revolving Credit
Facility.

On March 28, 2003, On Command and its bank lenders amended the On Command
Revolving Credit Facility to postpone until June 30, 2003 the step down of the
leverage ratio covenant of the On Command Revolving Credit Facility from 4.25 to
3.50. On June 27, 2003, a similar amendment was executed to postpone such step
down until October 1, 2003. Accordingly, the maximum leverage ratio permitted
under the On Command Revolving Credit Facility at June 30, 2003 was 4.25, and On
Command's actual leverage ratio was 4.20 as of such date. On Command and its
bank lenders executed an Amended and Restated Credit Agreement on April 17,
2003, and an amendment thereto on June 27, 2003. The effectiveness of the
Amended and Restated Credit Agreement is contingent upon the contribution of
$40,000,000 by the Liberty Media Group to On Command to be used to repay
principal due, and permanently reduce lender commitments, pursuant to the
Amended and Restated Credit Agreement. However, the Liberty Media Group has no
obligation to make any contribution to On Command, and there can be no assurance
that any such contribution will be made or, if made,

I-29

what the form or terms would be. After the proposed reduction of lender
commitments, the Amended and Restated Credit Agreement would constitute a
$235,000,000 senior secured credit facility, consisting of a $50,000,000
revolving credit facility and a $185,000,000 term loan facility. The term loan
would be subject to scheduled amortizations commencing September 30, 2003, and
both facilities would mature on December 31, 2007. If it does not earlier become
effective, and if it is not otherwise amended, the Amended and Restated Credit
Agreement will terminate on September 30, 2003.

Although On Command is in compliance with the leverage ratio covenant of its
existing On Command Revolving Credit Facility at June 30, 2003, and On Command
expects to be in compliance with such covenant at September 30, 2003, On Command
believes that it will be out of compliance with such covenant at December 31,
2003 if the Amended and Restated Credit Agreement does not become effective by
that date. If the Amended and Restated Credit Agreement has not become effective
by, or is otherwise terminated prior to, December 31, 2003, On Command
anticipates that it will request a further amendment to its existing On Command
Revolving Credit Facility to postpone the step down of the leverage ratio
covenant. It is uncertain if On Command's lenders would agree to such a further
amendment and what terms might be imposed by the lenders in connection with such
further amendment. In the event that the Amended and Restated Credit Agreement
does not become effective by the date that the leverage ratio is reduced to
3.50, On Command anticipates that a default would occur under 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 On Command's assets. No
assurance can be given that the Amended and Restated Credit Agreement will
become effective. In addition, if the Amended and Restated Credit Agreement does
not become effective, no assurance can be given that On Command will be able to
successfully restructure or refinance its existing On Command Revolving Credit
Facility on terms acceptable to On Command, or that On Command will be able to
avoid a default under its existing On Command Revolving Credit Facility. In
light of the uncertainties with respect to the restructuring of the On Command
Revolving Credit Facility, On Command's independent auditors included an
explanatory paragraph in their audit report on the December 31, 2002
consolidated financial statements of On Command stating in part that "On Command
is seeking to restructure the debt facility and such restructuring is contingent
on certain events, which raises substantial doubt about On Command's ability to
continue as a going concern."

The Company has classified all borrowings outstanding under the On Command
Revolving Credit Facility as current liabilities in its June 30, 2003 condensed
consolidated balance sheet due to the fact that an amendment was obtained from
its lenders that allowed On Command to meet its leverage ratio covenant at
June 30, 2003. In the absence of such amendment, On Command would not have been
in compliance with the leverage ratio covenant under the On Command Revolving
Credit Facility at June 30, 2003. As the amendment postponed the step down of
the leverage ratio covenant for a period of less than 12 months, the Company has
classified the debt as current in accordance with EMERGING ISSUES TASK FORCE
ISSUE NO. 86-30, CLASSIFICATION OF OBLIGATIONS WHEN A VIOLATION IS WAIVED BY A
CREDITOR, and STATEMENT OF FINANCIAL STANDARDS NO. 6, CLASSIFICATION OF
SHORT-TERM OBLIGATIONS TO BE REFINANCED. Although On Command has the intent to
refinance the On Command Revolving Credit Facility with long-term borrowings
under the Amended and Restated Credit Agreement, On Command does not now have
the unilateral ability to complete the conditions precedent to the effectiveness
of the Amended and Restated Credit Agreement.

In connection with a first quarter 2001 acquisition of a 7.5% interest in
MagiNet and the settlement of certain litigation, On Command agreed that MagiNet
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 MagiNet at a price of $15 per share. During
the fourth quarter of 2002, On Command repurchased 119,500 of such shares for an

I-30

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. On March 1, 2003, 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. Subsequent to June 30, 2003, MagiNet agreed to assign
the above-described 36,000 shares to the Company in exchange for a $540,000
credit against the cost of equipment to be purchased by MagiNet from the Company
through March 1, 2004. To the extent that MagiNet has not used all of such
credit by March 1, 2004, the remaining credit will be settled in cash.

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. On Command expects that it will be able to rely on
cash provided by operations, existing availability under the On Command
Revolving Credit Facility, and existing cash and cash equivalent balances to
fund its capital expenditures and other anticipated liquidity requirements
during 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 will require
a $40,000,000 contribution from the Liberty Media Group in order to satisfy one
of the conditions for the effectiveness of the Amended and Restated Credit
Agreement, and that it would require additional external financing to (i) fund
any significant new growth initiatives or unanticipated liquidity requirements;
or (ii) refinance the On Command Revolving Credit Facility, if the Amended and
Restated Credit Agreement does not become effective on a timely basis (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.

OFF-BALANCE SHEET ARRANGEMENTS

Liberty International, a subsidiary of Liberty Media, and other investors in
the Sky Latin America businesses have severally guaranteed obligations of Sky
Latin America 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
June 30, 2003, 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 $103,980,000 and
$5,757,000, respectively. During the fourth quarter of 2002, 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, 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. Pursuant to the Forbearance Agreement, PamAmSat
refrained from enforcing its rights under the Transponder Services Agreement

I-31

through April 30, 2003, so long as it received at least 70% of the fees due
under the Transponder Services Agreement. Through July 31, 2003, the Company and
the other investors in Sky Multi-Country have collectively funded at least 70%
of the fees due under the Transponder Service Agreement. The parties are
currently finalizing an agreement that would extend the term of the Forbearance
Agreement to October 31, 2003, subject to certain conditions. At June 30, 2003,
the aggregate obligations of Sky Multi-Country that were severally guaranteed by
Liberty International were $39,080,000. Sky Multi-Country partially funds
another Sky Latin America entity in which GloboPar is an investor. At June 30,
2003, the aggregate obligations of this entity that are severally guaranteed by
Liberty International were $5,757,000. In the case of 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 June 30, 2003, the aggregate obligations of Sky Brasil that are
severally guaranteed by Liberty International were $40,040,000.

As detailed above, the three entities in which GloboPar is an investor
account for approximately $84,877,000 of the aggregate obligations guaranteed by
Liberty International at June 30, 2003. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2003, the Company had $265,633,000 of variable-rate liabilities.
Exclusive of facility fees, such liabilities had a weighted-average interest
rate of 4.83% as of such date. 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 June 30, 2003 would increase (or decrease) the Company's
annual interest expense and cash outflows by approximately $2,656,000.

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 June 30, 2003, the aggregate fair market value of the
Company's publicly traded securities (excluding the fair value of related hedge
instruments) was $40,347,000. At June 30, 2003, the fair value of the Company's
equity collar was $17,557,000 and the fair value of the Company's put spread
collar was $20,167,000. At June 30, 2003, the fair market value of the GM Hughes
Stock that is the subject of the put spread collar was $23,339,000. Among other
things, the GM Hughes Stock 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 June 30, 2003, the per share market value of GM Hughes Stock was $12.81. In
addition, the Company owned $2,891,000 of publicly traded securities at
June 30, 2003 that were not hedged.

I-32

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

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 4. CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried
out an evaluation, under the supervision and with the participation of
management, including its president and chief financial officer (the
"Executive"), of the effectiveness of its disclosure controls and procedures as
of the end of the period covered by this report. Based on that evaluation, the
Executive concluded that the Company's disclosure controls and procedures were
effective as of June 30, 2003 to provide reasonable assurance that information
required to be disclosed in its reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.

There has been no change in the Company's internal controls over financial
reporting that occurred during the three months ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, its internal
controls over financial reporting.

I-33

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

In July 2003, Broadcast Music, Inc. ("BMI") and various other plaintiffs
filed suit against On Command in the United States District Court for the
Southern District of New York, Case Number 03 CV 5531, for willful copyright
infringement. The plaintiffs allege that On Command has failed to obtain
permission to publicly perform BMI musical works contained in the motion
pictures and videos On Command transmits to hotels and motels for viewing in
guest rooms on a pay-per-view basis. On Command has been in negotiations with
BMI for a performance license and intends to continue such negotiations. On
Command does not believe that the ultimate resolution of this matter will have a
material adverse effect on its financial condition or results of operations.

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

(a) Exhibits:

31 Rule 13a-14(a)/15d-14(a) Certification.

32 Section 1350 Certification.

(b) Reports on Form 8-K filed during quarter ended June 30, 2003:

II-1

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

LIBERTY SATELLITE & TECHNOLOGY, INC.

Date: August 14, 2003 By: /s/ KENNETH G. CARROLL
------------------------------------------------
Kenneth G. Carroll
President, Chief Financial Officer and
Treasurer (Principal Financial Officer and
Principal Accounting Officer)

II-2

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):

31 Rule 13a-14(a)/15d-14(a) Certification.

32 Section 1350 Certification.