<PAGE>   1



                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D. C.  20549

                                   FORM 10-K

[ X ]    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December
         31, 1996

                                       OR

[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from
         ____ to ____

Commission File Number 0-20421



                          TELE-COMMUNICATIONS, INC.
         ----------------------------------------------------------
           (Exact name of Registrant as specified in its charter)


      State of Delaware                                 84-1260157           
--------------------------------            ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

      5619 DTC Parkway
     Englewood, Colorado                                       80111    
----------------------------------------                 ----------------
(Address of principal executive offices)                     (Zip Code)

         Registrant's telephone number, including area code:  (303) 267-5500

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

         Securities registered pursuant to Section 12(g) of the Act:
                 Tele-Communications, Inc. Series A TCI Group common stock, par
                    value $1.00 per share
                 Tele-Communications, Inc. Series B TCI Group common stock, par
                    value $1.00 per share
                 Tele-Communications, Inc. Series A Liberty Media Group common
                    stock, par value $1.00 per share
                 Tele-Communications, Inc. Series B Liberty Media Group common
                    stock, par value $1.00 per share
                 Class B 6% Cumulative Redeemable Exchangeable Junior Preferred
                    Stock, par value $.01 per share

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

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

         The aggregate market value of the voting stock held by nonaffiliates
of Tele-Communications, Inc., computed by reference to the last sales price of
such stock, as of the close of trading on January 31, 1997, was
$12,415,086,846.

         The number of shares outstanding of Tele-Communications, Inc.'s common
stock (net of shares held by subsidiaries), as of January 31, 1997, was:

Tele-Communications, Inc. Series A TCI Group common stock - 597,497,573 shares,

 Tele-Communications, Inc. Series B TCI Group common stock - 84,647,065 shares,

    Tele-Communications, Inc. Series A Liberty Media Group common stock -
                           228,558,926 shares, and

    Tele-Communications, Inc. Series B Liberty Media Group common stock -
                             21,187,969 shares.

                      Documents Incorporated by Reference
                      -----------------------------------

         Portions of the Registrant's definitive Proxy Statement to be used in
connection with the 1997 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Form 10-K.
<PAGE>   2
                           TELE-COMMUNICATIONS, INC.

                        1996 ANNUAL REPORT ON FORM 10-K

                               Table of Contents


<TABLE>
<CAPTION>                                                                PAGE
                                                                         ---- 
<S>                                                                      <C>
                                    PART I
                                                                             
Item 1.   Business   . . . . . . . . . . . . . . . . . . . . . . . .     I-  1
         
Item 2.   Properties   . . . . . . . . . . . . . . . . . . . . . . .     I- 53
                                                                             
Item 3.   Legal Proceedings    . . . . . . . . . . . . . . . . . . .     I- 54
                                                                             
Item 4.   Submission of Matters to a Vote of Security Holders    . .     I- 62
                                                                             
                                                                             
                                                                             
                                   PART II
                                                                             
Item 5.   Market for Registrant's Common Equity and                           
            Related Stockholder Matters    . . . . . . . . . . . . .     II- 1
                                                                             
Item 6.   Selected Financial Data    . . . . . . . . . . . . . . . .     II- 5
                                                                             
Item 7.   Management's Discussion and Analysis of Financial                   
            Condition and Results of Operations    . . . . . . . . .     II- 9
                                                                             
Item 8.   Financial Statements and Supplementary Data    . . . . . .     II-49
                                                                             
Item 9.   Changes in and Disagreements with Accountants                       
            on Accounting and Financial Disclosure     . . . . . . .     II-49
                                                                             
                                                                             
                                                                             
                                   PART III
                                                                             
Item 10.  Directors and Executive Officers of the Registrant   . . .    III- 1
                                                                             
Item 11.  Executive Compensation   . . . . . . . . . . . . . . . . .    III- 1
                                                                             
Item 12.  Security Ownership of Certain Beneficial Owners             
            and Management     . . . . . . . . . . . . . . . . . . .    III- 1
                                                                             
Item 13.  Certain Relationships and Related Transactions   . . . . .    III- 1
                                                                             
                                                                             
                                                                             
                                   PART IV
                                                                             
Item 14.  Exhibits, Financial Statement Schedules, and                
            Reports on Form 8-K    . . . . . . . . . . . . . . . . .     IV- 1
</TABLE>
<PAGE>   3



                                 PART I.

Item 1.  Business.

         (a)     General Development of Business

         Tele-Communications, Inc. ("TCI" or the "Company"), through its
subsidiaries and affiliates, is principally engaged in the construction,
acquisition, ownership, and operation of cable television systems and the
provision of satellite-delivered video entertainment, information and home
shopping programming services to various video distribution media, principally
cable television systems.  The Company also has investments in cable and
telecommunications operations and television programming in certain
international markets as well as investments in companies and joint ventures
involved in developing and providing programming for new television and
telecommunications technologies.  The Company is a Delaware corporation and was
incorporated in 1994.  TCI Communications, Inc. ("TCIC"), a subsidiary of TCI,
and its predecessors have been engaged in the cable television business since
the early 1950's.

         On August 3, 1995, the stockholders of TCI approved an amendment to
the Company's charter to (i) authorize two new series of common stock of the
Company, designated the Tele-Communications, Inc. Series A Liberty Media Group
Common Stock, par value $1.00 per share and the Tele-Communications, Inc.
Series B Liberty Media Group Common Stock, par value $1.00 per share
(collectively, the "Liberty Group Stock"), and (ii) redesignate the Company's
Class A Common Stock, par value $1.00 per share, as the Tele-Communications,
Inc. Series A TCI Group Common Stock, par value $1.00 per share, and the Class
B Common Stock, par value $1.00 per share, as the Tele-Communications, Inc.
Series B TCI Group Common Stock, par value $1.00 per share (the Series A and
Series B TCI Group Common Stock are referred to collectively herein as the "TCI
Group Stock").  The Liberty Group Stock reflects the separate performance of
"Liberty Media Group", which currently consists of the Company's businesses and
investments in businesses that are engaged in: (i) the production, acquisition
and distribution through all available formats and media of branded
entertainment, educational and informational programming and software,
including multimedia products and (ii) electronic retailing, direct marketing,
advertising sales relating to programming services, infomercials and
transaction processing.  At December 31, 1996, the TCI Group Stock reflects the
separate performance of the Company's businesses and assets ("TCI Group") not
included in Liberty Media Group.  The issuance of the Liberty Group Stock did
not result in any transfer of assets or liabilities of TCI or any of its
subsidiaries or affect the rights of holders of TCI's or any of its
subsidiaries' debt.  On August 10, 1995, TCI distributed, in the form of a
dividend, one share of Liberty Group Stock for each four shares of TCI Group
Stock owned.  Such distribution represented one hundred percent of the equity
value attributable to Liberty Media Group.

         On March 12, 1997, the TCI stockholders approved an amendment to the
Company's charter to authorize two new series of the Company's common stock,
par value $1.00 per share (the "Common Stock"), (and a corresponding increase
in the total number of authorized shares of Common Stock) to be designated
Tele-Communications, Inc. Series A Telephony Group Common Stock and
Tele-Communications, Inc. Series B Telephony Group Common Stock (collectively,
the "Telephony Group Stock").  The Telephony Group Stock, if issued, would be
intended to reflect the separate performance of Telephony Group, which
initially consists of the Company's investments in certain entities engaged in
the domestic wireline and wireless telephony businesses.  A total of 750
million shares of Series A Telephony Group Stock and 75 million shares of
Series B Telephony Group Stock were authorized.




                                  I-1
<PAGE>   4
         Upon authorization of the Telephony Group Stock and until shares of
Telephony Group Stock are issued, the investments attributed to Telephony Group
will be included in TCI Group.  The TCI Group Stock will continue to reflect
all of the assets, liabilities and common stockholders' equity value of the
Company attributable to Telephony Group, in addition to the separate
performance of the Company's domestic cable distribution business; telephony
distribution and communications business (other than the investments attributed
to Telephony Group); international cable, telephony and programming businesses;
technology/venture capital business; and any other business of the Company not
attributed to either Liberty Media Group or Telephony Group.  As shares of
Telephony Group Stock are issued and distributed or sold, the percentage of the
common stockholders' equity value of the Company attributable to the Telephony
Group that is reflected in the TCI Group Stock will be reduced accordingly.
The composition of Liberty Media Group was not affected by the authorization,
and will not be affected by the issuance, of Telephony Group Stock.

         As of April 29, 1996, the Company and The News Corporation Limited
("News Corp.") formed two sports programming ventures.  In the United States,
the Company, through Liberty Media Group, and News Corp. formed the Liberty/Fox
U.S.  Sports LLC ("Fox Sports") into which the Company contributed interests in
its national and regional sports networks and into which News Corp. contributed
its fx cable network and certain other assets.  The Company received a 50%
interest in Fox Sports and $350 million in cash.

         Internationally, News Corp. and the Company formed a venture ("Fox
Sports International") to operate previously existing sports services in Latin
America and Australia and a variety of new sports services throughout the
world, except in Asia and in the United Kingdom, Japan and New Zealand where
prior arrangements preclude an immediate collaboration.  The Company, through
Liberty Media Group and Tele-Communications International, Inc. ("TINTA"), owns
50% of Fox Sports International with News Corp. owning the other 50%.  News
Corp. contributed various international sports rights and certain trademark
rights.  The Company contributed Prime Deportiva, a Spanish language sports
service distributed in Latin American and in Hispanic markets in the United
States; an interest in Torneos y Competencias S.A., an Argentinean sports
programming and production business; various international sports and satellite
transponder rights and cash.  The Company also contributed its 50% interest in
Premier Sports and All-Star Sports.  Both are Australian 24- hour sports
services available via multichannel, multipoint distribution systems or cable
television.

         On July 31, 1996, pursuant to certain agreements entered into among
TCIC, TCI, Viacom International, Inc. and Viacom Inc. ("Viacom"), TCIC acquired
all of the common stock of a subsidiary of Viacom ("Cable Sub") which owned
Viacom's cable systems and related assets (the "Viacom Acquisition").

         The transaction was structured as a tax-free reorganization in which
Cable Sub transferred all of its non-cable assets, as well as all of its
liabilities other than current liabilities, to a new subsidiary of Viacom ("New
Viacom Sub").  Cable Sub also transferred to New Viacom Sub the proceeds (the
"Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged
by TCIC, TCI and Cable Sub.  Following these transfers, Cable Sub retained
cable assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds.





                                      I-2
<PAGE>   5
         Prior to the consummation of the Viacom Acquisition, Viacom offered to
the holders of shares of Viacom Class A Common Stock and Viacom Class B Common
Stock (collectively, "Viacom Common Stock") the opportunity to exchange (the
"Exchange Offer") a portion of their shares of Viacom Common Stock for shares
of Class A Common Stock, par value $100 per share, of Cable Sub ("Cable Sub
Class A Stock").  Immediately following the completion of the Exchange Offer,
TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock (the
"Share Issuance") for $350 million (which was used to reduce Cable Sub's
obligations under the Loan Facility).  At the time of the Share Issuance, the
Cable Sub Class A Stock received by Viacom stockholders pursuant to the
Exchange Offer automatically converted into $625,796,100 in aggregate face
value of shares of 5% Class A Senior Cumulative Exchangeable Preferred Stock
("Exchangeable Preferred Stock") of Cable Sub.  The Exchangeable Preferred
Stock is exchangeable, at the option of the holder commencing after the fifth
anniversary of the date of issuance, for shares of Series A TCI Group Stock at
an exchange rate of 5.447 shares of Series A TCI Group for each share of
Exchangeable Preferred Stock exchanged.

         On October 10, 1996, Time Warner, Inc. ("Time Warner") and Turner
Broadcasting System, Inc. ("TBS") consummated a merger (the "TBS/Time Warner
Merger")  whereby TBS shareholders received 0.75 of a Time Warner common share
for each TBS Class A and Class B common share held, and each holder of TBS
Class C preferred stock received 0.80 of a Time Warner common share for each of
the 6 shares of TBS Class B common stock into which each share of Class C
preferred stock could have been converted.  Prior to the TBS/Time Warner
Merger, the Company owned shares of TBS common stock and shares of a class of
TBS preferred stock that were convertible into TBS common stock.  In connection
with the TBS/Time Warner Merger, the Company received approximately 50.6
million shares of a Time Warner security with limited voting rights (the "TW
Exchange Stock") in exchange for its TBS holdings.

         Subject to a number of conditions, including receipt of a ruling from
the Internal Revenue Service that such dividend would be tax free to the
Liberty Media Group stockholders, TCI agreed that it would distribute in the
form of a stock dividend (the "Spin-Off") to the Liberty Media Group
stockholders the stock of a new company ("Spinco") which would own, directly or
indirectly, the TW Exchange Stock and the business of Southern Satellite
Systems, Inc., a wholly owned subsidiary of Liberty Media Group which
distributes the TBS SuperStation ("WTBS") signal in the United States and
Canada.  The level of Liberty Media Group's ownership interest in Time Warner
will be restricted until the Spin-Off occurs, at which time, such restriction
would be eased for Spinco.

         If the Spin-Off occurs, certain control stockholders of TCI would
exchange the Spinco common stock they receive for a Spinco convertible
preferred security which would only be entitled to vote on major corporate
transactions involving Spinco.

         Through December 4, 1996, the Company had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar").
Primestar provides programming and marketing support to each of its cable
partners who provide satellite television service to their customers.  On
December 4, 1996, the Company distributed (the "Satellite Spin-off") to the
holders of shares of TCI Group Stock all of the issued and outstanding common
stock of TCI Satellite Entertainment, Inc. ("Satellite").  At the time of the
Satellite Spin-off, Satellite's assets and operations included the Company's
interest in Primestar, the Company's business of distributing Primestar
programming and two communications satellites.





                                      I-3
<PAGE>   6
         Pursuant to an agreement among Liberty Media Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and amended
in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV
INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million
shares of Class B common stock of Silver King Communications, Inc. ("Silver
King") (which shares represented voting control of Silver King at such time)
and $3,500,000 in cash, representing the exercise price of the Option.  BDTV-I
is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the
BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and
none of the voting power (except for protective rights with respect to certain
fundamental corporate actions) and Mr. Diller owns less than 1% of the equity
and all of the voting power.  BDTV-I exercised the option shortly after its
contribution, thereby becoming the controlling stockholder of Silver King.
Such change in control of Silver King had been approved by the Federal
Communications Commission ("FCC") in June 1996, subject, however, to the
condition that the equity interest of Liberty Media Group in Silver King not
exceed 21.37% without the prior approval of the FCC (the "FCC Order").

         Pursuant to an Agreement and Plan of Exchange and Merger entered into
in August 1996, Silver King acquired Home Shopping Network, Inc. ("HSN") by
merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN
Merger") where HSN is the surviving corporation and a subsidiary of Silver King
following the HSN Merger.  In order to effect the HSN Merger in compliance with
the FCC Order, Liberty Media Group agreed to defer receiving certain shares of
Silver King that would otherwise have become issuable to it in the HSN Merger
until such time as it was permitted to own such shares.  As a result, the HSN
Merger was structured so that Liberty Media Group received (i) 7,809,111 shares
of Class B common stock of Silver King, all of which shares Liberty Media Group
contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the
"Contingent Right") to be issued up to an additional 2,591,752 shares of Class
B common stock of Silver King from time to time upon the occurrence of certain
events which would allow Liberty Media Group to own additional shares in
compliance with the FCC Order (including events resulting in the dilution of
Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of
Class B common stock and 17,566,702 shares of common stock of HSN (representing
approximately 19.9% of the equity of HSN).  BDTV-II is a corporation formed by
Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which
the relative equity ownership and voting power of Liberty Media Group and Mr.
Diller are substantially the same as their respective equity ownership and
voting power in BDTV-I.

         During 1996, the Company, through certain subsidiaries, issued $500
million in face value of 8.72% Trust Originated Preferred SecuritiesSM and $500
million in face value of 10% Trust Preferred Securities for aggregate net cash
proceeds of $971 million.  The Company used the proceeds from such issuances to
retire commercial paper and to repay certain other indebtedness.

         During March 1997, the Company through certain subsidiaries, issued
$300 million in face value of 9.65% Capital Securities and $200 million in face
value of 9.72% Trust Preferred Securities.  The Company used the net proceeds
from such issuances to retire commercial paper and repay certain other
indebtedness.





                                      I-4
<PAGE>   7
         At December 31, 1996, the Company, through various subsidiaries, owned
approximately 45% of the outstanding common stock of DMX, Inc. ("DMX").  DMX is
primarily engaged in programming, distributing and marketing a premium digital
music service which provides 24-hour per day, commercial free, CD quality music
programming.  On February 6, 1997, the Company, DMX and TCI Music, Inc., a
wholly-owned subsidiary of the Company ("TCI Music Co."), entered into an
Agreement and Plan of Merger (the "TCI Music Co. Merger Agreement").  Pursuant
to the TCI Music Co. Merger Agreement, DMX will become a wholly-owned
subsidiary of TCI Music Co.  Subject to DMX shareholder and regulatory
approvals and to certain other conditions, the transactions contemplated by the
TCI Music Co. Merger Agreement are expected to occur during the second or third
quarter of 1997.  However, no assurance can be given that such transactions
will occur.

         Effective January 13, 1997, the Company issued a stock dividend to
holders of Liberty Group Stock consisting of one share of Series A Liberty
Group Stock for every two shares of Series A Liberty Group Stock owned and one
share of Series A Liberty Group Stock for every two shares of Series B Liberty
Group Stock owned.

         During 1996, the Company announced that the Board had approved the
filing of a request for a ruling from the Internal Revenue Service with respect
to the tax-free nature of the distribution of its entire equity ownership
interest in TINTA to holders of TCI Group Stock.  The Board also approved the
filing of a similar request with respect to the distribution of the Company's
remaining equity ownership interest in Liberty Media Corporation, after giving
effect to the Spin-Off, to holders of Liberty Group Stock.  The Company cannot
presently predict whether or when such distributions will occur.

         (b)     Financial Information about Industry Segments

         The Company is organized based upon four lines of business: Domestic
Cable and Communications; Programming; International Cable and Programming; and
Technology/Venture Capital.  Within the Domestic Cable and Communications line
of business, the Company operates three strategic business units:  Cable,
Telephony and Internet.  Relevant information with respect to the Company's
International Cable and Programming unit, Technology/Venture Capital unit,
Telephony unit and Internet unit are contained in the discussion of the
Company's Cable and Communications unit due to their relative insignificance.
Accordingly, the Company has significant operations principally in two industry
segments:  cable and communications services and programming services.
Financial information related to the Company's industry segments can be found
in the footnotes to the Company's consolidated financial statements found in
Part II of this report.

         (c)     Narrative Description of Business

         CABLE AND COMMUNICATIONS SERVICES

         Domestic Cable

         General.  Cable television systems receive video, audio and data
signals transmitted by nearby television and radio broadcast stations,
terrestrial microwave relay services and communications satellites.  Such
signals are then amplified and distributed by coaxial cable and optical fiber
to the premises of customers who pay a fee for the service.  In many cases,
cable television systems also originate and distribute local programming.





                                      I-5
<PAGE>   8
         Cable operators have traditionally used coaxial cable for transmission
of television signals to subscribers.  Optical fiber is a technologically
advanced transmission medium capable of carrying cable television signals via
light waves generated by a laser.  Optical fiber, when used as an alternative
to coaxial cable, can improve system reliability and provide for additional
capacity which should enable the provision of incremental revenue-producing
services.  During 1992, the Company began upgrading and installing optical
fiber in its cable systems.

         At December 31, 1996, approximately 68% of the Company's cable
television systems had bandwidth capacities ranging from 400 megahertz to 750
megahertz, which generally permit a cable television system to carry from 54 to
112 analog channels, respectively.  Compressed digital video technology
converts on average as many as fourteen analog signals (now used to transmit
video and voice) into a digital format and compresses such signals (which is
accomplished primarily by eliminating the redundancies in television imagery)
into the space normally occupied by one analog signal.  The digitally
compressed signal is uplinked to a satellite, which sends the signal back down
to a customer's satellite dish or to a cable system's headend to be
distributed, via optical fiber and coaxial cable, to the customer's home.  At
the home, a set-top video terminal converts the digital signal back into analog
channels that can be viewed on a normal television set.  The Company conducted
a beta test of its digital cable television service in late 1996 and began
offering such service to selected paying customers in three markets during the
first quarter of 1997.

         Imedia, a small high technology firm, has developed a technology which
represents a significant advancement in increasing the number of digital
television programs delivered over a single satellite transponder or channel on
a cable system.  Without requiring any change in fielded digital receiving
equipment in either the cable system headend or the customer's home, and
without requiring significant upgrades to the existing cable plant, the
introduction of Imedia's StatMux(TM) technology significantly increases the
transportation capacity of the operator's system.  The Company anticipates that
it will incorporate such technology with its digital service in strategic cable
systems during 1997.

         Service Charges.  The Company offers a limited "basic service" ("Basic
TV") (primarily comprised of local broadcast signals and public, educational
and governmental access channels) and an "expanded" tier (primarily comprised
of specialized programming services, in such areas as health, family
entertainment, religion, news, weather, public affairs, education, shopping,
sports and music).  The monthly fee for "basic service" generally ranges from
$8.00 to $11.00, and the monthly service fee for the "expanded" tier generally
ranges from $13.00 to $18.00.  The Company offers "premium services" (referred
to in the cable television industry as "Pay-TV" and "pay-per-view") to its
customers.  Such services consist principally of feature films, as well as live
and taped sports events, concerts and other programming.  The Company offers
Pay-TV services for a monthly fee generally ranging from $9.00 to $15.00 per
service, except for certain movie or sports services (such as various regional
sports networks and certain pay-TV channels) offered at $1.00 to $5.00 per
month, pay-per-view movies offered separately generally at $4.00 per movie and
certain pay-per-view events offered separately at $10.00 to $50.00 per event.
Charges are usually discounted when multiple Pay-TV services are ordered.

         As further enhancements to their cable services, customers may
generally rent converters and/or remote control devices for a monthly charge
ranging from $0.10 to $5.00 each, as well as purchase a channel guide for a
monthly charge ranging from $1.50 to $2.00.  Also a nonrecurring installation
charge (which is limited by the FCC's rules which regulate hourly service
charges for each individual cable system) of up to $60.00 is usually charged.





                                      I-6
<PAGE>   9
         Monthly fees for basic and Pay-TV services to commercial customers
vary widely depending on the nature and type of service.  Except under the
terms of certain contracts to provide service to commercial accounts, customers
are free to discontinue service at any time without penalty.

         As noted below, the Company's service offerings and rates were
affected by rate regulations issued by the FCC in 1993 and 1994.  See
Regulation and Legislation below.

         Customer Data.  TCI operates its cable television systems either
through its operating divisions or through certain other subsidiaries or
affiliated companies.  Domestic basic and Pay-TV cable customers served by TCI
and its consolidated subsidiaries are summarized as follows (amounts in
millions):

<TABLE>
<CAPTION>
                                                        Basic TV customers at December 31,              
                                               ---------------------------------------------------      
                                                 1996       1995       1994      1993       1992        
                                               --------   --------   --------  --------   --------      
<S>                                            <C>          <C>      <C>        <C>        <C>      
Managed through the Company's                                                                                     
  operating divisions                            13.4       11.9       10.7       9.8       9.4         
Other non-managed subsidiaries                    0.5        0.6        0.5       0.5       0.5         
                                                 ----       ----       ----      ----      ----         
                                                 13.9       12.5       11.2      10.3       9.9         
                                                 ====       ====       ====      ====      ====         
                                                                                                        
                                                       Pay TV subscriptions at December 31,             
                                               ---------------------------------------------------      
                                                 1996       1995       1994      1993       1992        
                                               --------   --------   --------  --------   --------      
Managed through the Company's                                                                                    
  operating divisions                            14.7       13.4       11.5       9.5       8.8         
Other non-managed subsidiaries                    0.4        0.4        0.4       0.4       0.5         
                                                 ----       ----       ----      ----      ----         
                                                                                                        
                                                 15.1       13.8       11.9       9.9       9.3         
                                                 ====       ====       ====       ===      ====         
</TABLE>

         TCI, its subsidiaries and affiliates operate cable television systems
throughout the continental United States, Hawaii, Puerto Rico and Argentina
and, through certain joint ventures accounted for under the equity method, have
cable television systems and investments in the United Kingdom, other parts of
Europe, Asia, Latin America and certain other foreign countries.

         In addition to cable television service, the Company provides
satellite service to C-band satellite customers through its subsidiary
Superstar/Netlink Group LLC ("Superstar/Netlink").  At December 31, 1996,
Superstar/Netlink provided service to approximately 980,000 subscribers.

         Local Franchises.  Cable television systems generally are constructed
and operated under the authority of nonexclusive permits or "franchises"
granted by local and/or state governmental authorities.  Federal law, including
the Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"), limits the power of the franchising authorities to impose certain
conditions upon cable television operators as a condition of the granting or
renewal of a franchise.

         Franchises contain varying provisions relating to construction and
operation of cable television systems, such as time limitations on commencement
and/or completion of construction; quality of service, including (in certain
circumstances) requirements as to the number of channels and broad categories
of programming offered to subscribers; rate regulation; provision of service to
certain institutions; provision of channels for public access and commercial
leased-use; and maintenance of insurance and/or indemnity bonds.  The Company's
franchises also typically provide for periodic payments of fees, not to exceed
5% of revenue, to the governmental authority granting the franchise.
Franchises usually require the consent of the franchising authority prior to a
transfer of the franchise or a transfer or change in ownership or operating
control of the franchisee.





                                      I-7
<PAGE>   10
         Subject to applicable law, a franchise may be terminated prior to its
expiration date if the cable television operator fails to comply with the
material terms and conditions thereof.  Under the 1984 Cable Act, if a
franchise is lawfully terminated, and if the franchising authority acquires
ownership of the cable television system or effects a transfer of ownership to
a third party, such acquisition or transfer must be at an equitable price or,
in the case of a franchise existing on the effective date of the 1984 Cable
Act, at a price determined in accordance with the terms of the franchise, if
any.

         In connection with a renewal of a franchise, the franchising authority
may require the cable operator to comply with different and more stringent
conditions than those originally imposed, subject to the provisions of the 1984
Cable Act and other applicable federal, state and local law.  The 1984 Cable
Act, as supplemented by the renewal provisions of the 1992 Cable Act,
establishes an orderly process for franchise renewal which protects cable
operators against unfair denials of renewals when the operator's past
performance and proposal for future performance meet the standards established
by the 1984 Cable Act.  The Company believes that its cable television systems
generally have been operated in a manner which satisfies such standards and
allows for the renewal of such franchises; however, there can be no assurance
that the franchises for such systems will be successfully renewed as they
expire.

         Most of the Company's present franchises had initial terms of
approximately 10 to 15 years.  The duration of the Company's outstanding
franchises presently varies from a period of months to an indefinite period of
time.  Approximately 1,200 of the Company's franchises expire within the next
five years.  This represents approximately twenty-seven percent of the
franchises held by the Company and involves approximately 4.5 million basic
subscribers.

         Competition.  Cable television competes for customers in local markets
with other providers of entertainment, news and information.  The competitors
in these markets include broadcast television and radio, newspapers, magazines
and other printed material, motion picture theatres, video cassettes and other
sources of information and entertainment including directly competitive cable
television operations and Internet service providers.  Both the 1992 Cable Act
and the Telecommunications Act of 1996 ("1996 Telecom Act") are designed to
increase competition in the cable television industry.  See Regulation and
Legislation below.

         There are alternative methods of distributing the same or similar
video programming offered by cable television systems.  Further, these
technologies have been encouraged by Congress and the FCC to offer services in
direct competition with existing cable systems.





                                      I-8
<PAGE>   11
         DBS.  During 1996, the Company has experienced a competitive impact
from medium power and high power direct broadcast satellites ("DBS") that use
high frequencies to transmit signals that can be received by dish antennas
("HSDs") much smaller in size than traditional HSDs.  The Primestar partners
distribute a multi-channel programming service via a medium power
communications satellite to HSDs of approximately 3 feet in diameter.  Prior to
the Satellite Spin-off, the Company provided this satellite delivered service.
DirecTv, Inc., United States Satellite Broadcasting Corporation and EchoStar
Communications Corp. ("Echostar"), transmit from high power satellites and
generally use smaller dishes to receive their signals.  Alphastar, Inc. began
offering medium power service in the second quarter of 1996.  On February 24,
1997, News Corp. and EchoStar announced that News Corp. will acquire a 50%
interest in EchoStar and that the companies will combine their DBS businesses
into a new company, which will operate under the name Sky.  The two companies
contend that Sky, which is scheduled to launch in early 1998, will offer 500
channels of digital television, Internet services and local broadcast network
television signals, capable of reaching more than 50% of all television
households upon the launch of Sky and 75% of all television households by the
end of 1998.  DBS operators have the right to distribute substantially all of
the significant cable television programming services currently carried by
cable television systems.  Estimated DBS customers nationwide increased from
approximately 2.2 million at the end of 1995 to approximately 4.4 million at
the end of 1996, and the Company expects that competition from DBS will
continue to increase.

         DBS has advantages and disadvantages as an alternative means of
distributing video signals to the home.  Among the advantages are that the
capital investment (although initially high) for the satellite and uplinking
segment of a DBS system is fixed and does not increase with the number of
subscribers receiving satellite transmissions; that DBS is not currently
subject to local regulation of service and prices or required to pay franchise
fees; and that the capital costs for the ground segment of a DBS system (the
reception equipment) are directly related to, and limited by, the number of
service subscribers.  DBS's disadvantages presently include limited ability to
tailor the programming package to the interests of different geographic
markets, such as providing local news, other local origination services and
local broadcast stations; signal reception being subject to line of sight
angles; and technology which requires a customer to rent or own one set-top box
(which is significantly more expensive than a cable converter) for each
television on which they wish to view DBS programming.

         Although the effect of competition from these DBS services cannot be
specifically predicted, it is clear there has been significant growth in DBS
subscribers and the Company assumes that such DBS competition will be
substantial in the near future as developments in technology continue to
increase satellite transmitter power and decrease the cost and size of
equipment needed to receive these transmissions and enable DBS to overcome the
aforementioned disadvantages.  Further, the extensive national advertising of
DBS programming packages, including certain sports packages not currently
available on cable television systems, will likely continue the growth in
DBS subscribers.





                                      I-9
<PAGE>   12
         Telephone Company Entry.  The 1996 Telecom Act eliminated the
statutory and regulatory restrictions that prevented local telephone companies
from competing with cable operators for the provision of video services by any
means.  See Regulation and Legislation section.  The 1996 Telecom Act
allows local telephone companies, including the regional bell operating
companies ("RBOCs"), to compete with cable television operators both inside and
outside their telephone service areas.  The Company expects that it will face
substantial competition from telephone companies for the provision of video
services, whether it is through wireless cable, or through upgraded telephone
networks.  The Company assumes that all major telephone companies have already
entered or soon will enter the business of providing video services.  The
Company is aware that telephone companies have already built, or are in the
process of building, competing cable system facilities in a few of the
Company's franchise areas.  Most major telephone companies have greater
financial resources than the Company, and the 1992 Cable Act ensures that
telephone company providers of video services will have access to acquiring all
of the significant cable television programming services.  The specific manner
in which telephone company provision of video services will be regulated is
described under Regulation and Legislation below.  Additionally, the 1996
Telecom Act eliminates certain federal restrictions on utility holding
companies and thus frees all utility companies to provide cable television
services.  The Company expects this could result in another source of
significant competition in the delivery of video services.

         Although long distance telephone companies had no legal prohibition on
the provision of video services, they have historically not been providers of
such services in competition with cable systems.  However, such companies may
prove to be a source of competition in the future.  The long distance companies
are expected to expand into local markets with local telephone and other
offerings (including video services) in competition with the regional bell
operating companies.

         MMDS/LMDS.  Another alternative method of distribution is
multi-channel multi-point distribution systems ("MMDS"), which deliver
programming services over microwave channels received by customers with special
antennas.  MMDS systems are less capital intensive, are not required to obtain
local franchises or pay franchise fees, and are subject to fewer regulatory
requirements than cable television systems.  The 1992 Cable Act also ensures
that MMDS operators have the opportunity to acquire all significant cable
television programming services.  Although there are relatively few MMDS
systems in the United States currently in operation, virtually all markets have
been licensed or tentatively licensed.  The FCC has taken a series of actions
intended to facilitate the development of wireless cable systems as an
alternative means of distributing video programming, including reallocating the
use of certain frequencies to these services and expanding the permissible use
of certain channels reserved for educational purposes.  The FCC's actions
enable a single entity to develop an MMDS system with a potential of up to 35
analog channels, and thus compete more effectively with cable television.
Developments in digital compression technology will significantly increase the
number of channels that can be made available from MMDS.  Further, in 1995,
several large telephone companies acquired significant ownership in numerous
MMDS companies.  This infusion of money into the MMDS industry was expected to
accelerate its growth and its competitive impact.  However, in 1996 telephone
company support of MMDS appeared to diminish as both Bell Atlantic Corporation
and NYNEX Corporation suspended their investments in two major MMDS companies.
Finally, an emerging technology, local multipoint distribution services
("LMDS"), could also pose a significant threat to the cable television
industry, if and when it becomes established.  LMDS, sometimes referred to as
cellular television, could have the capability of delivering more than 100
channels of video programming to a customer's home.  The potential impact of
LMDS is difficult to assess due to the recent development of the technology and
the absence of any current fully operational LMDS systems.





                                      I-10
<PAGE>   13
         Within the cable television industry, cable operators may compete with
other cable operators or others seeking franchises for competing cable
television systems at any time during the terms of existing franchises or upon
expiration of such franchises in expectation that the existing franchise will
not be renewed.  The 1992 Cable Act promotes the granting of competitive
franchises.  An increasing number of cities are exploring the feasibility of
owning their own cable systems in a manner similar to city-provided utility
services.

         Private Cable.  The Company also competes with Master Antenna
Television ("MATV") systems and Satellite MATV ("SMATV") systems, which provide
multi-channel program services directly to hotel, motel, apartment, condominium
and similar multi-unit complexes within a cable television system's franchise
area, generally free of any regulation by state and local governmental
authorities.  Further, the FCC is now considering new rules that would restrict
or eliminate the ability of cable operators to maintain ownership of cable
wiring inside multi-unit buildings, thereby potentially making it less
expensive for SMATV competitors to reach those customers.

         In addition to competition for customers, the cable television
industry competes with broadcast television, radio, the print media and other
sources of information and entertainment for advertising revenue.  As the cable
television industry has developed additional programming, its advertising
revenue has increased.  Cable operators sell advertising spots primarily to
local and regional advertisers.

         The Company has no basis upon which to estimate the number of cable
television companies and other entities with which it competes or may
potentially compete.  There are a large number of individual and multiple
system cable television operators in the United States but, measured by the
number of basic customers, the Company is the largest provider of cable
television services.

         The full extent to which other media or home delivery services will
compete with cable television systems may not be known for some time and there
can be no assurance that existing, proposed or as yet undeveloped technologies
will not become dominant in the future.

         Regulation and Legislation.  The operation of cable television systems
is extensively regulated by the FCC, some state governments and most local
governments. On February 8, 1996, the President signed into law the 1996
Telecom Act. This new law alters the regulatory structure governing the
nation's telecommunications providers.  It removes barriers to competition in
both the cable television market and the local telephone market.  Among other
things, it reduces the scope of cable rate regulation.

         The 1996 Telecom Act requires the FCC to implement numerous
rulemakings, the final outcome of which cannot yet be determined.  Moreover,
Congress and the FCC have frequently revisited the subject of cable television
regulation and may do so again.  Future legislative and regulatory changes
could adversely affect the Company's operations.  This section briefly
summarizes key laws and regulations currently affecting the growth and
operation of the Company's cable systems.





                                      I-11
<PAGE>   14
         Cable Rate Regulation.  The 1992 Cable Act imposed extensive rate
regulation on the cable television industry.  All cable systems are subject to
rate regulation, unless they face "effective competition" in their local
franchise area.  Under the 1992 Cable Act, the incumbent cable operator can
demonstrate "effective competition" by showing either low penetration (less
than 30% of the local population subscribes to basic service) or the presence
(measured collectively as 50% availability, 15% subscriber penetration) of
other multichannel video programming distributors ("MVPDs").  The 1996 Telecom
Act expands the existing definition of "effective competition" to create a
special test for a competing  MVPD (other than a DBS distributor) affiliated
with a local exchange carrier ("LEC").  There is no penetration minimum for a
LEC affiliate to qualify as an effective competitor, but it must offer
comparable programming services in the franchise area.

         Although the FCC establishes all cable rate rules, local government
units (commonly referred to as local franchising authorities or "LFAs") are
primarily responsible for administering the regulation of the lowest level of
cable -- the basic service tier ("BST"), which typically contains local
broadcast stations and public, educational and government access channels.
Before an LFA begins BST rate regulation, it must certify to the FCC that it
will follow applicable federal rules, and many LFAs have voluntarily declined to
exercise this authority.  LFAs also have primary responsibility for regulating
cable equipment rates.  Under federal law, charges for various types of cable
equipment must be unbundled from each other and from monthly charges for
programming services.

         The FCC itself directly administers rate regulation of any cable
programming service tiers ("CPST"), which typically contain satellite-delivered
programming.   Under the 1996 Telecom Act, the FCC can regulate CPST rates only
if an LFA first receives at least two complaints from local subscribers within
90 days of a CPST rate increase and then files a formal complaint with the FCC.
When new CPST rate complaints are filed, the FCC now considers only whether the
incremental increase is justified and will not reduce the previously
established CPST rate.

         Under the FCC's rate regulations, the Company was required to reduce
its BST and CPST rates in 1993 and 1994, and has since had its rate increases
governed by a complicated price structure that allows for the recovery of
inflation and certain increased costs, as well as providing some incentive for
expanding channel carriage.  The FCC has modified its rate adjustment
regulations to allow for annual rate increases and to minimize previous
problems associated with delays in implementing rate increases. Operators also
have the opportunity of bypassing this "benchmark" structure in favor of
traditional cost-of-service regulation in cases where the latter methodology
appears favorable.  However, the FCC significantly limited the inclusion in the
rate base of acquisition costs in excess of the historical cost of tangible
assets. As a result, the Company pursued cost of service justifications in only
a few cases.  Premium cable services offered on a per channel or per program
basis remain unregulated, as do affirmatively marketed packages consisting
entirely of new programming product.

         The 1996 Telecom Act sunsets FCC regulation of CPST rates for all
systems (regardless of size) on March 31, 1999.  It also relaxes existing
uniform rate requirements by specifying that uniform rate requirements do not
apply where the operator faces "effective competition," and by exempting bulk
discounts to multiple dwelling units, although complaints about predatory
pricing still may be made to the FCC.





                                      I-12
<PAGE>   15
         Cable Entry Into Telecommunications.  The 1996 Telecom Act provides
that no state or local laws or regulations may prohibit or have the effect of
prohibiting any entity from providing any interstate or intrastate
telecommunications service.  States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection.  State and local
governments also retain their authority to manage the public rights-of-way.
Although the 1996 Telecom Act clarifies that traditional cable franchise fees
may be based only on revenues related to the provision of cable television
services, it also provides that LFAs may require reasonable, competitively
neutral compensation for management of the public rights-of-way when cable
operators provide telecommunications service.   The 1996 Telecom Act  prohibits
LFAs from requiring cable operators to provide telecommunications service or
facilities as a condition of a franchise grant, renewal or transfer, except
that LFAs can seek "institutional networks" as part of such franchise
negotiations.  The favorable pole attachment rates afforded cable operators
under federal law can be increased by utility companies owning the poles during
a five year phase in period beginning in 2001, if the cable operator provides
telecommunications service, as well as cable service, over its plant.

         Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators.  One critical
component of the 1996 Telecom Act intended to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers.  Review of the FCC's
initial interconnection order is now pending before the Eighth Circuit Court of
Appeals.

         Telephone Company Entry Into Cable Television.  The 1996 Telecom Act
allows telephone companies to compete directly with cable operators by
repealing the historic telephone company/cable company cross-ownership ban and
the FCC's video dialtone regulations.  This will allow LECs, including the
RBOCs, to compete with cable operators both inside and outside their telephone
service areas.  Because of their resources, LECs could be formidable
competitors to traditional cable operators, and certain LECs have begun
offering cable service.

         Under the 1996 Telecom Act, a LEC providing video programming to
customers will be regulated as a traditional cable operator (subject to local
franchising and federal regulatory requirements), unless the LEC elects to
provide its programming via an "open video system" ("OVS").  LECs providing
service through an OVS can proceed without a traditional cable franchise,
although an OVS operator will be subject to general rights-of-way management
regulations and can be required to pay franchise fees to the extent it provides
cable services.  To be eligible for OVS status, the LEC itself cannot occupy
more than one-third of the system's activated channels when demand for channels
exceeds supply.  Nor can it discriminate among programmers or establish
unreasonable rates, terms or conditions for service.

         Although LECs and cable operators can now expand their offerings
across traditional service boundaries, the general prohibitions remain on LEC
buyouts (i.e., any ownership interest exceeding 10 percent) of co-located cable
systems, cable operator buyouts of co-located LEC systems, and joint ventures
between cable operators and LECs in the same market.  The 1996 Telecom Act
provides a few limited exceptions to this buyout prohibition.   The "rural
exemption" permits buyouts where the purchased system serves an area with fewer
than 35,000 inhabitants outside an urban area, and the cable system plus any
other system in which the LEC has an interest do not represent 10% or more of
the LEC's telephone service area.   The 1996 Telecom Act also provides the FCC
with the power to grant waivers of the buyout prohibition in cases where: (1)
the cable operator or LEC would be subject to undue economic distress; (2) the
system or facilities would not be economically viable; or (3) the
anticompetitive effects of the proposed transaction are clearly outweighed by
the effect of the transaction in meeting community needs.  The LFA must approve
any such waiver.





                                      I-13
<PAGE>   16
         Electric Utility Entry Into Telecommunications/Cable Television.  The
1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act.  Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating
authority.  Again, because of their resources, electric utilities could be
formidable competitors to traditional cable systems.

         Additional Ownership Restrictions.  Pursuant to the 1992 Cable Act,
the FCC adopted regulations establishing a 30% limit on the number of homes
nationwide that a cable operator may reach through cable systems in which it
holds an attributable interest (attributable for these purposes is defined as a
5% or greater ownership interest or the existence of any common directors),
with an increase to 35% if the additional cable systems are minority
controlled.  However, the FCC stayed the effectiveness of its ownership limits
pending the appeal of a September 16, 1993 decision by the United States
District Court for the District of Columbia which, among other things, found
unconstitutional the provision of the 1992 Cable Act requiring the FCC to
establish such ownership limits.  If the ownership limits are determined on
appeal to be constitutional, they may affect the Company's ability to acquire
interests in additional cable systems.

         The FCC also adopted regulations limiting carriage by a cable operator
of national programming services in which that operator holds an attributable
interest (using the same attribution standards as were adopted for its limits
on the number of homes nationwide that a cable operator may reach through its
cable systems) to 40% of the first 75 activated channels on each of the cable
operator's systems.  The rules provide for the use of two additional channels
or a 45% limit, whichever is greater, provided that the additional channels
carry minority controlled programming services.  The regulations also
grandfather existing carriage arrangements which exceed the channel limits, but
require new channel capacity to be devoted to unaffiliated programming services
until the system achieves compliance with the regulations.  Channels beyond the
first 75 activated channels are not subject to such limitations, and the rules
do not apply to local or regional programming services.

         The 1996 Telecom Act eliminates statutory restrictions on
broadcast/cable cross-ownership (including broadcast network/cable
restrictions), but leaves in place existing FCC regulations prohibiting local
cross-ownership between television stations and cable systems.  The 1996
Telecom Act also eliminates the three year holding period required under the
1992 Cable Act's "anti-trafficking" provision. The 1996 Telecom Act leaves in
place existing restrictions on cable cross-ownership with SMATV and MMDS
facilities, but lifts those restrictions where the cable operator is subject to
effective competition.  In January 1995, however, the FCC adopted regulations
which permit cable operators to own and operate SMATV systems within their
franchise area, provided that such operation is consistent with local cable
franchise requirements.

         Must Carry/Retransmission Consent.  The 1992 Cable Act contains
broadcast signal carriage requirements that allow local commercial television
broadcast stations to elect once every three years between requiring a cable
system to carry the station ("must carry") or negotiating for payments for
granting permission to the cable operator to carry the station ("retransmission
consent"). Less popular stations typically elect "must carry," and more
popular stations typically elect "retransmission consent."  Must carry requests
can dilute the appeal of a cable system's programming offerings, and
retransmission consent demands may require substantial payments or other
concessions.  Either option has a potentially adverse affect on the Company's
business.  Additionally, cable systems are required to obtain retransmission
consent for all "distant" commercial television stations (except for commercial
satellite-delivered independent "superstations" such as WTBS). The
constitutionality of the must carry requirements has been challenged and is
awaiting a decision from the U.S. Supreme Court.





                                      I-14
<PAGE>   17
         Access Channels.  LFAs can include franchise provisions requiring
cable operators to set aside certain channels for public, educational and
governmental access programming.  Federal law also requires a cable system with
36 or more channels to designate a portion of its channel capacity (either 10%
or 15%) for commercial leased access by unaffiliated third parties.  The FCC
has adopted rules regulating the terms, conditions and maximum rates a cable
operator may charge for use of this designated channel capacity, but use of
commercial leased access channels has been relatively limited.  In February of
1997, the FCC released revised rules which mandate a modest rate reduction and
could make commercial leased access a more attractive option for third party
programmers.

         "Anti-Buy Through" Provisions.  Federal law requires each cable system
to permit subscribers to purchase premium or pay-per-view video programming
offered by the operator on a per-channel or a per-program basis without the
necessity of subscribing to any tier of service (other than the basic service
tier) unless the system's lack of addressable converter boxes or other
technological limitations does not permit it to do so.  The statutory exemption
for cable systems that do not have the technological capability to comply
expires in December 2002, but the FCC may extend that period if deemed
necessary.

         Access to Programming.  To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers.  Of special significance from a competitive business posture, the
1992 Cable Act precludes video programmers affiliated with cable companies from
favoring cable operators over competitors and requires such programmers to sell
their programming to other multichannel video distributors (such as DBS and
MMDS).  This provision limits the ability of vertically integrated cable
programmers to offer exclusive programming arrangements to the Company.

         Other FCC Regulations.  In addition to the FCC regulations noted
above, there are other FCC regulations covering such areas as equal employment
opportunity, subscriber privacy, programming practices (including, among other
things, syndicated program exclusivity, network program nonduplication, local
sports blackouts, indecent programming, lottery programming, political
programming, sponsorship identification, and children's programming
advertisements), registration of cable systems and facilities licensing,
maintenance of various records and public inspection files, frequency usage,
lockbox availability, antenna structure notification, tower marking and
lighting, consumer protection and customer service standards, technical
standards, and consumer electronics equipment compatibility.  The FCC is
expected to impose new Emergency Alert System requirements on cable operators
in 1997.  The FCC has the authority to enforce its regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.

         Two pending FCC proceedings of particular competitive concern involve
inside wiring and navigational devices or converter boxes.  The former FCC
proceeding is considering ownership of cable wiring located inside multiple
dwelling unit ("MDU") complexes.  If the FCC concludes that such wiring belongs
to, or can be unilaterally acquired by the MDU owner, it will become easier for
MDU owners to terminate service from the incumbent cable operator in favor of a
new entrant.  The latter FCC proceeding is considering whether cable customers
should be permitted to purchase cable converters from third party vendors.  If
the FCC concludes that third party sale of converters is required, and does not
make appropriate allowances for signal piracy concerns, it may become more
difficult for cable operators to combat theft of service.





                                      I-15
<PAGE>   18
         Copyright.  Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals.  In
exchange for filing certain reports and contributing a percentage of their
revenue to a federal copyright royalty pool (such percentage varies depending
on the size of the system and the number of distant broadcast television
signals carried), cable operators can obtain blanket permission to retransmit
copyrighted material on broadcast signals.  The possible modification or
elimination of this compulsory copyright license is subject to continuing
review and could adversely affect the Company's ability to obtain desired
broadcast programming.  In addition, the cable industry pays music licensing
fees to Broadcast Music, Inc. and is negotiating a similar arrangement with the
American Society of Composers, Authors and Publishers.  Copyright clearances
for nonbroadcast programming services are arranged through private
negotiations.

         State and Local Regulation.  Cable television systems generally are
operated pursuant to nonexclusive franchises granted by a municipality or other
state or local government entity. The 1996 Telecom Act clarified that the need
for an entity providing cable services to obtain a local franchise depends
solely on whether the entity crosses public rights of way.   Federal law now
prohibits franchise authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises covering an existing cable
system's service area.  Cable franchises generally are granted for fixed terms
and in many cases are terminable if the franchisee fails to comply with
material provisions.  Non-compliance by the cable operator with franchise
provisions may also result in monetary penalties.

         The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction.  Each franchise generally contains provisions
governing cable operations, service rates, franchise fees, system construction
and maintenance obligations, system channel capacity, design and technical
performance, customer service standards, and indemnification protections.  A
number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility.  Although LFAs have considerable
discretion in establishing franchise terms, there are certain federal
limitations.  For example, LFAs cannot insist on franchise fees exceeding 5% of
the system's gross revenue, cannot dictate the particular technology used by
the system, and cannot specify video programming other than identifying broad
categories of programming.

         Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal.  Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal.  Similarly, if a franchise
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for consent.  Historically,
franchises have been renewed for cable operators that have provided
satisfactory services and have complied with the terms of their franchises.

         Proposed Changes in Regulation.  The regulation of cable television
systems at the federal, state and local levels is subject to the political
process and has been in constant flux over the past decade.  Material changes
in the law and regulatory requirements must be anticipated and there can be no
assurance that the Company's business will not be affected adversely by future
legislation, new regulation or deregulation.





                                      I-16
<PAGE>   19
         International Cable and Programming

         The Company, through TINTA, owns interests in companies that operate
multi-channel video and telecommunications distribution networks in, and
provides diversified programming services to, selected markets outside the
United States.  TINTA seeks to operate in markets with favorable regulatory
environments and with long-term strategic partners. As of December 31, 1996,
TCI owns 83% of the issued and outstanding stock of TINTA, representing 91% of
the voting power of TINTA.

         Included among TINTA's distribution assets are an indirect 26.6%
interest in Telewest Communications plc ("Telewest") and a 40% interest in
Jupiter Telecommunications Co, Ltd. ("Jupiter").  Telewest and Jupiter provide
cable television and residential and business cable telephony in the United
Kingdom and Japan, respectively.  TINTA also has a 51% ownership interest in
Cablevision S.A., which provides cable television service in and around Buenos
Aires, Argentina.

         TINTA's programming interests include a majority interest in Flextech
p.l.c. ("Flextech"), a 33.3% interest in MultiThematiques, S.A.
("MultiThematiques") and a 50% interest in Jupiter Programming Co., Ltd.
("JPC").  Flextech provides multi-channel video programming to cable television
and direct-to-home ("DTH") satellite providers in the United Kingdom through
its interests in 14 programming channels.  MultiThematiques and JPC provide
multi-channel programming to cable television and DTH satellite providers in
France and Japan, respectively.  Certain of the MultiThematiques channels are
also carried in Poland, Germany and Spain.

         Through certain other joint ventures with strategic partners, TINTA
has distribution and programming interests in Puerto Rico, Chile, Poland,
Ireland, Malta, Israel, France, Dominican Republic, Singapore, and New Zealand.

         Telephony

         The Company is currently in the developmental stage of its cable
telephony business, which provides conventional telephone service via TCI's
cable plant to residential and small business customers in certain of the
geographic areas served by TCI's cable television systems. The Company is
currently in the process of evaluating the customer acceptance and economic
attractiveness of the residential telephony opportunity utilizing upgraded
cable plant.  As part of this evaluation, the Company began offering
residential telephony service commercially in Hartford, Connecticut in October
1996 and in Arlington Heights, Illinois in January 1997.  TCI is currently
testing the provision of residential telephony service over its cable plant in
Fremont, California, and anticipates commercially launching the service there
in the first half of 1997.

         In addition, the Company has investments in a series of partnerships
formed to engage in the business of providing wireless communications services,
using the radio spectrum for broadband personal communications services
("PCS"), to residential and business customers nationwide under the "Sprint"
brand (the "PCS Ventures"), and an investment in Teleport Communications Group
Inc., a Delaware corporation ("TCG" or "Teleport"), which is a competitive
local exchange carrier.  The PCS Ventures include Sprint Spectrum Holding
Company, L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo").  The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation, Cox Communications, Inc.  ("Cox") and the Company.  The
partners of PhillieCo are subsidiaries of Sprint, Cox and the Company.  The
Company has a 30% interest as a partner in each of the Sprint PCS Partnerships
and a 35.3% interest as a partner in PhillieCo.  As of March 15, 1997, the
Company has a 30.7% equity interest (which represents a 37.4% voting interest)
in TCG.





                                      I-17
<PAGE>   20
         Sprint PCS is the largest broadband wireless personal communications
services company in the United States in terms of total licensed "Pops," with
licenses (including those owned by licensees that are affiliated or have agreed
to affiliate with Sprint PCS (including PhillieCo)) to provide service to MTAs
(or metropolitan trading areas) covering over 190 million Pops.  The term
"Pops" refers to the population covered by a license or group of licenses and,
as used in this Form 10-K is based on the Donnelley Marketing Service estimate
of the December 31, 1995 population of a geographic area.  Sprint PCS is in the
process of initiating wireless communications services nationwide under the
Sprint brand name and, as of December 31, 1996, had eight markets operational.
Teleport, the largest competitive local exchange carrier in the United States
as measured by route miles, offers a wide range of local telecommunications
services in major metropolitan markets nationwide, primarily to businesses,
long-distance carriers and resellers, and wireless communications companies.
TCI also holds a 50% partnership interest in Kansas City Fiber Network, L.P.
and a 40% partnership interest in NHT Partnership, which are competitive access
providers serving the Kansas City and Buffalo metropolitan areas, respectively.
As part of its telephony business, the Company operates Western
Tele-Communications, Inc., a wholesale provider of long distance, voice, data
and other telecommunications services.

         Technology/Venture Capital

         The Company is a developer of, and an investor in, new television and
telecommunications technologies and services.  This role is carried out through
investments in companies and joint ventures as well as internal development.
Areas of technological development include set-top box functionality,
architecture, performance and security of broadband networks and digital video
compression.  The development of new services is focused on broadening
interactive services to the television, giving consumers access to a variety of
new information and entertainment services and advertisers new opportunities to
reach consumers.

         The Company owns and operates the National Digital Television Center
("NDTC") in Denver.  This facility provides services to the cable television
and satellite entertainment industries which include production, digital video
compression, satellite uplinking and transponder management as well as signal
authorization and encryption.  The NDTC's "Headend in the Sky" ("HITS")
provides cable operators with the ability to securely encrypt and control
viewer access for analog and digital subscribers from a single centralized
location.  In addition to HITS, the NDTC contains 20,000 square feet of video
production space and operates post production facilities in New York, Hollywood
and Hong Kong.

         In January 1996, the Company acquired a controlling interest in United
Video Satellite Group, Inc. ("UVSG"), which operates (i) Prevue Channel, the
leading electronic programming guide, (ii) Superstar Satellite Entertainment, a
direct-to-home C-band satellite provider, (iii) SpaceCom Systems, a satellite
service provider to the paging industry and others, and (iv) UVTV, which
distributes the superstation WGN and other networks to cable operators and
satellite customers.  UVSG also has a 70% interest in SSDS, Inc., which
provides information technology consulting and software development services to
large organizations with complex computer needs.





                                      I-18
<PAGE>   21
         ETC w/tci, Inc. ("ETC") was launched in February of 1996 to
consolidate TCI's various education initiatives and focus on a growing market
for the use of telecommunications technologies in education, training and
communication.  ETC provides a wide range of programs delivered via cable or
satellite, addressing the needs of customers at school, in the office and at
home.  ETC w/CareerTrack, a subsidiary of ETC is a leading developer, producer
and marketer of business and educational seminars and related publications.
ETC w/NSCI, another subsidiary of ETC, is a provider of conference and
satellite-delivered staff development programming for educators.  Ingenious,
another subsidiary of ETC, is a developer of education software products
designed to facilitate learning in the classroom.  In addition, ETC manages the
Company's investments in educational ventures such as The Lightspan
Partnership, Inc. and Academic Systems Corporation.

         The Company's investment portfolio includes Acclaim Entertainment,
Inc., a publisher of entertainment software, Netscape Communications
Corporation, a provider of internet and intranet software and Antec Corporation
("Antec"), a producer and distributor of cable television equipment.  The
Company's investment in Antec was acquired through the February 1997 merger
between Antec and TSX Corporation.

         Internet Services

         In May 1995, the Company and Kleiner Perkins Caufield & Byers ("KPCB")
formed a new company, At Home Corporation ("@Home"), that develops high speed,
next generation Internet services for homes and businesses over cable
television systems and fiber optic networks.  In August 1996, the Company,
KPCB, Comcast and Cox consummated a series of transactions which resulted in
the Company having a 45.35% equity interest (which represents a 76.77% voting
interest in @Home).  A key element of the @Home service is the underlying
network.  @Home proposes to operate a national, high speed, Internet
Protocol-based network connecting to both information providers and cable
operators on a turnkey basis.  This national network will reach local customers
through local headends.  Distribution over cable systems based on both upgraded
fiber/coaxial cable designs as well as older, non-upgraded systems using
telephone return paths is planned.  @Home affiliates plan to provide customers
with the required broadband cable modem, which in turn connect to customers'
personal computers using existing standard data communications interfaces.  The
Company began offering @Home to TCI customers in September 1996 and currently
offers @Home in Arlington Heights, Illinois; Fremont, California; and Hartford,
Connecticut.  @Home's other cable partners are currently marketing high-speed
Internet services in Orange County, California; Baltimore, Maryland; and
Sarasota, Florida.





                                      I-19
<PAGE>   22
PROGRAMMING SERVICES

         Liberty Media Group, through Liberty Media Corporation ("Liberty") its
subsidiaries and affiliates, is an investor in and manager of entities engaged
in the production, acquisition and distribution through all available formats
and media, including cable television systems, broadcast television stations,
by C-Band satellite delivery systems ("C-Band") and by DBS to HSDs, on-line and
interactive services, home video and traditional retail outlets, of branded
entertainment and informational programming and software, including multimedia
products, delivered in both analog and digital form. The various entertainment
and information programming and programming-related businesses in which Liberty
Media Group has interests fall into five categories: movie services; general
entertainment and information services; sports programming services;
broadcasting and satellite; and electronic retailing, which includes direct
marketing, advertising sales relating to programming services, infomercials and
transaction processing.

         The following table sets forth Liberty Media Group's programming
interests which are held directly and indirectly through partnerships, joint
ventures, common stock investments and instruments convertible or exchangeable
into common stock. Ownership percentages in the table are approximate,
calculated as of March 14, 1997 and, where applicable (or except as otherwise
noted), assume conversion to common stock by the Company and, to the extent
known by the Company, other holders. In some cases, Liberty Media Group's
interest may be subject to buy/sell procedures, repurchase rights or, under
certain circumstances, dilution.


<TABLE>
<CAPTION>
                                                                                                                 
                                                                                                   
---------------------------------------------------------------------------------------------------------------------
                                                                                                  LIBERTY MEDIA   
                                         SUBSCRIBERS          SUBSCRIBERS                        GROUP ATTRIBUTED               
                                          AT 12/31/96         AT 12/31/95         YEAR              OWNERSHIP   
         ENTITY                             (000'S)             (000'S)         LAUNCHED                % 
---------------------------------------------------------------------------------------------------------------------
                                                 MOVIE SERVICES                                                   
<S>                                       <C>                <C>                   <C>              <C>           
Encore Media Corporation                                                                            90%        
    Encore                                  10,154              7,468              1991                          
    plex                                     1,120                475              1995                          
    Love Stories                             1,681                860              1994                          
    Westerns                                 3,261              1,517              1994                          
    Mystery                                  2,708              1,515              1994                          
    Action                                   1,664                834              1994                          
    True Stories                             1,660                832              1994                          
    WAM! America's Kidz 
       Network                               1,661                833              1994                          
                                                                                                                 
STARZ!                                       4,925              3,187              1994             48%(1)       
STARZ!2                                        537                N/A              1996                          
                                                                                                                 
Request TV                                  39,639(2)          32,242(2)           1985             40%(3)       
                                                                                                                 
Viewer's Choice                             44,889(2)          38,404(2)           1985             10%        
</TABLE>





                                      I-20
<PAGE>   23
<TABLE>
<CAPTION>
                                                                                                   
----------------------------------------------------------------------------------------------------------------------
                                                                                               LIBERTY MEDIA   
                                         SUBSCRIBERS          SUBSCRIBERS                    GROUP ATTRIBUTED                 
                                         AT 12/31/96          AT 12/31/95          YEAR          OWNERSHIP        
               ENTITY                      (000'S)              (000'S)           LAUNCHED           %                          
----------------------------------------------------------------------------------------------------------------------
                                     ENTERTAINMENT AND INFORMATION SERVICES                                       
                                                                                                                  
<S>                                        <C>                   <C>           <C>                  <C>
Bay TV                                       1,390                1,200              1994             49%         
BET Holdings, Inc. (NYSE-BTV)                                                                         22%         
      BET Cable Network                     47,000               44,234              1980                         
      BET Action Pay-Per-View                9,000(2)             7,200(2)           1990                         
      BET on Jazz                            2,200                  N/A              1996                         
      BET Movies/STARZ!3                       N/A                  N/A              1997             36%         
                                                                                                                  
Court TV                                    26,453               20,646              1991             33%(3)        
                                                                                                                  
Discovery Communications, Inc.                                                                        49%         
      Animal Planet                         14,900                  N/A              1996                         
      Discovery Channel                     70,556               66,534              1985                         
      The Learning Channel                  53,992               43,248              1980                         
      Discovery Science                           (4)               N/A              1996                         
      Discovery Civilization                      (4)               N/A              1996                         
      Discovery Travel & Living                   (4)               N/A              1996                         
      Discovery Kids                              (4)               N/A              1996                         
      Discovery Asia                         4,452                1,441              1994                         
      Discovery India                        4,625                  N/A              1996                         
      Discovery Japan                        1,500                  N/A              1996                         
      Discovery Europe                      13,018               11,075              1989                         
      Discovery Germany                  not available              N/A              1996                         
      Discovery Italy/Africa             not available              N/A              1996                         
      Discovery Latin America                6,251                  N/A              1996                         
      Discovery Kids-Latin America           1,200                  N/A              1996                         
      Discovery Channel Online                 N/A(5)               N/A(5)           1995                         
                                                                                                                  
DMX Inc. (Nasdaq-TUNE)                                                                                10%(3)        
      DMX                                   19,400(2)            18,250(2)           1991                         
                                                                                                                  
E! Entertainment Television                 41,872               37,300              1990             10%(6)        
                                                                                                                  
International Channel                        7,355                7,062              1990             45%         
                                                                                                                  
International Family Entertainment, 
  Inc. (NYSE-FAM)                                                                                     20%         
      The Family Channel                    65,700               62,000              1977                         
      FIT TV                                11,800                5,610              1993             25%         
                                                                                                                  
MacNeil/Lehrer Productions                     N/A                  N/A                               67%         
                                                                                                                  
Odyssey (f/k/a Faith & Values               26,800               25,354              1993             49%         
      Channel)                                                                                                    
                                                                                                                  
The Box Worldwide, Inc. (f/k/a 
  Video Jukebox Network,                                                                               5%         
  Inc.) (Nasdaq-BOXW)                                                                                               
      The Box                               22,189               22,241              1985                         
                                                                                                                  
Time Warner Inc. (NYSE-TWX)                                                                            9%         
      Time Warner/Turner Programming 
        Services(7)                                                                  
</TABLE>





                                      I-21
<PAGE>   24
<TABLE>
<CAPTION>
 ---------------------------------------------------------------------------------------------------------------------------
                                                                                                        LIBERTY MEDIA    
                                                 SUBSCRIBERS           SUBSCRIBERS                     GROUP ATTRIBUTED   
                                                 AT 12/31/96           AT 12/31/95         YEAR          ECONOMIC(8)        
                     ENTITY                        (000'S)               (000'S)          LAUNCHED            %             
 ---------------------------------------------------------------------------------------------------------------------------

                                                       SPORTS SERVICES                                                   
       REGIONAL SPORTS NETWORKS                                                                                          
<S>                                                <C>                     <C>              <C>             <C>           
             Fox Sports Arizona                       744                  N/A              1996              50%        
             Fox Sports                                                                                                  
               Intermountain West                     617                  559              1990              50%        
             Fox Sports Midwest                     1,222                  670              1989              50%        
             Fox Sports Northwest                   2,416                2,299              1988              50%        
             Fox Sports Pittsburgh                  1,698                2,310              1985              50%        
             Fox Sports Rocky                                                                                            
               Mountain                             1,690                1,690              1988              50%        
             Fox Sports South                       5,228                4,768              1990              44%        
             Fox Sports Southwest                   4,751                4,509              1983              50%        
             Fox Sports West                        3,956(9)             4,560              1985              50%        
             Fox Sports West 2                        N/A                  N/A              1997              50%        
             Home Team Sports                       3,835                3,149              1984              17%        
             SportsChannel Chicago                  2,707                2,533              1984              25%(3)       
             SportsChannel Pacific                  4,083                3,553              1990              25%(3)       
             SportsChannel                                                                                               
               Philadelphia/PRISM                   2,534                2,465              1983              17%(3)       
             Sunshine Network                       3,706                3,582              1988              27%(3)       
                                                                                                                         
       NATIONAL SPORTS NETWORKS                                                                                          
             fX Network(10)                        31,136               24,664              1994              50%        
             Fox Sports Americas                    1,682                1,524              1993              25%        
             Fox Sports Direct(11)                  3,731                2,270              1989              50%        
             Fox Sports Net                        23,632(2)               N/A              1996              50%        
             NewSport                               7,623                6,279              1994              25%(3)       
             Prime Network                         48,620(2)            50,325(2)           1989              25%(3)       
                                                                                                                         
       INTERNATIONAL SPORTS PROGRAMMING                                                                                  
             Fox Sports Australia                     171                   80                              12.5%        
             Fox Sports Americas                    2,120                1,394                                25%        
             STAR TV(12)                          220,200(12)                                               3.75%      
             Torneos y Competencias, SA               N/A                  N/A                                 9%        
</TABLE>





                                      I-22
<PAGE>   25
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                                                     LIBERTY 
                                                                                                      MEDIA  
                                                                                                      GROUP             
                                        SUBSCRIBERS AT       SUBSCRIBERS AT                         ATTRIBUTED  
                                           12/31/96             12/31/95            YEAR             OWNERSHIP                
               ENTITY                      (000'S)              (000'S)           LAUNCHED              %         
-------------------------------------------------------------------------------------------------------------------------
                                           BROADCASTING AND SATELLITE                                             
<S>                                         <C>                  <C>                  <C>              <C>
Superstar/Netlink                              981                  947               N/A               50%(13)      
                                                                                                                  
Netlink Wholesale                            1,364(14)            1,316(14)           N/A              100%       
                                                                                                                  
Southern Satellite Systems,                 66,735               62,495               N/A              100%       
Inc.(15)                                                                                                          
                                                                                                                  
HSN, Inc. (f/k/a Silver King 
  Communications, Inc.)                                                                                 21%(16)      
    (Nasdaq-HSNI)                                                                                                     
    SKTV, Inc.                              28,302(17)           28,000(17)           1986                         
    SF Broadcasting                          1,800(18)            1,800(18)                                          
                                                                                                                  
                                              ELECTRONIC RETAILING                                                
                                                                                                                  
HSN, Inc. (Nasdaq-HSNI)                                                                                 21%(16)       
    HSN                                     70,694(2)(19)        69,189(2)(19)        1985              37%        
    America's Store                         11,116(2)            12,000(2)            1986              37%        
    ISN                                        N/A(5)               N/A(5)            1995              37%        
    HSN-Germany                              7,000(2)               N/A               1996              11%        
    Shop Channel (Japan)                       300(2)               N/A               1996              11%       
                                                                                                                  
QVC, Inc.                                                                                               43%(3)      
    QVC, Network                            59,669(2)            54,611(2)            1986                         
    Q2                                      13,111(2)            13,031(2)            1994                         
    QVC-The Shopping                         5,750(2)             4,029(2)            1993                         
      Channel (UK)                                                                                                
    QVC-Germany                              4,500(2)               N/A               1996                         
    iQVC                                       N/A(5)               N/A(5)            1995                         
</TABLE>


(1)      An entity attributed to TCI Group owns a 50.1% interest in STARZ!;
         Liberty owns a 29.9% direct interest and Encore Media Corporation owns
         a 20% interest.

(2)      Number of subscribers to whom service is available.

(3)      The interests of Liberty Media Group in these entities are presently
         or will become subject to buy-sell procedures under which one owner
         may initiate the procedure by giving notice setting forth a value for
         the entity and the other owner(s) may then elect either to buy the
         interest of the initiating owner or to sell their interests to the
         initiating owner at a price equal to the value specified by the
         initiating owner multiplied by the ownership percentage of the selling
         partner.

(4)      Digital services to be launched on TCI's digital ALL TV service.

(5)      Internet service.





                                      I-23
<PAGE>   26
(6)      In connection with the exercise of a buy/sell provision triggered in
         October 1996, in which Comcast agreed to purchased Time Warner's
         interest in E!, Liberty agreed that its interest in E! will be subject
         to a put/call arrangement which replaces the prior buy/sell agreement.
         Beginning in 2002, Liberty will have the right to require E! to
         purchase, and E! will have the right to require Liberty to sell, its
         interest in E! at fair market value.

(7)      Includes CNN, Cartoon Network, Headline News, TNT, Turner Classic
         Movies, TBS Superstation, CNNfn, CNN/SI, CNN International, TNT Latin
         America, Cartoon Network Latin America, TNT & Cartoon Network Europe,
         TNT and Cartoon Network Asia, HBO, Cinemax, Comedy Central, HBO Ole,
         HBO Asia, TVKO and WB Television Network.  Following consummation of
         the TBS/Time Warner merger on October 10, 1996, Liberty is no longer
         reporting subscriber numbers for these programming services.

(8)      "Economic" interests and "ownership" interests may vary for certain
         sports services.

(9)      Prior years included subs now reported in Fox Sports-Arizona.

(10)     fX Network is a general entertainment and sports network included in
         the Liberty/Fox Sports joint venture described below.

(11)     f/k/a Liberty Satellite Sports, distributor of sports programming to
         C-Band and DBS markets.

(12)     STAR TV is a satellite-delivered television platform.  Programming
         services on STAR TV's platform include STAR Sports, STAR Plus, Phoenix
         Chinese Channel, STAR Movies and ZEE TV, among others.  STAR TV
         reaches approximately 220 million people in Asia, India and the Middle
         East.

(13)     UVSG, an entity controlled by the TCI Group, owns the remaining 50%
         interest.

(14)     Aggregate number of units.  Netlink Wholesale uplinks 6 broadcast
         stations.

(15)     Distributes TBS Superstation in the US and Canada.

(16)     Mergers of Silver King Communications, Inc. ("Silver King") with Home
         Shopping Network, Inc. and Savoy Pictures Entertainment, Inc. were
         consummated in December 1996 and Silver King subsequently changed its
         name to HSN, Inc. ("HSNI"). Liberty owns direct and indirect interests
         in various HSNI and Home Shopping Network, Inc.  securities which, if
         converted or exchanged for HSNI common stock would result in an
         ownership interest in HSNI of approximately 36.5%.  See description of
         the Silver King transactions in "Broadcasting" below. Liberty holds
         nominal voting interest in HSNI.

(17)     Number of television households in areas of SKTV, Inc.'s owned and
         operated broadcast stations.

(18)     Number of television households in areas of SF Broadcasting's owned
         and operated broadcast stations.

(19)     Includes broadcast households and cable subscribers.





                                      I-24
<PAGE>   27
         Movie Services.  Encore Media Corporation ("EMC") produces and
distributes a variety of movie services.  Its principal service is "Encore,"
launched in 1991, which primarily airs hit movies from the 1960s, 1970s and
1980s.  As of December 31, 1996, the service was being offered by cable
operators and other distribution technologies to approximately 34.5 million
households, of which approximately 10 million subscribed to Encore.  The
service is generally offered as a single premium service or in conjunction with
other premium services.  In either case, the subscription price paid by the
subscriber for Encore is generally lower than the prices charged for other
premium movie services.  During 1994, EMC launched six thematic multiplex
services: "Love Stories," "Westerns," "Action," "True Stories," and "WAM!
America's Kidz Network."  As of December 31, 1996, the thematic multiplex
services were available, primarily by DBS services such as DIRECTV and
Primestar, as well as by cable operators and other distribution technologies,
to approximately 6.5 million households.  As of December 31, 1996, these
generated subscriptions to approximately 12.6 million units (one household may
subscribe to as many as 6 multiplex services, which would constitute 6
"units").  "plex," a cable service which offers theme-by-day movies, was
launched by EMC in 1995.  As of December 31, 1996, plex was being offered by
cable operators and other distribution technologies to approximately 3.4
million households, of which approximately 1.1 million subscribed to plex.  As
of December 31, 1996, EMC's distribution was approximately 24 million total
aggregate units (Encore, thematic multiplex services and plex).

         Cable operators and other distributors pay EMC a per subscriber fee
for the services.  EMC obtains rights to air movies by entering into film
licensing agreements with the holders of distribution rights.  EMC has entered
into library agreements the majority of which extend beyond  2002 and several
of which extend beyond 2005, with various distributors to exhibit certain
films.

         "STARZ!" is a first-run premium movie programming service which is
managed by EMC. As of December 31, 1996, STARZ! was offered by cable operators
and other multi-channel video distribution technologies to approximately 25.1
million subscribers, of which approximately 4.9 million elected to receive
STARZ!.

         As of December 31, 1996, approximately 53% of the subscribers electing
to received STARZ! were customers of cable systems which purchase STARZ!
pursuant to an affiliation agreement with Satellite Services, Inc. ("SSI"), a
wholly owned subsidiary of TCIC.  SSI purchases programming services from
programming suppliers and then makes such services available to TCI's
subsidiaries and affiliates.  Customers served by cable television systems
eligible to purchase programming services through SSI ("SSI Subscribers")
represented approximately 24.5% of U.S. households which received cable or
satellite delivered programming at December 31, 1996 (based on estimates by
Paul Kagan Associates, Inc. of cable, C-Band, DBS and MMDS subscribers).  To
the extent that the ratio of SSI Subscribers to overall subscribers for any
programming service in which the Liberty Media Group has an interest
significantly exceeds 24.5%, such information is provided below.





                                      I-25
<PAGE>   28
         STARZ! is operated and distributed by a partnership ("QE+") owned
29.9% by Liberty Starz, Inc. ("Liberty Starz"); 50.1% by TCI Starz, Inc.
("TCIS"), an entity included in TCI Group, and 20% by EMC.  The QE+ agreement
provides that TCIS will be required to make special capital contributions to
QE+ through July 1, 2005, up to a maximum aggregate capital contribution of
$350 million (the "TCIS Contribution"). QE+ is obligated to pay TCIS a
preferred return of 10% per annum on the first $200 million of the TCIS
Contribution beginning five years from the date of the contribution or five
years from January 1, 1996, whichever is later.  Any amount of the TCIS
Contribution in excess of $200 million will be entitled to a preferred return
of 10% per annum from the date of the contribution.  QE+ will be required to
apply 75% of its available cash flow (as defined) to repay the TCIS
Contribution and any preferred return payable thereon.  To the extent QE+ has
incremental cash requirements, TCIS and Liberty Starz will have the option to
fund 50.1% and 49.9%, respectively, of any such additional capital
requirements.  To the extent TCIS and Liberty Starz elect to fund such
additional capital requirements, EMC's interest will be proportionately
diluted.  As of December 31, 1996, the amount of the TCIS Contribution was
approximately $203 million.  EMC is paid a fee for managing the STARZ! service
equal to 20% of the "managed costs" (as defined) of the service.

         In addition, effective July 1, 1995, Liberty Starz began earning a
"Content Fee" for certain services provided to QE+ equal to 4% of the gross
revenue of QE+.  The Content Fee was approximately $3,735,000 for the year
ended December 31, 1996 and $972,000 for the six months ended December 31,
1995.  The Content Fee agreement expires on June 30, 2001, subject to renewal
on an annual basis thereafter.  Payment of the Content Fee is subordinated to
the repayment of the TCIS Contribution, including any preferred return, and any
other obligations of QE+ to its partners.

         Cable operators and other distributors pay STARZ! a per subscriber fee
for the service.  QE+ has entered into first run output agreements, the
majority of which extend through 2003, where the license fees are contingent
upon future production, sales and certain other criteria.  In addition, EMC
provides library programming for a fee to QE+ under a shared programming
agreement.

         Liberty also has interests in "Request TV" and "Viewer's Choice" which
provide pay-per-view movies and pay-per-view events to cable operators. Both
Request TV and Viewer's Choice act as intermediaries between movie studios and
event promoters, on the one hand, and cable operators, on the other hand,
providing scheduling for movies to be sold on a pay-per-view basis, satellite
distribution of such movies, marketing and promotion, and, in some instances,
billing and collection services. For providing these services, they are paid a
negotiated percentage of pay-per-view revenue generated by their respective
affiliated cable operators.

         Entertainment and Information Services.  "Bay TV" is a local news and
entertainment service located in the San Francisco Bay area.  Liberty acquired
its interest in Bay TV in 1996.  At December 31, 1996, Bay TV was received by
approximately 1.4 million subscribers, approximately 80% of which were SSI
subscribers.





                                      I-26
<PAGE>   29
         BET Holdings, Inc. ("BET") primarily operates cable television
programming services and magazines targeted to the interests and concerns of
African-Americans.  "BET Cable Network" provides a broad mix of programming
which is produced in-house or acquired from a variety of sources.  The
network's productions include hosted music video programs, talk shows, sports,
news and public affairs, children's programs and comedy shows.  Acquired
programs include situation comedies, gospel music programs and sports and
entertainment specials.  "BET on Jazz," launched in January 1996, is an
advertiser-supported basic cable network featuring jazz concerts, music videos
and interviews with jazz artists.  In June 1996, BET on Jazz began providing
programming in the United Kingdom and South Africa.  "BET Action Pay-Per-View"
is a pay-per-view service which distributes films produced by major studios and
independent film companies.  BET also publishes Emerge magazine, retails a line
of skin care products and musical recordings, and has ownership interests in
BET Film Productions (a joint venture with EMC) and BET Pictures which produce
low-budget feature length motion pictures.

         In September 1996 EMC, QE+ and BET formed BET Movies/STARZ3, a premium
movie service dedicated to the development and exhibition of Black oriented
feature length films.  BET Movies/STARZ!3 launched in February 1997 to
approximately 200,000 subscribers, all of which are SSI Subscribers.

         "Court TV" provides live and/or tape delayed coverage and analysis of
selected criminal and civil legal proceedings. The Court TV service was
received by approximately 26.5 million subscribers at December 31, 1996,
approximately 26% of which were SSI Subscribers.

         Discovery Communications, Inc. ("Discovery") operates four business
units.  The first of these, Discovery Networks, U.S., consists of three
advertiser-supported basic cable networks: "Discovery Channel," "The Learning
Channel" and "Animal Planet"; and four newly created networks for the digital
platform: "Discovery Science," "Discovery Civilization," "Discovery Travel &
Living" and "Discovery Kids."  Discovery Channel provides nature, science and
technology, history, exploration and adventure programming and is distributed
to customers in virtually all U.S. pay television homes.  The Learning Channel
provides a variety of educational and non-fiction programming.  Animal Planet,
launched in June 1996, offers a range of animal programming, including
children's programs, game shows, comedies, dramas, feature films, wildlife
documentaries, how-to pet care shows, event reportage and series featuring
television's favorite animal heroes.  The four digital networks were launched
in 1996 on TCI's digital service, ALL TV.

         Discovery Networks International includes Discovery Europe, Discovery
Asia, Discovery India, Discovery Latin America and the recently launched
Discovery Kids-Latin America, Discovery Germany, Discovery Japan and Discovery
Italy/Africa.  Discovery's international networks serve more than 30 million
customers in 140 countries outside the U.S.  Discovery Enterprises Worldwide
includes Discovery Channel Multimedia, Discovery Channel Online, Discovery
Channel Video and Discovery Channel Publishing.

         The fourth Discovery business unit, Discovery Retail and Theme,
operates 16 Discovery Channel Stores, 113 stores of The Nature Company and
three Scientific Revolution stores in the US.  Discovery also operates two
locations of The Nature Company in Canada and two locations in the UK.
Discovery purchased the assets of The Nature Company in June 1996.  In addition
to the stores, these assets included distribution facilities and The Nature
Company's catalog business.  The Nature Company is a specialty retail chain and
mail order business providing products designed to enhance appreciation of the
natural world.  In October 1996, Discovery entered into an agreement with Sony
to create in San Francisco a Discovery Channel Destination flagship store which
will feature a combination of retailing and interactive, hands-on entertainment
elements related to the programming concepts of Discovery.





                                      I-27
<PAGE>   30
         Discovery also operates Your Choice TV ("YCTV").  YCTV is a
development stage business designed to take advantage of the promise of the
digital television platform by offering increased access to popular television
programs.

         In 1996, Discovery entered into a memorandum of understanding with the
BBC to pursue the possibility of jointly developing and launching non-fiction
networks in international markets.  These networks would have access to the
vast program libraries and strong brand identities of each partner.  The
agreement also calls for a program development relationship which would make
Discovery the primary co-production partner of the BBC in North America.

         DMX Inc. is primarily engaged in programming, distributing and
marketing a premium digital music service, "DMX," which provides 24-hour per
day, commercial-free, CD quality music programming. DMX is delivered, for a
monthly per subscriber license fee, by C-Band and DBS for distribution to
residential and commercial subscribers.  Both cable and DBS subscribers receive
DMX through a specially designed tuner to their stereo systems.  Approximately
61% of DMX's domestic enabled tuners are in the homes of SSI Subscribers.

         On February 6, 1997, TCI, DMX Inc. and TCI Music, Inc. ("TCI Music"),
a wholly-owned subsidiary of TCI attributed to the TCI Group, entered into an
Agreement and Plan of Merger (the "TCI Music Merger Agreement") pursuant to
which DMX Inc. will become a wholly-owned subsidiary of TCI Music and each
share of DMX Inc. common stock will be converted into the right to receive (i)
one-half share of TCI Music Series A Common Stock ("TCI Music Common Stock")
and (ii) one right (a "Right") with respect to each whole share of TCI Music
Series A Common Stock (the "DMX Merger").  Each Right will entitle the holder
to require TCI to purchase from such holder one share of TCI Music Common Stock
for $4.00 per share (the equivalent of $2.00 per share of DMX Inc. common
stock) payable at the election of TCI, in cash, a number of shares of TCI Group
Stock or a combination thereof, if during the one-year period beginning on the
effective date of the DMX Merger, the price of TCI Music Common Stock does not
equal or exceed $4.00 per share for a period of at least 20 consecutive trading
days.  Assuming consummation of the DMX Merger, Liberty will own 3,029,531
Rights and 3,029,531 shares of TCI Music Common Stock, representing
approximately a 2% equity interest and less than a 1% voting interest in TCI
Music.

         "E! Entertainment Television" is a 24-hour network devoted to the
world of celebrities and entertainment. The network's programming mix includes
entertainment news reports, original programs and exclusive live coverage of
major awards shows and celebrity events.

         International Family Entertainment, Inc.'s ("IFE") principal business
is "The Family Channel," an advertiser-supported basic cable television
network that provides family oriented entertainment programming in the United
States.  In addition, IFE owns MTM Entertainment, Inc., a producer and
worldwide distributor of television series and made-for-television movies and
the owner of a significant library of television programming; FiT TV, an
advertiser-supported health and fitness cable network; and Calvin Gilmore
Productions, a producer of live musical variety shows.

         On April 22, 1996, IFE consummated the sale of its television
production studio in Maidstone, England and its 61% interest in The Family
Channel (UK) to Flextech pursuant to an agreement dated as of March 20, 1996.
Flextech previously owned a 39% interest in The Family Channel (UK).  As
consideration for this transaction, IFE received cash and shares of Flextech's
convertible, redeemable non-voting common stock.  This common stock is
convertible, under certain circumstances, beginning in June 1997 at IFE's
option, into Flextech's voting ordinary shares which are listed on the London
Stock Exchange.  TINTA owns an interest in Flextech.





                                      I-28
<PAGE>   31
         "International Channel" is a basic cable service providing
multi-lingual programming in the U.S.  The International Channel is planning to
launch several single language pay services designed primarily to serve viewers
who use English as their second language.  These services will be launched on
the digital platform.  Approximately 27% of International Channels' subscribers
are SSI Subscribers.

         "Odyssey" (f/k/a The Faith & Values Channel), a national basic cable
network, is managed by representatives of the National Interfaith Cable
Coalition, a group of 64 U.S. denominations and faith groups.  The channel
provides its viewers with non-denominational religious and values-based
entertainment and informational programming.  Approximately 27% of Odyssey's
subscribers are SSI subscribers.

         Time Warner is the world's leading media company, and has interests in
three fundamental areas of business: Entertainment, consisting principally of
interests in recorded music and music publishing, filmed entertainment,
broadcasting, theme parks and cable television programming; News and
Information, consisting principally of interests in magazine publishing, book
publishing and direct marketing; and Telecommunications, consisting principally
of interests in cable television systems.

         TBS is a diversified information and entertainment company.  Through
its subsidiaries, TBS owns and operates four domestic entertainment
networks--"TBS Superstation," Turner Network Television ("TNT"), the Cartoon
Network and Turner Classic Movies ("TCM"); four international entertainment
networks--TNT Latin America, Cartoon Network Latin America, TNT & Cartoon
Network Europe, and TNT & Cartoon Network Asia; and four news networks--Cable
News Network ("CNN"), Headline News, Cable News Network International ("CNNI")
and CNN Financial News Network ("CNNfn").  TBS produces and distributes
entertainment and news programming worldwide, with operations in motion
picture, animation and television production, home video, television
syndication, licensing and merchandising, and publishing.

         On October 10, 1996, Time Warner and TBS consummated the TBS/Time
Warner Merger whereby TBS shareholders received 0.75 of a Time Warner common
share for each TBS Class A and Class B common share held, and each holder of
TBS Class C preferred stock received 0.80 of a Time Warner common share for
each of the 6 shares of TBS Class B common stock into which each share of Class
C preferred stock held could have been converted.  After an extensive review of
the transaction by the staff of the Federal Trade Commission ("FTC") and in
order to eliminate certain concerns raised by the FTC staff regarding possible
effects of the transaction, Time Warner, TBS, TCI, and Liberty entered into an
Agreement Containing Consent Order with the FTC, dated August 14, 1996, as
amended on September 4, 1996 (the "FTC Consent Decree").  The FTC Consent
Decree received final approval by the FTC on February 7, 1997 following public
comment.  Pursuant to the FTC Consent Decree, among other things, Liberty
agreed to exchange the shares of Time Warner common stock to be received by it
in the TBS/Time Warner Merger for shares of a separate series of Time Warner
common stock with limited voting rights (the "TW Exchange Stock").  Holders of
the TW Exchange Stock are entitled to one one- hundredth (1/100th) of a vote
for each share with respect to the election of directors.  Holders of the TW
Exchange Stock have no other voting rights, except as required by law or with
respect to limited matters, including amendments of the terms of the TW
Exchange Stock adverse to such holders.  Subject to the federal communications
laws, each share of the TW Exchange Stock is convertible at the option of the
holder on a one-for-one basis for a share of Time Warner common stock.  Holders
of TW Exchange Stock are entitled to receive dividends ratably with the Time
Warner common stock and to share ratably with the holders of Time Warner common
stock in assets remaining for common stockholders upon dissolution, liquidation
or winding up of Time Warner.  In connection with the TBS/Time Warner Merger,
Liberty Media Group received approximately 50.6 million shares of the TW
Exchange Stock in exchange for its TBS holdings.





                                      I-29
<PAGE>   32
         Subject to a number of conditions including receipt of a ruling from
the Internal Revenue Service ("IRS") that such dividend would be tax free to
the holders of Liberty Media Group stock, TCI agreed to the FTC Consent Decree
that it would distribute in the form of a stock dividend (the "Spin-Off") to
the holders of Liberty Media Group stock the stock of a separate company
("Spinco") which would own, directly or indirectly, the TW Exchange Stock and
the business of Southern Satellite Systems, Inc. ("Southern"), a wholly owned
subsidiary attributed to Liberty Media Group that distributes the TBS
SuperStation ("WTBS") signal in the United States and Canada.  The level of the
Company's ownership interest in Time Warner will be restricted until the
Spin-Off occurs, at which time such restriction will be eased for Spinco.  The
FTC Consent Decree also contains provisions imposing certain separations
between Spinco, TCI and Liberty.

         If the Spin-Off occurs, the FTC Consent Decree requires certain
control stockholders of TCI to exchange the Spinco common stock they receive
for a Spinco convertible preferred security which would only be entitled to
vote on major corproate transactions involving Spinco.

         In connection with the TBS/Time Warner Merger, Liberty and Time Warner
entered into, among other agreements, an agreement providing for the grant to
Time Warner of an option (the "Contract Option") to enter into a contract with
Southern (the "Distribution Contract") pursuant to which Southern would provide
Time Warner with certain uplinking and distribution services relating to WTBS
and would assist Time Warner in converting WTBS from a superstation into a
copyright paid cable programming service.  The Contract Option will be granted
no later than the fifth business day following the earlier of May 31, 1997, the
receipt of a favorable IRS ruling and the determination that the IRS ruling
will not be obtained.  On the date of grant, Time Warner will issue to
Southern, in consideration for the Contract Option and certain noncompetition
covenants, an aggregate of 5.0 million shares of TW Exchange Stock and
$66,666,700, payable at Time Warner's option in cash or TW Exchange Stock.  If
Time Warner exercises the Contract Option and enters into the Distribution
Contract, Time Warner will be obligated to make quarterly payments to Southern
in an amount which, when added to Southern's net cash flow, would aggregate
approximately $213.3 million on a present value basis discounted to the
effective date of the Distribution Contract.

         "The Box" is a viewer interactive music video service produced by The
Box Worldwide, Inc. (f/k/a Video Jukebox Network, Inc.) ("VJN") and offered
through cable television systems and low-power television stations. Viewers may
select the music videos they desire to watch by calling a designated 900 or 976
telephone number, in which case they pay a fee to VJN for their selections.
Alternatively, viewers may passively view the music videos selected by others,
in which case there is no additional charge for the service.

         MacNeil/Lehrer Productions ("MLP") is the primary producer of the
"News Hour" on PBS and a producer of other high-quality documentary and public
affairs programming.  Liberty is attempting to increase the level of production
at MLP by finding new markets for MLP documentary and public affairs
programming.  These markets may include cable, as well as broadcast networks,
on line services and CD-ROM applications.

         Sports Programming Services.      As of April 29, 1996, Liberty Media
Group, News Corp. and TINTA formed two sports programming ventures.  In the
United States, Liberty Media Group and News Corp. formed the Liberty/Fox U.S.
Sports LLC ("Fox Sports") into which Liberty Media Group contributed interests
in its national and regional sports networks and into which News Corp.
contributed its fX cable network and certain other assets.  Liberty Media Group
received a 50% interest in Fox Sports and $350 million in cash.





                                      I-30
<PAGE>   33
         Internationally, News Corp. and a limited liability company
("Liberty/TINTA") formed by a wholly-owned subsidiary of Liberty Media Group,
and TINTA formed a venture ("Fox Sports International") to operate previously
existing sports services in Latin America and Australia and a variety of new
sports services throughout the world, except in Asia, the United Kingdom, Japan
and New Zealand where prior arrangements presently preclude collaboration.
Liberty/TINTA owns 50% of Fox Sports International with News Corp. owning the
other 50%.  News Corp. contributed various international sports rights and
certain trademark rights. Liberty/TINTA contributed Prime Deportiva, (renamed
Fox Sports Americas) a Spanish language sports service distributed in Latin
America and in Hispanic markets in the United States; an interest in Torneos y
Competencias S.A., an Argentinean sports programming and production business;
various international sports and satellite transponder rights and cash.
Liberty/TINTA also contributed its 50% interest in Premier Sports and All-Star
Sports.  Both are Australian 24-hour sports services available via MMDS or cable
television.

         In connection with the TBS/Time Warner Merger, TBS sold its interest
in Fox Sports South (formerly, SportSouth Network), a regional sports cable
network, to Fox Sports for approximately $60 million.  Additionally, Time
Warner granted Liberty an option (the "Sunshine Option") to purchase Time
Warner's interest in Sunshine Network, a Florida- based sports cable network,
for approximately $14 million.  Liberty has contributed the Sunshine Option,
which has not yet been exercised, to Fox Sports.

         Affiliated Regional Communications Ltd. ("ARC") is a partnership
through which interests in several of the regional sports networks are held.
In 1996, prior to the formation of Fox Sports, Liberty's interest in ARC
increased from approximately 65% to approximately 87%.  Following the
contribution of ARC to Fox Sports, on March 13, 1997, Fox Sports increased its
economic interest in ARC to 100%, resulting in a proportionate increase in the
Liberty Media Group's attributed economic interest in the sports networks owned
through ARC.

         Regional Sports Programming Services.  Fox Sports has varying
interests in 15 regional sports networks (the "Sports Networks"), which
acquire, develop, produce, syndicate and distribute sports programming of
primarily local and regional interest by satellite to cable television
operators, to other multi-channel video programming distributors, and to HSD
owners, in specified geographic areas.  The following table sets forth for each
of the Sports Networks the state service areas and significant teams with
respect to whose games the network currently has programming rights:

<TABLE>
<CAPTION>
Sports Network                                   Service Area                    Current Teams              
--------------                                   ------------                    -------------              
<S>                                                <C>                       <C>                                  
Fox Sports Arizona                                 AZ                        Arizona Diamondbacks                 
                                                                             Phoenix Coyotes                      
                                                                             Arizona State University             
                                                                             University of Arizona                
                                                                                                                  
Fox Sports Intermountain West                      ID, MT,                   Utah Jazz                            
                                                   NV, UT,                                                        
                                                   WY                                                             
                                                                                                                  
Fox Sports Midwest                                 IA,IL,                    Indianapolis Pacers                  
                                                   IN, MO                    St. Louis Cardinals                  
                                                                             St. Louis Blues                      
                                                                                                                  
Fox Sports Northwest                               AK, ID,                   Seattle Mariners                     
                                                   MT, OR,                   Seattle Supersonics                  
                                                   WA                        Big Sky Conference                   
                                                                             Oregon State University              
                                                                             University of Oregon                 
                                                                             University of Washington             
                                                                             Washington State University          
</TABLE>





                                      I-31
<PAGE>   34
<TABLE>
<CAPTION>
Sports Network                                 Service Area                  Current Teams               
--------------                                 ------------                  -------------               
<S>                                                <C>                     <C>                                    
Fox Sports Pittsburgh                              PA, OH                  Pittsburgh Penguins                    
                                                   WV                      Pittsburgh Pirates                     
                                                                           Pittsburgh Lumberjacks                 
                                                                           University of Pittsburgh               
                                                                                                                  
Fox Sports -Rocky Mountain                         CO, KS,                 Colorado Avalanche                     
                                                   NE, NM                  Colorado Rockies                       
                                                   SD, WY                  Denver Nuggets                         
                                                                           Kansas City Royals                     
                                                                           Colorado State University              
                                                                           Denver University                      
                                                                           US Air Force Academy                   
                                                                                                                  
Fox Sports -South                                  AL, GA,                 Atlanta Braves                         
                                                   MS, NC,                 Atlanta Hawks                          
                                                   SC, TN                  Charlotte Hornets                      
                                                                           Southeast Conference                   
                                                                           Atlantic Coast Conference              
                                                                           Southern Conference                    
                                                                           Ohio Valley Conference                 
                                                                                                                  
Fox Sports Southwest                               AR, LA,                 Dallas Mavericks                       
                                                   NM, OK,                 Houston Aeros                          
                                                   TX                      Houston Astros                         
                                                                           Houston Rockets                        
                                                                           Dallas Stars                           
                                                                           Texas Rangers                          
                                                                           San Antonio Spurs                      
                                                                                                                  
Fox Sports West                                    CA,HI                   Los Angeles Lakers                     
                                                   NV                      Los Angeles Kings                      
                                                                           California Angels                      
                                                                           University of Southern California      
                                                                           UCLA                                   
                                                                           San Diego State University             
                                                                           Pepperdine University                  
                                                                           Long Beach Ice Dogs                    
                                                                           Anaheim Piranha                        
                                                                                                                  
Fox Sports West 2                                  CA, HI,                 Anaheim Mighty Ducks                   
                                                   NV                      Los Angeles Dodgers                    
                                                                           Los Angeles Clippers                   
                                                                           University of Southern California      
                                                                           UCLA                                   
                                                                           Pepperdine University                  
                                                                                                                  
Home Team Sports                                   DC, DE,                 Baltimore Orioles                      
                                                   MD, NC,                 Washington Bullets                     
                                                   PA, VA,                 Washington Capitals                    
                                                   WV                      Colonial Conference                    
                                                                           Atlantic 10 Conference                 
                                                                           Atlantic Coast Conference              
                                                                                                                  
SportsChannel Chicago                              IA, IL,                 Chicago Blackhawks                     
                                                   IN, WI                  Chicago Bulls                          
                                                                           Chicago White Sox                      
                                                                           University of Notre Dame               
                                                                           Big 10 Conference                      
</TABLE>





                                      I-32
<PAGE>   35
<TABLE>
<CAPTION>
Sports Network                                 Service Area                  Current Teams               
--------------                                 ------------                  -------------               
<S>                                                <C>                     <C>                                    
SportsChannel Pacific                              CA, NV,                 Golden State Warriors                  
                                                   HI                      Oakland A's                            
                                                                           Sacramento Kings                       
                                                                           San Francisco Giants                   
                                                                           San Jose Sharks                        
                                                                           Stanford University                    
                                                                           University of Cal-Berkeley             
                                                                                                                  
SportsChannel Philadelphia/PRISM                   DE, NJ,                 Philadelphia Flyers                    
                                                   PA                      Philadelphia Phillies                  
                                                                           Philadelphia 76ers                     
                                                                           Atlantic 10 Conference                 
                                                                           Big East Conference                    
                                                                                                                  
Sunshine Network                                   FL                      Orlando Magic                          
                                                                           Florida State University               
                                                                           Tampa Bay Lightning                    
                                                                           Florida Marlins                        
                                                                           Miami Heat                             
                                                                           Orlando Predators                      
                                                                           Tampa Bay Storm                        
                                                                           Florida Bobcats                        
                                                                           Sunshine State Conference              
                                                                           University of Florida                  
                                                                           Orlando Solar Bears                    
</TABLE>

         Fox Sports has entered into multi-year agreements granting rights to
Fox Sports Net for national distribution of certain sports events of the PAC-10
Conference, Big 12 Conference and Conference USA, which will be distributed in
part through the Sports Networks and in part through other distribution media.

         In November 1995, Fox Sports entered into a 4-year, non-exclusive
agreement with Major League Baseball ("MLB"), commencing with the 1997 regular
season games, for 2 cable-exclusive nights per week for 26 weeks for national
distribution.  MLB games will be carried on fX and through Fox Sports Net, the
Sports Networks.

         The Sports Networks derive revenue from two principal sources: (1)
fees paid by multichannel video programming distributors pursuant to
affiliation agreements entered into with the Sports Networks and (2) the sale
of advertising time to local, regional and national advertisers plus
infomercials. Each cable operator or other distributor is typically charged a
monthly fee per subscriber in its systems receiving the programming service,
which fees vary depending on whether the service is offered as a basic,
expanded basic or Pay-TV service and the proximity of the cable system to the
venue of the major sporting events distributed by the network. The affiliation
agreements generally provide for limited increases during their term in the
fees charged by the networks.

         In addition to owning interests in and operating the Sports Networks,
Fox Sports also provides various services to affiliated and non-affiliated
networks. Fox Sports, through Fox Sports Direct, acts as a marketing agent to
C-Band HSD owners and distributors to C-Band HSD owners for certain of the
Sports Networks with which it is affiliated. In addition, Fox Sports provides
support services, such as master control and satellite uplinking services, and
certain program scheduling, post-production and editing services, to certain of
its affiliated networks.





                                      I-33
<PAGE>   36
         Each of the Sports Networks sells advertising time to local, regional
and national advertisers. In general, each network's own sales force markets
and sells advertising time to local and regional advertisers, which accounts
for approximately 60% of the total advertising revenue of the Sports Networks.
The remaining 40% of such advertising revenue is sold nationally through Fox
Sports Net Sales, a national advertising group headquartered in New York.
Advertising revenue as a percentage of each network's total revenue varies from
network to network, with the more established networks generally deriving a
greater percentage of their revenue from advertising sales than the newer
networks with fewer subscribers.

         The cost of acquiring sports programming rights and production of
events are the principal expense categories of the Sports Networks. The Sports
Networks typically enter into rights contracts with one or more professional
sports teams in their regions and acquire rights to collegiate sporting events
through arrangements with regional conferences, individual schools and
programming syndicators. The duration of the rights agreements with the
professional teams ranges from one to fifteen years. The rights contracts for
collegiate sporting events typically range from two to five years.  Pursuant to
the professional sports rights agreements, the Sports Networks usually acquire
the exclusive right to distribute via cable and other forms of pay television,
in their respective regions, a specified number of games that are not subject
to national cable or broadcast contracts. In some cases, the contract requires
the network to exhibit a minimum number of games and permits exhibition of
additional games, up to a fixed maximum number. The arrangements with respect
to collegiate sports are more varied, but usually provide exclusive regional
cable distribution rights (other than via free over-the-air broadcast
television) to a specified number of events.  Both professional and collegiate
rights granted under such agreements are generally subordinate to rights
granted under league or conference national broadcast and national cable
contracts. The fee arrangements for the rights granted to the Sports Networks
under the professional and collegiate sports agreements also vary from contract
to contract. In most cases, the contract provides for a charge per game or
event, subject to limited increases over the term of the contract, with either
a minimum annual exhibition requirement or a minimum payment requirement or
both. In certain recent cases a Sports Network has also acquired broadcast or
radio rights to professional teams or collegiate events and has sub-licensed
such rights to broadcast or radio distributors. Certain factors such as player
strikes, bankruptcy of leagues or individual teams, or team relocations may
have an adverse effect on the revenue of the Sports Networks.

         The value of the exhibition rights granted under sports rights
contracts, and in some cases the financial commitments incurred thereunder, are
subject to certain contingencies that are not within the control of the Sports
Networks, such as the relocation of a professional team to a different region,
changes in the schools participating in a particular collegiate conference, the
terms of applicable national broadcast or cable contracts, and the rules and
regulations of the applicable professional or collegiate league, conference or
association.

         As the Sports Networks are regional in nature, to the extent that TCI
is the predominant cable provider in a specific region, the percentage of SSI
subscribers to certain of the Sports Networks may significantly exceed 24.5%.





                                      I-34
<PAGE>   37
         National Sports Programming Services.  "Fox Sports Net" a national
service, distributing network programming to the Sports Networks, other
regional sports networks, and certain other local cable or broadcast
affiliates.  It consists of sports news, professional and collegiate sports
events and other sports programming not subject to territorial restrictions
(including the national MLB games referred to above), college football and
basketball games, (including games from the PAC-10, Big 12 and Conference USA
packages referred to above), college baseball, professional tennis, auto
racing, soccer, golf, boxing and skiing.  Fox Sports Net has recently created a
sports news program, "Fox Sports News," which is part of the Fox Sports Net
network programming.  The establishment of Fox Sports Net allows Fox Sports to
supplement the local and regional sports programming on each Sports Network
with high quality national sports programming.

         "Prime Network" is another national sports service.  Several Sports
Networks are contractually obligated to carry certain programming from Prime
Network.  Prime Network primarily supplies secondary sports programming, also
used to supplement the Sports Networks programming service.

         "NewSport" is a national service primarily dedicated to the production
and delivery of sports news and related programming.  NewSport is distributed
primarily to regional sports networks to be used as either backdrop programming
or a stand-alone second service.  The term "backdrop service" is used to
distinguish between original programming produced by a regional sports network
and ancillary programming purchased by a regional sports network from others to
supplement its programming service.

         "fX" is a general entertainment channel that will be featuring MLB
games once a week and the syndicated series of NYPD Blue, X-Files, Picket
Fences along with a number of other high-quality series.  Approximately 37% of
the subscribers to fX are SSI Subscribers.

         In January 1997, Fox Sports entered into a six-year agreement to clear
broadcast of certain Fox Sports programming on WBIS, a New York City broadcast
station. Fox Sports will provide up to 25 hours per week of its sports
programming during WBIS's sports programming block in the evenings and on
weekends, including its "Fox Sports News" and other national sporting event
programming.  Fox Sports paid a fee to WBIS for broadcast of the sports
programming and will be entitled to a share of the net advertising revenue
derived from such programming.





                                      I-35
<PAGE>   38
         Competition-Programming Companies.  The business of distributing
pro-gramming for cable television is highly competitive. The number of analog
channels available to the average subscriber of a domestic cable television
system is 60 or less.  The various sports, entertainment and information
Programming Companies described above in which Liberty Media Group has
interests (the "Programming Companies") directly compete with other programming
services for distribution on a limited number of cable television channels and,
when distribution is obtained, the programming offered by the Programming
Companies competes, in varying degrees, for viewers and advertisers with other
cable programming services and off-air broadcast television, radio, print
media, motion picture theaters, video cassettes, internet services and other
sources of information and entertainment.  Important competitive factors are
the prices charged for programming, the quantity, quality and variety of the
programming offered and effectiveness of marketing efforts.  With the advent of
new compression technologies, which are intended to increase channel capacity,
competition for channel capacity may substantially decrease, although
additional competitors may have the opportunity to enter the marketplace
thereby increasing competition for subscriber fees and advertising revenue.  No
predictions can be made with respect to the viability of these technologies or
the extent to which they will ultimately impact the availability of channel
capacity.

         In addition to competition for cable distribution, viewers and
advertisers, the Programming Companies also compete, to varying degrees, for
programming.  With respect to the acquisition of sports programming rights, the
Programming Companies compete for national rights principally with the national
broadcast television networks; a number of national cable services that
specialize in or carry sports programming; television "superstations," which
distribute sports and other programming to cable television systems by
satellite; and with independent syndicators that acquire and resell such rights
nationally, regionally and locally.  They also compete for local and regional
rights with those competitors, with local broadcast television stations and
with other local and regional sports networks.  The owners of distribution
outlets such as cable television systems may also contract directly with the
sports teams in their service areas for the right to distribute a number of
such teams' games on their systems.  Four professional sports leagues have each
entered into agreements with national DBS distribution outlets for the
distribution of selected league games.  With respect to the acquisition of
non-sports programming (such as syndicated programs and movies) which is not
produced by or specifically for the Programming Companies, competitors include
the national broadcast television networks, local broadcast television
stations, suppliers of pay-per-view programs and other cable program suppliers.

         As set forth in Regulation-Programming Companies below, the FCC's
"financial interest and syndication" rules had limited the ability of the three
major broadcast networks to distribute network programs through syndication to
broadcast stations and to acquire certain financial interests or domestic
syndication rights in first-run non-network programs.  However, the FCC
repealed these rules in September 1995. Elimination of these restrictions
permits a myriad of broadcast station/network production/exhibition
arrangements, further increasing competition to the Programming Companies in
the acquisition and sale of programming.





                                      I-36
<PAGE>   39
         In a series of decisions, federal courts had invalidated the statute
prohibiting telephone companies from providing video programming and other
information directly to subscribers in their telephone service areas.  Although
those decisions had been subject to review, telephone companies had begun to
invest in and/or form entities for the production and/or acquisition of
programming.  Such entities will provide further competition to the Programming
Companies in the creation, acquisition and/or sale of programming.  The 1996
Telecom Act eliminated that statutory prohibition and any remaining
uncertainty.  Therefore telephone company investment in, development of, and/or
acquisition of programming may be expected to continue and may increase.
However, the telephone companies through their entry into video distribution
could increase the number of outlets for programming sold by the Programming
Companies.

         Satellite Transponder Agreements. The Programming Companies lease
satellite transponders under varying terms on both domestic and international
communications satellites.  Domestic communications satellite transponders may
be leased full or part time on a "protected," "transponder protected" or
"unprotected" basis.  When the carrier provides services to a customer on a
"protected" basis, replacement transponders are reserved on board the satellite
for use in the event the "protected" transponder fails. Should there be no
reserve transponders available, the "protected" customer will displace an
"unprotected" transponder customer on the same satellite.  In certain cases,
the carrier also maintains a protection satellite and should a satellite fail
completely, all of the lessees' "protected" services would be moved to the
protection satellite.  The customer who leases an "unprotected" transponder has
no reserve transponders available, and may have its service interrupted for an
indefinite period when its transponder is required to restore a "protected"
service.

         The availability of replacement satellites and transponder time beyond
current leases is dependent on a number of factors over which Liberty Media
Group has no control, including the market demand for additional transponder
capacity by other prospective users and the normal uncertainties surrounding
the launch of new satellites and the on- orbit failure of existing satellites,
which, collectively, determine the future price of satellite transponders as
the demand versus supply ratio fluctuates.  Although the Company believes that
the Programming Companies have taken reasonable steps to ensure its continued
satellite transmission capability, there can be no assurance that termination
or interruption of satellite transmissions will not occur.  Such a termination
or interruption of service by one or more of these satellites could have a
material adverse effect on the results of operations and financial condition of
Liberty Media Group.

         The Company began deployment of compressed digital video transmission
in Hartford, CT, during 1996.  This technology converts on average as many as
fourteen analog signals (now used to transmit video and voice) into a digital
format and compresses such signals (which is accomplished primarily by
eliminating the redundancies in television imagery) into the space normally
occupied by one analog signal.  The industry is currently developing standards
for sending and receiving compressed signals.  Several of Liberty Media Group's
transponder leases provide the right to use the transponders to provide
compressed services.  Use of compressed service may result in greater
transponder capacity.





                                      I-37
<PAGE>   40
         Regulation-Programming Companies.  The FCC regulates the providers of
satellite communications services and facilities for the transmission of
programming services, the cable television systems that carry such services and
to some extent the programming services themselves.  Cable television systems
are also regulated by municipalities or other state and local government
authorities. Municipalities generally have the jurisdiction to grant and to
review the transfer of franchises, to review rates charged to subscribers, and
to require public, educational, governmental or leased-access channels, except
to the extent that such jurisdiction is preempted by federal law. Any such rate
regulation or other franchise conditions could place downward pressure on
subscriber fees earned by the Programming Companies, and such regulatory
carriage requirements could adversely affect the number of channels available
to carry the Programming Companies.

         The 1992 Cable Act expanded greatly the scope of federal and local
regulation. Liberty Media Group believes that the legislation taken as a whole
and as presently implemented is having a material adverse impact upon the cable
industry in general and upon Liberty Media Group's programming operations
specifically.

         The 1996 Telecom Act, also made significant changes in the regulation
of and competition among telecommunications-related industries, including the
cable television industry.  See "Cable and Communications Services--Domestic
Cable--Regulation and Legislation" above, for a more detailed summary of such
changes.  Among other things, the 1996 Telecom Act eliminated the statutory
prohibition of telephone companies providing video programming in their service
areas; established a regulatory alternative for open video systems; eliminated
rate regulation of cable programming service tiers immediately for small cable
systems and on March 31, 1999, for all cable systems; extended the program
access and anti-discrimination rules to satellite cable programming vendors
owned by telephone companies and other common carriers; and imposed closed-
captioning requirements for video programming.  A number of provisions of the
1996 Telecom Act remain subject to implementation through rulemaking proceedings
by the FCC.  Certain of the more significant areas of regulation imposed by the
1992 Cable Act as revised by the 1996 Telecom Act that relate to or may affect
programming operations are discussed below.

         Regulation of Program Licensing.  The 1992 Cable Act directed the FCC
to promulgate regulations regarding the sale and acquisition of cable
programming between multichannel video program distributors (including cable
operators) and programming services in which a cable operator has an
attributable interest.  The legislation and the implementing regulations
adopted by the FCC preclude virtually all exclusive programming contracts
between cable operators and programmers affiliated with any cable operator
(unless the FCC first determines the contract serves the public interest) and
generally prohibit a cable operator which has an attributable interest in a
programmer from improperly influencing the terms and conditions of sale to
unaffiliated multichannel video distributors.  Further, the 1992 Cable Act
requires that such affiliated programmers make their programming services
available to cable operators and competing video technologies such as MMDS and
DBS services on terms and conditions that do not unfairly discriminate among
such technologies.  The 1996 Telecom Act has extended this requirement to
programming services in which telephone companies and other common carriers
have attributable ownership interests.

         Regulation of Carriage of Programming.  Under the 1992 Cable Act, the
FCC has adopted regulations prohibiting cable operators from requiring a
financial interest in a program service as a condition to carriage of such
service, coercing exclusive rights in a programming service or favoring
affiliated programmers so as to restrain unreasonably the ability of
unaffiliated programmers to compete.





                                      I-38
<PAGE>   41
         Regulation of Cable Service Rates.  Cable systems are subject to
extensive rate regulation as summarized above in "Regulations and Legislation -
Regulation of Cable Service Rates."  The 1996 Telecom Act eliminates rate
regulation of CPSTs in all cable systems as of March 31, 1999.  Such
comprehensive regulations include provisions controlling rate increases for
changes in costs, including programming costs, and for additional channels.

         The FCC's rate regulations permit cable operators to adjust rates to
account for inflation and increases in certain external costs, including
increases in programming costs to the extent such increases exceed the rate of
inflation.  In 1995, the FCC adopted an alternative methodology for adjusting
regulated rates to account for such cost increases and for the costs of adding
channels which provides cable operators with increased flexibility to recover
such costs.  Cable television systems also may adjust rates when regulated
tiers are affected by channel additions or deletions.  Additional programming
costs resulting from channel additions can be accorded the same external
treatment as other program costs increases, and cable operators presently are
permitted to recover a mark-up on their programming expenses.  However, a cable
operator may pass through increases in the cost of programming services
affiliated with such cable operator to the extent such costs exceed the rate of
inflation only if the price charged by the programmer to the affiliated cable
operator reflects prevailing prices offered in the marketplace by the
programmer to unaffiliated third parties or the fair market value of the
programming.

         The FCC's rate regulations have impaired the willingness and ability
of cable operators to add programming services and to invest in additional
cable plant to expand channel capacity.  Consequently, the cumulative impact of
the FCC's rate regulation is likely to continue to have an adverse impact on
Liberty Media Group's programming interests.

         Regulation of Carriage of Broadcast Stations.  The 1992 Cable Act
granted broadcasters a choice of "must carry" rights or "retransmission
consent" rights. Cable operators are required to secure permission from
broadcasters that elected retransmission consent rights before retransmitting
the broadcasters' signals.  Local and distant broadcasters can require cable
operators to make payments as a condition to carriage of such broadcasters'
station on a cable system.  (Established "superstations" were not granted such
rights.)  Alternatively, commercial broadcasters have the right to deny such
carriage unless they grant retransmission consent.





                                      I-39
<PAGE>   42
         The 1992 Cable Act also imposed obligations to carry "local" broadcast
stations for such stations which chose a "must carry" right, as distinguished
from the "retransmission consent" right described above.  The rules adopted by
the FCC generally provided for mandatory carriage by cable systems of all local
full-power commercial television broadcast signals selecting must carry and,
depending on a cable system's channel capacity, non-commercial television
broadcast signals.  In July 1993, the FCC ruled that stations predominantly
used for the transmission of sales presentations or program-length commercials
operate in the public interest and are entitled to choose "must carry" status.
HSNI's full- time broadcast affiliates have all requested "must carry" status
in lieu of a retransmission fee. A petition for reconsideration of the FCC's
ruling currently remains pending before the FCC, which petition has been
opposed by HSNI.  The United States Supreme Court is currently reviewing the
constitutionality of the must carry regulations and is expected to rule on
their constitutionality in 1997.  The "must-carry" and "retransmission consent"
statutory provisions and regulations remain in effect pending the outcome of
these ongoing judicial proceedings.  Such statutorily mandated carriage of
broadcast stations coupled with the provisions of the 1984 Cable Act, which
require cable television systems with 36 or more "activated" channels to
reserve a percentage of such channels for commercial use by unaffiliated third
parties and permit franchise authorities to require the cable operator to
provide channel capacity, equipment and facilities for public, educational and
governmental access, could adversely affect some or substantially all of the
Programming Companies by limiting the carriage of such services in cable
systems with limited channel capacity. As a result of "must carry," HSNI has
experienced increased cable distribution of its programming due to an increase
in the number of cable systems that carry HSNI programming.

         On February 4, 1997, the FCC released revised rules for calculating
the maximum rate for leased commercial access to tiered channels.  The
newly-adopted formula yields a lower maximum rate than the current rate such
that the use of leased access may be expected to increase, thereby further
restricting the channel capacity available for carriage of the Programming
Companies.

         Ownership Regulations.  The 1992 Cable Act required the FCC to, among
other things, (1) prescribe rules and regulations establishing reasonable
limits on the number of channels on a cable system that will be allowed to
carry programming in which the owner of such cable system has an attributable
interest and (2) consider the necessity and appropriateness of imposing
limitations on the degree to which multichannel video programming distributors
(including cable operators) may engage in the creation or production of video
programming.

         In 1993, the FCC adopted regulations limiting carriage by a cable
operator of national programming services in which that operator holds an
attributable interest (using the same attribution standards as were adopted for
its limits on the number of homes nationwide that a cable operator may reach
through its cable systems) to 40% of the first 75 activated channels on each of
the cable operator's systems.  The rules provide for the use of two additional
channels or a 45% limit, whichever is greater, provided that the additional
channels carry minority controlled programming services.  The regulations also
grandfather existing carriage arrangements which exceed the channel limits, but
require new channel capacity to be devoted to unaffiliated programming services
until the system achieves compliance with the regulations.  Channels beyond the
first 75 activated channels are not subject to such limitations, and the rules
do not apply to local or regional programming services.  These rules may limit
carriage of Liberty Media Group's programming services on certain systems of
cable operators affiliated with Liberty Media Group.  In the same rulemaking,
the FCC concluded that additional restrictions on the ability of multichannel
distributors to engage in the creation or production of video programming
presently are unwarranted.





                                      I-40
<PAGE>   43
         Closed Captioning Regulation.  The 1996 Telecom Act also requires the
FCC to establish rules and an implementation schedule to ensure that video
programming is fully accessible to the hearing impaired through closed
captioning.  On January 17, 1997, the FCC released proposed new rules which
would require substantial closed captioning.  Depending upon the rules and
implementation schedule ultimately adopted by the FCC, the Programming
Companies may incur significant additional costs for closed captioning.

         Voluntary Parental Television Guidelines. On January 17, 1997, the
National Association of Broadcasters, the National Cable Television
Association, and the Motion Picture Association of America submitted a joint
proposal to the FCC proposing a voluntary ratings system for video programming.
Under this proposal, television programming would be rated according to one of
the six following categories:  TV-Y (designed for all children), TV-Y7
(designed for children age 7 and above), TV-G (designed for all ages), TV-PG
(parental guidance suggested), TV-14 (parents strongly cautioned, programming
may contain material that many parents would find unsuitable for children under
14 years of age), and TV-M (mature audience only, programming may be unsuitable
for children under 17 years of age).  The FCC requested comment on this
proposal on February 7, 1997.  Under Sections 551(b) and 551 (e)(1)(A) of the
1996 Telecom Act, the FCC, in consultation with public interest groups and
interested individuals from the private sector, has the authority to prescribe
television rating guidelines and procedures if the voluntary industry proposal
is not "acceptable."

         Several petitions filed with the FCC seeking reconsideration of
various aspects of the regulations implementing the 1992 Cable Act remain
undecided.  Petitions for judicial review of regulations adopted by the FCC, as
well as other court challenges to the 1992 Cable Act and the FCC's regulations,
also remain pending.  The FCC also has initiated numerous rulemakings to
implement the 1996 Telecom Act.  The Company is uncertain how the courts and/or
FCC ultimately will rule or whether such rulings will materially change any
existing rules or statutory requirements. Further, virtually all are subject to
revision at the discretion of the appropriate governmental authority.

         Proposed Changes in Regulation.  The regulation of cable television
systems at the federal, state and local levels is subject to the political
process and has been in constant flux over the past decade.  This process
continues in the context of legislative proposals for new laws and the adoption
or deletion of administrative regulations and policies.  Further material
changes in the law and regulatory requirements must be anticipated and there
can be no assurance that Liberty Media Group's business will not be affected
adversely by future legislation, new regulation or deregulation.





                                      I-41
<PAGE>   44
         Satellites and Uplink.  In general, authorization from the FCC must be
obtained for the construction and operation of a communications satellite.  The
FCC authorizes utilization of satellite orbital slots assigned to the United
States by the World Administrative Radio Conference.  Such slots are finite in
number, thus limiting the number of carriers that can provide satellite
transponders and the number of transponders available for transmission of
programming services.  At present, however, there are numerous competing
satellite service providers that make transponders available for video services
to the cable industry.  Certain satellites are more valuable than others to
cable television programmers based on whether a particular satellite is used by
other programmers of popular cable services. Factors that may affect the
Programming Companies' ability to meet their transponder needs in the future
include the market demand for additional transponder capacity by other
prospective users and the normal uncertainties surrounding the launch of new
satellites and the on-orbit failure of existing satellites, which,
collectively, determine the future price of satellite transponders as the
demand versus supply ratio fluctuates.  Under current policy, the carriers from
whom the Programming Companies obtain transponder services are not subject to
the market exit provisions of Section 214 of the Communications Act of 1934, as
amended (the "Communications Act"), and may therefore cease providing
communications services to customers on short notice, provided that such action
is just, reasonable and non- discriminatory, and subject to any additional
rights or remedies to which the customer and the carrier may have agreed.  The
Company has no reason to believe that such service providers have any intention
to cease providing transmission services via their respective satellite
systems.

         The FCC also grants licenses to construct and operate satellite uplink
facilities which transmit signals to satellites.  These licenses are generally
issued without a hearing if suitable frequencies are available.  A number of
the Programming Companies, as well as HSN and Southern, have been granted
licenses for the construction and operation satellite uplink facilities and
others obtain satellite uplink services from established service providers.

         Financial Interest and Syndication. The FCC's "financial interest and
syndication" rules had limited the ability of the three major broadcast
networks to distribute network programs through syndication to broadcast
stations.  The major broadcast networks have not been restricted from
distributing network programs to cable or satellite programmers, such as the
Programming Companies.  However, under the FCC's modified financial interest
and syndication rules adopted in 1993, the three major networks had been
prohibited from: (a) actively syndicating any prime-time entertainment or
first-run non-network programming to television stations in the United States,
(b) acquiring financial interests or domestic syndication rights in any
first-run non-network program or series distributed in the United States unless
that program or series was produced solely "in-house" by the network, and (c)
warehousing programming by withholding it from the syndication market beyond
certain defined periods.

         The FCC eliminated these rules in September 1995.  Elimination of
these restrictions permits a myriad of broadcast station/network
production/exhibition arrangements that only cable operators and the major
broadcast networks (to the extent of distributing to cable and satellite
programmers) were permitted to undertake, further increasing competition to the
Programming Companies in the acquisition and sale of programming.  The grant of
expanded syndication powers to the three major networks could lessen the
attractiveness and/or availability of the major networks' programming to cable
system operators and programmers because they would have to compete directly
for such programming with broadcast stations and could be less likely to secure
cable/broadcast network exclusive distribution and other arrangements.





                                      I-42
<PAGE>   45
         Broadcasting.  Netlink USA, ("Netlink") a subsidiary of the Company
atrributed to the Liberty Media Group, has two lines of business: packaging,
marketing and distributing programming to the U.S. C-Band market (the "Retail
Business"); and uplinking the signals of broadcast television stations to
C-Band packagers and cable systems (the "Wholesale Business").

         Effective April 1, 1996, UVSG, an entity controlled by the TCI Group,
and Netlink combined the Retail Businesses of Netlink and Superstar Satellite
Entertainment ("Superstar"), another large distributor of programming to the
C-Band market, owned by UVSG.  The resulting venture, Superstar Netlink Group
LLC ("Superstar/Netlink"), owned 50% by each of UVSG and Netlink, is the
nation's largest provider of programming to C-Band customers with approximately
42% of the C-Band market.  This includes approximately 36,000 subscribers added
through Superstar/Netlink's acquisition in 1996 of the retail C-Band business
of Jones Satellite Programming.  Liberty Media Group retained 100% ownership of
the Wholesale Business of Netlink ("Netlink Wholesale").

         Superstar/Netlink acquires rights to market various satellite-
transmitted programming, including services such as ESPN, CNN, HBO, WTBS and 
Discovery Channel, to C-Band HSD households.  Superstar/Netlink offers C-Band 
HSD households various packages of programming for monthly, quarterly,
semi-annual and annual subscription periods.  Once a subscriber has ordered
service by telephone or through a C-Band HSD retailer, Superstar/Netlink
transmits an authorization code to the customer's descrambler, allowing
customers to receive the programming.

         Superstar/Netlink markets its C-Band services through direct retail
efforts and satellite equipment dealers.  During 1996, approximately 29% of
Superstar/Netlink's new subscribers were generated through satellite equipment
dealers. During 1996, Superstar/Netlink paid commissions to more than 6,000
dealers. Direct marketing includes advertising in publications targeted at
C-Band HSD households, telemarketing and direct mail.

         During 1996, Netlink Wholesale uplinked and sold the signals of six
broadcast television stations to C-Band packagers and cable systems in the U.S.
As of December 31, 1996, approximately 613,000 C-Band HSD households subscribed
to one or more of such stations offered by Netlink Wholesale through C-Band
packagers and cable companies.  The C-Band packagers and cable companies pay
Netlink Wholesale a fee for the right to sell these services to their
customers.

         Competition-Netlink.  Superstar/Netlink competes with other C-Band
program packagers, some of which are affiliated with well-known, large
programmers and cable television system operators.  Because a significant
portion of Superstar/Netlink's sales are generated through C-Band HSD dealers,
Superstar/Netlink also competes for dealer relationships on the basis of
commission rates and quality of service offered to the dealer and its
customers.  In addition, the C-Band market faces significant competition from
cable television as well as DBS services, which were launched in 1994.  DBS
uses higher power Ku-Band frequencies that can be received by significantly
smaller HSDs than HSDs that receive C-Band frequencies.  Because of the smaller
dish size, DBS may be more widely accepted than C-Band systems in urban
markets.  The Company believes that the entry of DBS will serve to decrease the
size of the C-Band market in the short and long term.  During 1996, the C-Band
industry decreased 4% to 2.3 million subscribers.





                                      I-43
<PAGE>   46
         During 1996 Netlink Wholesale leased six satellite transponders on an
"unprotected" or "transponder unprotected" basis on a communications satellite.
Netlink Wholesale has "seniority status" on such satellite transponders which
results in Netlink Wholesale having favorable ranking should transponders be
required to restore a "protected" service.  See "Satellite Transponder
Agreements" above.

         In uplinking and selling the signals of broadcast television stations
in the U.S., Netlink Wholesale is subject to the FCC regulations and Copyright
Act provisions described below under "Transmission of TBS Superstation
("WTBS")--Regulation--Southern".  Pursuant to such regulations, Netlink
Wholesale may only distribute the signals of network broadcast stations to
"unserved households" which are outside the Grade B contours of a primary
station affiliated with such network.  Netlink Wholesale has entered into an
agreement in principle with representatives of the National Association of
Broadcasters and of its television network affiliate members to identify by zip
code those geographic areas which are "unserved" by network affiliated
stations.  Depending upon finalization of the agreement and such
identification, Netlink Wholesale may be required to disconnect a substantial
number of existing subscribers which would have a material adverse effect upon
the operations of Netlink Wholesale.

         Transmission of TBS SuperStation ("WTBS").  Southern and its wholly
owned subsidiary, Royal Communications, Inc. ("Royal"), transmit the signal of
WTBS, a 24-hour independent UHF television station originated by TBS, from the
uplinking facilities of LMC SatCom, Inc., a wholly owned subsidiary of
Southern, in and near Atlanta, Georgia, to a protected transponder on the
Galaxy V Satellite.  Southern leases such transponder from TBS pursuant to a
sublease that expires in the year 2000.  Southern makes the WTBS signal
available to cable television system operators and operators of other
non-broadcast distribution media who receive the signal on their earth stations
and offer the service to their subscribers.  Southern also makes the WTBS
signal available to C-Band HSD owners through program packagers.  A substantial
portion of Southern's consolidated revenue for 1996 was derived from the C-Band
market.  No payment to TBS is required for the transmission by Southern of the
WTBS signal.  See "Regulation-Southern" below.  At December 31, 1996, Southern
(and Royal) transmitted WTBS to an estimated 67 million homes throughout the
United States, Puerto Rico, the U.S. Virgin Islands and Canada.  Cable and
other operators pay Southern a per-subscriber fee for this service, generally
pursuant to written service agreements, the expiration dates of which range
from 1997 to 2005. Cable television system operators serving approximately
76.7% of the U.S. cable subscribers to whom the WTBS service was made available
at December 31, 1996, are served either on a non-contract basis or pursuant to
service agreements which expire in the next five years.  Royal began
distribution in Canada of the WTBS signal in 1991.  Canadian agreements expire
between 1997 and 2001.  Southern provides the WTBS signal to the U.S. and
Canadian C-Band HSD markets for a per-subscriber fee pursuant to program
packager agreements, all of which are currently on automatic rollover of one
year increments.  Southern also has agreements with DBS distributors including
Primestar, DIRECTV, Inc., AlphaStar, EchoStar and Express Vu (Canadian).  Such
agreements expire between 1997 and 1998 except the agreement with EchoStar
which expires in 1999.





                                      I-44
<PAGE>   47
         In connection with the TBS/Time Warner Merger, Liberty and Time Warner
entered into an agreement providing for the grant to Time Warner of an option
(the "Contract Option") to enter into a contract with Southern (the
"Distribution Contract") pursuant to which Southern would provide Time Warner
with certain uplinking and distribution services relating to WTBS and would
assist Time Wanrer in converting WTBS from a superstation into a copyright paid
cable programming service.  Also in connection with the TBS/Time Warner Merger,
subject to a number of conditions, TCI agreed in the FTC Consent Decree that it
would Spin-off to holders of Liberty Media Group stock the stock of a separate
company, the assets of which would include Southern. For a more detailed
description of the terms of the Contract Option, the Distribution Contract and
the Spin-off, see the description of the TBS/Time Warner Merger in
"Entertainment and Information" above.

         Competition-Southern.  Although Southern is currently the sole
satellite carrier of WTBS, other independent television stations are
transmitted by other carriers. Southern does not have an agreement with TBS
with respect to the retransmission of the WTBS signal and there are no specific
statutory or regulatory restrictions that would prevent any satellite carrier
from transmitting the WTBS signal so long as the carrier meets the passive
carrier requirements of the Copyright Act, and any applicable requirements of
the Communications Act or, if the carrier serves C-Band HSD owners, so long as
the carrier meets the requirements of the Satellite Home Viewer Act of 1988
(the "SHV Act").  Further, Southern has no control over the programming on such
stations.  TBS produces and distributes other cable programming services,
including "TNT," a basic cable entertainment service, and TBS has and may be
expected to continue to give priority to the programming needs of such services
in allocating programming owned by it or to which it has national distribution
rights. Southern's business could be adversely affected by any change in the
type, mix or quality of the programming on WTBS that results in the service
being less desirable to cable operators and their subscribers.  TBS derives
significant revenues from the sale of advertising time on WTBS, however, and
Liberty Media Group therefore believes that TBS has an economic incentive to
maintain the audience appeal of WTBS's programming.

         Regulation-Southern.  Southern is subject to a number of FCC and
Copyright Act regulations.  In addition to the copyright and licensing
requirements summarized below, Southern is subject to the Regulation of Program
Licensing adopted by the FCC under the 1992 Cable Act as summarized above in
the discussion under "Regulation-Programming Companies."

         Copyright Regulations.  The Copyright Act provides cable television
operators with a compulsory copyright license for retransmission of broadcast
television programming without having to negotiate program rights with the
stations or individual copyright owners.  However, see "Regulation-Programming
Companies-Regulation of Carriage of Broadcast Stations" above regarding the
imposition of retransmission consent for broadcast stations.  Therefore, cable
systems that carry distant broadcast signals, such as WTBS, must pay royalty
fees to the Register of Copyrights, the amount of which is based upon a formula
utilizing the amount of the system's semi-annual gross receipts and the number
and type of distant signals carried by the system.  Any increases in the
required fees could adversely affect the competitive position of WTBS and
therefore, Southern.  The Copyright Act empowers the Copyright Office to review
periodically and adjust copyright royalty rates based on inflation and/or
petitions for adjustments due to modifications of FCC rules.  Further, the FCC
has recommended to Congress the abolition of the compulsory license for cable
television carriage of broadcast signals, a proposal that has received
substantial support from members of Congress.  If the compulsory license is
abolished, a cable operator would not be permitted to retransmit WTBS unless
such cable operator reached a licensing agreement with the copyright owners or
licensees of the programming contained on the WTBS signal being retransmitted.





                                      I-45
<PAGE>   48
         Southern is not permitted to provide the WTBS signal to C-Band HSD
owners under the separate compulsory license extended to cable systems.  Under
regulations adopted by the Copyright Office, satellite carriers such as
Southern are not "cable systems" within the meaning of the Copyright Act.  In
1994 the United States Court of Appeals for the Eleventh Circuit upheld such
regulations in an action challenging their validity brought by Southern and
other satellite carriers, and the Supreme Court declined to review that
decision.  Instead, Southern markets the WTBS signal through program packagers
to C-Band HSD owners.  Pursuant to the SHV Act, Congress granted a compulsory
copyright license to satellite carriers retransmitting the broadcast signals of
"superstations," such as WTBS, and network stations to the public for private
home viewing.  In 1994, Congress extended this license until December 31, 1999.
Pursuant to the provisions of the SHV Act, on May 1, 1992 the Copyright Royalty
Tribunal ("CRT") adopted an increase in the compulsory license fees for the
C-Band market effective January 1, 1993, which Congress has extended through
July 1, 1997, thus increasing Southern's copyright payment by 17%.  New fees
after July 1, 1997 will be determined either through negotiations with the
copyright owners of the signals being carried or, if no agreement can be
reached, by an arbitration panel in a proceeding now being conducted under the
auspices of the Copyright Office in which the copyright owners are seeking
substantially higher fees.  If the license granted under the SHV Act is not
further extended, satellite carriers will be required to negotiate private
licenses for the retransmission of copyrighted material to C- Band HSD owners
after 1999.

         Syndicated Exclusivity.  The FCC's syndicated exclusivity rules, which
became effective January 1, 1990, require cable systems with more than 1,000
subscribers to delete programming from distant broadcast signals if exclusive
local broadcast rights to such programming have been purchased by a television
station which broadcasts in the locale of the cable system and such station
requests the cable system to "black out" such programming.  These rules could
have an adverse effect on Southern's business if WTBS were to carry a material
amount of programming subject to deletion.  TBS has stated that it is
programming WTBS to avoid blackouts and that, because it has a reasonable basis
for believing that deletions of its programming will not be required, it is
offering, as permitted by the FCC, to indemnify cable operators that carry WTBS
in order to ensure that its programming is not blacked out.  However, Southern
cannot control TBS's programming decisions with respect to WTBS.

         FCC Licensing. Satellite carriers, including carriers like Southern
that lease transponders from others rather than owning a satellite, may provide
their services as a private carrier and/or as a common carrier.  Common
carriers are required, pursuant to the Communications Act, to provide services
on terms and conditions that are just, reasonable and non-discriminatory.
Private carriers are subject to a lesser degree of regulation by the FCC.  The
Copyright Act exempts any carrier from liability for copyright infringement in
delivering television broadcast signals to cable television systems if it meets
the passive carrier requirements of the Copyright Act.

         HSN, Inc.  In December 1996, Silver King Communications, Inc. ("Silver
King") consummated mergers with Savoy Pictures Entertainment, Inc. ("Savoy")
)the "Savoy Merger") and with Home Shopping Network, Inc. ("HSN") and
subsequently changed its name to HSN, Inc. ("HSNI").  Following such mergers,
HSNI's principal areas of business are electronic retailing and television
broadcasting.

         Pursuant to an Agreement and Plan of Exchange and Merger entered into
in August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of
Silver King in December 1996 (the "HSN Merger").  Each outstanding share of HSN
Common Stock was converted into the right to receive .45 of a share of HSNI's
Common Stock.  Each outstanding share of HSN Class B Common Stock was converted
into the right to receive .54 of a share of HSNI's Class B Common Stock except
for a portion of the HSN Common Stock and the HSN Class B Common Stock owned by
the Liberty Media Group, the treatment of which is discussed below.





                                      I-46
<PAGE>   49
         Pursuant to an agreement among Liberty Media Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and amended
in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV
INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million
shares of Class B common stock of Silver King (which shares represented voting
control of Silver King at such time) and $3,500,000 in cash, representing the
exercise price of the Option.  BDTV-I is a corporation formed by Liberty Media
Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty Media
Group owns over 99% of the equity and none of the voting power (except for
protective rights with respect to certain fundamental corporate actions) and
Mr. Diller owns less than 1% of the equity and all of the voting power.  BDTV-I
exercised the option shortly after its contribution, thereby becoming the
controlling stockholder of Silver King.  Such change in control of Silver King
had been approved by the FCC in June 1996, subject, however, to the condition
that the equity interest of the Company in Silver King not exceed 21.37%
without the prior approval of the FCC (the "FCC Order").

         Prior to the HSN Merger, HSN was a consolidated subsidiary of the
Company attributed to Liberty Media Group.  In order to effect the HSN Merger in
compliance with the FCC Order, Liberty Media Group agreed to defer receiving
certain shares of Silver King that would otherwise have become issuable to it in
the HSN Merger until such time as it was permitted to own such shares.  As a
result, the HSN Merger was structured so that Liberty Media Group received: (i)
7,809,111 shares of Class B common stock of Silver King, all of which shares
Liberty Media Group contributed to BDTV II INC. ("BDTV-II"), (ii) the
contractual right (the "Contingent Right") to be issued up to an additional
2,591,752 shares of Class B common stock of Silver King from time to time upon
the occurrence of certain events which would allow Liberty Media Group to own
additional shares in compliance with the FCC Order (including events resulting
in the dilution of Liberty Media Group's percentage equity interest), and (iii)
739,141 shares of Class B common stock and 17,566,702 shares of common stock of
HSN (representing approximately 19.9% of the equity of HSN).  BDTV-II is a
corporation formed by Liberty Media Group and Barry Diller pursuant to the BDTV
Agreement, in which the relative equity ownership and voting power of Liberty
Media Group and Mr. Diller are substantially the same as their respective equity
ownership and voting power in BDTV-I.  Pursuant to an Exchange Agreement between
Liberty Media Group and Silver King, the shares of HSN held by Liberty Media
Group following the HSN Merger are mandatorily exchangeable from time to time
for shares of common stock and Class B common stock of Silver King (in the same
ratio as the merger ratio in the HSN Merger) (x) upon the occurrence of certain
events or changes in laws, rules or regulations which would entitle Liberty
Media Group to own directly a greater number of shares of Silver King or (y) in
connection with the sale of the shares of Silver King to be received in the
exchange to a third party who would be entitled to own such shares under
applicable law.  If all shares of Silver King stock issuable pursuant to the
Contingent Right and the Exchange Agreement were issued, Liberty Media Group's
beneficial ownership of Silver King stock would increase from 21.37% to
approximately 36.5% of the outstanding common equity (with such shares and the
shares owned by BDTV-I and BDTV-II representing approximately 77% of the total
voting power of the Silver King common equity).





                                      I-47
<PAGE>   50
         Liberty Media Group's shares of nonvoting stock of BDTV-I and BDTV-II
are convertible into voting stock upon the occurrence of certain events
(including a change in law), which would permit Liberty Media Group to own
directly and to vote the Silver King stock held by BDTV-I and BDTV-II,
respectively, pursuant to the rules and regulations of the FCC (a "Change in
Law").  At such time as a Change in Law occurs, Liberty Media Group will have
the right to acquire Mr.  Diller's shares of BDTV-I and BDTV-II for an amount
equal to Mr. Diller's investment in such shares, plus interest.  Following a
Change in Law, Liberty Media Group and Mr. Diller have agreed that they will
vote upon a slate of directors of Silver King, of which a majority will be
Liberty Media Group designees, and the remainder will be designees of Mr.
Diller, and Liberty Media Group will vote, and will cause its director
designees to vote, in the same manner as Mr.  Diller, except with respect to
certain fundamental matters and certain matters related to Mr. Diller's
employment with Silver King.

         The BDTV Agreement grants Mr. Diller the right, so long as he owns a
minimum number of shares of Silver King stock and is President, Chief Executive
Officer or Chairman of the Board of Silver King, to exchange shares of Silver
King Class B common stock owned by Liberty Media Group (10 votes per share) or
held by BDTV-I or BDTV-II for shares of Silver King common stock (one vote per
share) held by Mr. Diller, except to the extent that such exchange would result
in Liberty Media Group beneficially owning securities representing less than
50% of the voting power of Silver King.  The BDTV Agreement also contains
restrictions on transfers of shares of Silver King stock by Liberty Media Group
and Mr.  Diller; rights of first refusal on permitted transfers of shares
(except to a controlled affiliate); and a right of Mr.  Diller to sell his
Silver King shares to Liberty Media Group, if he ceases to be the President,
Chief Executive Officer or Chairman of the Board of Silver King following the
third anniversary of the BDTV Agreement (other than for cause).  If Mr. Diller
exercises his "put" right, the purchase price for such shares will be their
"Appraised Value" (as defined) and such purchase price may be paid in cash or
in any publicly traded securities of TCI or Liberty.

         The BDTV Agreement contemplates the creation of additional companies
("BDTV Entities") with the same capital structure as BDTV-I and BDTV-II, to
which Liberty Media Group may contribute shares of Silver King received
pursuant to the Contingent Right.

         HSNI, through its SKTV, Inc. subsidiary ("SKTV") and through Savoy's
broadcasting operations ("SF Broadcasting"), acquired as a result of the Savoy
Merger, controlled, as of December 31, 1996, 18 full-power television broadcast
stations, including three satellite stations.  HSNI also owned 26 low-power
television stations (the "LPTV Stations") and two low-power translators.

         SKTV owns and operates 12 independent full-power UHF television
stations, including one television satellite station (the "SKTV Stations"),
which affiliate with and primarily broadcast HSN retail sales programming.  To
a limited extent, the SKTV Stations also broadcast syndicated programming,
locally produced public affairs and public interest programming and
commercial-free children's programming.  The SKTV Stations serve 10 of the 16
largest metropolitan television markets in the U.S.  The LPTV Stations also
broadcast HSN programming.  In addition, SKTV holds notes receivable and/or
equity interests in six other entities that hold broadcast licenses or
authorizations in nine television markets.





                                      I-48
<PAGE>   51
         Each SKTV Station, through the applicable HSNI subsidiary, has entered
into an affiliation agreement with HSN pursuant to which such SKTV Station
broadcasts HSN's electronic retail sales programming for 164 hours per week.
No decision has been made by HSNI regarding whether SKTV will continue to
broadcast HSN programming or whether SKTV will, instead, develop and broadcast
programming independently of HSN.  Because HSN has obtained carriage of its
programming in many of SKTV's markets through long-term cable affiliation
agreements, HSNI is evaluating the process for an orderly termination of the
affiliation agreements between SKTV and HSN in the event the agreements are not
renewed, and HSNI has initiated preliminary discussions in a number of markets
for the purpose of securing alternative carriage of HSN programming.  If SKTV
elects to develop programming independently of HSN, substantial expenditures
would be required to develop SKTV programming and promotions, requiring
significant capital expenditures, which, during this developmental and
transitional stage, will not be offset by sufficient revenues.

         There can be no assurance that, if SKTV ceases to broadcast HSN
programming, SKTV will be successful in its strategy to develop and broadcast
its own programming, whether on a local or national basis, or that HSN will be
able to find other means of distributing its programming on favorable terms to
the households in the broadcast areas currently served by the SKTV Stations.

         SF Broadcasting owns and operates 6 full-power stations (the "SF
Stations"), including two satellite stations, and two low-power translators.
Each of the SF Stations has entered into affiliation agreements with Fox
Broadcasting Company ("Fox").  A subsidiary of HSNI owns a 50% equity and 100%
voting interests in the SF Stations.  Fox owns the remaining 50% non-voting
equity interests and has the right to exchange all of such non-voting interests
for voting interests in the SF Stations beginning in the third and fourth
quarters of 1997, subject to necessary regulatory approvals.

         As summarized above in "Regulation of Carriage of Broadcast Stations,"
the Supreme Court is reviewing the constitutionality of the "must-carry"
regulations.  The outcome of the Supreme Court's review of the case cannot be
predicted.  Termination of carriage of the SKTV Stations could have an adverse
impact on HSNI due to HSN revenue loss.  In addition, the elimination of
"must-carry" regulations would adversely affect HSNI's ability to obtain
carriage of programming that it may develop in the future.

         Electronic Retailing Services.       The Liberty Media Group currently
provides electronic retailing services through an equity affiliate, QVC, Inc.
("QVC"), and HSN which was a subsidiary until December 20, 1996, when, as a
result of the HSN Merger, described above, HSN became an equity affiliate of
the Liberty Media Group.

         Upon consummation of the HSN Merger, HSNI owned 80.1% of the equity of
HSN and the Liberty Media Group owned 19.9% of the equity of HSN.  After the HSN
Merger, at such time from time to time as Liberty or its permitted transferee
may be allowed under applicable regulations to hold additional shares of HSNI's
stock, and after exercise in full of the Contingent Rights, Liberty will
exchange its HSN Common Stock and HSN Class B Common Stock for shares of HSNI
Common Stock and HSNI Class B Common Stock at the same ratio as the merger ratio
in the HSN Merger.  Upon completion of such exchange, HSN would become a
wholly-owned subsidiary of HSNI.





                                      I-49
<PAGE>   52
         HSN through its Home Shopping Club, Inc. ("HSC") subsidiary, sells a
variety of consumer goods and services by means of live, customer-interactive
electronic retail sales programs which are transmitted twenty-four hours a day,
seven days per week, via satellite to cable television systems, affiliated
broadcast television stations and HSDs.  HSN retail sales programming is
currently carried on two separate networks, The Home Shopping Network ("THSN")
and America's Store (formerly "Spree").  Both networks are carried by cable
television systems and broadcast television stations throughout the country.
America's Store programming is available in one-hour segments, which enables
broadcast and cable affiliates to air America's Store in available time slots
that would not otherwise produce revenue for the affiliate.

         HSN fulfillment subsidiaries store, service and ship merchandise from
warehouses located in Salem, Virginia and Waterloo, Iowa.  During 1996, HSN
moved its St. Petersburg fulfillment operations to Salem, Virginia.

         HSN purchases merchandise made to its specifications, merchandise from
manufacturers' lines and overstock inventories of wholesalers.  During 1996,
HSN continued to change its purchasing strategy to emphasize price point,
variety, continuity sales, product sourcing and events.  The mix of products
and source of such merchandise depends upon a variety of factors including
price and availability.  HSC generally does not have long-term commitments with
its vendors and there are various sources of supply available for each category
of merchandise sold.  HSN's product offerings include: jewelry; hardgoods,
which include consumer electronics, collectibles, housewares, and consumables;
cosmetics, softgoods, which consist primarily of apparel, and fashion
accessories.

         HSN liquidates short lots and returned merchandise through its
liquidation center and four outlet stores located in Florida.  Merchandise that
is damaged is liquidated by HSN through traditional channels.

         HSN produces retail sales programs in its studios located in St.
Petersburg, Florida.  These programs are distributed to cable television
systems, broadcast television stations, DBS and C-Band HSDs by means of HSN's
satellite uplink facilities to satellite transponders leased by HSN.  HSN has
lease agreements securing full-time use of three transponders, one of which is
sublet to a third party, on three domestic communications satellites.  Each of
the transponder lease agreements grants HSN "protected" rights.  The terms of
two of the leases are for the life of the satellites, which are projected to be
through 2004.  The term of the third lease, which is currently being sublet, is
through December 31, 2006, subject to earlier termination under certain
circumstances.





                                      I-50
<PAGE>   53
         HSN enters into affiliation agreements with cable system operators to
carry THSN, America's Store or both. HSN has a standard form of affiliation
agreement which has a term of five years, is automatically renewable for
subsequent one-year terms, and obligates the cable operator to assist the
promotional efforts of HSN by carrying commercials regarding THSN and America's
Store and distributing HSN's marketing materials to the cable operator's
subscribers.  The standard form of affiliation agreement provides that the
cable operator will receive a commission of five percent of the net sales of
merchandise sold within the cable operator's franchise area (from cable and
broadcast households).  However, particularly with larger, multiple system
operators, HSN has agreed to provide additional compensation.  In the past,
this has included the purchase of advertising availabilities from cable
operators on other programming networks and the establishment of commission
guarantees committing HSN to a certain level of payments.  Although a number of
these contracts remain in effect, as a general rule, HSN is no longer entering
into agreements that provide for advertising availability and commission
guarantee compensation.  These forms of compensation were replaced with cable
distribution fees primarily consisting of up-front payments, based on
commitment to transmit HSN programming to a certain number of subscribers,
and/or performance bonus commissions that are intended to increase sales by
compensating the cable operators for promotional efforts which result in higher
net sales levels for HSN.

         Additional Subsidiary Businesses.  In addition to the electronic
retailing and broadcasting businesses, HSNI's subsidiaries are involved in
Internet shopping and other businesses complementary to electronic retailing.
These include:

         HSN Mail Order, Inc. which markets a variety of merchandise through
four mail order catalogs;

         Vela Research, Inc. which develops and markets high technology audio
and video MPEG compression/decompression products to the cable, computer and
telecommunications industries;

         Internet Shopping Network, Inc. ("ISN") which operates an interactive
shopping service on the Internet, specializing in small office and computer
equipment.  ISN is also engaged in exploring business opportunities for
merchandising products via digital interactive television services and other
new digital retailing vehicles.

         National Call Center, Inc. ("NCII"), performs telemarketing services
using toll free 800 numbers.  NCCI performs direct response telemarketing and
provides services on a contractual basis to HSN and third parties using inbound
and outbound telemarketing.  NCCI can perform any number of related functions,
including fulfillment and credit card clearing services.

         International Ventures.  During 1996 and in 1997, HSN entered into two
international ventures as a minority participant.

         Germany.  HSN acquired a 29% interest in Home Order Television
("HOT"), a venture based in Munich.  HOT broadcasts television shopping 24
hours per day, 12 of which are devoted to live shopping.  HOT is carried via
cable and satellite to several million households in Germany and Austria.

         Japan.  HSN acquired a 30% interest in Shop Channel, a venture based
in Tokyo.  Shop Channel broadcasts televised shopping 24 hours a day, with 18
hours per week devoted to live shopping.  Shop Channel currently is carried by
cable affiliates to approximately one-half million households.





                                      I-51
<PAGE>   54
         Effect on HSN of the 1992 Cable Act. HSC's full-time, full power
broadcast affiliates have all requested "must carry" status in lieu of a
retransmission fee and most have obtained "must carry" status.  (See
"Regulation of Carriage of Broadcast Stations" above for a discussion of
"must-carry").  The U.S. District court for the District of Columbia has twice
upheld the constitutionality of the "must carry" rules.  The Supreme Court is
expected to rule on their constitutionality in 1997.  Due to the possibility of
"must carry" being found unconstitutional, HSN  embarked on an aggressive
campaign to bring the "must carry" households under contract by volunteering to
pay commissions to cable operators required to transmit HSN's programming and
by offering certain other incentives.  Due to HSC's success in obtaining
long-term carriage commitments, in the event "must carry" is ruled
unconstitutional, HSN does not believe the ruling will have a material adverse
impact on HSN or result in any significant loss in carriage.

         Competition-HSN.  HSN operates in a highly competitive environment.
It is in direct competition with businesses which are engaged in retail
merchandising, other electronic retailers, direct marketing retailers such as
mail order companies, companies that sell from catalogs, and other discount
retailers and companies that market through computer technology.  HSN also
competes for access to its customers with broadcasters and alternative forms of
entertainment and information, such as programming for network and independent
broadcast television stations, basic and pay cable television services,
newspapers, radio, magazines, outdoor advertising, transit advertising, yellow
page directories and direct mail.  In particular, the price and availability of
programming for cable television systems affects the availability of these
channels for HSN's programs and the compensation which must be paid to the
cable operators for carriage of HSN programming.

         HSN was the first specialty retailer to market merchandise by means of
live, nationally televised sales programs.  There are other companies, some
having an affiliation or common ownership with cable operators (including TCI),
that now market merchandise by means of live television.  A number of other
entities are engaged in direct retail sales businesses which utilize television
in some form and which target the same markets in which HSN operates.  HSN
cannot predict the degree of success with which it will meet competition in the
future.

         In addition to the above factors, HSN's affiliation with broadcast
television stations creates another set of competitive conditions.  These
stations compete for television viewers primarily within local markets.  HSN's
affiliated broadcast television stations are located in highly competitive
markets and compete against both VHF and UHF stations.  Due to technical
factors, a UHF television generally requires greater power and a high antenna
to secure substantially the same geographical coverage as a VHF television
station.  Under present FCC regulations, additional UHF commercial television
broadcasting stations may be licensed in all such markets with the possible
exception of New York City.  HSN cannot quantify the competitive effect of the
foregoing or any other sources of video programming on any of HSN's affiliated
television stations, nor can it predict whether such competition will have a
material adverse effect on its operations.

         For a more detailed discussion of HSNI's businesses, please refer to
HSNI's Annual Report on Form 10-K for the year ended December 31, 1996
(commission File No. 0-20570).

         QVC.The Liberty Media Group owns a 42.6% interest in QVC.
Substantially all of the remaining 57.4% of QVC is held by a subsidiary of
Comcast, which manages the day-to-day operations of QVC.





                                      I-52
<PAGE>   55
         QVC markets and sells a wide variety of consumer products and services
primarily by means of its televised shopping programs, known as "QVC" and "Q2".
Cable television system operators that have entered into affiliation agreements
with QVC carry its programming as part of their basic service and pursuant to
such agreements receive from QVC commissions equal to 5% of the net sales of
merchandise sold to customers located in the cable operator's service area.
QVC is also a joint venturer in the operation of a British televised shopping
service.  QVC also operates iQVC, an online shopping service which is available
on the Internet and via the Microsoft Network.  iQVC is offering a wide variety
of consumer products.  During 1996, QVC launched a televised shopping service
in Germany and in January 1997, formed a joint venture in Japan to produce
twelve 1/2 hour programs.

         GENERAL

         Legislative, administrative and/or action may change all or portions
of the foregoing statements relating to competition and regulation.

         The Company has not expended material amounts during the last three
fiscal years on research and development activities.

         There is no one customer or affiliated group of customers to whom
sales are made in an amount which exceeds 10% of the Company's consolidated
revenue.

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

         At December 31, 1996, the Company had approximately 35,000 employees,
the majority of which are employees of TCIC.  Of these employees, approximately
1,400 were located in its corporate headquarters and most of the balance were
located at the Company's various facilities in the communities in which the
Company owns and/or operates cable television systems or programming services.

(d)      Financial Information about Foreign & Domestic Operations and Export
Sales

         The Company has neither material foreign operations nor export sales.

Item 2.  Properties.

         The Company owns its executive offices in a suburb of Denver,
Colorado.  It leases most of its regional and local operating offices.  The
Company owns many of its head-end and antenna sites.  Its physical cable
television properties, which are located throughout the United States, consist
of system components, motor vehicles, miscellaneous hardware, spare parts and
other components.

         The Company's cable television facilities are, in the opinion of
management, suitable and adequate by industry standards.  Physical properties
of the Company are not held subject to any major encumbrance.





                                      I-53
<PAGE>   56
Item 3.  Legal Proceedings.

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

         On September 30, 1994, an action captioned The Carter Revocable Trust
by H. Allen Carter and Sharlynn Carter as Trustees v. Tele-Communications,
Inc.; IR-Daniels Partners III; Daniels Ventures, Inc.; Cablevision Equities IV;
Daniels & Associates, Inc.; and John V. Saeman, 94-N-2253, was filed in the
United States District Court for the District of Colorado.  The suit alleges
that all the defendants violated disclosure requirements under the Securities
Exchange Act of 1934, and that defendants IR-Daniels Partners III (now known as
IR-TCI Partners III), Daniels Ventures, Inc. (now known as TCI Ventures, Inc.)
and Daniels & Associates, Inc. (now known as TCI Cablevision Associates, Inc.
or "D&A") breached a fiduciary duty to plaintiff and other limited partners of
American Cable TV Investors 3 (the "ACT 3 Partnership"), in connection with (i)
the sale to TCI Communications, Inc. of ACT 3 Partnership's ownership interest
in the Redlands System and (ii) the sale to affiliates of TCIC of ACT 3
Partnership's ownership interests in other cable television systems (the "ACT 3
Transactions").

         Plaintiff brought this action on behalf of himself and on behalf of
all persons who were limited partners of the ACT 3 Partnership as of the close
of business on October 1, 1993 and who had their proxies solicited by the
defendants in connection with the ACT 3 Transactions that allegedly "resulted
in the dissolution of the ACT 3 Partnership and the loss of their limited
partnership interests."

         Plaintiff seeks unspecified damages that allegedly include, but are
not limited to (i) the difference between the value of ACT 3 Partnership's
interest in the Redlands System (as a percentage of the appraised value of that
system as determined by a 1992 appraisal) and the amount paid by TCIC for the
ACT 3 Partnership's interest in the Redlands System, plus the amount of a fee
paid to D&A, and (ii) the difference between the fair market value of the
limited partnership interests owned by members of a putative class and value
received by members of the putative class pursuant to the ACT 3 Transactions.
Plaintiff also seeks interest and consequential damages.

         Plaintiffs moved for class certification which was granted by the
Court on November 3, 1995.  Factual discovery in this case is complete.
Defendants have filed a Motion for Summary Judgment within the scheduling
deadlines ordered by the Court.  The case is set for trial on September 29,
1997.  Management of the Company believes that, although no assurance can be
given as to the outcome of this action, the ultimate disposition should not
have a material adverse effect upon the financial condition of the Company.

         On September 30, 1994, an action captioned WEBBCO v.
Tele-Communications, Inc.; IR-Daniels Partners II; Daniels Ventures, Inc.;
Cablevision Equities III; Daniels & Associates, Inc.; and John V. Saeman,
94-N-2254, was filed in the United States District Court for the District of
Colorado.  The suit alleges that all the defendants violated disclosure
requirements under the Securities Exchange Act of 1934, and that defendants
IR-Daniels Partners II (now known as IR-TCI Partners II), Daniels Ventures,
Inc. (now known as TCI Ventures, Inc.) and D&A breached a fiduciary duty to
plaintiff and other limited partners of American Cable TV Investors 2 (the "ACT
2 Partnership"), in connection with the sale to TCIC of ACT 2 Partnership's
ownership interest in the Redlands System (the "ACT 2 Transaction").

         Plaintiff brought this action on behalf of himself and on behalf of
all persons who were limited partners of the ACT 2 Partnership as of the close
of business on October 1, 1993 and who had their proxies solicited by the
defendants in connection with the ACT 2 Transaction that allegedly "resulted in
the dissolution of the ACT 2 Partnership and the loss of their limited
partnership interests."





                                      I-54
<PAGE>   57
         Plaintiff seeks unspecified damages that allegedly include, but are
not limited to (i) the difference between the value of ACT 2 Partnership's
interest in the Redlands System (as a percentage of the appraised value of that
system as determined by a 1992 appraisal) and the amount paid by TCIC for ACT 2
Partnership's interest in the Redlands System, plus the amount of a fee paid to
D&A, and (ii) the difference between the fair market value of the limited
partnership interests owned by members of a putative class and value received
by members of the putative class pursuant to the ACT 2 Transaction.  Plaintiff
also seeks interest and consequential damages.

         Plaintiffs moved for class certification which was granted by the
Court on November 3, 1995.  Factual discovery in this case is complete.
Defendants have filed a Motion for Summary Judgment within the scheduling
deadlines ordered by the Court.  The case is set for trial on September 29,
1997.  Management of the Company believes that, although no assurance can be
given as to the outcome of this action, the ultimate disposition should not
have a material adverse effect upon the financial condition of the Company.

         Intellectual Property Development Corporation v. UA-Columbia
Cablevision of Westchester, Inc. and Tele-Communications, Inc.  On September
1, 1994, plaintiff filed suit in federal court in New York for the alleged
infringement of a patent for an invention used in broadcasting systems with
fiber optic transmission lines.  Plaintiff seeks injunctive relief and
unspecified treble damages.  The patent at issue expired on January 16, 1996,
thereby eliminating any claim for injunctive relief by plaintiff.  The issues
now center around whether defendants owe past damages up to the time the patent
expired.  Discovery is currently ongoing.  Based upon the facts available,
management believes that, although no assurance can be given as to the outcome
of this action, the ultimate disposition of this action should not have a
material adverse effect upon the financial condition of the Company.

         Turner Broadcasting Systems, Inc. Shareholder Litigation.  Following
the announcement of the proposed merger (the "TBS-Time Warner Merger") between
Turner Broadcasting Systems, Inc. ("TBS") and Time Warner, Inc. ("Time Warner")
several purported class action lawsuits were filed by TBS shareholders in
Fulton County Superior Court, Georgia.  On November 1, 1995, plaintiffs in
thirteen of the cases filed a second amended class action Complaint in what
will be a consolidated action styled Lewis v. TBS, Inc. C.A. No. B-41500.  The
defendants include, among others, Tele-Communications, Inc., John Malone,
Peter Barton and Fred Vierra.  The claims and defendants in the actions other
than the Lewis action are substantially the same as set forth in the second
amended complaint in the Lewis action.  Plaintiffs allege in the second amended
complaint in the Lewis action that defendants have injured the public
stockholders of TBS in conjunction with the TBS-Time Warner Merger proposal by
(a) misrepresenting the extent to which defendants Time Warner, TCI, John
Malone and R.E. Turner ("Turner") have acted for their own benefit and not for
the benefit of TBS or its stockholders, (b) failing to adequately disclose the
full nature and value of special considerations granted to TCI and Turner in
connection with the TBS-Time Warner Merger proposal, (c) failing to engage in
arms' length bargaining or give any consideration to maximizing TBS stockholder
value, (d) proposing to provide the public holders of TBS stock with unfair
consideration in the TBS-Time Warner Merger, and (e) seeking to entrench
certain of the TBS officers and directors.  Plaintiffs in the Lewis action seek
to enjoin the consummation of the TBS-Time Warner Merger, enjoin the transfer
of any assets to TCI in connection with the TBS-Time Warner Merger, or to
rescind the TBS-Time Warner Merger or transfer of assets if such acts are
consummated.  Plaintiffs also seek unspecified compensatory and punitive
damages.  On December 20, 1996, the Georgia State Court dismissed the
plaintiffs third amended complaint in the Lewis action.  Plaintiffs have stated
their intention to appeal the dismissal order and filed a fourth amended
complaint on January 16, 1997.  Discovery has not commenced in any of the
actions.  Based upon the facts available, management believes that, although no
assurance can be given as to the outcome of these actions, the ultimate
disposition should not have a material adverse effect upon the financial
condition of the Company.





                                      I-55
<PAGE>   58
         QVC Shareholders Litigation.  In July 1994, eight putative class
action lawsuits were filed by certain shareholders of the company in the
Delaware Court of Chancery on behalf of unspecified classes of holders of QVC
common stock.  On August 3, 1994, these actions were consolidated under the
caption In re QVC Shareholders Litigation, Consolidated Civil Action No. 13590
(Court of Chancery, New Castle County, State of Delaware) (the "Consolidated
Action").  The defendants named in the designated complaint in the Consolidated
Action included QVC and its then directors (Barry Diller, Bruce R. Ramer, Linda
J Wachner, William F. Costello, J. Bruce Llewellyn, Brian L. Roberts, Ralph J.
Roberts and Joseph M. Segal).  In their designated complaint in the
Consolidated Action, plaintiffs alleged, among other things, that the QVC
directors breached their fiduciary duties by failing to take all possible steps
to seek out and encourage the best offer for QVC following the announcement by
Comcast of a merger proposal to acquire QVC.  Plaintiffs sought, among other
things, an injunction ordering the defendants to auction QVC and an award of
unspecified damages to the members of the plaintiff class.  On July 22, 1994,
Comcast and Liberty made a merger proposal to QVC in order to acquire the
remaining shares of QVC common stock that Comcast and Liberty collectively did
not already own.

         During early August 1994, counsel for the plaintiffs in the
Consolidated Action advised counsel for Liberty that they were preparing to
amend the designated complaint to name Comcast and Liberty as defendants.  On
August 3-4, 1994, plaintiffs' counsel negotiated with counsel for Liberty with
respect to a proposed increase in the consideration to be paid to QVC's public
shareholders as well as the accelerated payment of such consideration, as bases
for the possible settlement of the Consolidated Action.  On August 5,
plaintiffs, defendants, Comcast and Liberty executed a memorandum of
understanding which contemplated the settlement and dismissal with prejudice of
the Consolidated Action.  On August 4, 1994, Comcast, Liberty, QVC Programming
Holdings, Inc. and the Company executed a merger agreement which, among other
things, reflected the parties' agreement to the terms and transactions
contemplated by the memorandum of understanding.  On August 19, 1994, as
contemplated by the memorandum of understanding, plaintiffs filed a
consolidated amended class action complaint with the Delaware Court of Chancery
against QVC, the company's directors, Comcast and Liberty.

         The settlement of the Consolidated Action was approved by the Delaware
Court of Chancery on February 5, 1997 and will result in the dismissal with
prejudice of the Consolidated Action, and a complete release of all claims,
known or unknown, arising out of or related to the acts, transactions or
occurrences that are alleged in the Consolidated Action.  Defendants in the
Consolidated Action have entered into the memorandum of understanding and have
entered into the stipulation of settlement for the Consolidated Action solely
because the proposed settlement would eliminate the distraction, burden and
expense of the litigation. This represents the final resolution of this matter,
and accordingly, it will not be reported in future filings.

         HSN Shareholder Litigation.  During August 1996, five putative class
action complaints were filed with the Delaware Court of Chancery in C.A. Nos.
15179, 15187, 15188, 15189 and 15195 by stockholders of Home Shopping Network,
Inc. ("HSN").  The complaints were filed following the announcement of the
proposed HSN merger.  The defendants in the actions include HSN, Silver King,
Tele-Communications, Inc. ("TCI"), Liberty Media Corporation ("Liberty") and
the directors of HSN (Barry Diller, James G. Held, Peter R. Barton, Robert R.
Bennett, Leo J. Hindery, Jr., H. Norman Schwarzkopf and Mr. Eli Segal).
Messrs. Barton and Bennett are executive officers of Liberty.  Mr. Hindery is
an executive officer of TCI.  The foregoing actions have been consolidated for
all purposes pursuant to an order by the court which specifies that the
complaint in C.A. No. 15188 is the designated complaint in the consolidated
action.





                                      I-56
<PAGE>   59
         The gravamen of the complaint in C.A. No 15188 is that the HSN
directors breached their fiduciary duties by approving the merger agreement.
Plaintiffs also claim that TCI and Liberty, by supporting the proposed merger,
breached their asserted fiduciary duties as controlling stockholders of HSN.
Specifically, plaintiffs allege that the proposed merger is designed to allow
Silver King and, indirectly, TCI and Liberty to acquire HSN without paying
adequate consideration to the public holders of HSN common stock by timing the
transaction at a time when the price of HSN common stock is low and by ignoring
the anticipated positive prospects of HSN.  Plaintiffs further allege that TCI
and Liberty will be unjustly enriched because, under the merger agreement, they
would receive a premium for their shares of HSN Class B stock while retaining
what plaintiffs assert to be a controlling interest in Silver King through
their ownership of Silver King Class B stock.  According to plaintiffs, Silver
King has knowingly aided and abetted these alleged breaches of fiduciary
duties.  Plaintiffs seek to enjoin the consummation of the proposed merger or,
should the proposed merger proceed, rescission or rescissory damages.
Plaintiffs also seek unspecified compensatory damages, fees and costs.  The
consolidated action remains pending and discovery has not commenced.  Based
upon the facts available, management believes that, although no assurance can
be given as to the outcome of this action, the ultimate disposition should not
have a material adverse effect upon the financial condition of the Company.

         In re Liberty Media Corporation Shareholder Litigation, Cons. C.A. No.
13168 (Del. Ch.).  In October 1993, after the announcement that Liberty would
recombine with TCI through the mergers of TCIC and Liberty with subsidiaries of
a newly formed holding company, seven putative class action lawsuits were filed
by Liberty stockholders in the Court of Chancery of the State of Delaware (the
"Delaware Chancery Court") on behalf of unspecified classes of the holders of
Liberty common stock (other than defendants).  The original defendants included
certain directors of Liberty (Bob Magness, John C. Malone, Peter R. Barton,
H.F. Lenfest, Robert L. Johnson and Paul A. Gould), Liberty and TCI.  These
actions were consolidated by the Delaware Chancery Court on October 27, 1993
under the caption In re Liberty Media Corporation Shareholder Litigation, Cons.
C.A. No. 13168 (the "Liberty Stockholder Action").  On December 21, 1994,
plaintiffs were permitted by the Delaware Chancery Court to file a second
consolidated amended complaint against the defendants named in the pending
complaint and Liberty directors David Wargo and David Rapley.  The pending
complaint is on behalf of a putative class consisting of all holders of Liberty
common stock (except the defendants and their affiliates) from and after
October 7, 1993 through the date of the TCI/Liberty Combination.  Plaintiffs
alleged that the Liberty stockholders received inadequate consideration in the
TCI/Liberty Combination, that the defendants impeded the ability of third
parties to seek to acquire Liberty, and that the defendants failed to conduct
an auction or market check following the announcement of the proposed
TCI/Liberty Combination.  Plaintiffs sought to rescind the TCI/Liberty
Combination, to require defendants to take all appropriate steps to enhance
Liberty's value as an acquisition candidate, to account to the plaintiff class
for all profits obtained by defendants, and to require defendants to pay
unspecified damages to the plaintiff class.  In February 1997, the parties to
the action reached an agreement, in principle, to settle the litigation in
exchange for the payment by TCI of (i) $44 million (in TCI Group stock or cash)
to the Liberty stockholders at the time of the TCI/Liberty Combination and (ii)
fees for plaintiffs' counsel.  Formal settlement papers are expected to be
filed with the Delaware Chancery Court by April 30, 1997.  This represents the
final resolution of this matter, and accordingly, it will not be reported in
future filings.





                                      I-57
<PAGE>   60
         Time Warner Stockholder Litigation.  In November 1995, two derivative
action lawsuits on behalf of and for the benefit of Time Warner, Inc. were
filed in the Delaware Chancery Court by purported stockholders of Time Warner.
These actions, which have identical claims and allegations, are styled as
Bernard v. Time Warner, Inc., C.A. No. 14651, and Parnes v. Time Warner, Inc.,
C.A. No. 14660, respectively.  The defendants named in both complaints are Time
Warner, Inc., Tele-Communications, Inc., and the following individuals who are
directors of Time Warner:  Gerald M. Levin, Merv Adelson, Beverly Sills
Greenough, Michael A. Miles, Donald S. Perkins, Raymond S. Trough, Edward S.
Finkelstein, Carla A. Hills, Henry Luce, III, Reuben Mark, Francis T. Vincent,
Jr., Lawrence B. Buttenweiser, David T. Kearns, J. Richard Munro, and Richard
D. Parsons.  In both cases, plaintiffs allege among other things that the Time
Warner directors breached their fiduciary duties in establishing the terms of
Time Warner's proposed merger with Turner Broadcasting System, Inc.
Specifically, plaintiffs contend in both cases that the Time Warner directors
impermissibly sought to entrench themselves and that TCI aided and abetted the
Time Warner directors' alleged breaches of fiduciary duty.  Plaintiffs complain
in both cases that, in connection with the proposed TBS-Time Warner Merger, TCI
will receive (i) a premium for its TBS stock with a value of nearly 7% over the
value of the merger consideration to be received by other TBS stockholders,
(ii) exclusive programming benefits at discounted prices from TBS, (iii) an
agreement to purchase TBS's and Time Warner's interests in two regional sports
networks, and (iv) five million additional shares of Time Warner stock in
exchange for giving Time Warner an option to purchase a subsidiary of TCI.   In
exchange for these alleged benefits, TCI allegedly facilitated efforts by the
Time Warner directors and Time Warner's management to entrench themselves by
allowing the Time Warner voting stock to be received by TCI upon consummation
of the TBS-Time Warner Merger to be placed in a voting trust controlled by
defendant Levin, who is the chairman and chief executive officer of Time
Warner.  Plaintiffs seek in both actions to enjoin the consummation of the
proposed TBS-Time Warner Merger, to rescind the TBS-Time Warner Merger if it is
consummated, and to enjoin the transfer of Time Warner's assets or stock to TCI
in connection with the TBS-Time Warner Merger.  TCI moved to dismiss these
actions on November 22, 1995.  Discovery has not commenced in these actions.
On December 5, 1995, plaintiffs in both actions agreed to stay any proceedings
pending regulatory developments regarding the proposed TBS-Time Warner Merger.
The TBS-Time Warner Merger was consummated on October 10, 1996.  Based upon the
facts available, management believes that, although no assurances can be given
as to the outcome of this action, the ultimate disposition should not have a
material adverse effect upon the financial condition of the Company.

         DMX Shareholders Litigation.  In September 1996, a putative class
action complaint was filed with the Delaware Court of Chancery in C.A. No 15206
by a stockholder of DMX Inc. ("DMX").  The complaint was filed following the
announcement of a proposed business combination in which TCI Music, Inc. ("TCI
Music"), a newly formed entity, would acquire DMX.  The proposed business
combination contemplates that the shareholders of DMX, including subsidiaries
of TCI that currently own approximately 45% of DMX's outstanding stock, would
receive shares of TCI Music Class A common stock having one vote per share and
representing approximately 19% of TCI Music's outstanding shares.  TCI would
hold TCI Music Class B common stock having ten votes per share and representing
approximately 81% of the TCI Music common equity outstanding immediately after
the transaction.  TCI would acquire those shares in exchange for consideration
that includes DMX subscriber accounts held by TCI subsidiaries and equipment
used by those subsidiaries to distribute the DMX music service to TCI
subscribers.  The defendants in the action include DMX, TCI and the directors
of DMX (Jerold H.  Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R.
Shaw, Sr., Kent Burkhart, J.C. Sparkman and Menon Bhaskar).  Mr. Fisher is a
director of and a consultant to TCI.  Mr. Hindery is an executive officer of
TCI.  Mr. Sparkman is a director of TCI.





                                      I-58
<PAGE>   61
         The gravamen of the complaint is that the DMX directors would breach
their fiduciary duties by approving the proposed business combination.
Specifically, plaintiff alleges that, due to TCI's alleged control over the DMX
board, the DMX directors are unwilling to negotiate with TCI to maximize the
value for the public stockholders of DMX.  Plaintiff claims that the proposed
consideration to be paid the public stockholders of DMX is grossly unfair,
inadequate and substantially below the fair value of DMX.  Plaintiff seeks to
enjoin the consummation of proposed business combination or, should the
proposed transaction proceed, to rescind the transaction.  Plaintiff also seeks
unspecified rescissory and compensatory damages, fees and costs.  The action
remains pending and discovery has not commenced.  Based upon the facts
available, management believes that, although no assurance can be given as to
the outcome of this action, the ultimate disposition should not have a material
adverse effect upon the financial condition of the Company.

         Interactive Network, Inc. Shareholder Litigation.  In January of 1995,
two class action complaints ("Actions") were filed against Interactive Network,
Inc. ("Interactive") and certain of its then current and former officers and
directors (collectively the "Interactive Defendants") in the United States
District Court for the Northern District of California which sought unspecified
damages for alleged violations of the disclosure requirements of the federal
securities laws.  The Actions were filed on behalf of a class of shareholders
that purchased the stock of Interactive during the period August 15, 1994
through November 22, 1994.  Pursuant to an order of the Court, the Actions were
consolidated and in April 1995, a Consolidated Amended Class Action Complaint
captioned In re Interactive Network Inc.  Securities Litigation
("Consolidated Case") was filed in the same court which again sought
damages against the Interactive Defendants for violations of the disclosure
requirements of the federal securities laws, which violations allegedly
occurred during the period May 2, 1994 through March 31, 1995.  On June 17,
1996, a Third Amended Consolidated Class Action Complaint was filed in the
Consolidated Case against the Interactive Defendants and also added
Tele-Communications, Inc., TCI Communications, Inc., TCI Development
Corporation and Gary Howard as defendant parties (collectively, the "TCI
Defendants").  The Third Amended Consolidated Class Action Complaint which was
served upon the TCI Defendants (except Gary Howard) on June 28, 1996, continues
to seek damages against the Interactive Defendants for violation of disclosure
requirements of the federal securities laws and also seeks similar unspecified
damages against the TCI Defendants predicated upon the allegation that they
were "controlling persons" of Interactive at the time the alleged wrongs took
place.  During a mandatory settlement conference on November 19, 1996,
plaintiffs estimated their alleged damages at $25 million.  Based upon the
facts available, management believes that, although no assurance can be given
as to the outcome of this action, the ultimate disposition should not have a
material adverse effect upon the financial condition of the Company.

         Clarence L. Elder, both individually and as the group Representative
vs. Tele-Communications, Inc. et al.  On December 11, 1995, plaintiff filed
suit in the Circuit Court for Baltimore City, Case No. 95345001/CL205580
against UCTC L.P. Company, UCTC of Baltimore, Inc., UTI Purchase Company, Inc.
and Tele-Communications, Inc.  The allegations made in the complaint pertain to
plaintiff's interest in United Cable Television of Baltimore Limited
Partnership.  Plaintiff claims he was wrongfully denied certain preference
distributions, rights to purchase stock, rights to escrow funds, and tax
distributions.  Plaintiff claims entitlement to compensatory damages in excess
of $70,000,000 plus punitive damages in excess of $450,000,000.  Plaintiff
asserts claims for:  breach of contract; negligent misrepresentation;
negligence; unjust enrichment; conversion; fraud; and breach of fiduciary duty.
The Court granted defendants' Motion for Summary Judgment and plaintiff has
filed an appeal.  Based upon the facts available, management believes that,
although no assurance can be given as to the outcome of this action, the
ultimate disposition should not have a material adverse effect upon the
financial condition of the Company.





                                      I-59
<PAGE>   62
         Les Dunnaville v. United Artists Cable, et al. On February 9, 1994,
Les Dunnaville and Jay Sharrieff, former employees of United Cable Television
of Baltimore Limited Partnership, filed an amended complaint in the Circuit
Court for Baltimore City against United Cable Television of Baltimore Limited
Partnership, TCI Cablevision of Maryland, Tele-Communications, Inc. and three
company employees, Roy Harbert, Tony Peduto, and Richard Bushey (the suit was
initially filed on December 3, 1993, but the parties agreed on December 30,
1993 that no responsive pleading would be due pending filing of an amended
complaint).  The action alleges, inter alia, intentional interference with
contract, tortious interference with prospective advantage, defamation, false
light, invasion of privacy, intentional infliction of emotional distress, civil
conspiracy, violation of Maryland's Fair Employment Practices Act, and
respondeat superior with respect to the individual defendants.  Six counts in
the complaint each seek compensatory damages of $1,000,000 and punitive damages
of $1,000,000; the intentional infliction of emotional distress count seeks
compensatory damages of $1,000,000 and punitive damages of $2,000,000; and the
count which alleges violation of Maryland's Fair Employment Practices Act seeks
damages of $500,000.  By order dated May 18, 1994, the Court dismissed the
respondeat superior claim.  Defendants filed Motions for Summary Judgment in
December 1995 and January 1996 on all remaining counts of plaintiffs'
complaint.  The Court granted summary judgment in defendants' favor on March
18, 1996.  The plaintiffs have appealed the Circuit Court ruling to the
Maryland Court of Special Appeals and such appeal is pending.  Based upon the
facts available, management believes that, although no assurance can be given
as to the outcome of this action, the ultimate disposition should not have a
material adverse effect upon the financial condition of the Company.

         Donald E. Watson v. Tele-Communications, Inc., et al. On March 10,
1995, Donald Watson, doing business under the name of Tri-County Cable, filed
suit in Superior Court for the District of Columbia against TCI, TCI East,
Inc., District Cablevision Limited Partnership, District Cablevision, Inc., TCI
of D.C., Inc., TCI of Maryland, Inc., TCI Development Corporation, United Cable
Television of Baltimore Limited Partnership, TCI of Pennsylvania, Inc. and two
individuals, Richard Bushey and Roy Harbert.  The action alleges breach of
settlement agreement, intentional misrepresentations, tortious interference
with prospective advantage, tortious interference with contract, tortious
interference with economic relations, and discrimination on the basis of race.
Three counts in the Complaint seek compensatory damages of $2,500,000 and
punitive damages of $25,000,000; one count seeks compensatory damages of
$2,500,000 and punitive damages of $40,000,000; and two counts each seek
compensatory damages of $20,000,000 and punitive damages of $40,000,000.  Based
upon the facts available, management believes that, although no assurance can
be given as to the outcome of this action, the ultimate disposition should not
have a material adverse effect upon the financial condition of the Company.





                                      I-60
<PAGE>   63
         Louis Beverly v. Tele-Communications, Inc., et al.  On July 27, 1995,
Louis Beverly, a former employee of United Cable Television of Baltimore
Limited Partnership filed a complaint in United States District Court for the
District of Maryland against Tele-Communications, Inc., United Artists Cable of
Baltimore, Inc., United Cable Television of Baltimore Limited Partnership, UCTC
of Baltimore, Inc., and TCI East, Inc.  The plaintiff alleges, in part, that
his termination on September 11, 1987, was the result of racial discrimination.
Plaintiff filed five counts, including race discrimination (Title VII),
violation of 42 USC 1981, defamation, invasion of privacy (false light), and
assault and battery.  Each count seeks $3,000,000 in compensatory and
$6,000,000 in punitive damages, an award of all bonuses and other compensation
lost due to defendants' actions as well as attorneys' fees, costs, and
pre-judgment interest.  On February 14, 1996, the Court granted defendants'
Motion dismissing Tele-Communications, Inc., and TCI East, Inc. as parties,
along with various counts asserted by the plaintiffs including 42 USC 1981,
defamation, invasion of privacy, and assault and battery.  United Artists Cable
of Baltimore was also dismissed from the Title VII claim for race
discrimination.  Currently, the only damages available to plaintiff are those
which existed prior to the amendment to the Civil Rights Act of 1991.  As the
case currently stands, the remaining defendants are faced with one count
without exposure to punitive damages.  Based upon the facts available,
management believes that, although no assurances can be given as to the outcome
of this action, the ultimate disposition should not have a material adverse
effect upon the financial condition of the Company.

         C. Lamont Smith, et al. v. Mile Hi Cable Partners, et al.  On December
9, 1996, C. Lamont Smith and The Black Movie Channel, LLC filed suit in the
District Court for the City and County of Denver against subsidiaries of Tele-
Communications, Inc. (TCI Communications, Inc.; Mile Hi Cable Partners, LP;
Liberty Media Corporation and Encore Media Corporation); Black Entertainment
Television; Steve Santamaria; Media Management Group, Inc. and Virginia Butler.
Plaintiffs assert, in part, that the defendants misappropriated plaintiffs'
concept for the development of a 24 hours a day, seven days a week, cable or
satellite premium channel which would broadcast movies made by or featuring
African Americans, as well as educational programming and community oriented
programming of interest to both the Hispanic and Black communities.  Plaintiffs
claim anticipated annual net profits from such a network would exceed $600
million.  Plaintiffs also assert that the franchise agreement with the City and
County of Denver has been breached for alleged implied covenants of good faith
and fair dealing under the Denver franchise; promissory estoppel and breach of
implied contract; misappropriation of confidential information and trade
secrets; breach of confidence; breach of fiduciary duty; as well as unjust
enrichment; fraud; negligent misrepresentation; non-disclosure and concealment;
civil conspiracy; and violation of the Colorado Antitrust Act of 1992.
Plaintiffs seek an award of consequential, special and restitutionary damages
in an unspecified amount as well as exemplary damages, prejudgment interest,
expert witness fees, attorneys fees and costs.  Based upon the facts available,
management believes that, although no assurance can be given as to the outcome
of this action, the ultimate disposition should not have a material adverse
effect upon the financial condition of the Company.





                                      I-61
<PAGE>   64
         James Dalton, et al. v. Tele-Communications, Inc., et al. On February
24, 1997, James Dalton, et al. filed suit in District Court for Arapahoe
County, Colorado, Case No. 97-CV421, against Tele-Communications, Inc. ("TCI")
and certain officers of TCI. Plaintiffs filed this action under the Colorado
Securities Act and Colorado common law on behalf of all persons who purchased
TCI securities from January 10, 1996 through October 24, 1996 ("the class
period").  Plaintiffs claim, in part, that the defendants made false and
misleading statements during the class period concerning TCI's revenue and cash
flow growth, subscriber growth, and expansion and diversification into a
multi-business platform; and that TCI failed to disclose the performance of its
various operations.  Plaintiffs claim further, in part, that TCI's cash flow
growth was weak and below levels necessary to fund a multi-business
diversification program and that TCI was competitively disadvantaged and would
likely be threatened by adverse conditions impacting its business.  Plaintiffs
are seeking nationwide class certification and claim that the amount in
controversy is less than $75,000 per named plaintiff, exclusive of interest and
costs. TCI intends to defend such claims vigorously.  Based upon the facts
available, management believes that, although no assurances can be given as to
the outcome of this action, the ultimate disposition should not have a material
adverse effect upon the financial condition of the Company.

Item 4.  Submission of Matters to a Vote of Security Holders.

         None.





                                      I-62

<PAGE>   65
                                    PART II.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

     On August 3, 1995, the stockholders of Tele-Communications, Inc. ("TCI" or
the "Company") authorized the Board of Directors (the "Board") of TCI to issue
two new series of stock ("Liberty Group Stock") which reflect the separate
performance of TCI's business which produces and distributes cable television
programming services ("Liberty Media Group"). Additionally, the stockholders of
TCI approved the redesignation of the previously authorized TCI Class A and
Class B common stock into Series A TCI Group and Series B TCI Group common
stock ("TCI Group Stock"). The issuance of the Liberty Group Stock did not
result in any transfer of assets or liabilities of TCI or any of its
subsidiaries or affect the rights of holders of TCI's or any of its
subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a
dividend, one share of Liberty Group Stock for each four shares of TCI Group
Stock owned. Such distribution (the "Distribution") represented one hundred
percent of the equity value attributable to Liberty Media Group. At December
31, 1996, the TCI Group Stock reflects the performance of those businesses of
the Company not attributed to Liberty Media Group.

         Prior to the Distribution, shares of TCI's Class A and Class B common
stock were traded on the Nasdaq National Market Tier of the Nasdaq Stock Market
under the symbols TCOMA and TCOMB, respectively. Subsequent to the Distribution,
shares of Series A and Series B TCI Group Stock and Series A and Series B
Liberty Group Stock are traded on the Nasdaq National Market Tier of the Nasdaq
Stock Market under the symbols TCOMA, TCOMB, LBTYA and LBTYB, respectively. The
table below sets forth the range of high and low sales prices in United States
dollars of shares of common stock of TCI for the periods indicated as furnished
by Nasdaq. The prices have been rounded up to the nearest eighth, and do not
include retail markups, markdowns, or commissions.

     On March 12, 1997, the TCI stockholders authorized the Board to issue two
new series of the Company's common stock, par value $1.00 per share (and a
corresponding increase in the total number of authorized shares of common
stock) to be designated Tele-Communications, Inc. Series A Telephony Group
common stock and Tele-Communications, Inc. Series B Telephony Group common
stock (collectively, the "Telephony Group Stock"). The Telephony Group Stock,
if issued, would be intended to reflect the separate performance of Telephony
Group, which initially consists of the Company's investments in certain
entities engaged in the domestic wireline and wireless telephony businesses. A
total of 750 million shares of Series A Telephony Group Stock and 75 million
shares of Series B Telephony Group Stock were authorized. As of March 24, 1997,
no shares of Telephony Group Stock have been issued.

     Effective January 13, 1997, the Company issued a stock dividend to holders
of Liberty Group Stock consisting of one share of Series A Liberty Group Stock
for every two shares of Series A Liberty Group Stock owned and one share of
Series A Liberty Group Stock for every two shares of Series B Liberty Group
Stock owned (the "Liberty Group Stock Dividend"). All Liberty Group Stock sales
prices and share amounts have been adjusted to give effect to the Liberty Group
Stock Dividend.

                                      II-1

<PAGE>   66

     <TABLE>
     <CAPTION>

     Tele-Communications, Inc.
     -------------------------

                                               Class A          Class B
                                           ----------------  -----------------
                                             High     Low      High      Low
                                           --------  ------  ---------  ------
     <S>                                    <C>     <C>        <C>     <C>

     1995:
     -----
     First quarter                          23-3/4  19-7/8     25      20-3/4
     Second quarter                         24-1/2  17-1/4     24      18-1/4
     Third quarter (through
       the Distribution)                    26-1/4  22-5/8     26-1/4  22-1/4


     TCI Group Stock
     ---------------

     <CAPTION>

                                               Series A         Series B
                                           ----------------  -----------------
                                             High     Low      High      Low
                                           --------  ------  ---------  ------
     <S>                                    <C>     <C>        <C>     <C>
     1995:
     -----
     Third quarter (from the Distribution
     through September 30, 1995)                 20  16-7/8         20  17-1/2
     Fourth quarter                          21-1/4  16-5/8     21-1/4  16-3/4

     1996:
     -----
     First quarter                           22-3/8  18-3/8     22-3/4  18-1/2
     Second quarter                          20-1/8  17-3/8     20-1/2  17-1/2
     Third quarter                           18-1/2  13-1/8         18  13-3/4
     Fourth quarter                              15  11-3/8         15  11-5/8


     Liberty Group Stock
     -------------------

     <CAPTION>

                                               Series A          Series B
                                           ----------------  -----------------
                                             High     Low      High      Low
                                           --------  ------  ---------  ------
     <C>                                      <C>    <C>        <C>   <C>
     1995:
     -----
     Third quarter (from the Distribution
     through September 30, 1995)             18 3/4  15-3/4     19-3/4  16-1/4
     Fourth quarter                          18-3/4  15-1/4     19-3/8  16

     1996:
     -----
     First quarter                           19-1/2  17-1/8     20-3/4  17-3/8
     Second quarter                          20-3/4  17-1/4     21      18
     Third quarter                           19-5/8  13-3/4     19-7/8  15-3/8
     Fourth quarter                          19-7/8  14-3/4     19-1/2  15-3/4
     </TABLE>
     
     As of January 31, 1997, there were 8,437 holders of record of Series A TCI
Group Stock, 587 holders of record of Series B TCI Group Stock, 7,807 holders
of record of Series A Liberty Group Stock and 570 holders of record of Series B
Liberty Group Stock (which amounts do not include the number of stockholders
whose shares are held of record by brokerage houses but include each brokerage
house as one stockholder).


                                      II-2

<PAGE>   67


     The Company has not paid cash dividends on its common stock and has no
present intention of so doing. Payment of cash dividends, if any, in the future
will be determined by the Board in light of the Company's earnings, financial
condition and other relevant considerations. The Company is a holding company
and its assets consist almost entirely of investments in its subsidiaries. As a
holding company, the Company's ability to pay dividends on any classes or
series of its stock is dependent on the earnings of, or other funds available
to, the Company's subsidiaries and the distribution or other payment of such
earnings or other funds to the Company in the form of dividends, loans or other
advances, payment or reimbursement of management fees and expenses and
repayment of loans and advances from the Company. Certain of the Company's
subsidiaries are subject to loan agreements that prohibit or limit the transfer
of funds by such subsidiaries to the Company in the form of dividends, loans,
or advances, and require that such subsidiaries' indebtedness to the Company be
subordinate to the indebtedness under such loan agreements. The amount of net
assets of subsidiaries subject to such restrictions exceeds the Company's
consolidated net assets. For further discussion of such restrictions, see the
Tele-Communications, Inc. Management's Discussion and Analysis of Financial
Condition and Results of Operations.

     On August 8, 1994, the Company issued 70,559 shares of Convertible
Preferred Stock, Series C with a liquidation value of $2,375 per share ("Series
C Preferred Stock") to Mr. Bill Daniels as partial consideration for an
acquisition. The Company subsequently issued 16 additional shares of Series C
Preferred Stock to Mr. Daniels in connection with post-closing adjustments
related to the aforementioned acquisition. Each share of Series C Preferred
Stock is convertible, at the option of the holder, into 116.24 shares of Series
A TCI Group Stock and approximately 37 shares of Series A Liberty Group Stock.

     Effective September 13, 1994, the Company issued 5,555,555 shares of TCI
Class A common stock in exchange for a 20% interest in Microsoft Online
Services Partnership (the "Partnership"). The aggregate value attributed to
such partnership interest was $130 million. In connection with the
Distribution, the Company issued 2,083,332 shares of Liberty Group Stock.
Effective October 14, 1996, the Company resigned as a member of the
Partnership, and the Partnership returned the shares of Series A TCI Group
Stock and Series A Liberty Group Stock that the Company originally contributed
to the Partnership.

     During 1994, the Company, through a series of transactions, restructured
certain of its operations. In connection with such restructuring, certain
subsidiaries transferred assets to certain other subsidiaries and received
shares of TCI Class A common stock and shares of Redeemable Convertible
Preferred Stock, Series E ("Series E Preferred Stock") in return. An aggregate
of 317,105 shares of TCI Class A common stock and 246,402 shares of Series E
Preferred Stock were issued at an aggregate value of $23 million.

     Effective January 4, 1995, the Company issued an aggregate of 445,594
shares of TCI Class A common stock to Neely Productions Limited, JAKL, Inc. and
William Morris Agency, Inc. in exchange for a 66-2/3% general partnership
interest in MacNeil/Lehrer Productions. Such issued shares were valued at $10
million at the time of issuance.

     Effective January 26, 1995, the Company issued 13,343,274 shares of TCI
Class A common stock to Comcast Corporation ("Comcast") as consideration for
the purchase of Comcast's 19.9% ownership interest in Heritage Communications,
Inc. Such issued shares were valued at $292 million at the time of issuance.

     Effective February 2, 1995, the Company issued 3,403,405 shares of TCI
Class A common stock to Acclaim Entertainment, Inc. ("Acclaim") in exchange for
9.8% of Acclaim's outstanding stock. Such exchange was valued at $74 million.


                                      II-3

<PAGE>   68


     Effective February 14, 1995, the Company sold an aggregate of 1,348,314
shares of TCI Class A common stock to Sumitomo Corporation and Sumitomo
Corporation of America for cash proceeds of $30 million.

     Effective June 30, 1995, a subsidiary of TCI transferred certain assets to
another subsidiary of TCI in exchange for 42,667 shares of TCI Class A common
stock. Such shares were valued at approximately $1 million at the time of
issuance.

     In connection with the Distribution, the Company issued 355,141 shares of
Convertible Redeemable Participating Preferred Stock, Series F ("Series F
Preferred Stock") to certain of its subsidiaries in exchange for shares of the
Company's Class A common stock and preferred stock owned by such subsidiaries.
Each share of Series F Preferred Stock is convertible into 1,496.65 shares of
Series A TCI Group Stock.

     Effective March 29, 1996, the Company issued 11,056,500 shares of Series A
TCI Group Stock and 4,146,188 shares of Series A Liberty Group Stock to the
stockholders of The Chronicle Publishing Company ("Chronicle") as partial
consideration for Chronicle's cable television assets. Such shares were valued
at $265 million at the time of issuance.

     During 1994 and 1995 the Company issued 2,350,000 shares and 3,416 shares,
respectively, of TCI Class A common stock upon conversion of $13,983,000 and
$20,000 face value of certain notes payable. During 1996, the Company issued
1,623,800 shares of Series A TCI Group Stock and 608,925 shares of Liberty
Group Stock upon conversion of an additional $9,662,000 face value of notes
payable.

     Each of the above-described issuances of Class A common stock, Series A
TCI Group Common Stock or other equity securities of the Company were made
pursuant to the private placement exemption from the Securities Act of 1933
(the "Act") afforded by Section 4(2) of the Act, and, in certain cases, also
pursuant to Rule 506 of Regulation D of the Act.

     Pursuant to various stock incentive plans, the Company has granted stock
options, stock options with tandems stock appreciation rights and restricted
stock awards to certain directors, officers and other key employees. The common
stock which is issuable upon exercise of the options has been registered
pursuant to various registration statements on Form S-8 filed by the Company.
The aggregate number of options and restricted stock awards granted in 1994,
1995 and 1996 is as follows:


<TABLE>
<CAPTION>
                     TCI Class A      Series A            Series A
                     common stock   TCI Group Stock   Liberty Group Stock
                     ------------   ---------------   -------------------
     <S>              <C>              <C>                  <C>
     1994...........  3,520,000               --                   --
     1995...........         --        7,837,500            3,924,000
     1996...........         --          150,000               56,250
</TABLE>


                                      II-4

<PAGE>   69


Item 6.  Selected Financial Data.

     The following tables present selected information relating to the
financial condition and results of operations of Tele-Communications, Inc. for
the past five years. The following data should be read in conjunction with the
Company's consolidated financial statements.

<TABLE>
<CAPTION>
                                                      December 31,
                                        ---------------------------------------
                                        1996      1995     1994    1993    1992
                                        ----      ----     ----    ----    ----
                                                  amounts in millions
<S>                                     <C>      <C>      <C>     <C>     <C>
Summary Balance Sheet Data:
---------------------------
Property and equipment, net             $ 7,528    7,409   5,876   4,935   4,562

Franchise costs, net                    $15,436   12,230   9,444   9,197   9,300

Total assets                            $30,244   25,577  19,276  16,527  16,315

Debt                                    $14,926   13,211  11,162   9,900  10,285

Minority interests in equity of
  consolidated subsidiaries             $ 1,493      651     429     285     280

Redeemable preferred stock              $   658      478     170      18     110

Company-obligated mandatorily 
  redeemable preferred securities 
  of subsidiary trusts ("Trust 
  Securities") holding solely 
  subordinated debt securities of
  TCI Communications, Inc.              $ 1,000       --      --      --      --

Stockholders' equity                    $ 4,253    4,550   2,655   2,116   1,728

Common shares outstanding
  (net of shares held by
   subsidiaries):
     Class A common stock                    --       --     491     403     382
     Class B common stock                    --       --      85      47      48
     Series A TCI Group Stock               579      572      --      --      --
     Series B TCI Group Stock                85       85      --      --      --
     Series A Liberty Group Stock           228(a)   225(a)   --      --      --
     Series B Liberty Group Stock            21       21      --      --      --
</TABLE>
---------------
(a)  Adjusted to give effect to the Liberty Group Stock Dividend.

                                      II-5
<PAGE>   70




<TABLE>
<CAPTION>
                                          Years ended December 31,          
                              ------------------------------------------------
                              1996         1995       1994      1993      1992
                              ----         ----       ----      ----      ----
                                amounts in millions, except per share data
<S>                          <C>         <C>         <C>      <C>      <C>
Summary Statement of
Operations Data:
--------------------
Revenue                      $ 8,022     6,506       4,682     3,977     3,463

Operating income             $   632       542         788       916       864

Interest expense             $(1,096)   (1,010)       (785)     (731)     (718)

Share of losses of
  affiliates, other
  than Liberty Media
  Corporation, net           $  (473)     (193)       (112)      (76)     (105)

Gain (loss) on
  disposition of assets      $ 1,593        49         (10)       42         9

Earnings (loss) from
 continuing operations       $   278      (171)         62        (5)        8

Net earnings (loss) 
   attributable to common 
   stockholders:
     TCI Class A and
       Class B common stock  $    --       (71)(a)      54        (7)      (22)
     TCI Group Stock            (813)     (107)(b)      --        --       --
     Liberty Group Stock       1,056       (27)(b)      --        --       --
                             -------  --------      ------    ------     -----
                             $   243      (205)         54        (7)      (22)
                             =======  ========      ======    ======     =====
Primary earnings
  (loss) from
  continuing operations
  attributable to
  common stockholders
  per common and common
  equivalent share:
     TCI Class A and
       Class B common stock  $    --      (.11)(a)     .10      (.02)     (.01)
     TCI Group Stock         $ (1.22)     (.16)(b)      --        --        --
     Liberty Group Stock     $  3.97      (.11)(b)(c)   --        --        --

Fully diluted earnings 
  (loss) from continuing 
  operations attributable 
  to common stockholders 
  per common and common 
  equivalent share:
     TCI Class A and
       Class B common stock  $    --      (.11)(a)     .10      (.02)     (.01)
     TCI Group Stock         $ (1.22)     (.16)(b)      --        --        --
     Liberty Group Stock     $  3.88      (.11)(b)(c)   --        --        --
Weighted average common 
  and common equivalent 
  shares outstanding:
     TCI Class A and
       Class B common stock       --       648(a)      541       433       424
     TCI Group Stock             665       656(b)       --        --        --
     Liberty Group Stock         249 (c)   246(b)(c)    --        --        --
</TABLE>

(a)  From January 1, 1995 through the date of the Distribution.

(b)  From the date of the Distribution through December 31, 1995.

(c)  Adjusted to give effect to the Liberty Group Stock Dividend.

                                      II-6

<PAGE>   71


     The following tables present selected information relating to the
financial condition and results of operations of Liberty Media Group for the
past three years. The following data should be read in conjunction with Liberty
Media Group's combined financial statements.


<TABLE>
<CAPTION>
                                                              December 31,
                                                          -------------------
                                                       1996     1995       1994
                                                       ----     ----       ----
                                                          amounts in millions
<S>                                                      <C>     <C>    <C> 
Summary Balance Sheet Data:
---------------------------
Investments in affiliates, accounted for
   under the equity method, and related
   receivables                                        $  545       299       279

Investment in Time Warner, Inc.                       $2,017        --        --

Investment in Turner Broadcasting System, Inc.        $   --       945       654

Other investments, at cost                            $   82       111       103

Total assets                                          $3,059     2,518     2,188

Debt                                                  $    2       251        93

Combined equity                                       $2,397     1,613     1,518

<CAPTION>
                                                              December 31,
                                                          -------------------
                                                       1996     1995      1994
                                                       ----     ----      ----
                                                          amounts in millions
<S>                                                      <C>     <C>    <C> 
Summary Statement of Operations Data:
-------------------------------------
Revenue                                               $ 1,339   1,441      1,371

Cost of goods sold, operating, selling,
   general and administrative expenses,
   including amounts to TCI Group                     $(1,175) (1,425)    (1,299)

Depreciation and amortization                         $   (61)    (98)       (49)

Operating income (loss)                               $    86    (111)        31

Share of earnings (losses) of affiliates, net         $     8     (15)        31

Gain (loss) on disposition of assets                  $ 1,537      (2)       181

Net earnings (loss)                                   $ 1,056     (56)       135
</TABLE>


                                      II-7

<PAGE>   72


     The following tables present selected information relating to the
financial condition and results of operations of TCI Group for the past three
years. The following data should be read in conjunction with TCI Group's
combined financial statements.


<TABLE>
<CAPTION>
<CAPTION>
                                                              December 31,
                                                       ------------------------
                                                       1996     1995       1994
                                                       ----     ----       ----
                                                          amounts in millions
<S>                                                  <C>       <C>        <C> 
Summary Balance Sheet Data:
--------------------------
Property and equipment, net                          $ 7,518    7,205      5,682
Franchise cost, net                                  $15,436   12,230      9,444
Total assets                                         $27,154   23,059     17,121
Debt                                                 $14,924   12,960     11,068
Minority interests in equity of consolidated
  subsidiaries                                       $ 1,454      563        314
Redeemable preferred stocks                          $   658      478        168
Trust Securities                                     $ 1,000       --         --
Combined equity                                      $ 1,863    2,936      1,137

<CAPTION>
                                                       Years ended December 31,
                                                       ------------------------
                                                       1996     1995       1994
                                                       ----     ----       ----
                                                         amounts in millions
Summary Statement of Operations Data:
------------------------------------
<S>                                                      <C>     <C>    <C> 
Revenue                                               $ 6,790    5,145       4,068
Operating, selling, general and
  administrative expenses                             $(4,678)  (3,173)     (2,284)
Depreciation and amortization                         $(1,555)  (1,274)     (1,001)
Operating income                                      $   546      653         788
Interest expense                                      $(1,080)    (993)       (786)
Share of losses of affiliates, net                    $  (469)    (178)       (117)
Loss before earnings (loss) of Liberty Media
  Group through the date of Distribution              $  (778)    (115)        (22)
Earnings (loss) of Liberty Media Group
  through the date of Distribution                         --      (29)        135
                                                      -------  -------     -------
Net earnings (loss)                                      (778)    (144)        113
Dividend requirement on preferred stocks                  (35)     (34)        (14)
                                                      -------  -------     -------
Net earnings (loss) attributable to common
  stockholders                                        $  (813)    (178)         99
                                                      =======  =======     =======
</TABLE>


                                      II-8

<PAGE>   73



Item 7.    Management's Discussion and Analysis of Financial Condition and 
             Results of Operations.

     TELE-COMMUNICATIONS, INC.

     Summary of Operations

     As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "Old TCI") and Liberty Media Corporation
("Liberty") entered into a definitive merger agreement to combine the two
companies (the "TCI/Liberty Combination"). The transaction was consummated on
August 4, 1994 and was structured as a tax free exchange of Class A and Class B
shares of both companies and preferred stock of Liberty for like shares of a
newly formed holding company, TCI/Liberty Holding Company. In connection with
the TCI/Liberty Combination, Old TCI changed its name to TCI Communications,
Inc. ("TCIC") and TCI/Liberty Holding Company changed its name to
Tele-Communications, Inc.

     On August 3, 1995, the stockholders of TCI authorized the Board to issue
the Liberty Group Stock which reflects the separate performance of Liberty
Media Group. Additionally, the stockholders of TCI approved the redesignation
of the previously authorized TCI Class A and Class B common stock into Series A
TCI Group and Series B TCI Group common stock. The issuance of the Liberty
Group Stock did not result in any transfer of assets or liabilities of TCI or
any of its subsidiaries or affect the rights of holders of TCI's or any of its
subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a
dividend, one share of Liberty Group Stock for each four shares of TCI Group
Stock owned. Such distribution represented one hundred percent of the equity
value attributable to Liberty Media Group. As of December 31, 1996, the TCI
Group Stock reflects the performance of those businesses of the Company not
attributed to Liberty Media Group. Such businesses are referred to herein as
"TCI Group". Liberty Media Group and TCI Group are sometimes herein after
referred to individually as a "Group".

     On March 12, 1997, the TCI stockholders authorized the Board to issue two
new series of the Company's common stock, par value $1.00 per share, (and a
corresponding increase in the total number of authorized shares of common
stock) to be designated Tele-Communications, Inc. Series A Telephony Group
Common Stock and Tele-Communications, Inc. Series B Telephony Group Common
Stock. The Telephony Group Stock, if issued, would be intended to reflect the
separate performance of Telephony Group, which initially consists of the
Company's investments in certain entities engaged in the domestic wireline and
wireless telephony businesses. A total of 750 million shares of Series A
Telephony Group Stock and 75 million shares of Series B Telephony Group Stock
were authorized.

     The Company is organized based upon four lines of business: Domestic Cable
and Communications; Programming; International Cable and Programming ("TINTA");
and Technology/Venture Capital. Within the Domestic Cable and Communications
line of business, the Company operates three strategic business units: Cable,
Telephony and Internet. The Company's organizational structure provides for
financial and operational independence in the four operating units, each under
the direction of its own chief executive officer, while maintaining the
synergies and scale economies provided by a common corporate parent. While the
International Cable and Programming unit, Telephony unit, Internet unit or the
Technology/Venture Capital unit is currently significant to the Company as a
whole, the Company believes each unit has growth potential and each unit is
unique enough in nature to warrant separate operational focus.


                                     II-9

<PAGE>   74


     Notwithstanding the foregoing, the Company currently has significant
operations principally in two industry segments: cable and communications
services and programming services. Home shopping is a programming service which
includes a retail function. Separate amounts for home shopping services have
been provided to enhance the readers understanding of the Company. The
Technology/Venture Capital, Telephony, Internet and the International Cable and
Programming portions of the Company's business have been included with cable
and communications services due to their relative insignificance. The amounts
provided for the Company's programming services segment represent the results
of Liberty Media Group since the date of the TCI/Liberty Combination.

     Cable and Communications Services

     The table below sets forth for the periods presented, the percentage
relationship that certain items bear to revenue. This summary provides trend
data relating to the normal recurring operations of the Company. Other items of
significance are discussed under separate captions below.


<TABLE>
<CAPTION>
                                            Years ended December 31,
                                   --------------------------------------------
                                         1996          1995          1994
                                   --------------  -------------   ------------
                                            dollar amounts in millions
<S>                                <C>    <C>      <C>    <C>     <C>    <C>
Revenue                             100%  $6,790    100%  $5,145   100%  $4,043
Operating, selling, general and
 administrative expenses (1)         69    4,678     61    3,173     56   2,275
Compensation (adjustment to
 compensation) relating to stock
 appreciation rights                 --      (30)     1       45     --      (5)
Restructuring charges                --       41     --       --     --      --
 Depreciation and amortization       23    1,555     25    1,274     25     992
                                    ---   ------    ---   ------   ---   ------
   Operating income                   8%  $  546     13%  $  653    19%  $  781
                                    ===   ======    ===   ======   ===   ======
</TABLE>

(1)  Includes intercompany programming charges of $107 million, $80 million
     and $33 million in 1996, 1995 and 1994, respectively. Such programming
     charges eliminate in consolidation.

     The operation of the Company's cable television systems is regulated at
the federal, state and local levels. The Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Cable Act") and the Telecommunications
Act of 1996 (together with the 1992 Cable Act, the "Cable Acts") established
rules under which the Company's basic and tier service rates and its equipment
and installation charges (the "Regulated Services") are regulated if a
complaint is filed or if the appropriate franchise authority is certified. At
December 31, 1996, approximately 78% of the Company's basic customers were
served by cable television systems that were subject to such rate regulation.

     During the year ended December 31, 1996, 61% of the Company's revenue from
Cable and Communications Services was derived from Regulated Services. As noted
above, any increases in rates charged for Regulated Services are regulated by
the Cable Acts. Moreover, competitive factors may limit the Company's ability
to increase its service rates.


                                     II-10

<PAGE>   75


     Through December 4, 1996, the Company had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar").
Primestar provides programming and marketing support to each of its cable
partners who provide satellite television service to their customers. On
December 4, 1996, the Company distributed (the "Satellite Spin-off") to the
holders of shares of TCI Group Stock all of the issued and outstanding common
stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the
Satellite Spin-off, Satellite's assets and operations included the Company's
interest in Primestar, the Company's business of distributing Primestar
programming and two communications satellites. As a result of the Satellite
Spin-off, Satellite's operations are no longer consolidated with the Company's.
See note 7 to the accompanying consolidated financial statements for the effect
of the Satellite Spin-off on the Company's results of operations and financial
position.

     Revenue from Cable and Communications services increased 32% and 27% for
the years ended December 31, 1996 and 1995, respectively, as compared to the
prior years. In the Company's regulated cable systems, the Company implemented
rate increases for its Regulated Services in June 1996. As allowed by Federal
Communications Commission ("FCC") regulations, such rate increases included
amounts intended to recover increased programming costs incurred during the
first five months of 1996 and not previously recovered, as well as interest on
said amounts.

     The 1996 increase in revenue from Cable and Communications is due to the
effect of certain acquisitions (18%), increases in the rates charged to the
Company's customers due to inflation, programming cost increases as previously
discussed and channel additions (7%), growth in the Company's satellite
customers through the date of the Satellite Spin-off (3%), net growth in basic
customer levels within the Company's cable television systems (1%) and an
increase in the Company's international programming revenue, advertising sales
and other revenue (3%).

     The 1995 increase in revenue from Cable and Communications is due to the
effect of certain acquisitions (13%), growth in the Company's satellite
customers (4%), increases in the rates charged to the Company's customers from
inflation, programming cost increases and channel additions (4%), net growth in
basic customer levels within the Company's cable television systems (4%) and an
increase in the Company's long-distance voice and data service and other
revenue (2%).

     Operating, selling, general and administrative expenses increased 47% and
39% for the years ended December 31, 1996 and 1995, respectively, as compared to
the prior year. Exclusive of the effects of acquisitions (21% and 13%) and
Primestar (5% and 8%), such expenses increased 21% and 18%, respectively.
Programming expenses accounted for the majority of such increase. In this
regard, programming expenses, including intercompany programming charges,
represented $1,782 million (38%), $1,331 million (42%) and $936 million (41%) of
operating, selling, general and administrative expenses during 1996, 1995 and
1994, respectively. The Company cannot determine whether and to what extent
increases in the cost of programming will affect its future operating costs.
However, such programming costs have increased at a greater percentage than
increases in revenue of Regulated Services. During the fourth quarter of 1995,
the Company incurred $25 million in expenses related to payment of bonuses to
the majority of its employees.

     During the fourth quarter of 1996, the Company restructured certain of its
operating and accounting functions (the "Restructuring"). In connection with
the Restructuring, the Company recognized a charge of $41 million related
primarily to work force reductions. As of December 31, 1996, $8 million of such
restructuring charges had been paid. The Company anticipates that the majority
of the remaining charges will be paid during the six months ended June 30,
1997.


                                     II-11

<PAGE>   76


     The increase in the Company's depreciation expense in 1996 and 1995 is due
to acquisitions, as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in the Company's cable systems.
The increase in amortization expense in 1996 and 1995 is due to acquisitions.

     The Company records compensation relating to stock appreciation rights and
restricted stock awards granted to certain employees. Such compensation is
subject to future adjustment based upon market value, and ultimately, on the
final determination of market value when the rights are exercised or the
restricted stock awards are vested.

     Programming Services

     The table below sets forth for the periods presented, the percentage
relationship that certain items bear to revenue. This summary provides trend
data relating to the normal recurring operations of the Company. Other items of
significance are discussed under separate captions below.


<TABLE>
<CAPTION>
                                                 Years ended December 31,
                                       --------------------------------------------------------
                                             1996              1995                   1994
                                       ---------------  -----------------      ----------------
                                                    dollar amounts in millions
<S>                                     <C>      <C>     <C>         <C>         <C>      <C>
 Electronic Retailing Services:

  Net sales                              100%    $ 984      100%     $ 920       100%     $ 432
  Cost of sales                           61       605       66        603        61        263
  Operating, selling, general
    and administrative expenses           31       306       37        342        34        145
  Restructuring charges                   --        --        2         17        --         --
  Depreciation and amortization            4        37        4         43         3         15
                                       -----     -----    -----      -----     -----      -----
   Operating income (loss)                 4%    $  36       (9)%    $ (85)        2%     $   9
                                       =====     =====    =====      =====     =====      =====
 Other Programming Services:
                                                                                          -----
  Revenue (1)                            100%    $ 355      100%     $ 521       100%     $ 240
  Operating, selling, general
    and administrative expenses           74       264       92        480        97        234
  Compensation (adjustment to
    compensation) relating to
    stock appreciation rights              5        17        2         12        (1)        (3)
  Depreciation and amortization            7        24       11         55         5         11
                                       -----     -----    -----      -----     -----      -----
   Operating income (loss)                14%    $  50       (5)%    $ (26)       (1)%    $  (2)
                                       =====     =====    =====      =====     =====      =====
</TABLE>

    (1)  Includes intercompany programming revenue of $107 million, $80 million
         and $33 million in 1996, 1995 and 1994, respectively. Such programming
         revenue eliminates in consolidation.

                                     II-12

<PAGE>   77


     Electronic Retailing Services

     This information reflects the results of Home Shopping Network, Inc.
("HSN"), which became a consolidated subsidiary of the Company in the
TCI/Liberty Combination and ceased to be a consolidated subsidiary in December
1996 pursuant to the transactions described below. HSN's primary business is
the sale of merchandise to viewers of the home shopping programming produced
and distributed by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary
of HSN.

     Pursuant to an agreement among Liberty Media Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and amended
in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV
INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million
shares of Class B common stock of Silver King Communications, Inc. ("Silver
King") (which shares represented voting control of Silver King at such time)
and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I
is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the
BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and
none of the voting power (except for protective rights with respect to certain
fundamental corporate actions) and Mr. Diller owns less than 1% of the equity
and all of the voting power. BDTV-I exercised the option shortly after its
contribution, thereby becoming the controlling stockholder of Silver King. Such
change in control of Silver King had been approved by the FCC in June 1996,
subject, however, to the condition that the equity interest of Liberty Media
Group in Silver King not exceed 21.37% without the prior approval of the FCC
(the "FCC Order").

     Pursuant to an Agreement and Plan of Exchange and Merger entered into in
August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of
Silver King in December 1996 (the "HSN Merger") where HSN is the surviving
corporation and a subsidiary of Silver King following the HSN Merger. In order
to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group
agreed to defer receiving certain shares of Silver King that would otherwise
have become issuable to it in the HSN Merger until such time as it was permitted
to own such shares. As a result, the HSN Merger was structured so that Liberty
Media Group received (i) 7,809,111 shares of Class B common stock of Silver
King, all of which shares Liberty Media Group contributed to BDTV II INC.
("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up
to an additional 2,591,752 shares of Class B common stock of Silver King from
time to time upon the occurrence of certain events which would allow Liberty
Media Group to own additional shares in compliance with the FCC Order (including
events resulting in the dilution of Liberty Media Group's percentage equity
interest), and (iii) 739,141 shares of Class B common stock and 17,566,702
shares of common stock of HSN (representing approximately 19.9% of the equity of
HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller
pursuant to the BDTV Agreement, in which the relative equity ownership and
voting power of Liberty Media Group and Mr. Diller are substantially the same as
their respective equity ownership and voting power in BDTV-I.


                                     II-13

<PAGE>   78


     As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty
Media Group and therefore, the financial results of HSN will no longer be
consolidated with the financial results of Liberty Media Group. Although
Liberty Media Group no longer possesses voting control over HSN, it continues
to have an indirect equity interest in HSN through its ownership of the equity
securities of BDTV-I and BDTV-II as well as a direct interest in HSN which
would be exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and
BDTV-II are accounted for using the equity method.

     During the year ended December 31, 1996, HSN's net sales increased 7%, as
compared to the prior year. Such increase is due primarily to the net effect of
an 11.5% increase in the number of packages shipped partially offset by an 8.5%
decrease in the average price per unit sold.

     Net sales from electronic retailing services increased from $432 million
in 1994 to $920 million in 1995. Such increase is due to the consolidation of
HSN in August of 1994 in connection with the TCI/Liberty Combination. However,
on an annualized basis, HSN's net sales decreased approximately 11%. Such
annualized decrease is the net affect of a 19% decrease in the number of
packages shipped, partially offset by a 9% increase in the average price per
unit sold.

     For the year ended December 31, 1996, cost of sales increased $2 million
or less than 1% as compared to 1995. As a percentage of net sales, cost of
sales decreased from 66% to 61% from 1995 to 1996. Such decrease is due to
promotional events in 1995 which had the effect of lowering revenue but not
cost of sales and to a change in product sales mix in 1996.

     Cost of sales increased from $263 million in 1994 to $603 million in 1995.
As a percent of sales, cost of sales increased from 61% in 1994 to 66% in 1995.
The increase in the cost of sales percentages primarily relate to warehouse
sales and other promotional events. Such events included price discounts to (i)
facilitate the restructuring of HSN's distribution center, (ii) make room for
new holiday merchandise and (iii) adjust inventory levels and product mix. In
addition, cost of sales for the year ended December 31, 1995 includes a $12
million increase in HSC's inventory carrying value adjustment related to
products which were inconsistent with HSN's then new sales and merchandise
philosophy.

     HSN believes that seasonality does impact its business, but not to the
same extent it impacts the retail industry in general.

     Other Programming Services

     On April 1, 1996, United Video Satellite Group, Inc. ("UVSG"), a
subsidiary of TCI Group, and Netlink USA ("Netlink"), a subsidiary of Liberty
Media Group, formed Superstar/Netlink Group LLC ("Superstar/Netlink"), a
limited liability company comprised of UVSG's Superstar Satellite Entertainment
and Netlink's retail C-band satellite business. Liberty Media Group and UVSG
each own 50% of Superstar/Netlink. As of April 1, 1996, Netlink's retail C-band
business is no longer consolidated with the financial results of Liberty Media
Group.

     As of April 29, 1996, Liberty Media Group, The News Corporation Limited
("News Corp.") and TINTA formed two sports programming ventures both of which
are accounted for using the equity method. In the United States, Liberty Media
Group and News Corp. formed the Liberty/Fox U.S. Sports LLC ("Fox Sports") into
which Liberty Media Group contributed interests in its national and regional
sports networks and into which News Corp. contributed its fx cable network and
certain other assets. Liberty Media Group received a 50% interest in Fox Sports
and $350 million in cash.


                                     II-14

<PAGE>   79


     Internationally, News Corp. and a limited liability company
("Liberty/TINTA") formed by Liberty Sports, Inc., a wholly-owned subsidiary of
Liberty Media Group, and TINTA formed a venture ("Fox Sports International") to
operate previously existing sports services in Latin America and Australia and
a variety of new sports services throughout the world, except in Asia and in
the United Kingdom, Japan and New Zealand where prior arrangements preclude an
immediate collaboration. Liberty/TINTA owns 50% of Fox Sports International
with News Corp. owning the other 50%. News Corp. contributed various
international sports rights and certain trademark rights. Liberty/TINTA
contributed Prime Deportiva, a Spanish language sports service distributed in
Latin American and in Hispanic markets in the United States; an interest in
Torneos y Competencias S.A., an Argentinean sports programming and production
business; various international sports and satellite transponder rights and
cash. Liberty/TINTA also contributed its 50% interest in Premier Sports and
All-Star Sports. Both are Australian 24-hour sports services available via
multichannel, multipoint distribution systems or cable television.

     As part of the formation of Fox Sports International, Liberty/TINTA is
entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is
entitled to receive from Liberty/TINTA $20 million and rights under various
Asian sports programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.

     Revenue from the Company's Other Programming Services decreased $166
million or 32% from 1995 to 1996. Such decrease is due to the net effect of the
deconsolidation of (i) the Company's sports programming entities upon the
formation of Fox Sports and Fox Sports International and (ii) Netlink's retail
C-band satellite business offset by a $50 million increase in revenue from
Encore Media Corporation and a $9 million increase from other services.

     Revenue from the Company's Other Programming Services increased $281
million or 117% from 1994 to 1995, and operating costs and expenses before
depreciation and amortization increased $246 million or 105%. Such increases
are primarily due to the TCI/Liberty Combination.

     Other Income and Expense

     The Company's interest expense increased $86 million or 9% during 1996, as
compared to 1995 and $225 million or 29% during 1995, as compared to 1994. The
increase in 1996 is the net result of an increase due to higher debt balances
partially offset by a decrease due to a lower weighted average interest rate.
The 1995 increase is the result of higher interest rates and debt balances. The
Company's weighted average interest rate on borrowings was 7.8%, 8.1% and 7.5%
during 1996, 1995 and 1994, respectively.

     During the year ended December 31, 1996, in order to reduce future
interest costs, the Company redeemed certain notes payable which had an
aggregate principle balance of $904 million and fixed interest rates ranging
from 7.88% to 10.44% (the "Redemption"). In connection with the Redemption, the
Company recognized a loss on early extinguishment of debt of $62 million. Such
loss related to prepayment penalties amounting to $60 million and the
retirement of deferred loan costs.

     Also, during the year ended December 31, 1996, certain subsidiaries of the
Company terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion and
refinanced certain other bank credit facilities. In connection with such
termination and refinancings, the Company recognized a loss on early
extinguishment of debt of $9 million related to the retirement of deferred loan
costs.


                                     II-15

<PAGE>   80


     At December 31, 1996, the Company had an effective ownership interest of
approximately 27% in Telewest Communications plc ("Telewest"), a company that
is currently operating and constructing cable television and telephone systems
in the United Kingdom ("UK"). Telewest, which is accounted for under the equity
method, had a carrying value at December 31, 1996 of $488 million and comprised
$109 million, $70 million and $43 million of the Company's share of its
affiliates' losses in 1996, 1995, and 1994, respectively. The increase in the
Company's share of losses of Telewest in 1996 and 1995 is due, in part, to an
increase in Telewest's interest expense and foreign currency translation losses
related to the 1995 issuance of U.S. dollar denominated debentures by Telewest.
In addition, the Company has other less significant equity method investments
in video distribution and programming businesses located in the UK, other parts
of Europe, Asia, Latin America and certain other foreign countries. In the
aggregate, such other equity method investments had a carrying value of $422
million at December 31, 1996 and accounted for $79 million, $62 million and $50
million of the Company's share of its affiliates' losses in 1996, 1995 and
1994, respectively.

     Telewest was formed during the fourth quarter of 1995 upon the merger (the
"TeleWest Merger") of TeleWest Communications plc (formerly TCI/US WEST Cable
Communications Group) ("TeleWest Communications") with SBC (CableComms)(UK).
Prior to the TeleWest Merger, the Company had an effective ownership interest
of approximately 36% in TeleWest Communications, and subsequent to the TeleWest
Merger the Company has an effective ownership interest of approximately 27% in
Telewest. As a result of the TeleWest Merger, the Company recognized a gain of
$165 million (before deducting the related tax expense of $58 million). Such
gain represents the difference between the Company's recorded cost for TeleWest
Communications and the Company's effective proportionate share of Telewest's
net assets. There is no assurance that the Company will realize similar gains
in future periods.

     As a result of the TeleWest Communications November 1994 initial public
offering (the "TeleWest IPO") and the associated dilution of the Company's
ownership interest of TeleWest Communications, the Company recognized a gain
amounting to $161 million (before deducting the related tax expense of $57
million) in 1994.

     The Company's share of losses of affiliates was $473 million, $193 million
and $112 million (exclusive of share of earnings of Liberty prior to the
TCI/Liberty Combination) in 1996, 1995 and 1994, respectively. The increases in
1996 and 1995 are due in part to the aforementioned share of losses of Telewest
and the Company's other international investments. Additionally, included in
share of losses of affiliates for the year ended December 31, 1996 is $168
million attributable to Sprint Spectrum Holding Company, L.P. ("Sprint
Spectrum"). Such amount includes $34 million associated with prior periods.

     On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased 49.9%
of Liberty's 50% general partnership interest in American Movie Classics
Company ("AMC"). The gain recognized by Liberty in connection with the
disposition of AMC was $183 million and is included in the Company's share of
Liberty's earnings prior to the TCI/Liberty Combination.

     Teleport Communications Group Inc. ("TCG"), a competitive local exchange
carrier, conducted an initial public offering (the "TCG IPO") on July 2, 1996
in which it sold 27,025,000 shares of Class A common stock at $16.00 per share
to the public for aggregate net proceeds of approximately $410,000,000. As a
result of the TCG IPO, the Company's ownership interest in TCG was reduced from
approximately 35% to approximately 31%. Accordingly, the Company recognized a
gain amounting to $12 million (before deducting deferred income tax expense of
approximately $5 million).


                                     II-16

<PAGE>   81


     During the year ended December 31, 1995, the Company recognized a gain
amounting to $123 million in connection with the sale by TINTA to the public of
20 million shares of TINTA common stock (the "IPO") and the issuance by TINTA
of shares of common stock for an investment in an Argentine programming entity
(the "TYC Acquisition").

     Minority interests in earnings of consolidated subsidiaries aggregated $56
million for the year ended December 31, 1996, as compared to minority interests
in losses of consolidated subsidiaries in 1995 and 1994. Such change in 1996 is
due primarily to the accrual of dividends on preferred securities issued by
certain subsidiaries of the Company.

     On October 10, 1996, Time Warner, Inc. ("Time Warner") and Turner
Broadcasting System, Inc. ("TBS") consummated a merger (the "TBS/Time Warner
Merger") whereby TBS shareholders received 0.75 of a Time Warner common share
for each TBS Class A and Class B common share held, and each holder of TBS
Class C preferred stock received 0.80 of a Time Warner common share for each of
the 6 shares of TBS Class B common stock into which each share of Class C
preferred stock could have been converted. Prior to the TBS/Time Warner Merger,
the Company owned shares of TBS common stock and shares of a class of TBS
preferred stock that were convertible into TBS common stock. Time Warner, TBS,
TCI and Liberty entered into an Agreement Containing Consent Order with the
Federal Trade Commission ("FTC") dated August 14, 1996, as amended September 4,
1996 (the "FTC Consent Decree"). Pursuant to the FTC Consent Decree, among
other things, Liberty agreed to exchange the shares of Time Warner common stock
to be received in the TBS/Time Warner Merger for shares of a separate series of
Time Warner common stock with limited voting rights (the "TW Exchange Stock")
in exchange for its TBS common and preferred stock. Holders of the TW Exchange
Stock are entitled to one one-hundredth of a vote for each share with respect
to the election of directors. Holders of the TW Exchange Stock will not have
any other voting rights, except as required by law or with respect to limited
matters, including amendments of the terms of the TW Exchange Stock adverse to
such holders. Subject to the federal communications laws, each share of the TW
Exchange Stock will be convertible at any time at the option of the holder on a
one-for-one basis for a share of Time Warner common stock. Holders of TW
Exchange Stock are entitled to receive dividends ratably with the Time Warner
common stock and to share ratably with the holder of Time Warner common stock
in assets remaining for common stockholders upon dissolution, liquidation or
winding up of Time Warner. In connection with the TBS/Time Warner Merger, the
Company received approximately 50.6 million shares of TW Exchange Stock in
exchange for its TBS holdings. As a result of the TBS/Time Warner Merger, the
Company recognized a pre-tax gain of approximately $1.5 billion in the fourth
quarter of 1996.

     Net Earnings

     The Company's net earnings (before preferred stock dividend requirements)
of $278 million for the year ended December 31, 1996 represents an increase of
$449 million as compared to the Company's net loss (before preferred stock
dividend requirements) of $171 million for 1995. Such increase is due to the
net effect of the gains recorded in connection with the TBS/Time Warner Merger
and the HSN Merger partially offset by an increase in share of losses of
affiliates, income tax expense and interest expense. Additionally, the Company
recognized gains in 1995 related to the TeleWest Merger and TINTA IPO.


                                     II-17

<PAGE>   82


     The Company's net loss (before preferred stock dividend requirements) of
$171 million for the year ended December 31, 1995 represents a decrease of $233
million as compared to the Company's net earnings (before preferred stock
dividend requirements) of $62 million for the corresponding period of 1994.
Such decrease is due primarily to a decrease in operating income, a decrease in
share of earnings of affiliates (a significant portion of which results from
the gain recognized in 1994 by Liberty upon the sale of its investment in AMC),
and an increase in interest expense partially offset by the recognition of a
gain resulting from the TINTA IPO.

     Inflation has not had a significant impact on the Company's results of
operations during the three-year period ended December 31, 1996.

     Liquidity and Capital Resources

     On July 31, 1996, pursuant to certain agreements entered into among TCIC,
TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all
of the common stock of a subsidiary of Viacom ("Cable Sub") which owned
Viacom's cable systems and related assets (the "Viacom Acquisition").

     The transaction was structured as a tax-free reorganization in which Cable
Sub transferred all of its non-cable assets, as well as all of its liabilities
other than current liabilities, to a new subsidiary of Viacom ("New Viacom
Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan
Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by
TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has
any obligation with respect to repayment of the Loan Proceeds. The Viacom
Acquisition has been accounted for by the purchase method and accordingly, the
Company recorded Cable Sub's assets and liabilities at fair value.

     Prior to the consummation of the Viacom Acquisition, Viacom offered to the
holders of shares of Viacom Class A Common Stock and Viacom Class B Common
Stock (collectively, "Viacom Common Stock") the opportunity to exchange (the
"Exchange Offer") a portion of their shares of Viacom Common Stock for shares
of Class A Common Stock, par value $100 per share, of Cable Sub ("Cable Sub
Class A Stock"). Immediately following the completion of the Exchange Offer,
TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock (the
"Share Issuance") for $350 million (which was used to reduce Cable Sub's
obligations under the Loan Facility). At the time of the Share Issuance, the
Cable Sub Class A Stock received by Viacom stockholders pursuant to the
Exchange Offer automatically converted into 5% Class A Senior Cumulative
Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub
with a stated value of $100 per share (the "Stated Value"). The Exchangeable
Preferred Stock is exchangeable, at the option of the holder commencing after
the fifth anniversary of the date of issuance, for shares of Series A TCI Group
Stock at an exchange rate of 5.447 shares of Series A TCI Group Stock for each
share of Exchangeable Preferred Stock exchanged. The Exchangeable Preferred
Stock is subject to redemption, at the option of Cable Sub, after the fifth
anniversary of the date of issuance, initially at a redemption price of $102.50
per share and thereafter at prices declining ratably annually to $100 per share
on and after the eighth anniversary of the date of issuance, plus accrued and
unpaid dividends to the date of redemption. The Exchangeable Preferred Stock is
also subject to mandatory redemption on the tenth anniversary of the date of
issuance at a price equal to the Stated Value per share plus accrued and unpaid
dividends. Amounts payable by Cable Sub in satisfaction of its optional or
mandatory redemption obligations with respect to the Exchangeable Preferred
Stock may be made in cash or, at the election of Cable Sub, in shares of Series
A TCI Group Stock, or in any combination of the foregoing.


                                     II-18

<PAGE>   83
     In addition to the Viacom Acquisition, the Company consummated certain
other acquisitions during 1996. See note 3 to the accompanying consolidated
financial statements for additional information regarding assets acquired and
liabilities assumed in connection with all acquisitions.

     During the year ended December 31, 1996, the Company, through certain
subsidiaries, issued (i) 4.6 million shares of Cumulative Exchangeable
Preferred Stock for net cash proceeds of $223 million, (ii) $500 million in
face value of 8.72% Trust Originated Preferred SecuritiesSM for net cash
proceeds of $486 million (through a special purpose entity formed as a Delaware
business trust) (iii) $500 million in face value of 10% Trust Preferred
Securities for net cash proceeds of $485 million (through a special purpose
entity formed as a Delaware business trust) and (iv) $2.06 billion of
publicly-placed senior and medium term notes with interest rates ranging from
6.1% to 7.9% and maturity dates ranging through 2026. The Company used the
proceeds from the aforementioned debt and equity issuances to retire commercial
paper and to repay certain other indebtedness.

     During March 1997, the Company, through special purpose entities formed as
Delaware business trusts, issued $300 million in face value of 9.65% Capital
Securities and $200 million in face value of 9.72% Trust Preferred Securities.
The Company used the net proceeds from such issuances to retire commercial
paper and repay certain other indebtedness.

     Additionally, in February 1996, TINTA issued $345 million (before
deducting offering costs of $9 million) of 4.5% convertible subordinated
debentures. TINTA anticipates that it will use the net proceeds to fund capital
contributions to certain of its equity investees.

     In January 1997, the Company acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that the Company did not previously own and certain
additional assets for aggregate consideration of approximately $970 million.
The Company issued approximately 16 million shares of TCI Group Stock, assumed
$584 million of TKR Cable's debt and paid cash of $88 million and shares of
Time Warner common stock valued at $41 million upon consummation of such
acquisition.

     The Company is a holding company and its assets consist almost entirely of
investments in its subsidiaries. As a holding company, the Company's ability to
pay dividends on any classes or series of preferred stock is dependent on the
earnings of, or other funds available to, the Company's subsidiaries and the
distribution or other payment of such earnings or other funds to the Company in
the form of dividends, loans or other advances, payment or reimbursement of
management fees and expenses and repayment of loans and advances from the
Company. The Company's subsidiaries are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay the dividends on any
class or series of preferred stock of TCI or to make any funds available
therefor, whether by dividends, loans or other payments. The payment of
dividends or the making of loans and advances to the Company by its
subsidiaries may be subject to statutory or regulatory restrictions, are
contingent upon the earnings of those subsidiaries and are subject to various
business considerations. Further, certain of the Company's subsidiaries are
subject to loan agreements that prohibit or limit the transfer of funds by such
subsidiaries to the Company in the form of dividends, loans, or advances, and
require that such subsidiaries' indebtedness to the Company be subordinate to
the indebtedness under such loan agreements. The amount of net assets of
subsidiaries subject to such restrictions exceeds the Company's consolidated
net assets. The Company's subsidiaries currently have the ability to transfer
funds to the Company in amounts exceeding the Company's dividend requirement on
any class or series of preferred stock. Net cash provided by operating
activities of subsidiaries which are not restricted from making transfers to
the parent company have been and are expected to continue to be sufficient to
enable the parent company to meet its cash obligations.


                                     II-19

<PAGE>   84


     Moreover, almost all of the consolidated liabilities of the Company have
been incurred by its subsidiaries. Therefore, the Company's rights, and the
extent to which the holders of the Company's preferred stocks will be able to
participate in the distribution of assets of any subsidiary upon the latter's
liquidation or reorganization, will be subject to prior claims of the
subsidiary's creditors, including trade creditors, except to the extent that
the Company may itself be a creditor with recognized claims against such
subsidiary (in which case the claims of the Company would still be subject to
the prior claims of any secured creditor of such subsidiary and of any holder
of indebtedness of such subsidiary that is senior to that held by the Company).

     During the second quarter of 1996, certain subsidiaries of the Company
terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion. The Company
does not believe that such terminations will adversely affect its future
liquidity. At December 31, 1996, subsidiaries of the Company had approximately
$1.8 billion in unused lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although such
subsidiaries were in compliance with the restrictive covenants contained in
their credit facilities at said date, additional borrowings under the credit
facilities are subject to the subsidiaries' continuing compliance with such
restrictive covenants (which relate primarily to the maintenance of certain
ratios of cash flow to total debt and cash flow to debt service, as defined in
the credit facilities) after giving effect to such additional borrowings. See
note 8 to the accompanying consolidated financial statements for additional
information regarding the material terms of the subsidiaries' lines of credit.

     One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization, compensation relating to
stock appreciation rights, adjustment to compensation relating to stock
appreciation rights and restructuring charges) ($2,276 million, $1,988 million
and $1,798 million in 1996, 1995 and 1994, respectively) to interest expense
($1,096 million, $1,010 million and $785 million in 1996, 1995 and 1994,
respectively), is determined by reference to the consolidated statements of
operations. The Company's interest coverage ratio was 208%, 197% and 229% for
1996, 1995 and 1994, respectively. Management of the Company believes that the
foregoing interest coverage ratio is adequate in light of the consistency and
nonseasonal nature of its cable television operations and the relative
predictability of the Company's interest expense, almost half of which results
from fixed rate indebtedness. However, the Company's current intent is to reduce
its outstanding indebtedness such that its interest coverage ratio could be
increased. There is no assurance that the Company will be able to achieve such
objective. Operating Cash Flow is a measure of value and borrowing capacity
within the cable television industry and is not intended to be a substitute for
cash flows provided by operating activities, a measure of performance prepared
in accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.


                                     II-20

<PAGE>   85


     Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying consolidated statements of cash flows. Net
cash provided by operating activities ($1,228 million, $957 million and $908
million in 1996, 1995 and 1994, respectively) reflects net cash from the
operations of the Company available for the Company's liquidity needs after
taking into consideration the aforementioned additional substantial costs of
doing business not reflected in Operating Cash Flow. Amounts expended by the
Company for its investing activities exceed net cash provided by operating
activities. However, management believes that net cash provided by operating
activities, the ability of the Company and its subsidiaries to obtain
additional financing (including the subsidiaries' available lines of credit and
access to public debt markets), issuances and sales of the Company's equity or
equity of its subsidiaries, and proceeds from disposition of assets will
provide adequate sources of short-term and long-term liquidity in the future.
See the Company's consolidated statements of cash flows included in the
accompanying consolidated financial statements.

     The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Historically, amounts expended for acquisitions and capital expenditures have
exceeded net cash provided by operating activities. In this regard, the amount
of capital expended by the Company for property and equipment was $2,055
million, $1,782 million and $1,264 million in 1996, 1995 and 1994,
respectively. The Company has reevaluated its capital expenditure strategy and
currently anticipates that it will expend significantly less for property and
equipment in 1997 than it did in 1996. To the extent that net cash provided by
operating activities exceeds net cash used in investing activities in 1997, the
Company currently anticipates that such excess cash will initially be used to
reduce outstanding debt.

     In late April 1996, TCIC was notified by Moody's Investors Service, Inc.
("Moody's") and Duff & Phelps Credit Rating Co. ("Duff and Phelps") that those
rating agencies had downgraded by one level their respective ratings of TCIC's
senior debt to the first level below investment grade. Fitch Investors Service,
L.P. ("Fitch") reaffirmed its rating for TCIC's senior debt at the last level
of investment grade. On October 18, 1996, Standard and Poor's Securities, Inc.
("Standard & Poor's") issued a press release stating that TCIC's senior debt
would be placed on CreditWatch with negative implications. On January 24, 1997,
Standard & Poor's removed TCIC's senior debt from CreditWatch. TCIC's senior
debt is currently rated BBB- by Standard & Poor's (the last level of investment
grade) with a negative outlook. These actions are expected to marginally
increase TCIC's cost of borrowings under certain bank credit facilities, and
may adversely affect TCIC's access to the public debt market and its overall
cost of future borrowings.

     The Company is a partner in a series of partnerships formed to engage in
the business of providing wireless communications services, using the radio
spectrum for broadband personal communications services ("PCS"), to residential
and business customers nationwide, using the "Sprint" brand (the "PCS
Ventures"). The PCS Ventures include Sprint Spectrum and MinorCo, L.P.
(collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P.
("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation ("Sprint"), Comcast, Cox Communications,
Inc. ("Cox") and the Company. The partners of PhillieCo are subsidiaries of
Sprint, Cox and the Company. The Company has a 30% partnership interest in each
of the Sprint PCS Partnerships and a 35.3% interest as a partner in PhillieCo
and accounts for its interests in the PCS Ventures by the equity method.


                                     II-21

<PAGE>   86


     The Sprint PCS Partnerships have licenses, and have affiliated with other
entities (including PhillieCo) that have licenses, to provide PCS service to
MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or
population equivalents), based on the Donnelley Marketing Service estimate of
the December 31, 1995 population of the relevant geographic areas. The Sprint
PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction
conducted by the FCC that ended in March 1995, for an aggregate license cost of
approximately $2.1 billion. The Sprint PCS Partnerships have invested in
(acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"),
which owns a PCS license for and operates a PCS system in the
Baltimore/Washington, D.C. MTA, and Cox California PCS, L.P.
("Cox-California"), which holds a PCS license for the Los Angeles/San Diego MTA
and currently operates a PCS system in San Diego, California. The Sprint PCS
Partnerships may invest in other entities that hold PCS Licenses. PhillieCo
holds the license for the Philadelphia MTA, which was acquired at a license
cost of $85 million. During December 1996, the Sprint PCS Partnerships
initiated the commercial launch of PCS service in seven markets.

     From inception through 1996, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company
contributed an aggregate of approximately $0.9 billion, including approximately
$0.2 billion during the year ended December 31, 1996.) The remaining capital
that the Sprint PCS Partnerships will require to fund the construction of the
PCS systems and the commitments made to APC and Cox-California will be
substantial. The partners had agreed in forming the Sprint PCS Partnerships to
contribute up to an aggregate of approximately $4.2 billion of equity thereto,
from inception through fiscal 1999, subject to certain requirements. The
Company expects that the remaining approximately $1.2 billion of such amount
(of which the Company's share is approximately $0.4 billion) will be
contributed by the end of the second quarter of 1998 (although there can be no
assurance that any additional capital will be contributed). The Company expects
that the Sprint PCS Partnerships will require additional equity thereafter.

     The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $278
million at December 31, 1996. Although there can be no assurance, management of
the Company believes that it will not be required to meet its obligations under
such guarantees, or if it is required to meet any of such guarantees, that they
will not be material to the Company.

     The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2009 (the "Film Licensing
Obligations"). Based on customer levels at December 31, 1996, these agreements
require minimum payments aggregating approximately $571 million. The aggregate
amount of the Film Licensing Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as
well as the domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, the Company's aggregate payments under the Film
Licensing Obligations could prove to be significant.

     The Company has made certain financial commitments related to the
acquisition of foreign sports program rights through 2004.  At December 31,
1996, such commitments aggregated $226 million.

     The Company's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by the Company)
and through net cash provided by their own operating activities.

                                     II-22

<PAGE>   87


     In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements. Pursuant to the interest rate exchange agreements, the Company (i)
pays fixed interest rates ranging from 7.2% to 9.3% and receives variable
interest rates on notional amounts of $310 million at December 31, 1996 (the
"Fixed Rate Agreements") and (ii) pays variable interest rates and receives
fixed interest rates ranging from 4.8% to 7.4% on notional amounts of $1,750
million at December 31, 1996 (the "Variable Rate Agreements"). During the year
ended December 31, 1996, 1995 and 1994, the Company's net payments pursuant to
the Fixed Rate Agreements were $14 million, $13 million and $26 million,
respectively; and the Company's net receipts (payments) pursuant to the
Variable Rate Agreements were $15 million, (less than $1 million) and $36
million, respectively. During the year ended December 31, 1996, the Company
terminated certain Variable Rate Agreements with an aggregate notional amount
of $700 million. The Company received $16 million upon such terminations. The
Company will amortize the termination settlement over the remainder of the
original terms of the terminated Variable Rate Agreements. The Company is
exposed to credit losses for the periodic settlements of amounts due under the
interest rate exchange agreements in the event of nonperformance by the other
parties to the agreements. However, the Company does not anticipate that it
will incur any material credit losses because it does not anticipate
nonperformance by the counterparties.

     At December 31, 1996, after considering the net effect of the
aforementioned interest rate exchange agreements, the Company had $7,349
million (or 49%) of fixed-rate debt with a weighted average interest rate of
8.5% and $7,577 million (or 51%) of variable-rate debt with a weighted average
interest rate of 6.3%.

     In connection with its investments in certain foreign entities, the
Company is exposed to unfavorable and potentially volatile fluctuations of the
U.S. dollar against the UK pound sterling ("L."), the Japanese yen ("Y."), and
various other foreign currencies that are the functional currencies of the
Company's foreign subsidiaries and affiliates. Any increase (decrease) in the
value of the U.S. dollar against any foreign currency that is the functional
currency of an operating subsidiary or affiliate of TINTA will cause the
Company to experience unrealized foreign currency translation losses (gains)
with respect to amounts already invested in such foreign currencies. The
Company is also exposed to foreign currency risk to the extent that the Company
or its foreign subsidiaries and affiliates enter into transactions denominated
in currencies other than their respective functional currencies. Because the
Company generally views its foreign operating subsidiaries and affiliates as
long-term investments, the Company generally does not attempt to hedge existing
investments in its foreign affiliates and subsidiaries. With respect to funding
commitments that are denominated in currencies other than the U.S. dollar, the
Company historically has sought to reduce its exposure to short-term (generally
no more than 90 days) movements in the applicable exchange rates once the
timing and amount of such funding commitments becomes fixed. Although the
Company monitors foreign currency exchange rates with the objective of
mitigating its exposure to unfavorable fluctuations in such rates, the Company
believes that it is not possible or practical to completely eliminate the
Company's exposure to unfavorable fluctuations in foreign currency exchange
rates.


                                     II-23

<PAGE>   88


     Approximately twenty-seven percent of the franchises held by the Company,
involving approximately 4.5 million basic customers, expire within five years.
There can be no assurance that the franchises for the Company's systems will be
renewed as they expire, although the Company believes that its cable television
systems generally have been operated in a manner which satisfies the standards
established by the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), as supplemented by the renewal provisions of the 1992 Cable Act, for
franchise renewal. However, in the event they are renewed, the Company cannot
predict the impact of any new or different conditions that might be imposed by
the franchising authorities in connection with the renewals. To date they have
not varied significantly from the original terms.

     During 1996, the Company has experienced a competitive impact from medium
power and high power direct broadcast satellites ("DBS") that use high
frequencies to transmit signals that can be received by dish antennas ("HSDs")
much smaller in size than traditional HSDs. The Primestar partners distribute a
multi-channel programming service via a medium power communications satellite
to HSDs of approximately 3 feet in diameter. Prior to the Satellite Spin-off,
the Company provided this satellite service. DirecTv, Inc. ("DirecTv"), United
States Satellite Broadcasting Corporation ("USSB") and EchoStar Communications
Corp. ("EchoStar"), transmit from high power satellites and generally use
smaller dishes to receive their signals. Alphastar, Inc. ("Alphastar") began
offering medium power service in the second quarter of 1996. On February 24,
1997, News Corp. and EchoStar announced that News Corp. will acquire a 50%
interest in EchoStar and that the companies will combine their DBS businesses
into a new company, which will operate under the name Sky. The two companies
contend that Sky, which is scheduled to launch in early 1998, will offer 500
channels of digital television on a nationwide basis (not all of which would be
available to each subscriber), Internet services and local broadcast network
television signals, capable of reaching more than 50% of all television
householders upon the launch of Sky and 75% of all television households by the
end of 1998. DBS operators have the right to distribute substantially all of
the significant cable television programming services currently carried by
cable television systems. Estimated DBS customers nationwide increased from
approximately 2.2 million at the end of 1995 to approximately 4.4 million at
the end of 1996, and the Company expects that competition from DBS will
continue to increase. However, the Company is unable to predict what effect
such competition will have on the Company's financial position.


                                     II-24

<PAGE>   89


     LIBERTY MEDIA GROUP

     General

     On August 3, 1995, the stockholders of TCI authorized the Board to issue
two new series of stock which reflect the separate performance of Liberty Media
Group. The issuance of Liberty Group Stock did not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI
distributed, in the form of a dividend, one share of Liberty Group Stock for
each four shares of TCI Group Stock owned. Such distribution represented one
hundred percent of the equity value attributable to Liberty Media Group.

     At December 31, 1996, the TCI Group Stock reflects the separate
performance of TCI Group, which is generally comprised of the subsidiaries and
assets not attributed to Liberty Media Group, including TCI's Domestic Cable
and Communications unit, TCI's International Cable and Programming unit, TCI's
Telephony unit, TCI's Internet unit and TCI's Technology/Venture Capital unit.
The businesses of TCI not attributed to Liberty Media Group are referred to as
"TCI Group". Intercompany balances resulting from transactions with such units
are reflected as borrowings from or loans to TCI Group and, prior to the
Distribution, are included in combined equity in the accompanying combined
financial statements of Liberty Media Group. See note 9 to the accompanying
Liberty Media Group combined financial statements.

     On April 1, 1996, UVSG, a subsidiary of TCI Group, and Netlink, a
subsidiary of Liberty Media Group, formed Superstar/Netlink, a limited
liability company comprised of UVSG's Superstar Satellite Entertainment and
Netlink's retail C-band satellite business. Liberty Media Group and UVSG each
own 50% of Superstar/Netlink. As of April 1, 1996, Netlink's retail C-band
satellite business is no longer consolidated with the financial results of
Liberty Media Group.

     As of April 29, 1996, Liberty Media Group, News Corp. and TINTA formed two
sports programming ventures both of which are accounted for using the equity
method. In the United States, Liberty Media Group and News Corp. formed Fox
Sports into which Liberty Media Group contributed interests in its national and
regional sports networks and into which News Corp. contributed its fx cable
network and certain other assets. Liberty Media Group received a 50% interest
in Fox Sports and $350 million in cash.

     Internationally, News Corp. and Liberty/TINTA formed Fox Sports
International to operate previously existing sports services in Latin America
and Australia and a variety of new sports services throughout the world, except
in Asia and in the United Kingdom, Japan and New Zealand where prior
arrangements preclude an immediate collaboration. Liberty/TINTA owns 50% of Fox
Sports International with News Corp. owning the other 50%. News Corp.
contributed various international sports rights and certain trademark rights.
Liberty/TINTA contributed Prime Deportiva, a Spanish language sports service
distributed in Latin American and in Hispanic markets in the United States; an
interest in Torneos y Competencias S.A., an Argentinean sports programming and
production business; various international sports and satellite transponder
rights and cash. Liberty/TINTA also contributed its 50% interest in Premier
Sports and All-Star Sports. Both are Australian 24-hour sports services
available via multichannel, multipoint distribution systems or cable
television.


                                     II-25

<PAGE>   90


     As part of the formation of Fox Sports International, Liberty/TINTA is
entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is
entitled to receive from Liberty/TINTA $20 million and rights under various
Asian sports programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.

     On October 10, 1996, Time Warner and TBS consummated the TBS/Time Warner
Merger whereby TBS shareholders received 0.75 of a Time Warner common share for
each TBS Class A and Class B common share held, and each holder of TBS Class C
preferred stock received 0.80 of a Time Warner common share for each of the 6
shares of TBS Class B common stock into which each share of Class C preferred
stock could have been converted. Prior to the TBS/Time Warner Merger, Liberty
Media Group owned shares of TBS common stock and shares of a class of TBS
preferred stock that were convertible into TBS common stock. Time Warner, TBS,
TCI and Liberty entered into an Agreement Containing Consent Order with the FTC
dated August 14, 1996, as amended September 4, 1996. Pursuant to the FTC
Consent Decree, among other things, Liberty agreed to exchange the shares of
Time Warner common stock to be received in the TBS/Time Warner Merger for
shares of TW Exchange Stock. Holders of the TW Exchange Stock are entitled to
one one-hundredth of a vote for each share with respect to the election of
directors. Holders of the TW Exchange Stock will not have any other voting
rights, except as required by law or with respect to limited matters, including
amendments of the terms of the TW Exchange Stock adverse to such holders.
Subject to the federal communications laws, each share of the TW Exchange Stock
will be convertible at any time at the option of the holder on a one-for-one
basis for a share of Time Warner common stock. Holders of TW Exchange Stock are
entitled to receive dividends ratably with the Time Warner Common Stock and to
share ratably with the holders of Time Warner common stock in assets remaining
for common stockholders upon dissolution, liquidation or winding up of Time
Warner. In connection with the TBS/Time Warner Merger, Liberty Media Group
received approximately 50.6 million shares of the TW Exchange Stock in exchange
for its TBS holdings. As a result of the TBS/Time Warner Merger, Liberty Media
Group recognized a pre-tax gain of approximately $1.5 billion in the fourth
quarter of 1996.

     Subject to a number of conditions, including receipt of a ruling from the
Internal Revenue Service ("IRS") that such dividend would be tax free to the
Liberty Media Group stockholders, TCI agreed that it would distribute in the
form of a stock dividend (the "Spin-Off") to the Liberty Media Group
stockholders the stock of a new company ("Spinco") which would own, directly or
indirectly, the TW Exchange Stock and the business of Southern Satellite
Systems, Inc. ("Southern"), a wholly owned subsidiary of Liberty Media Group
which distributes the TBS SuperStation ("WTBS") signal in the United States and
Canada. The level of Liberty Media Group's ownership interest in Time Warner
will be restricted until the Spin-Off occurs, at which time, such restriction
would be eased for Spinco.

     If the Spin-Off occurs, certain control stockholders of TCI would exchange
the Spinco common stock they receive for a Spinco convertible preferred
security which would only be entitled to vote on major corporate transactions
involving Spinco.


                                     II-26

<PAGE>   91


     In connection with the TBS/Time Warner Merger, Liberty and Time Warner
entered into, among other agreements, an agreement providing for the grant to
Time Warner of an option (the "Contract Option") to enter into a contract with
Southern (the "Distribution Contract") pursuant to which Southern would provide
Time Warner with certain uplinking and distribution services relating to WTBS
and would assist Time Warner in converting WTBS from a superstation into a
copyright paid cable programming service. The Contract Option will be granted
no later than the fifth business day following the earlier of May 31, 1997, the
receipt of a favorable IRS ruling and the determination that the IRS ruling
will not be obtained. On the date of grant, Time Warner will issue to Southern,
in consideration for the Contract Option and certain noncompetition covenants,
an aggregate of 5.0 million shares of TW Exchange Stock and $66,666,700,
payable at Time Warner's option in cash or TW Exchange Stock. If Time Warner
exercises the Contract Option and enters into the Distribution Contract, Time
Warner will be obligated to make quarterly payments to Southern in an amount
which, when added to Southern's net cash flow, would aggregate approximately
$213.3 million on a present value basis discounted to the effective date of the
Distribution Contract.

     Pursuant to the BDTV Agreement among Liberty Media Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and amended
in August 1996, Liberty Media Group contributed to BDTV-I, in August 1996, the
option to purchase 2 million shares of Class B common stock of Silver King
(which shares represented voting control of Silver King at such time) and
$3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a
corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV
Agreement, in which Liberty Media Group owns over 99% of the equity and none of
the voting power (except for protective rights with respect to certain
fundamental corporate actions) and Mr. Diller owns less than 1% of the equity
and all of the voting power. BDTV-I exercised the option shortly after its
contribution, thereby becoming the controlling stockholder of Silver King. Such
change in control of Silver King had been approved by the FCC in June 1996,
subject, however, to the condition that the equity interest of Liberty Media
Group in Silver King not exceed 21.37% without the prior approval of the FCC.


                                     II-27

<PAGE>   92


     Pursuant to an Agreement and Plan of Exchange and Merger entered into in
August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of
Silver King in December 1996 where HSN is the surviving corporation and a
subsidiary of Silver King following the HSN Merger. In order to effect the HSN
Merger in compliance with the FCC Order, Liberty Media Group agreed to defer
receiving certain shares of Silver King that would otherwise have become
issuable to it in the HSN Merger until such time as it was permitted to own such
shares. As a result, the HSN Merger was structured so that Liberty Media Group
received: (i) 7,809,111 shares of Class B common stock of Silver King, all of
which shares Liberty Media Group contributed to BDTV-II, (ii) the contractual
right to be issued up to an additional 2,591,752 shares of Class B common stock
of Silver King from time to time upon the occurrence of certain events which
would allow Liberty Media Group to own additional shares in compliance with the
FCC Order (including events resulting in the dilution of Liberty Media Group's
percentage equity interest), and (iii) 739,141 shares of Class B common stock
and 17,566,702 shares of common stock of HSN (representing approximately 19.9%
of the equity and voting power of HSN). BDTV-II is a corporation formed by
Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which
the relative equity ownership and voting power of Liberty Media Group and Mr.
Diller are substantially the same as their respective equity ownership and
voting power in BDTV-I. Pursuant to an Exchange Agreement between Liberty Media
Group and Silver King, the shares of HSN held by Liberty Media Group following
the HSN Merger are mandatorily exchangeable from time to time for shares of
common stock and Class B common stock of Silver King (in the same ratio as the
merger ratio in the HSN Merger) either upon the occurrence of certain events or
changes in laws, rules or regulations which would entitle Liberty Media Group to
own directly a greater number of shares of Silver King or in connection with the
sale of the shares of Silver King to be received in the exchange to a third
party who would be entitled to own such shares under applicable law. If all
shares of Silver King stock issuable pursuant to the Contingent Right and the
Exchange Agreement were issued, Liberty Media Group's beneficial ownership of
Silver King stock would increase from 21.37% to approximately 36% of the
outstanding common equity (with such shares and the shares owned by BDTV-I and
BDTV-II representing approximately 77% of the total voting power of the Silver
King common equity).

     As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty
Media Group and therefore, the financial results of HSN will no longer be
consolidated with the financial results of Liberty Media Group. Although
Liberty Media Group no longer possesses voting control over HSN, it continues
to have an indirect equity interest in HSN through its ownership of the equity
securities of BDTV-I and BDTV-II, as well as a direct interest in HSN which
would be exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and
BDTV-II are accounted for using the equity method.


                                     II-28

<PAGE>   93


     Summary of Operations

     Liberty Media Group's programming services include production, acquisition
and distribution through all available formats and media of branded
entertainment, educational and informational programming and software,
including multimedia products ("Entertainment and Information Programming
Services"). Additionally, Liberty Media Group is engaged in electronic
retailing, direct marketing, advertising sales relating to programming
services, infomercials and transaction processing ("Electronic Retailing
Services"). To enhance the reader's understanding, separate financial data have
been provided below for Electronic Retailing Services, which include a retail
function, and other Entertainment and Information Programming Services. The
table below sets forth, for the periods indicated, certain financial
information and the percentage relationship that certain items bear to revenue.
This summary provides trend data related to the normal recurring operations of
Liberty Media Group. Corporate expenses have been reflected separately in the
following table. Liberty Media Group holds significant equity investments, the
results of which are not a component of operating income, but are discussed
below under "Other Income and Expense". Other items of significance are
discussed separately under their own captions below.


<TABLE>
<CAPTION>
                                                          Years ended December 31,
                                        --------------------------------------------------------
                                            1996                   1995               1994
                                        --------------   -------------------   -----------------
<S>                                     <C>    <C>        <C>        <C>        <C>   <C>
                                                      dollar amounts in thousands
Entertainment and Information
-----------------------------
Programming Services
--------------------

 Revenue                                 100%  $355,242        100%  $521,050   100%  $  357,031
 Operating, selling, general and
  administrative                          72    257,601         91    475,533    93      332,060
 Compensation relating to stock
  appreciation rights                      6     20,142          1      2,183    --           --
 Depreciation and amortization             7     23,676         10     54,688     5       17,006
                                         ---   --------   --------   --------   ---   ----------
   Operating income (loss)                15%  $ 53,823         (2)% $(11,354)    2%  $    7,965
                                         ===   ========   ========   ========   ===   ==========
Electronic Retailing Services
-----------------------------

 Net sales                               100%  $984,117        100%  $919,796   100%  $1,014,384
 Cost of sales                            61    605,116         66    602,849    61      618,972
 Operating, selling, general and
  administrative                          31    305,681         39    359,130    34      341,015
 Adjustments to compensation
  relating to stock appreciation
  rights                                  --         --         --       (758)   --      (1,547)
 Depreciation and amortization             4     36,891          4     43,249     3       32,244
                                         ---  ---------   --------   --------   ---   ----------
   Operating income (loss)                 4%  $ 36,429         (9)% $(84,674)    2%  $   23,700
                                         ===   ========   ========   ========   ===   ==========
Corporate expenses
------------------
 Selling, general and administrative           $  6,484              $  4,743         $    7,132
 Compensation (adjustments to
  compensation) relating to stock
  appreciation rights                            (2,789)               10,261             (7,027)
 Depreciation and amortization                      125                    74                 86
                                               --------              --------         ----------
 Operating loss                                $ (3,820)             $(15,078)        $     (191)
                                               ========              ========         ==========
</TABLE>



                                     II-29

<PAGE>   94


     Entertainment and Information Programming Services

     Revenue from Entertainment and Information Programming Services decreased
32% or $166 million for the year ended December 31, 1996, compared to the year
ended December 31, 1995. As a result of the formation of Fox Sports in April of
1996, the financial results of Liberty Media Group's regional sports
programming businesses were no longer consolidated with the financial results
of Liberty Media Group. Additionally, as of April 1, 1996, Netlink's retail
C-band satellite business no longer consolidates with the financial results of
Liberty Media Group. Excluding the effect of these two transactions, revenue
increased $62 million. Revenue from Encore Media Corporation ("Encore")
increased approximately $50 million from 1995 to 1996. Approximately $22
million of this increase was related to Encore's thematic multiplex services
("Multiplex"). Multiplex units increased 103% from 6 million at December 31,
1995 to approximately 12.2 million units at December 31, 1996. Encore
subscribers increased 39% to approximately 11 million at December 31, 1996
resulting in an increase in revenue of approximately $23 million in 1996.
Average rates per subscriber were essentially unchanged during these periods.
The remaining increase in Encore's revenue in 1996 was due to increased
management fees from affiliates. The remaining increase in revenue for
Entertainment and Information Programming Services is related to increases in
revenue from affiliate fees from Southern and TV Network Corporation ("Intro")
and the increase in the "Content Fee" from STARZ! (see note 4 to the
accompanying combined financial statements). Revenue from Intro accounted for
7% of total revenue from Entertainment and Information Programming Services for
the year ended December 31, 1996. Effective January 1, 1997 the operations for
Intro were discontinued. Consequently, revenue from such operations will not be
realized in future periods.

     Operating, selling, general and administrative expenses decreased 46% or
$218 million for the year ended December 31, 1996, compared to the year ended
December 31, 1995. The operations of Liberty Media Group's regional sports
programming businesses and the operations of Netlink's retail C-band satellite
business have not been consolidated with the financial results of Liberty Media
Group for most of the year ended December 31, 1996 which contributes
substantially to this decrease in operating costs and expenses. Excluding the
effect of the businesses which no longer consolidate with the financial results
of Liberty Media Group, operating, selling, general and administrative expenses
increased $19 million. Such increase primarily relates directly to the
corresponding increases in revenue. Programming costs for Encore increased
approximately $11 million primarily due to upgrading the quality of programming
on all Encore and Multiplex channels. Marketing costs and other general and
administrative costs for Encore increased approximately $4 million in 1996 in
relation to the increase in revenue and additional personnel and related costs
supporting the overall growth of the company. Intro's operating, selling,
general and administrative expenses will not be incurred in future periods due
to the discontinuation of Intro's operations.

     Operating income for Entertainment and Information Programming Services
increased $65 million from an $11 million loss for the year ended December 31,
1995 to operating income of $54 million for the year ended December 31, 1996.
Excluding the effect of Liberty Media Group's regional sports programming
businesses and Netlink's retail C-band satellite business, operating income
increased $20 million from 1995 to 1996. The increase in operating income is
primarily a result of the previously discussed increases in revenue offset by
the increases in operating expenses. The increase in compensation relating to
stock appreciation rights is due primarily to an increase in compensation
relating to Encore's phantom stock appreciation rights of approximately $14
million (see note 10 to the accompanying combined financial statements).



                                     II-30

<PAGE>   95


     Revenue from Entertainment and Information Programming Services increased
46% or $164 million from 1994 to 1995. Liberty Media Group's regional sports
programming businesses accounted for $102 million of such increase. Prime
Ticket Networks, L.P. ("Prime Sports-West") was acquired by Liberty Media Group
in August 1994, and was responsible for $40 million of the increase in revenue
from Liberty Media Group's regional sports programming businesses. Other new
regional sports programming businesses accounted for $27 million of the
increase in revenue for the year ended December 31, 1995. Excluding the effect
of Prime Sports-West and other new regional sports programming businesses,
advertising and infomercial revenue for the year ended December 31, 1995
increased $11 million over the year ended December 31, 1994. Increases in
direct broadcast satellite revenue accounts for $20 million of the 1995
increase in revenue from Liberty Media Group's regional sports programming
businesses. The remaining increase in revenue from Liberty Media Group's
regional sports programming businesses is attributed to customer growth and
rate increases in the established regional sports programming businesses.
Multiplex (three services launched in July 1994 and three services launched in
September 1994) and Intro (a 24-hour basic cable service launched in July 1994)
accounted for a combined increase in revenue of $24 million for the year ended
December 31, 1995. Excluding Multiplex, Encore experienced a 33% increase in
customers (primarily direct broadcast customers) representing an $11 million
increase in revenue over 1994. Revenue from Netlink increased $29 million for
the year ended December 31, 1995 compared to the year ended December 31, 1994.
Substantially, all of this increase is attributed to pricing increases and an
increase in the average number of retail customers.

     Operating, selling, general and administrative expenses increased 43% or
$143 million from 1994 to 1995. Prime Sports-West accounted for $33 million of
the increase in operating expenses of Liberty Media Group's regional sports
programming businesses. Other new businesses in the regional sports programming
businesses increased expenses $63 million for the year ended December 31, 1995.
Expenses at Liberty Media Group's regional sports programming businesses,
excluding the impact of new businesses, increased $14 million for the year
ended December 31, 1995. Such increase was caused by increased programming
rights fees in certain markets, new rights agreements, and increased production
costs and technical operations due to a larger number of events. Intro and
Multiplex, which were launched during 1994, were responsible for $13 million of
the increase in expenses from 1994 to 1995. Additionally, Encore's expenses
increased $4 million due to additional marketing expenses related to Encore's
increase in customers and due to additional personnel and related costs.
Netlink's programming costs increased $23 million for the year ended December
31, 1995 which is directly related to the increases in customers and increases
in the rates that Netlink pays to its program suppliers.

     Operating loss for Entertainment and Information Programming Services was
$11 million in 1995. Operating income was $8 million in 1994. Encore and Intro
accounted for a combined increase of $18 million in operating income in 1995
due to increased cable customers and Encore's increased direct broadcast
satellite customers. Such increase was offset by a $48 million decrease in
operating income in the regional sports programming businesses due to start-up
costs of new businesses, international ventures, and increased amortization
related to other intangibles acquired in the acquisition of Prime Sports-West.
The remaining increase in operating income of Liberty Media Group's
Entertainment and Information Programming Services is primarily a result of
increased revenue combined with decreased expenses from Southern, and growth in
rates and customers of Netlink.


                                     II-31

<PAGE>   96


     Electronic Retailing Services

     This information reflects the results of HSN, which became a consolidated
subsidiary of Liberty Media Group in February 1993. As a result of the HSN
Merger on December 20, 1996, HSN is no longer a consolidated subsidiary. HSN's
primary business is electronic retailing conducted by HSC.

     For the year ended December 31, 1996, revenue from Electronic Retailing
Services increased $64 million, or 7% as compared to 1995. Net sales reflects
an increase of 11.5% in the number of packages shipped and a decrease of 8.5%
in the average price per unit sold. The remaining increase in revenue is due to
increases in sales by other HSN wholly-owned subsidiaries, Internet Shopping
Network, Inc. ("ISN") and Vela Research, Inc. ("Vela"), which were offset by
decreases related to the sale of assets of Ortho-Vent, Inc., a subsidiary of
HSN Mail Order, Inc. ("Mail Order"), and decreases by HSN's infomercial joint
venture, HSN Direct Joint Venture ("HSND"). During April 1996, HSN sold a
majority of its interest in HSND for $5.9 million to TINTA.

     For the year ended December 31, 1996, gross profit for Electronic
Retailing Services increased $62 million, or 20%, compared to 1995. As a
percentage of net sales, gross profit increased to 39% from 34%. Such increase
was partially offset by combined decreases related to HSND and Ortho-Vent, Inc.

     The dollar increases in HSN's and HSC's gross profit relate to the higher
sales volume. The comparative increases in HSN's gross profit percentage relate
to warehouse sales and other promotional events held during 1995 which reduced
gross profit in these periods and a 1996 product sales mix which was composed
of higher gross profit merchandise.

     Operating, selling, general and administrative expenses decreased $53
million, to 31% of sales in 1996, compared with 39% of sales in 1995. In late
1995 and the first quarter of 1996, management of HSN instituted measures aimed
at streamlining operations primarily by reducing its work force and taking
other actions to reduce operating expenses. These changes resulted in
reductions in operating expenses in 1996 compared with the same periods in
1995.

     In November 1995, HSN appointed a new chairman of the board and a new
president and chief executive officer, both with significant experience in the
electronic retailing and programming areas. HSN believes that the improved
sales in 1996 were primarily the result of immediate changes made by new
management to HSN's merchandising and programming strategies. HSN's management
is taking additional steps designed to attract both first-time and active
customers which include reformatting the Spree! network to America's Jewelry
Store, a twenty-four hour jewelry shopping network, changes in the
merchandising area designed to broaden product assortment, changing the sales
mix, optimizing product level, improving inventory management and better
planning of programmed shows. HSN believes that its negative performance in
1995 was due, in part, to the adverse effects of certain merchandising and
programming strategies which had been implemented in late 1994 and 1995. There
can be no assurance that changes to HSN's merchandising and programming
strategies will achieve HSN's management's intended results.

     HSN revenue decreased $95 million or 9% from 1994 to 1995. HSC's sales
reflect the net effect of a 19% decrease in the number of packages shipped which
was partially offset by a 9% increase in the average price per unit sold. The
decrease in HSC sales was offset by sales increases by HSND, Mail Order and Vela
totaling $31 million for the year ended December 31, 1995.

                                     II-32

<PAGE>   97


     Cost of sales decreased $16 million, or 3%, from 1994 to 1995; and cost of
sales, as a percentage of net sales, increased to 66% from 61%. The 1995 dollar
decreases in cost of sales, compared to 1994, relate to the lower sales volumes.
The comparative increases in cost of sales percentages primarily relate to
warehouse sales and other promotional events. In addition, cost of sales for the
year ended December 31, 1995, reflect a $12 million adjustment to HSC's
inventory carrying value related to product which is inconsistent with HSC's new
sales and merchandising philosophy.

     Operating expenses, exclusive of depreciation and amortization, increased
$18 million, to 35% of sales during 1995 compared with 30% of sales in the
1994. The majority of such increase was restructuring charges of $16 million
during the year ended December 31, 1995. Such restructuring charges consist of
severance costs of $4 million related to a reduction in work force, $5 million
payments to certain executives as provided for under their employment
agreements in connection with the termination of their employment and $2
million related to the write-off of certain equipment maintenance and
contractual fees related to service contracts which HSN will no longer utilize.
In addition, HSN recorded a write-down of inventory totaling $1.3 million to
net realizable value based on the disposition of the assets of Ortho-Vent, Inc.

     Additionally, $4 million of the restructuring charges for the year ended
December 31, 1995, represents HSN management's estimate of costs to be incurred
in connection with the closing of HSN's Reno, Nevada, distribution center,
which was accomplished in June 1995. The decision to close the Reno
distribution center was based on an evaluation of HSN's overall distribution
strategy.

     HSN believes that seasonality does impact the business but not to the same
extent it impacts the retail industry in general.

     Corporate Expenses

     Corporate selling, general and administrative expenses were relatively
comparable for each of the years presented. The amount of expense associated
with stock appreciation rights is based on the market price of the underlying
common stock as of the date of the financial statements. The expense is subject
to future adjustment based on market price fluctuations and, ultimately, on the
final determination of market value when the rights are exercised. Stock
options and/or stock appreciation rights granted by Liberty prior to the
TCI/Liberty Combination have been assumed by TCI.

     Subsequent to the Distribution, certain corporate general and
administrative costs are charged to Liberty Media Group at rates set at the
beginning of each year based on projected utilization for that year. The
utilization-based charges are set at levels that management believes to be
reasonable and that would approximate the costs Liberty Media Group would incur
for comparable services on a stand alone basis. During the years ended December
31, 1996 and 1995, Liberty Media Group was allocated approximately $3 million
each year in corporate general and administrative costs by TCI Group.

     Other Income and Expense

     Interest expense was $17 million, $19 million and $13 million in 1996,
1995 and 1994, respectively. The increased debt at HSN and Prime Sports-West is
primarily responsible for the increase in interest expense in 1995.


                                     II-33

<PAGE>   98


     Dividend and interest income was $22 million, $12 million and $20 million
for the years ended December 31, 1996, 1995 and 1994, respectively. Dividend
income in 1996 increased due to dividends received on the TW Exchange Stock in
December of 1996. Interest income earned on invested cash balances increased
during 1996 due to an increase in such cash balances. The decrease in 1995 is
primarily the result of the repayment of an HSN note receivable in August 1994.

     Liberty Media Group's share of earnings of affiliates was $8 million in
1996 compared to losses of $15 million in 1995 and earnings of $31 million in
1994. The increase in earnings in 1996 was partially due to the investment in
Superstar/Netlink in April 1996 which contributed $11 million to the share of
earnings for 1996. The decrease in losses of Court was responsible for
approximately $19 million of the increase in earnings from 1995 to 1996. In
August 1995, Liberty Media Group made an additional $29 million investment in
Court which represented Liberty Media Group's pro rata share of capital calls
made in prior years by the other partners of Court that Liberty Media Group had
no obligation to fund. Due to the additional investment in Court, Liberty Media
Group's share of losses of Court for the year ended December 31, 1995 includes
$18 million of previously unrecognized losses of Court. Such losses were not
recognized in prior periods due to the fact that Liberty Media Group's
investment in Court had been reduced to zero. Earnings before interest, taxes
and depreciation and amortization for QVC increased 18% in 1996 compared to
1995. Interest expense for QVC was decreased approximately $10 million for the
year ended December 31, 1996 compared to the year ended December 31, 1995.
Additionally, QVC recorded a one time charge in 1995 for compensation resulting
from stock option redemptions in the QVC Merger. Consequently, Liberty Media
Group's share of earnings in affiliates attributable to its interest in QVC
increased $20 million in 1996 compared to 1995. These increases in share of
earnings attributable to Liberty Media Group's investments in affiliates were
offset by increased share of losses in other affiliates attributable to Liberty
Media Group. Such losses include share of losses of DMX which contributed $14
million in losses to Liberty Media Group in 1996. Additionally, due to the
formation of Fox Sports, share of earnings in affiliates attributable to Liberty
Media Group's interest in certain regional sports programming businesses reflect
twelve months of earnings in 1995 but only four months of earnings in 1996. This
represents a $6 million decrease in earnings in 1996. Liberty Media Group's
share of earnings in affiliates attributable to its interest in Discovery
Communications, Inc. ("Discovery") decreased by approximately $4 million in 1996
compared to 1995. Discovery's earnings before interest, taxes and depreciation
and amortization increased 34% in 1996 compared to 1995 for its established
businesses. This increase was almost entirely offset by increased losses before
interest, taxes and depreciation and amortization of its developing businesses.
Discovery also recorded increased depreciation and amortization on increased
fixed assets resulting from a 1996 acquisition by Discovery as well as increased
expense relating to an executive compensation plan.

     The increase in losses in 1995 is primarily due to share of losses of
Court. As previously discussed, Liberty Media Group's share of losses of Court
for the year ended December 31, 1995 of $21 million includes $18 million of
previously unrecognized losses of Court. The 1995 increase in losses also was
partially due to the sale of substantially all of Liberty Media Group's
interest in AMC in July 1994, which investment contributed $9 million to the
1994 earnings. Liberty Media Group's share of earnings in affiliates
attributable to its interest in QVC decreased $9 million for 1995, as compared
to 1994. Such change is primarily the result of increased interest expense on
additional debt arising from the QVC Merger as well as compensation resulting
from stock option redemptions in the QVC Merger. Liberty Media Group's share of
losses increased by $8 million in 1995 due to share of losses in Premier
Sports.


                                     II-34

<PAGE>   99


     Liquidity and Capital Resources

     Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to Liberty Media Group for purposes of preparing
its combined financial statements, the change in the capital structure of TCI
approved by the shareholders of TCI did not affect the ownership or the
respective legal title to assets or responsibility for liabilities of TCI or
any of its subsidiaries. TCI and its subsidiaries will each continue to be
responsible for their respective liabilities. Holders of Liberty Group Stock
are holders of common stock of TCI and will continue to be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities. The issuance of Liberty Group Stock does not affect the rights of
creditors of TCI.

     Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could affect
the combined results of operations or financial condition of Liberty Media
Group and the market price of shares of Liberty Group Stock. In addition, net
losses of any portion of TCI, dividends and distributions on, or repurchases
of, any series of common stock, and dividends on, or certain repurchases of
preferred stock would reduce funds of TCI legally available for dividends on
all series of common stock. Accordingly, Liberty Media Group financial
information should be read in conjunction with the TCI consolidated financial
information.

     Dividends on Liberty Group Stock will be payable at the sole discretion of
the Board out of the lesser of all assets of TCI legally available for
dividends and the available dividend amount with respect to Liberty Media
Group, as defined. Determinations to pay dividends on Liberty Group Stock will
be based primarily upon the financial condition, results of operations and
business requirements of Liberty Media Group and TCI as a whole.

     TCI Group manages certain treasury activities for Liberty Media Group on a
centralized basis. Previously, cash receipts of certain businesses attributed
to Liberty Media Group were remitted to TCI Group and certain cash
disbursements of Liberty Media Group were funded by TCI Group on a daily basis.
Prior to the Distribution, the net amounts of such cash activities are included
in combined equity in the accompanying combined financial statements.
Subsequent to the Distribution, such cash activities are included in borrowings
from or loans to TCI Group or, if determined by the Board, as an equity
contribution to the Liberty Media Group.

     The Board could determine from time to time that debt of TCI not incurred
by entities attributed to Liberty Media Group or preferred stock and the
proceeds thereof should be specifically attributed to and reflected on the
combined financial statements of Liberty Media Group to the extent that the
debt is incurred or the preferred stock is issued for the benefit of Liberty
Media Group.

     For all periods prior to the Distribution, all financial impacts of equity
offerings were attributed entirely to TCI. Following the Distribution, all
financial impacts of issuances of additional shares of TCI Group Stock will be
attributed entirely to TCI Group, and all financial impacts of issuances of
additional shares of Liberty Group Stock, the proceeds of which are attributed
to Liberty Media Group, will to such extent be reflected entirely in the
combined financial statements of Liberty Media Group. Financial impacts of
dividends or other distributions on, and purchases of, TCI Group Stock will be
attributed entirely to TCI Group, and financial impacts of dividends or other
distributions of Liberty Group Stock will be attributed entirely to Liberty
Media Group. Financial impacts of repurchases of Liberty Group Stock the
consideration for which is charged to Liberty Media Group will be reflected
entirely in the combined financial statements of Liberty Media Group, and
financial impacts of repurchases of Liberty Group Stock the consideration for
which is charged to TCI Group will be attributed entirely to TCI Group.


                                     II-35

<PAGE>   100


     Borrowings from or loans to TCI Group bear interest at such rates and have
repayment schedules and other terms as are established by the Board. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the use of
proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing sources.

     Liberty Media Group's sources of funds include its available cash
balances, cash generated from operating activities, cash distributions from
affiliates, dividend and interest payments, asset sales, availability under
certain credit facilities, and loans and/or equity contributions from TCI
Group. To the extent cash needs of Liberty Media Group exceed cash provided by
Liberty Media Group, TCI Group may transfer funds to Liberty Media Group.
Conversely, to the extent cash provided by Liberty Media Group exceeds cash
needs of Liberty Media Group, Liberty Media Group may transfer funds to TCI
Group.

     Encore's loan agreement contains restrictions regarding transfers of funds
to other members of Liberty Media Group in the form of loans, advances or cash
dividends. However, other subsidiaries, principally Southern and Netlink's
wholesale C-band satellite business are not restricted from making transfers of
funds to other members of the group. The cash provided by operating activities
of Southern is a significant source of cash available for distribution to
Liberty Media Group. Upon consummation of the Spin-Off, cash provided by
operating activities of Southern will no longer be available as a source of cash
for Liberty Media Group. In connection with the TBS/Time Warner Merger, Liberty
Media Group received approximately 50.6 million shares of TW Exchange Stock in
exchange for its holdings in TBS common and preferred stock. It is anticipated
that Time Warner will continue to pay dividends on its common stock and
consequently Liberty Media Group will receive dividends on the common stock
received in connection with the TBS/Time Warner Merger. However, there can be no
assurance that such dividends will continue to be paid. If the Spin-Off occurs,
such cash dividends would not be available as a source of cash for Liberty Media
Group. Cash provided by operating activities of Netlink's wholesale C-band
satellite business is another significant source of cash available for
distribution to Liberty Media Group. In addition, Netlink's wholesale C-band
satellite business, faces significant competition from other C-band distributors
as well as DBS services, which were launched in 1994. Liberty Media Group
believes that the entry of DBS will serve to decrease the size of the C-Band
market in the short and long term. During 1996, the C-Band industry decreased 4%
to 2.3 million subscribers. A significant deterioration of the C-Band market
could have a material effect on Netlink's wholesale C-band satellite business
and consequently, Liberty Media Group's cash provided by operating activities.
While the consummation of the Spin-Off and the decrease in the C-Band industry
could have significant effects on Liberty Media Group's cash provided by
operating activities, cash generated by Liberty Media Group's remaining
operating activities, distributions from affiliates, dividend and interest
payments and available cash balances should provide adequate cash to meet its
obligations.

     Liberty Media Group has a revolving line of credit which provides for
borrowings of up to $325 million. No borrowings were outstanding at December
31, 1996. Encore has a line of credit which provides for borrowings up to $50
million, $1.6 million of which was outstanding at December 31, 1996. Such
facility contains certain provisions which limit Encore as to additional
indebtedness, sale of assets, liens, guarantees and distributions and includes
various financial covenants, including maintenance of certain financial ratios.


                                     II-36

<PAGE>   101


     Various partnerships and other affiliates of Liberty Media Group accounted
for under the equity method finance a substantial portion of their acquisitions
and capital expenditures through borrowings under their own credit facilities
and net cash provided by their operating activities.

     Liberty Media Group intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. As of December 31, 1996, Liberty
Media Group's future minimum obligation related to certain film licensing
agreements was $194 million. The amount of the total obligation is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as
well as the domestic theatrical exhibition receipts upon the release of such
qualifying films. Continued development may require additional financing and it
cannot be predicted whether Liberty Media Group will obtain such financing. If
additional financing cannot be obtained, Liberty Media Group could attempt to
sell assets but there can be no assurance that asset sales, if any, can be
consummated at a price and on terms acceptable to Liberty Media Group. Further,
Liberty Media Group and/or TCI could attempt to sell equity securities but,
again, there can be no certainty that such a sale could be accomplished on
acceptable terms.

     The FCC has initiated a number of rulemakings to implement various
provisions of the Telecommunications Act of 1996 (the "1996 Telecom Act").
Recent regulatory developments which may affect Liberty Media Group's
programming interests include two additional proceedings. Section 612 of the
Communications Act of 1934, as amended, requires a cable operator, depending
upon the number of activated channels in its cable system, to set aside up to
15 percent of activated channels for leased access. On March 21, 1996, the FCC
adopted a Further Notice of Proposed Rulemaking in which it proposed an
alternative maximum rate formula that it believes may better promote the goals
of leased access. On February 4, 1997 the FCC released revised rules for
calculating the maximum rate for leased commercial access to tiered channels.
The newly-adopted formula yields a lower maximum rate than the current rate
such that the use of leased access may be expected to increase, thereby further
restricting the channel capacity available for carriage of Liberty Media
Group's programming services.

     Additionally, the 1996 Telecom Act also requires the FCC to establish
rules and implementation schedules to ensure that video programming is fully
accessible to the hearing impaired through closed captioning. On January 17,
1997, the FCC released proposed new rules which would require substantial
closed captioning. Depending upon the rules and implementation schedule
ultimately adopted by the FCC, Liberty Media Group's programming interests may
incur significant additional costs for closed captioning.

     Netlink's wholesale C-band satellite business uplinks the signals of
broadcast televisions stations to C-Band packagers and marketers in the United
States and Canada. In uplinking and selling the signals of broadcast television
stations in the United States, Netlink's wholesale C-band satellite business is
subject to certain FCC regulations and Copyright Act provisions. Pursuant to
such regulations, Netlink's wholesale C-band satellite business may only
distribute the signals of network broadcast stations to "unserved households"
which are outside the Grade B contours of a primary station affiliated with
such network. Netlink has entered into an agreement in principle with
representatives of the National Association of Broadcasters and of its
television network affiliate members to identify by zip code those geographic
areas which are "unserved" by network affiliated stations. Depending upon
finalization of the agreement and such identification, Netlink's wholesale
C-band satellite business may be required to disconnect a substantial number of
existing subscribers which would have a material adverse effect upon the
operations of the Netlink wholesale C-band business.


                                     II-37

<PAGE>   102


     TCI GROUP

     General

     The TCI/Liberty Combination was consummated on August 4, 1994. Due to the
significant economic interest held by TCIC through its ownership of Liberty
preferred stock and Liberty common stock and other related party
considerations, TCIC accounted for its investment in Liberty under the equity
method prior to the consummation of the TCI/Liberty Combination. Accordingly,
TCIC had recognized 100% of Liberty's earnings or losses before deducting
preferred stock dividends. The TCI/Liberty Combination was accounted for using
predecessor cost due to related party considerations. Accordingly, the
accompanying combined financial statements of TCI Group reflect the combination
of the historical financial information of the assets of TCI and Liberty which
have not been attributed to Liberty Media Group. For periods prior to the
TCI/Liberty Combination, the combined financial statements of TCI Group and
Liberty Media Group comprise all the accounts included in the corresponding
consolidated financial statements of TCI and subsidiaries and Liberty and
subsidiaries. For periods subsequent to the TCI/Liberty Combination, the
combined financial statements of TCI Group and Liberty Media Group comprise all
the accounts included in the corresponding consolidated financial statements of
TCI and subsidiaries.

     On August 3, 1995, the stockholders of TCI authorized the Board to issue
two new series of stock which reflect the separate performance of Liberty Media
Group. Additionally, stockholders of TCI approved the redesignation of the
previously authorized Class A and Class B common stock of TCI into Series A and
Series B TCI Group Stock. The issuance of the Liberty Group Stock did not
result in any transfer of assets or liabilities of TCI or any of its
subsidiaries or affect the rights of holders of TCI's or any of its
subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a
dividend, one share of Liberty Group Stock for each four shares of TCI Group
Stock owned. Such distribution represented one hundred percent of the equity
value attributable to Liberty Media Group.

     At December 31, 1996, the TCI Group Stock reflects the separate
performance of TCI Group, which is generally comprised of the subsidiaries and
assets not attributed to Liberty Media Group, including TCI's Domestic Cable
and Communications unit, TINTA and TCI's Technology/Venture Capital unit.

     On March 12, 1997, the TCI stockholders authorized the Board to issue two
new series of TCI's common stock, par value $1.00 per share, (and a
corresponding increase in the total number of authorized shares of common
stock) to be designated Tele-Communications, Inc. Series A Telephony Group
common stock and Tele-Communications, Inc. Series B Telephony Group common
stock. The Telephony Group Stock, if issued, would be intended to reflect the
separate performance of Telephony Group, which initially consists of TCI's
investments in certain entities engaged in the domestic wireline and wireless
telephony businesses. A total of 750 million shares of Series A Telephony Group
Stock and 75 million shares of Series B Telephony Group Stock were authorized.


                                     II-38

<PAGE>   103


     Upon authorization of the Telephony Group Stock and until shares of
Telephony Group Stock are issued, the investments attributed to Telephony Group
will be included in TCI Group. The TCI Group Stock will continue to reflect all
of the assets, liabilities and common stockholders' equity value of TCI
attributable to Telephony Group, in addition to the separate performance of
TCI's domestic cable distribution business, telephony distribution and
communications business (other than the investments attributed to Telephony
Group), international cable, telephony and programming businesses,
technology/venture capital business, and any other business of TCI not
attributed to either Liberty Media Group or Telephony Group. As shares of
Telephony Group Stock are issued and distributed or sold, the percentage of the
common stockholders' equity value of TCI attributable to the Telephony Group
that is or is intended to be reflected in the TCI Group Stock will be reduced
accordingly. The composition of Liberty Media Group was not affected by the
authorization, and will not be affected by the issuance, of Telephony Group
Stock.

     Summary of Operations

     TCI Group operates principally in the cable and communications industry.
The Telephony, Internet, Technology/Venture Capital and International Cable and
Programming portions of TCI Group's business have been included with cable and
communications services due to their relative insignificance. The table below
sets forth for the periods presented, the percentage relationship that certain
items bear to revenue. This summary provides trend data relating to the normal
recurring operations of TCI Group. Other items of significance are discussed
separately under separate captions below.


<TABLE>
<CAPTION>
                                            Years ended December 31,
                                   ----------------------------------------
                                       1996          1995         1994
                                   ------------  ------------  ------------
                                            dollar amounts in millions
<S>                                <C>   <C>     <C>   <C>     <C>   <C>
Revenue                            100%  $6,790  100%  $5,145  100%  $4,068
Operating, selling, general and
  administrative expenses            69   4,678   61    3,173    56   2,284
Compensation (adjustment to
  compensation) relating to stock
  appreciation rights                --     (30)   1       45            (5)
Restructuring charges                --      41   --       --    --      --
Depreciation and amortization        23   1,555   25    1,274    25   1,001
                                   ----  ------  ---   ------  ---   ------
  Operating income                   8%  $  546   13%  $  653   19%  $  788
                                   ====  ======  ===   ======  ===   ======
</TABLE>

     The operation of TCI Group's cable television systems is regulated at the
federal, state and local levels. The Cable Acts established rules under which
TCI Group's basic and tier service rates and its equipment and installation
charges are regulated if a complaint is filed or if the appropriate franchise
authority is certified. At December 31, 1996, approximately 78% of TCI Group's
basic customers were served by cable television systems that were subject to
such rate regulation.

     During the year ended December 31, 1996, 61% of TCI Group's revenue was
derived from Regulated Services. As noted above, any increases in rates charged
for Regulated Services are regulated by the Cable Acts. Moreover, competitive
factors may limit TCI Group's ability to increase its service rates.


                                     II-39

<PAGE>   104


     Through December 4, 1996, TCI Group had an investment in Primestar.
Primestar provides programming and marketing support to each of its cable
partners who provide satellite television service to their customers. On
December 4, 1996, TCI distributed to the holders of shares of TCI Group Stock
all of the issued and outstanding common stock of TCI Satellite Entertainment,
Inc. At the time of the Satellite Spin-off, Satellite's assets and operations
included TCI Group's interest in Primestar, TCI Group's business of
distributing Primestar programming and two communications satellites. As a
result of the Satellite Spin-off, Satellite's operations are no longer
consolidated with TCI Group's. See note 8 to the accompanying combined
financial statements for the effect of the Satellite Spin-off on TCI Group's
results of operations and financial position.

     Revenue increased 32% and 26% for the years ended December 31, 1996 and
1995, respectively, as compared to the prior years. In TCI Group's regulated
cable systems, TCI Group implemented rate increases for its Regulated Services
in June 1996. As allowed by FCC regulations, such rate increases include
amounts intended to recover increased programming costs incurred during the
first five months of 1996 and not previously recovered, as well as interest on
said amounts.

     The 1996 increase in revenue is the result of the effect of certain
acquisitions (including the Viacom Acquisition) (18%), increases in the rates
charged for TCI Group's cable television service due to inflation, programming
cost increases as previously discussed and channel additions (7%), an increase
in TCI Group's satellite customers through the date of the Satellite Spin-off
(3%), net growth in basic customers levels within TCI Group's cable television
systems (1%), and increases in advertising sales, international programming and
other revenue (3%).

     The 1995 increase in revenue is the result of the effect of certain
acquisitions (13%), growth in TCI Group's Primestar subscribers (4%), increases
in the rates charged for TCI Group's cable television service due to inflation,
programming cost increases and channel additions (4%), net growth in basic
customer levels within TCI Group's cable television systems (4%) and an
increase in TCI Group's long distance voice and data service revenue (1%).

     Operating, selling, general and administrative expenses increased 47% and
39% for the years ended December 31, 1996 and 1995, respectively. Exclusive of
the effects of acquisitions (21% and 13%) and Primestar (5% and 8%) such
expenses increased 21% and 18%. Programming expenses accounted for the majority
of such increase. TCI Group cannot determine whether and to what extent
increases in the cost of programming will affect its future operating costs.
However, such programming costs have increased at a greater percentage than
increases in revenue from Regulated Services. During the fourth quarter of
1995, TCI Group incurred $25 million in expenses related to payment of bonuses
to the majority of its employees.

     During the fourth quarter of 1996, TCI Group restructured certain of its
operating and accounting functions. In connection with the Restructuring, TCI
Group recognized a charge of $41 million related primarily to work force
reductions. As of December 31, 1996, $8 million of such restructuring charges
had been paid. TCI Group anticipates that the majority of the remaining charges
will be paid during the six months ended June 30, 1997.

     The increase in TCI Group's depreciation expense in 1996 and 1995 is due
to acquisitions as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in TCI Group's cable systems. The
increase in TCI Group's amortization expense in 1996 and 1995 is due to
acquisitions.


                                     II-40

<PAGE>   105


     Certain corporate general and administrative costs are charged to Liberty
Media Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels that
management believes to be reasonable and that would approximate the costs
Liberty Media Group would incur for comparable services on a stand alone basis.
During each of 1996 and 1995, Liberty Media Group was allocated $3 million in
corporate general and administrative costs by TCI Group.

     TCI Group records compensation relating to stock appreciation rights and
restricted stock awards granted to certain employees by TCI or TINTA. Such
compensation is subject to future adjustment based upon market value, and
ultimately, on the final determination of market value when the rights are
exercised or the restricted stock awards are vested.

     Other Income and Expenses

     TCI Group's interest expense increased $87 million or 9% from 1995 to 1996
and $207 million or 26% from 1994 to 1995. The increase in 1996 is the net
result of an increase due to higher debt balances partially offset by a
decrease due to a lower weighted average interest rate. The 1995 increase is
the result of higher interest rates and debt balances. TCI Group's weighted
average interest rate on borrowings was 7.7%, 8.1% and 7.6% during 1996, 1995
and 1994, respectively.

     During the year ended December 31, 1996, in order to reduce future
interest costs, TCI Group redeemed certain notes payable which had an aggregate
principle balance of $904 million and fixed interest rates ranging from 7.88%
to 10.44%. In connection with the Redemption, TCI Group recognized a loss on
early extinguishment of debt of $62 million. Such loss related to prepayment
penalties amounting to $60 million and the retirement of deferred loan costs.

     Also, during the year ended December 31, 1996, certain subsidiaries of TCI
Group terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion and
refinanced certain other bank credit facilities. In connection with such
termination and refinancings, TCI Group recognized a loss on early
extinguishment of debt of $9 million related to the retirement of deferred loan
costs.

     TCI Group's share of losses of affiliates were $469 million, $178 million
and $117 million in 1996, 1995 and 1994, respectively. The increases in 1996
and 1995 are due in part to the share of losses of Telewest and TCI Group's
other international investments described below. Additionally, included in
share of losses of affiliates for the year ended December 31, 1996, is $168
million attributable to Sprint Spectrum. Such amount includes $34 million
associated with prior periods.

     At December 31, 1996, TCI Group had an effective ownership interest of
approximately 27% in Telewest, a company that is currently operating and
constructing cable television and telephone systems in the UK. Telewest, which
is accounted for under the equity method, had a carrying value at December 31,
1996 of $488 million and comprised $109 million, $70 million and $43 million of
TCI Group's share of its affiliates' losses in 1996, 1995, and 1994,
respectively. The increase in TCI Group's share of losses of Telewest in 1996
and 1995 is due, in part, to an increase in Telewest's interest expense and
foreign currency translation losses related to the 1995 issuance of U.S. dollar
denominated debentures by Telewest. In addition, TCI Group has other less
significant equity method investments in video distribution and programming
businesses located in the UK, other parts of Europe, Asia, Latin America and
certain other foreign countries. In the aggregate, such other equity method
investments had a carrying value of $422 million at December 31, 1996 and
accounted for $79 million, $62 million and $50 million of TCI Group's share of
its affiliates' losses in 1996, 1995 and 1994, respectively.

                                     II-41

<PAGE>   106


     Telewest was formed during the fourth quarter of 1995 upon the merger of
TeleWest Communications with SBC (CableComms)(UK). Prior to the TeleWest
Merger, TCI Group had an effective ownership interest of approximately 36% in
TeleWest Communications, and subsequent to the TeleWest Merger, TCI Group has
an effective ownership interest of approximately 27% in TeleWest. As a result
of the TeleWest Merger, TCI Group recognized a gain of $165 million (before
deducting the related tax expense of $58 million). Such gain represents the
difference between TCI Group's recorded cost for TeleWest Communications and
TCI Group's effective proportionate share of Telewest's net assets. There is no
assurance that TCI Group will realize similar gains in future periods.

     As a result of the TeleWest Communications November 1994 initial public
offering and the associated dilution of TCI Group's ownership interest of
TeleWest Communications, TCI Group recognized a gain amounting to $161 million
(before deducting the related tax expense of $57 million) in 1994.

     As a result of the TCG IPO in 1996, TCI Group's ownership interest in TCG
was reduced from approximately 35% to approximately 31%. Accordingly, TCI Group
recognized a gain amounting to $12 million (before deducting deferred income
tax expense of approximately $5 million).

     As a result of the TINTA IPO and the TYC Acquisition, TCI Group recognized
a gain amounting to $123 million during 1995. There is no assurance that TCI
Group will realize similar gains in future periods.

     Minority interests in earnings of consolidated subsidiaries aggregated $54
million for the year ended December 31, 1996, as compared to $18 million in
1995 and minority interests in losses of consolidated subsidiaries in 1994. The
change in 1996 is due primarily to the accrual of dividends on preferred
securities issued by certain subsidiaries of TCI Group.

     Net Loss

     TCI Group's net loss (before preferred stock dividends requirements) of
$778 million for the year ended December 31, 1996 represents a decrease of $663
million, as compared to TCI Group's net loss (before earnings of Liberty Media
Group and preferred stock dividends) of $115 million for the year ended December
31, 1995. Such decrease is primarily the net result of an increase in share of
losses of affiliates, interest expense and an decrease in operating income
offset by an increase in income tax benefit. Additionally, TCI Group recorded
gains in 1995 related to the TeleWest Merger and the TINTA IPO.

     TCI Group's net loss (before earnings of Liberty Media Group and preferred
stock dividend requirements) of $115 million for the year ended December 31,
1995 represents a decrease of $93 million, as compared to TCI Group's net loss
of $22 million for 1994. Such decrease is the result of increases in interest
expense and share of losses of affiliates combined with a decrease in operating
income which were partially offset by the aforementioned gain recognized as a
result of the TINTA IPO and the TYC Acquisition and a decrease in tax expense.

     Inflation has not had a significant impact on TCI Group's results of
operations during the three-year period ended December 31, 1996.


                                     II-42

<PAGE>   107


     Liquidity and Capital Resources

     Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group for purposes of preparing its combined
financial statements, the change in the capital structure of TCI approved by
the shareholders of TCI did not affect the ownership or the respective legal
title to assets or responsibility for liabilities of TCI or any of its
subsidiaries. TCI and its subsidiaries each continue to be responsible for
their respective liabilities. Holders of TCI Group Stock are holders of common
stock of TCI and continue to be subject to risks associated with an investment
in TCI and all of its businesses, assets and liabilities. The issuance of
Liberty Group Stock did not affect the rights of creditors of TCI.

     Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could affect
the combined results of operations or financial condition of TCI Group and the
market price of shares of the TCI Group Stock. In addition, net losses of any
portion of TCI, dividends or distributions on, or repurchases of, any series of
common stock, and dividends on, or certain repurchases of preferred stock would
reduce the funds of TCI legally available for dividends on all series of common
stock. Accordingly, TCI Group financial information should be read in
conjunction with the TCI and Liberty Media Group financial information.

     Dividends on TCI Group Stock are payable at the sole discretion of the
Board out of the lesser of assets of TCI legally available for dividends and
the available dividend amount with respect to TCI Group, as defined.
Determinations to pay dividends on TCI Group Stock would be based primarily
upon the financial condition, results of operations and business requirements
of TCI Group and TCI as a whole.

     TCI Group manages certain treasury activities for Liberty Media Group on a
centralized basis. Previously, cash receipts of certain businesses attributed
to Liberty Media Group were remitted to TCI Group and certain cash
disbursements of Liberty Media Group were funded by TCI Group on a daily basis.
Prior to the Distribution, the net amounts of such cash activities are included
in investment in Liberty Media Group in the accompanying combined financial
statements. Subsequent to the Distribution, such cash activities are included
in borrowings from or loans to TCI Group or, if determined by the Board, as an
equity contribution to be reflected as an Inter-Group Interest to Liberty Media
Group.

     The Board could determine from time to time that debt of TCI Group not
incurred by entities attributed to Liberty Media Group or preferred stock and
the proceeds thereof should be specifically attributed to and reflected on the
combined financial statements of Liberty Media Group to the extent that the
debt is incurred or the preferred stock is issued for the benefit of Liberty
Media Group.

     For all periods prior to the Distribution, all financial impacts of equity
offerings were attributed entirely to TCI Group. After the Distribution, all
financial impacts of issuances of additional shares of TCI Group Stock will be
attributed entirely to TCI Group, all financial impacts of issuances of
additional shares of Liberty Group Stock, the proceeds of which are attributed
to Liberty Media Group, will be reflected entirely in the combined financial
statements of Liberty Media Group. Financial impacts of dividends or other
distributions on, and purchases of, TCI Group Stock will be attributed entirely
to TCI Group, and financial impacts of dividends or other distributions on
Liberty Group Stock will be attributed entirely to Liberty Media Group.
Financial impacts of repurchases of Liberty Group Stock the consideration for
which is charged to Liberty Media Group will be reflected entirely in the
combined financial statements of Liberty Media Group, and the financial impacts
of repurchases of Liberty Group Stock the consideration for which is charged to
TCI Group will be attributed entirely to TCI Group.

                                     II-43

<PAGE>   108


     Borrowings from or loans to TCI Group bear interest at such rates and have
repayment schedules and other terms as are established by the Board. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the use of
proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing sources.

     On July 31, 1996, pursuant to certain agreements entered into between TCI
Group, Viacom International, Inc. and Viacom, TCI Group acquired all of the
common stock of Cable Sub which owned Viacom's cable systems and related
assets.

     The transaction was structured as a tax-free reorganization in which Cable
Sub transferred all of its non-cable assets, as well as all of its liabilities
other than current liabilities, to New Viacom Sub. Cable Sub also transferred
to New Viacom Sub the Loan Proceeds. Following these transfers, Cable Sub
retained cable assets with a value at closing of approximately $2.326 billion
and the obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom
Sub has any obligation with respect to repayment of the Loan Proceeds. The
Viacom Acquisition has been accounted for by the purchase method and
accordingly, TCI Group recorded Cable Sub's assets and liabilities at fair
value.

     Prior to the consummation of the Viacom Acquisition, Viacom offered to the
holders of shares of Viacom Common Stock the opportunity to exchange a portion
of their shares of Viacom Common Stock for shares of Cable Sub Class A Stock.
Immediately following the completion of the Exchange Offer, TCI Group acquired
from Cable Sub shares of Cable Sub Class B Common Stock for $350 million (which
was used to reduce Cable Sub's obligations under the Loan Facility). At the
time of the Share Issuance, the Cable Sub Class A Stock received by Viacom
stockholders pursuant to the Exchange Offer automatically converted into
Exchangeable Preferred Stock of Cable Sub with a stated value of $100 per
share. The Exchangeable Preferred Stock is exchangeable, at the option of the
holder commencing after the fifth anniversary of the date of issuance, for
shares of Series A TCI Group Stock at an exchange rate of 5.447 shares of
Series A TCI Group Stock for each share of Exchangeable Preferred Stock
exchanged. The Exchangeable Preferred Stock is subject to redemption, at the
option of Cable Sub, after the fifth anniversary of the date of issuance,
initially at a redemption price of $102.50 per share and thereafter at prices
declining ratably annually to $100 per share on and after the eighth
anniversary of the date of issuance, plus accrued and unpaid dividends to the
date of redemption. The Exchangeable Preferred Stock is also subject to
mandatory redemption on the tenth anniversary of the date of issuance at a
price equal to the Stated Value per share plus accrued and unpaid dividends.
Amounts payable by Cable Sub in satisfaction of its optional or mandatory
redemption obligations with respect to the Exchangeable Preferred Stock may be
made in cash or, at the election of Cable Sub, in shares of Series A TCI Group
Stock, or in any combination of the foregoing.

     In addition to the Viacom Acquisition, TCI Group consummated certain other
acquisitions during 1996. See note 5 to the accompanying consolidated financial
statements for additional information regarding assets acquired and liabilities
assumed in connection with all acquisitions.

     During the year ended December 31, 1996, TCIC issued (i) 4.6 million
shares of Cumulative Exchangeable Preferred Stock for net cash proceeds of $223
million, (ii) $500 million in face value of 8.72% Trust Originated Preferred
SecuritiesSM for net cash proceeds of $486 million (through a special purpose
entity formed as a Delaware business trust), (iii) $500 million in face value
of 10% Trust Preferred Securities for net cash proceeds of $485 million
(through a special purpose entity formed as a Delaware business trust) and (iv)
$2.06 billion of publicly-placed senior and medium term notes with interest
rates ranging from 6.1% to 7.9% and maturity dates ranging through 2026. TCIC
used the proceeds from the aforementioned debt and equity issuances to retire
commercial paper and to repay certain other indebtedness.


                                     II-44

<PAGE>   109


     During March 1997, TCI Group, through special purpose entities formed as
Delaware business trusts, issued $300 million in face value of 9.65% Capital
Securities and $200 million in face value of 9.72% Trust Preferred Securities.
The Company used the net proceeds from such issuances to retire commercial
paper and repay certain other indebtedness.

     Additionally, in February 1996, TINTA issued $345 million (before
deducting offering costs of $9 million) of 4.5% convertible subordinated
debentures. TINTA anticipates that it will use the net proceeds to fund capital
contributions to certain of its equity investees.

     In January 1997, TCI Group acquired the 50% ownership interest in TKR
Cable that TCI Group did not previously own for aggregate consideration of
approximately $970 million. TCI Group issued approximately 16 million shares of
TCI Group Stock, assumed $584 million of TKR Cable's debt and paid cash of $88
million and shares of Time Warner common stock valued at $41 million upon
consummation of such acquisition.

     During the second quarter of 1996, certain subsidiaries of TCI Group
terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion. TCI Group
does not believe that such terminations will adversely affect its future
liquidity. At December 31, 1996, subsidiaries of TCI Group had approximately
$1.4 billion in unused lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although such
subsidiaries were in compliance with the restrictive covenants contained in
their credit facilities at said date, additional borrowings under the credit
facilities are subject to the subsidiaries' continuing compliance with the
restrictive covenants (which relate primarily to the maintenance of certain
ratios of cash flow to total debt and cash flow to debt service, as defined in
the credit facilities) after giving effect to such additional borrowings. See
note 9 to the accompanying TCI Group combined financial statements for
additional information regarding the material terms of the lines of credit.

     One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization, compensation relating to
stock appreciation rights, adjustment to compensation relating to stock
appreciation rights and restructuring charges) $2,112 million, $1,972 million
and $1,784 million for the years ended December 31, 1996, 1995 and 1994,
respectively) to interest expense ($1,080 million, $993 million and $786 million
in 1996, 1995 and 1994, respectively), is determined by reference to the
combined statements of operations. TCI Group's interest coverage ratio was 196%,
199% and 227% for 1996, 1995 and 1994, respectively. The decrease in TCI Group's
interest coverage in 1996 and 1995 is caused by an increase in interest expense
due to higher debt balances. Management of TCI Group believes that the foregoing
interest coverage ratio is adequate in light of the consistency and nonseasonal
nature of its cable television operations and the relative predictability of TCI
Group's interest expense, almost half of which results from fixed rate
indebtedness. However, TCI Group's current intent is to reduce its outstanding
indebtedness such that its interest coverage ratio could be increased. There is
no assurance that TCI Group will be able to achieve such objective. Operating
Cash Flow is a measure of value and borrowing capacity within the cable
television industry and is not intended to be a substitute for cash flows
provided by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.


                                     II-45

<PAGE>   110


     Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying combined statements of cash flows. Net cash
provided by operating activities ($1,084 million, $955 million and $1,001
million in 1996, 1995 and 1994, respectively) reflects net cash from the
operations of TCI Group available for TCI Group's liquidity needs after taking
into consideration the aforementioned additional substantial costs of doing
business not reflected in Operating Cash Flow. Amounts expended by TCI Group
for its investing activities exceed net cash provided by operating activities.
However, management believes that net cash provided by operating activities,
the ability of TCI Group to obtain additional financing (including the
available lines of credit and access to public debt markets), issuances and
sales of TCI's equity or equity of its subsidiaries, and proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See TCI Group's combined statements of cash flows
included in the accompanying combined financial statements.

     TCI Group's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Historically, amounts expended for acquisitions and capital expenditures have
exceeded net cash provided by operating activities. In this regard, the amount
of capital expended by TCI Group for property and equipment was $2,043 million,
$1,733 million and $1,249 million in 1996, 1995 and 1994, respectively. TCI
Group has reevaluated its capital expenditure strategy and currently
anticipates that it will expend significantly less for property and equipment
in 1997 than it did in 1996. To the extent that net cash provided by operating
activities exceeds net cash used in investing activities in 1997, TCI Group
currently anticipates that such excess cash will initially be used to reduce
outstanding debt.

     In late April, 1996, TCIC was notified by Moody's and Duff & Phelps that
those rating agencies had downgraded by one level their respective ratings of
TCIC's senior debt to the first level below investment grade. Fitch reaffirmed
its rating for TCIC's senior debt at the last level of investment grade. On
October 18, 1996, Standard and Poor's issued a press release stating that
TCIC's senior debt would be placed on CreditWatch with negative implications.
On January 24, 1997, Standard & Poor's removed TCIC's senior debt from
CreditWatch. TCIC's senior debt is currently rated BBB- by Standard & Poor's
(the last level of investment grade) with a negative outlook. These actions are
expected to marginally increase TCIC's cost of borrowings under certain bank
credit facilities, and may adversely affect TCIC's access to the public debt
market and its overall cost of future borrowings.

     TCI Group is a partner in a series of partnerships formed to engage in the
business of providing wireless communications services, using the radio
spectrum for broadband personal communications services, to residential and
business customers nationwide, using the "Sprint" brand. The PCS Ventures
include the Sprint PCS Partnerships and PhillieCo. The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint, Comcast, Cox and TCI Group.
The partners of PhillieCo are subsidiaries of Sprint, Cox and TCI Group. TCI
Group has a 30% partnership interest in each of the Sprint PCS Partnerships and
a 35.3% interest as a partner in PhillieCo and accounts for its interest in the
PCS Ventures by the equity method.


                                     II-46

<PAGE>   111


     The Sprint PCS Partnerships have licenses, and have affiliated with other
entities (including PhillieCo) that have licenses, to provide PCS service to
MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or
population equivalents), based on the Donnelley Marketing Service estimate of
the December 31, 1995 population of the relevant geographic areas. The Sprint
PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction
conducted by the FCC that ended in March 1995, for an aggregate license cost of
approximately $2.1 billion. The Sprint PCS Partnerships have invested in
(acquiring a 49% interest) and affiliated with APC, which owns a PCS license
for and operates a PCS system in the Baltimore/Washington, D.C. MTA, and
Cox-California, which holds a PCS license for the Los Angeles/San Diego MTA and
currently operates a PCS system in San Diego, California. The Sprint PCS
Partnerships may invest in other entities that hold PCS Licenses. PhillieCo
holds the license for the Philadelphia MTA, which was acquired at a license
cost of $85 million. During December 1996, the Sprint PCS Partnerships
initiated the commercial launch of PCS service in seven markets.

     From inception through 1996, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which TCI Group
contributed an aggregate of approximately $0.9 billion, including approximately
$0.2 billion during the year ended December 31, 1996.) The remaining capital
that the Sprint PCS Partnerships will require to fund the construction of the
PCS systems and the commitments made to APC and Cox-California will be
substantial. The partners had agreed in forming the Sprint PCS Partnerships to
contribute up to an aggregate of approximately $4.2 billion of equity thereto,
from inception through fiscal 1999, subject to certain requirements. TCI Group
expects that the remaining approximately $1.2 billion of such amount (of which
TCI Group's share is approximately $0.4 billion) will be contributed by the end
of the second quarter of 1998 (although there can be no assurance that any
additional capital will be contributed). TCI Group expects that the Sprint PCS
Partnerships will require additional equity thereafter.

     TCI Group has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $278 million at
December 31, 1996. Although there can be no assurance, management of TCI Group
believes that it will not be required to meet its obligations under such
guarantees or if it is required to meet any of such guarantees, that they will
not be material to TCI Group.

     TCI Group is obligated to pay fees for the rights to exhibit certain films
that are released by various producers through December 31, 2005. Based on
customer levels at December 31, 1996, these agreements require minimum payments
aggregating approximately $377 million. The aggregate amount of the Film
Licensing Obligations is not currently estimable because such amount is
dependent upon the number of qualifying films released theatrically by certain
motion picture studios as well as the domestic theatrical exhibition receipts
upon the release of such qualifying films. Nevertheless, TCI Group's required
aggregate payments under the Film Licensing Obligations could prove to be
significant.

     TCI Group has made certain financial commitments related to the
acquisition of foreign sports program rights through 2004.  At December 31,
1996, such commitments aggregated $226 million.

     TCI Group's various partnerships and other affiliates accounted for under
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by TCI Group) and through
net cash provided by their own operating activities.


                                     II-47

<PAGE>   112


     In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, TCI Group has entered into various interest rate exchange
agreements. Pursuant to the interest rate exchange agreements, TCI Group (i)
pays fixed interest rates ranging from 7.2% to 9.3% and receives variable rates
on notional amounts of $310 million at December 31, 1996 and (ii) pays variable
interest rates and receives fixed interest rates ranging from 4.8% to 7.4% on
notional amounts of $1,750 million at December 31, 1996. During the years ended
December 31, 1996, 1995 and 1994, TCI Group's net payments pursuant to the
Fixed Rate Agreements were $14 million, $13 million and $26 million,
respectively. During the years ended December 31, 1996, 1995 and 1994, TCI
Group's net receipts (payments) pursuant to the Variable Rate Agreements were
$15 million, (less than $1 million), and $36 million, respectively. During the
year ended December 31, 1996, TCI Group terminated certain Variable Rate
Agreements with an aggregate notional amount of $700 million. TCI Group
received $16 million upon such terminations. TCI Group will amortize the
termination settlement over the remainder of the original terms of the
terminated Variable Rate Agreements. TCI Group is exposed to credit losses for
the periodic settlements of amounts due under the interest rate exchange
agreements in the event of nonperformance by the other parties to the
agreements. However, TCI Group does not anticipate that it will incur any
material credit losses because it does not anticipate nonperformance by the
counterparties.

     At December 31, 1996, after considering the net effect of the
aforementioned interest rate exchange agreements, TCI Group had $7,347 million
(or 49%) of fixed-rate debt with a weighted average interest rate of 8.5% and
$7,577 million (or 51%) of variable-rate debt with a weighted average interest
rate of 6.3%.

     In connection with its investments in the above-described foreign
entities, TCI Group is exposed to unfavorable and potentially volatile
fluctuations of the U.S. dollar against the UK pound sterling ("L."), the
Japanese yen ("Y."), and various other foreign currencies that are the
functional currencies of TCI Group's foreign subsidiaries and affiliates. Any
increase (decrease) in the value of the U.S. dollar against any foreign
currency that is the functional currency of an operating subsidiary or
affiliate of TINTA will cause TCI Group to experience unrealized foreign
currency translation losses (gains) with respect to amounts already invested in
such foreign currencies. TCI Group is also exposed to foreign currency risk to
the extent that TCI Group or its foreign subsidiaries and affiliates enter into
transactions denominated in currencies other than their respective functional
currencies. Because TCI Group generally views its foreign operating
subsidiaries and affiliates as long-term investments, TCI Group generally does
not attempt to hedge existing investments in its foreign affiliates and
subsidiaries. With respect to funding commitments that are denominated in
currencies other than the U.S. dollar, TCI Group historically has sought to
reduce its exposure to short-term (generally no more than 90 days) movements in
the applicable exchange rates once the timing and amount of such funding
commitments becomes fixed. Although TCI Group monitors foreign currency
exchange rates with the objective of mitigating its exposure to unfavorable
fluctuations in such rates, TCI Group believes that it is not possible or
practical to completely eliminate TCI Group's exposure to unfavorable
fluctuations in foreign currency exchange rates.


                                     II-48

<PAGE>   113


     Approximately twenty-seven percent of the franchises held by TCI Group,
involving approximately 4.5 million basic customers, expire within five years.
There can be no assurance that the franchises for TCI Group's systems will be
renewed as they expire, although TCI Group believes that its cable television
systems generally have been operated in a manner which satisfies the standards
established by the 1984 Cable Act, as supplemented by the renewal provisions of
the 1992 Cable Act, for franchise renewal. However, in the event they are
renewed, TCI Group cannot predict the impact of any new or different conditions
that might be imposed by the franchising authorities in connection with the
renewals. To date they have not varied significantly from the original terms.

     During 1996, TCI Group has experienced a competitive impact from medium
power and high power direct broadcast satellites that use high frequencies to
transmit signals that can be received by HSDs much smaller in size than
traditional HSDs. The Primestar partners distribute a multi-channel programming
service via a medium power communications satellite to HSDs of approximately 3
feet in diameter. Prior to the Satellite Spin-off, TCI Group provided this
satellite service. DirecTv, USSB and EchoStar transmit from high power
satellites and generally use smaller dishes to receive their signals. Alphastar
began offering medium power service in the second quarter of 1996. On February
24, 1997, News Corp. and EchoStar announced that News Corp. will acquire a 50%
interest in EchoStar and that the companies will combine their DBS businesses
into a new company, which will operate under the name Sky. The two companies
contend that Sky, which is scheduled to launch in early 1998, will offer 500
channels of digital television on a nationwide basis (not all of which would be
available to each subscriber), Internet services and local broadcast network
television signals, capable of reaching more than 50% of all television
householders upon the launch of Sky and 75% of all television households by the
end of 1998. DBS operators have the right to distribute substantially all of
the significant cable television programming services currently carried by
cable television systems. Estimated DBS customers nationwide increased from
approximately 2.2 million at the end of 1995 to approximately 4.4 million at
the end of 1996, and TCI Group expects that competition from DBS will continue
to increase. However, TCI Group is unable to predict what effect such
competition will have on TCI Group's financial position.

Item 8.    Financial Statements and Supplementary Data.

     The consolidated financial statements of Tele-Communications, Inc. are
filed under this Item, beginning on Page II-50. The combined financial
statements of Liberty Media Group are filed under this Item, beginning on Page
II-102. The combined financial statements of TCI Group are filed under this
Item, beginning at Page II-129. The financial statement schedules required by
Regulation S-X are filed under Item 14 of this Annual Report on Form 10-K.


Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure.

     None.



                                     II-49
<PAGE>   114


                          INDEPENDENT AUDITORS' REPORT





The Board of Directors and Stockholders
Tele-Communications, Inc.:


We have audited the accompanying consolidated balance sheets of
Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of
Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.







                                             KPMG Peat Marwick LLP




Denver, Colorado
March 24, 1997




                                     II-50
<PAGE>   115




                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                           December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                        1996      1995
                                                      --------   --------
Assets                                                amounts in millions
<S>                                                   <C>          <C>   
Cash and cash equivalents                             $    394        118

Trade and other receivables, net                           448        407

Inventories, net                                            --        104

Prepaid expenses                                            81         65

Prepaid program rights                                      49         47

Committed film inventory                                   136        122

Investments in affiliates, accounted for under the
    equity method, and related receivables (note 4)      3,012      2,372

Investment in Time Warner, Inc. ("Time Warner")
    (note 5)                                             2,027         --

Investment in Turner Broadcasting System, Inc. 
    ("TBS") (note 5)                                        --        955

Property and equipment, at cost:
    Land                                                    77         88
    Distribution systems                                10,078      9,545
    Support equipment and buildings                      1,541      1,429
                                                      --------   --------
                                                        11,696     11,062
    Less accumulated depreciation                        4,168      3,653
                                                      --------   --------
                                                         7,528      7,409
                                                      --------   --------

Franchise costs                                         17,875     14,322
    Less accumulated amortization                        2,439      2,092
                                                      --------   --------
                                                        15,436     12,230
                                                      --------   --------

Other assets, at cost, net of amortization               1,133      1,748
                                                      --------   --------

                                                      $ 30,244     25,577
                                                      ========   ========
</TABLE>

                                                                    (continued)




                                     II-51
<PAGE>   116






                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                     Consolidated Balance Sheets, continued

                           December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                                       1996                  1995
                                                                      --------              --------
Liabilities and Stockholders' Equity                                        amounts in millions
<S>                                                                   <C>                     <C>   
Accounts payable                                                      $    216                   243

Accrued interest                                                           274                   233

Accrued programming expense                                                347                   318

Other accrued expenses                                                     812                 1,114

Debt (note 8)                                                           14,926                13,211

Deferred income taxes (note 14)                                          6,012                 4,584

Other liabilities                                                          253                   195
                                                                      --------              --------

      Total liabilities                                                 22,840                19,898
                                                                      --------              --------

Minority interests in equity of consolidated subsidiaries                1,493                   651

Redeemable preferred stocks (note 9)                                       658                   478

Company-obligated mandatorily redeemable preferred
    securities of subsidiary trusts ("Trust Securities")
    holding solely subordinated debt securities of TCI
    Communications, Inc. ("TCIC") (note 10)                              1,000                    --

Stockholders' equity (note 11):
    Series Preferred Stock, $.01 par value                                  --                    --
    Class B 6% Cumulative Redeemable Exchangeable
       Junior Preferred Stock, $.01 par value                               --                    --
    Tele-Communications, Inc. Series A TCI Group
       common stock, $1 par value. Authorized
       1,750,000,000 shares; issued 696,325,478 shares
       in 1996 and 672,211,009 shares in 1995                              696                   672
    Tele-Communications, Inc. Series B TCI Group
       common stock, $1 par value. Authorized
       150,000,000 shares; issued 84,647,065 shares
       in 1996 and 84,691,554 shares in 1995                                85                    85
    Tele-Communications, Inc. Series A Liberty Media
       Group common stock, $1 par value.  Authorized
       750,000,000 shares; issued 227,844,437 shares
       in 1996 and 224,942,830 shares in 1995                              228                   225
    Tele-Communications, Inc. Series B Liberty Media
       Group common stock, $1 par value. Authorized
       75,000,000 shares; issued 21,189,369 shares in
       1996 and 21,196,868 shares in 1995                                   21                    21
    Additional paid-in capital                                           3,672                 3,986
    Cumulative foreign currency translation adjustment,
       net of taxes                                                         26                    (9)
    Unrealized holding gains for available-for-sale
       securities, net of taxes                                             15                   338
    Accumulated deficit                                                   (176)                 (454)
                                                                      --------              --------
                                                                         4,567                 4,864
    Series A TCI Group common stock, at cost, held by
       subsidiaries (116,853,196 shares and
       100,524,364 shares in 1996 and 1995,
       respectively)                                                      (314)                 (314)
                                                                      --------              --------

          Total stockholders' equity                                     4,253                 4,550
                                                                      --------              --------

Commitments and contingencies (note 15)

                                                                      $ 30,244                25,577
                                                                      ========              ========
</TABLE>

See accompanying notes to consolidated financial statements.




                                     II-52
<PAGE>   117


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                     Consolidated Statements of Operations

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                              1996       1995      1994
                                                             -------    ------    ------
                                                                 amounts in millions,
                                                               except per share amounts

<S>                                                            <C>       <C>       <C>  
Revenue (note 16):
   Communications and programming services (note 6)          $ 7,038     5,586     4,250
   Net sales from electronic retailing services                  984       920       432
                                                             -------    ------    ------
                                                               8,022     6,506     4,682
                                                             -------    ------    ------
Operating costs and expenses:
   Operating                                                   2,917     2,161     1,507
   Cost of sales from electronic retailing services              605       603       263
   Selling, general and administrative                         2,224     1,754     1,114
   Compensation (adjustment to 
     compensation) relating to options and 
     stock appreciation rights                                   (13)       57        (8)
   Restructuring charges                                          41        17        --
   Depreciation                                                1,093       899       700
   Amortization                                                  523       473       318
                                                             -------    ------    ------
                                                               7,390     5,964     3,894
                                                             -------    ------    ------

       Operating income (note 16)                                632       542       788

Other income (expense):
   Interest expense                                           (1,096)   (1,010)     (785)
   Interest and dividend income                                   64        52        36
   Share of losses of affiliates, net  (note 4)                 (473)     (193)     (112)
   Share of earnings of Liberty Media Corporation                 --        --       128
   Loss on early extinguishment of debt (note 8)                 (71)       (6)       (9)
   Minority interests in losses (earnings) of 
     consolidated subsidiaries, net                              (56)       17         2
   Gain on sale of subsidiary stock (note 13)                     --       123        --
   Gain on sale of stock by equity investee (note 4)              12       165       161
   Gain (loss) on disposition of assets                        1,593        49       (10)
   Other, net                                                    (65)      (30)      (17)
                                                             -------    ------    ------
                                                                 (92)     (833)     (606)
                                                             -------    ------    ------

     Earnings (loss) before income taxes                         540      (291)      182

Income tax benefit (expense) (note 14)                          (262)      120      (120)
                                                             -------    ------    ------

     Net earnings (loss) (note 16)                               278      (171)       62

Dividend requirements on preferred stocks                        (35)      (34)       (8)
                                                             -------    ------    ------

     Net earnings (loss) attributable to common
       stockholders (note 6)                                 $   243      (205)       54
                                                             =======    ======    ======

</TABLE>


                                                                    (continued)



                                     II-53
<PAGE>   118


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                Consolidated Statements of Operations, continued

                  Years ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>
                                                   1996           1995        1994
                                                 ---------      ---------   ---------
                                                           amounts in millions,
                                                         except per share amounts
<S>                                              <C>            <C>         <C>
Net earnings (loss) attributable to
   common stockholders (note 2):
     TCI Class A and Class B common stock        $      --            (71)         54
     TCI Group Series A and Series B
        common stock                                  (813)          (107)         --
     Liberty Media Group Series A and
        Series B common stock                        1,056            (27)         --
                                                 ---------      ---------   ---------
                                                 $     243           (205)         54
                                                 =========      =========   =========
Primary net earnings (loss) attributable to
   common stockholders per common and
   common equivalent share (notes 2 and 6):
     TCI Class A and Class B common stock        $      --           (.11)        .10
     TCI Group Series A and Series
        B common stock                           $   (1.22)          (.16)         --
     Liberty Media Group Series A and Series
        B common stock                           $    3.97           (.11)         --

Fully diluted net earnings (loss)
   attributable to common stockholders per
   common and common equivalent share
   (notes 2 and 6):
     TCI Class A and Class B common stock        $      --           (.11)        .10
     TCI Group Series A and Series B
        common stock                             $   (1.22)          (.16)         --
     Liberty Media Group Series A and Series
        B common stock                           $    3.88           (.11)         --
</TABLE>


See accompanying notes to consolidated financial statements.



                                     II-54
<PAGE>   119
                Consolidated Statements of Stockholders' Equity

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>

                                                                               Common Stock                               
                                                       ---------------------------------------------------------------              
                                           Class B            TCI                TCI Group       Liberty Media Group    Additional  
                                          Preferred    ------------------  --------------------  --------------------     paid-in 
                                            Stock      Class A    Class B  Series A    Series B  Series A    Series B     capital   
                                            -----      -------    -------  --------    --------  --------    --------     -------
                                                                                 amounts in millions
<S>                                            <C>       <C>        <C>        <C>         <C>         <C>        <C>       <C>
Balance at December 31, 1993*                  $--       482        47         --          --          --         --         2,293
    Unrealized holding gains for available-                    
        for-sale securities as of January                      
        1, 1994                                 --        --        --         --          --          --         --            --
    Net earnings                                --        --        --         --          --          --         --            --
    Conversion of redeemable preferred                         
        stock (note 9)                          --         1        --         --          --          --         --            17
    Issuance of common stock upon                              
        conversion of notes (note 8)            --         3        --         --          --          --         --            --
    Issuance of common stock upon exercise                     
        of stock option                         --        --        --         --          --          --         --             3
    Acquisition and retirement of common                       
        stock                                   --        --        --         --          --          --         --            (2)
    Issuance of common stock for                               
        acquisition                             --        85        42         --          --          --         --           383
    Accreted dividends on all classes of                       
        preferred stock                         --        --        --         --          --          --         --            (8)
    Accreted dividends on all classes of                       
        preferred stock not subject to                         
        mandatory redemption requirements       --        --        --         --          --          --         --             4
    Foreign currency translation adjustment     --        --        --         --          --          --         --            --
    Issuance of TCI Class A common stock to                    
        subsidiaries of TCI in                                 
        Reorganization                          --        --        --         --          --          --         --           (23)
    Issuance of Class A common stock for                       
        investment                              --         6        --         --          --          --         --           124
    Repayment of note receivable from                          
        related party                           --        --        --         --          --          --         --            --
    Change in unrealized holding gains for                     
        available-for-sale securities           --        --        --         --          --          --         --            --
                                              ----      ----      ----       ----        ----        ----       ----         -----
Balance at December 31, 1994                   $--       577        89         --          --          --         --         2,791
                                              ----      ----      ----       ----        ----        ----       ----         -----


</TABLE>

<TABLE>
<CAPTION>
                                                           Unrealized
                                                            holding
                                                             gains
                                             Cumulative   (losses) for      Note
                                              foreign      available-   receivable
                                              currency      for-sale       from                                         Total
                                            translation    securities,     related     Accumulated      Treasury     stockholders'
                                             adjustment   net of taxes     party         deficit         stock          equity     
                                             ----------   ------------     -----         -------         -----          ------
                                                                      amounts in millions
<S>                                               <C>          <C>           <C>           <C>            <C>           <C>
Balance at December 31, 1993*                     (29)           --           --           (344)          (333)         2,116
    Unrealized holding gains for available-
        for-sale securities as of January
        1, 1994                                    --           297           --             --             --            297
    Net earnings                                   --            --           --             62             --             62
    Conversion of redeemable preferred
        stock (note 9)                             --            --           --             --             --             18
    Issuance of common stock upon
        conversion of notes (note 8)               --            --           --             --             --              3
    Issuance of common stock upon exercise
        of stock option                            --            --           --             --             --              3
    Acquisition and retirement of common
        stock                                      --            --           --             --             --             (2)
    Issuance of common stock for
        acquisition                                --             4          (15)            --           (285)           214
    Accreted dividends on all classes of
        preferred stock                            --            --           --             --             --             (8)
    Accreted dividends on all classes of
        preferred stock not subject to
        mandatory redemption requirements          --            --           --             --             --              4
    Foreign currency translation adjustment        25            --           --             --             --             25
    Issuance of TCI Class A common stock to
        subsidiaries of TCI in
        Reorganization                             --            --           --             --             23             --
    Issuance of Class A common stock for
        investment                                 --            --           --             --             --            130
    Repayment of note receivable from
        related party                              --            --           15             --            (15)            --
    Change in unrealized holding gains for
        available-for-sale securities              --          (207)          --             --             --           (207)
                                                 ----          ----         ----         ------          -----         ------

Balance at December 31, 1994                       (4)           94           --           (282)          (610)         2,655
                                                 ----          ----         ----         ------          -----         ------
</TABLE>

                                                                     (continued)



                                    II-55
<PAGE>   120
           Consolidated Statement of Stockholders' Equity, continued

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>

                                                                               Common Stock                               
                                                       ---------------------------------------------------------------              
                                           Class B            TCI                TCI Group       Liberty Media Group    Additional  
                                          Preferred    ------------------  --------------------  --------------------     paid-in 
                                            Stock      Class A    Class B  Series A    Series B  Series A    Series B     capital   
                                            -----      -------    -------  --------    --------  --------    --------     -------
                                                                                 amounts in millions
<S>                                            <C>       <C>        <C>        <C>         <C>         <C>       <C>       <C>
Balance at December 31, 1994                   $--        577        89         --         --           --       --        2,791
    Net loss                                    --         --        --         --         --           --       --           --
    Issuance of common stock in public                                                                           
        offering                                --         20        --         --         --           --       --          381
    Issuance of common stock in private                                                                          
        offering                                --          1        --         --         --           --       --           29
    Issuance of common stock for acquisitions                                                                    
        and investments (note 6)                --         59        --         --         --           --       --        1,329
    Issuance of Class A common stock to                                                                          
        subsidiary of TCI in Reorganization     --         --        --         --         --           --       --           (6)
    Issuance of Class A common stock to                                                                          
        subsidiary in exchange for investment   --         --        --         --         --           --       --           (1)
    Retirement of Class A common stock                                                                           
        previously held by subsidiary           --         --        --         --         --           --       --           29
    Exchange of common stock held by                                                                             
        subsidiaries of TCI for Convertible                                                                      
        Redeemable Participating Preferred                                                                       
        Stock, Series F ("Series F Preferred                                                                     
        Stock") (note 9)                        --        (86)       (4)        --         --           --       --         (542)
    Conversion of Series F Preferred Stock                                                                       
        held by subsidiary for Series A TCI                                                                      
        Group common stock                      --         --        --        101         --           --       --          213
    Distribution of Series A and Series B                                                                        
        Liberty Media Group common stock to                                                                      
        TCI common stockholders (note 1)        --         --        --         --         --          225       21         (246)
    Costs associated with Distribution to                                                                        
        stockholders                            --         --        --         --         --           --       --           (8)
    Redesignation of TCI common stock into                                                                       
        Series A and Series B TCI Group                                                                          
        common stock (note 1)                   --       (571)      (85)       571         85           --       --           --
    Accreted dividends on all classes of                                                                         
        preferred stock                         --         --        --         --         --           --       --          (34)
    Accreted dividends on all classes of                                                                         
        preferred stock not subject to                                                                           
        mandatory redemption requirements       --         --        --         --         --           --       --           10
    Payment of preferred stock dividends        --         --        --         --         --           --       --          (10)
    Issuance of common stock by subsidiary                                                                       
        (note 13)                               --         --        --         --         --           --       --           51
    Foreign currency translation adjustment     --         --        --         --         --           --       --           --
    Change in unrealized holding gains for                                                                       
        available-for-sale securities           --         --        --         --         --           --       --           --
    Adjustment to reflect elimination of                                                                         
        reporting delay with respect to                                                                          
        certain foreign subsidiaries            --         --        --         --         --           --       --           --
                                               ---       ----      ----      -----      -----        -----     ----       ------
Balance at December 31, 1995                   $--         --        --        672         85          225       21        3,986
                                               ---       ----      ----      -----      -----        -----     ----       ------
</TABLE>

<TABLE>
<CAPTION>
                                                           Unrealized
                                                            holding
                                                             gains
                                             Cumulative   (losses) for      Note
                                              foreign      available-   receivable
                                              currency      for-sale       from                                     Total
                                            translation    securities,     related     Accumulated   Treasury    stockholders'
                                             adjustment   net of taxes     party         deficit      stock         equity     
                                             ----------   ------------     -----         -------      -----         ------
                                                                      amounts in millions
<S>                                               <C>          <C>           <C>           <C>         <C>           <C>
Balance at December 31, 1994                       (4)          94            --          (282)        (610)        2,655 
    Net loss                                       --           --            --          (171)          --          (171)
    Issuance of common stock in public                                                                                    
        offering                                   --           --            --            --           --           401 
    Issuance of common stock in private                                                                                   
        offering                                   --           --            --            --           --            30 
    Issuance of common stock for acquisitions                                                                             
        and investments (note 6)                   --           --            --            --           --         1,388 
    Issuance of Class A common stock to                                                                                   
        subsidiary of TCI in Reorganization        --           --            --            --            6            -- 
    Issuance of Class A common stock to                                                                                   
        subsidiary in exchange for investment      --           --            --            --            1            -- 
    Retirement of Class A common stock                                                                                    
        previously held by subsidiary              --           --            --            --          (29)           -- 
    Exchange of common stock held by                                                                                      
        subsidiaries of TCI for Convertible                                                                               
        Redeemable Participating Preferred                                                                                
        Stock, Series F ("Series F Preferred                                                                              
        Stock") (note 9)                           --           --            --            --          632            -- 
    Conversion of Series F Preferred Stock                                                                                
        held by subsidiary for Series A TCI                                                                               
        Group common stock                         --           --            --            --         (314)           -- 
    Distribution of Series A and Series B                                                                                 
        Liberty Media Group common stock to                                                                               
        TCI common stockholders (note 1)           --           --            --            --           --            -- 
    Costs associated with Distribution to                                                                                 
        stockholders                               --           --            --            --           --            (8)
    Redesignation of TCI common stock into                                                                                
        Series A and Series B TCI Group                                                                                   
        common stock (note 1)                      --           --            --            --           --            -- 
    Accreted dividends on all classes of                                                                                  
        preferred stock                            --           --            --            --           --           (34)
    Accreted dividends on all classes of                                                                                  
        preferred stock not subject to                                                                                    
        mandatory redemption requirements          --           --            --            --           --            10 
    Payment of preferred stock dividends           --           --            --            --           --           (10)
    Issuance of common stock by subsidiary                                                                                
        (note 13)                                  --           --            --            --           --            51 
    Foreign currency translation adjustment        (5)          --            --            --           --            (5)
    Change in unrealized holding gains for                                                                                
        available-for-sale securities              --          244            --            --           --           244 
    Adjustment to reflect elimination of                                                                                  
        reporting delay with respect to                                                                                   
        certain foreign subsidiaries               --           --            --            (1)          --            (1)
                                                 ----         ----          ----          -----        ----          ---- 
                                                                                                                          
Balance at December 31, 1995                       (9)         338            --          (454)        (314)        4,550 
                                                 ----         ----          ----          -----        ----          ---- 
</TABLE>

                                                                     (continued)


                                    II-56
<PAGE>   121
           Consolidated Statement of Stockholders' Equity, continued

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>

                                                                               Common Stock                               
                                                       ---------------------------------------------------------------              
                                           Class B            TCI                TCI Group       Liberty Media Group    Additional  
                                          Preferred    ------------------  --------------------  --------------------     paid-in 
                                            Stock      Class A    Class B  Series A    Series B  Series A    Series B     capital   
                                            -----      -------    -------  --------    --------  --------    --------     -------
                                                                                 amounts in millions
<S>                                            <C>       <C>        <C>        <C>         <C>         <C>       <C>       <C>
Balance at December 31, 1995                   $--         --        --         672         85         225       21        3,986
 Net earnings                                   --         --        --          --         --          --       --           --
 Issuance of common stock for                                                                                   
  acquisition (note 6)                          --         --        --          11         --           4       --          250
 Issuance of common stock upon                                                                                  
  conversion of notes                           --         --        --           2         --           1       --           (1)
 Issuance of common stock upon                                                                                  
  conversion of preferred stock                 --         --        --           1         --          --       --           15
 Exchange of cost investment for TCI                                                                            
  Group and Liberty Media Group                                                                                 
  common stock                                  --         --        --          (6)        --          (2)      --         (122)
 Contribution of common stock to                                                                                
  subsidiary                                    --         --        --          16         --          --       --          (16)
 Spin-off of TCI Satellite                                                                                      
  Entertainment, Inc. (note 7)                  --         --        --          --         --          --       --         (405)
 Accreted dividends on all classes of                                                                           
  preferred stock                               --         --        --          --         --          --       --          (35)
 Accreted dividends on all classes of                                                                           
  preferred stock not subject to                                                                                
  mandatory redemption requirements             --         --        --          --         --          --       --           10
 Payment of preferred stock                     --         --        --          --         --          --       --          (10)
  dividends                                                                                                     
 Foreign currency translation                                                                                   
  adjustment                                    --         --        --          --         --          --       --           --
 Recognition of unrealized holding                                                                              
  gains on available-for-sale                                                                                   
  securities (note 5)                           --         --        --          --         --          --       --           --
 Recognition of unrealized holding                                                                              
  losses on available-for-sale  
  securities                                    --         --        --          --         --          --       --           --
 Change in unrealized holding gains                                                                                             
  for available-for-sale securities             --         --        --          --         --          --       --           --
                                              ----       ----      ----       -----      -----       -----     ----       ------
                                                                                                                
Balance at December 31, 1996                   $--         --        --         696         85         228       21        3,672
                                              ====       ====      ====       =====     ======       =====     ====       ======
</TABLE>



           Consolidated Statement of Stockholders' Equity, continued

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                           Unrealized
                                                            holding
                                                             gains
                                             Cumulative   (losses) for      Note
                                              foreign      available-   receivable
                                              currency      for-sale       from                                     Total
                                            translation    securities,     related     Accumulated   Treasury    stockholders'
                                             adjustment   net of taxes     party         deficit      stock         equity     
                                             ----------   ------------     -----         -------      -----         ------
                                                                      amounts in millions
<S>                                                 <C>        <C>            <C>         <C>         <C>            <C>      
Balance at December 31, 1995                        (9)         338           --          (454)       (314)          4,550    
 Net earnings                                       --           --           --           278          --             278    
 Issuance of common stock for                                                                                                 
  acquisition (note 6)                              --           --           --            --          --             265    
 Issuance of common stock upon                                                                                                
  conversion of notes                               --           --           --            --          --               2    
 Issuance of common stock upon                                                                                                
  conversion of preferred stock                     --           --           --            --          --              16    
 Exchange of cost investment for TCI                                                                                          
  Group and Liberty Media Group                                                                                               
  common stock                                      --           --           --            --          --            (130)   
 Contribution of common stock to                                                                                              
  subsidiary                                        --           --           --            --          --              --    
 Spin-off of TCI Satellite                                                                                                    
  Entertainment, Inc. (note 7)                      --           --           --            --          --            (405)   
 Accreted dividends on all classes of                                                                                         
  preferred stock                                   --           --           --            --          --             (35)   
 Accreted dividends on all classes of                                                                                         
  preferred stock not subject to                                                                                              
  mandatory redemption requirements                 --           --           --            --          --              10    
 Payment of preferred stock                         --           --           --            --          --             (10)   
  dividends                                                                                                                   
 Foreign currency translation                                                                                                 
  adjustment                                        35           --           --            --          --              35    
 Recognition of unrealized holding                                                                                            
  gains on available-for-sale                                                                                                 
  securities (note 5)                               --         (428)          --            --          --            (428)   
 Recognition of unrealized holding                                                                                            
  losses on available-for-sale 
  securities                                        --           64           --            --          --              64    
 Change in unrealized holding gains                                                                                           
  for available-for-sale securities                 --           41           --            --          --              41    
                                                  ----         ----         ----          ----        ----           -----    
                                                                                                                              
Balance at December 31, 1996                        26           15           --          (176)       (314)          4,253    
                                                  ====         ====         ====          ====        ====           =====    
</TABLE>


See accompanying notes to consolidated financial statements.

                                    II-57

<PAGE>   122


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                  Years ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>
                                                                                1996         1995        1994
                                                                               -------      ------      ------
                                                                                         amounts in millions
                                                                                             (see note 3)
<S>                                                                            <C>          <C>         <C>
Cash flows from operating activities:
   Net earnings (loss)                                                         $   278        (171)         62
   Adjustments to reconcile net earnings (loss) to net cash provided by
      operating activities:
        Depreciation and amortization                                            1,616       1,372       1,018
        Compensation (adjustment to compensation) relating to options and
          stock appreciation rights                                                (13)         57          (8)
        Payments of stock appreciation rights                                       (3)         (9)         --
        Restructuring charges                                                       41          17          --
        Payments of restructuring charges                                           (8)        (17)         --
        Share of losses of affiliates                                              473         193         112
        Share of earnings of Liberty Media Corporation                              --          --        (128)
        Loss on early extinguishment of debt                                        71           6           9
        Minority interests in earnings (losses)                                     56         (17)         (2)
        Gain on sale of subsidiary stock                                            --        (123)         --
        Gain on sale of stock by equity investee                                   (12)       (165)       (161)
        Loss (gain) on disposition of assets                                    (1,593)        (49)         10
        Deferred income tax expense (benefit)                                      224        (153)         37
        Other noncash charges (credits)                                             11         (28)         (2)
        Changes in operating assets and liabilities, net of the effect of
          acquisitions:
             Change in receivables                                                (115)        (70)         15
             Change in inventories                                                  (8)         16         (26)
             Change in prepaids                                                    (23)        (86)        (97)
             Change in accrued interest                                             40          45          13
             Change in other accruals and payables                                 193         139          56
                                                                               -------      ------      ------
              Net cash provided by operating activities                          1,228         957         908
                                                                               -------      ------      ------

Cash flows from investing activities:
   Cash paid for acquisitions                                                     (598)       (477)       (358)
   Capital expended for property and equipment                                  (2,055)     (1,782)     (1,264)
   Cash proceeds from disposition of assets                                        341         166          39
   Additional investments in and loans to affiliates and others                   (798)     (1,134)       (445)
   Repayments of loans to affiliates and others                                    679          18         148
   Other investing activities                                                      (38)       (135)        (15)
                                                                               -------      ------      ------
              Net cash used in investing activities                             (2,469)     (3,344)     (1,895)
                                                                               -------      ------      ------

Cash flows from financing activities:
   Borrowings of debt                                                            8,163       8,152       4,676
   Repayments of debt                                                           (7,969)     (6,567)     (3,607)
   Prepayment penalties                                                            (60)         --          --
   Proceeds from sale of subsidiary stock                                          223         445          --
   Proceeds from issuances of common stock                                          --         431           1
   Proceeds from issuance of Trust Securities                                      971          --          --
   Contributions by minority shareholders of subsidiaries                          319          --          --
   Payment of dividends on subsidiary preferred stock and Trust Securities         (95)         (6)         (6)
   Payment of preferred stock dividends                                            (35)        (24)         (4)
   Costs associated with Distribution to stockholders                               --          (8)         --
   Other financing activities                                                       --           8          --
                                                                               -------      ------      ------
               Net cash provided by financing activities                         1,517       2,431       1,060
                                                                               -------      ------      ------
               Net increase in cash and cash equivalents                           276          44          73
               Cash and cash equivalents at beginning of year                      118          74           1
                                                                               -------      ------      ------
               Cash and cash equivalents  at end of year                       $   394         118          74
                                                                               =======      ======      ======
</TABLE>


See accompanying notes to consolidated financial statements.



                                     II-58
<PAGE>   123






                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

(1)      Organization

         Principles of Consolidation

         The accompanying consolidated financial statements include the
         accounts of Tele-Communications, Inc. and those of all majority-owned
         subsidiaries ("TCI" or the "Company"). All significant intercompany
         accounts and transactions have been eliminated in consolidation.
         Preferred stock of TCI which is owned by subsidiaries of TCI
         eliminates in consolidation. Common stock of the Company held by
         subsidiaries is treated as treasury stock in consolidation.

         Industry Segments

         The Company currently has significant operations principally in two
         industry segments: cable and communications services
         ("Communications") and programming services ("Programming").
         Programming includes the production, acquisition and distribution of
         globally branded entertainment, education and information programming
         services and software for distribution through all available formats
         and media; and home shopping via television and other interactive
         media, direct marketing, advertising sales, infomercials and
         transaction processing. Home Shopping is a programming service which
         includes a retail function. The Company's cable and communications
         segment is comprised of five lines of business: Domestic Cable and
         Communications (the "Cable Unit"); International Cable and Programming
         ("TINTA"); Telephony; Internet; and Technology/Venture Capital. TINTA,
         Telephony, Internet and Technology/Venture Capital are not separately
         reportable segments due to their relative insignificance. The Company
         has investments accounted for under the equity method and the cost
         method, which also operate in the Communications and Programming
         industries. See note 16 for additional segment information.

         Targeted Stock

         On August 3, 1995, the TCI stockholders authorized the TCI Board of
         Directors (the "Board") to issue two new series of stock ("Liberty
         Group Stock") which reflect the separate performance of TCI's business
         which produces and distributes programming services ("Liberty Media
         Group"). Additionally, the stockholders of TCI approved the
         redesignation of the previously authorized TCI Class A and Class B
         common stock into Series A TCI Group and Series B TCI Group common
         stock ("TCI Group Stock"). The issuance of the Liberty Group Stock did
         not result in any transfer of assets or liabilities of TCI or any of
         its subsidiaries or affect the rights of holders of TCI's or any of
         its subsidiaries' debt. On August 10, 1995, TCI distributed, in the
         form of a dividend, one share of Liberty Group Stock for each four
         shares of TCI Group Stock owned. Such distribution (the
         "Distribution") represented one hundred percent of the equity value
         attributable to the Liberty Media Group.

         As of December 31, 1996, the TCI Group Stock reflects the separate
         performance of TCI's subsidiaries and assets not attributed to Liberty
         Media Group, including TCI's Cable Unit, TINTA, Telephony unit,
         Internet unit and Technology/Venture Capital unit. Such subsidiaries
         and assets are referred to as "TCI Group".

                                                                    (continued)



                                     II-59
<PAGE>   124

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         Notwithstanding the attribution of assets and liabilities, equity and
         items of income and expense to TCI Group or to Liberty Media Group for
         purposes of preparing their combined financial statements, the change
         in the capital structure of TCI does not affect the ownership or the
         respective legal title to assets or responsibility for liabilities of
         TCI or any of its subsidiaries. TCI and its subsidiaries each continue
         to be responsible for their respective liabilities. Holders of TCI
         Group Stock or Liberty Group Stock are holders of common stock of TCI
         and continue to be subject to risks associated with an investment in
         TCI and all of its businesses, assets and liabilities. The issuance of
         Liberty Group Stock did not affect the rights of creditors of TCI.

         Dividends on TCI Group Stock are payable at the sole discretion of the
         Board out of the lesser of assets of TCI legally available for
         dividends and the available dividend amount with respect to TCI Group,
         as defined. Determinations to pay dividends on TCI Group Stock will be
         based primarily upon the financial condition, results of operations
         and business requirements of TCI Group and TCI as a whole.

         Dividends on Liberty Group Stock are payable at the sole discretion of
         the Board out of the lesser of all assets of TCI legally available for
         dividends and the available dividend amount with respect to Liberty
         Media Group, as defined. Determinations to pay dividends on Liberty
         Group Stock will be based primarily upon the financial condition,
         results of operations and business requirements of Liberty Media Group
         and TCI as a whole.

         After the Distribution, existing preferred stock and debt securities
         of TCI that were convertible into or exchangeable for shares of TCI
         Class A common stock were, as a result of the operation of
         antidilution provisions, adjusted so that there will be delivered upon
         their conversion or exchange (in addition to the same number of shares
         of redesignated Series A TCI Group Stock as were theretofore issuable
         thereunder) the number of shares of Series A Liberty Group Stock that
         would have been issuable in the Distribution with respect to the TCI
         Class A common stock issuable upon conversion or exchange had such
         conversion or exchange occurred prior to the record date for the
         Distribution. Options to purchase TCI Class A common stock outstanding
         at the time of the Distribution were adjusted by issuing to the
         holders of such options separate options to purchase that number of
         shares of Series A Liberty Group Stock which the holder would have
         been entitled to receive had the holder exercised such option to
         purchase TCI Class A common stock prior to the record date for the
         Distribution and reallocating a portion of the aggregate exercise
         price of the previously outstanding options to the newly issued
         options to purchase Series A Liberty Group Stock.


                                                                    (continued)



                                     II-60
<PAGE>   125

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements





         A number of wholly-owned subsidiaries of the Company which are part of
         TCI Group owned shares of TCI Class A common stock and TCI preferred
         stock ("Subsidiary Shares"). Because the Distribution was made as a
         dividend to all holders of TCI's Class A common stock and Class B
         common stock and, pursuant to the anti-dilution provisions set forth
         therein, to the holders of securities convertible into TCI Class A
         common stock and Class B common stock upon the conversion thereof,
         shares of Liberty Group Stock would otherwise have been issued and
         become issuable in respect of the Subsidiary Shares held by these
         subsidiaries and would have been attributed to TCI Group. The Liberty
         Group Stock issued in connection with the Distribution was intended to
         constitute 100% of the equity value thereof to the holders of the TCI
         Class A common stock and TCI Class B common stock, and TCI Group did
         not initially have any interest in Liberty Media Group represented by
         any outstanding shares of Liberty Group Stock (an "Inter-Group
         Interest"). Therefore, TCI determined to exchange all of the
         outstanding Subsidiary Shares for shares of Series F Preferred Stock.
         See note 9. The rights, privileges and preferences of the Series F
         Preferred Stock did not entitle its holders to receive Liberty Group
         Stock in the Distribution or upon conversion of the Series F Preferred
         Stock.

         Stock Dividend

         Effective January 13, 1997, the Company issued a stock dividend to
         holders of Liberty Group Stock consisting of one share of Series A
         Liberty Group Stock for every two shares of Series A Liberty Group
         Stock owned and one share of Series A Liberty Group Stock for every
         two shares of Series B Liberty Group Stock owned (the "Liberty Group
         Stock Dividend"). The Liberty Group Stock Dividend has been treated as
         a stock split, and accordingly, all share and per share amounts have
         been retroactively restated to reflect the Liberty Group Stock
         Dividend.

         Telephony Group Stock Proposal

         On March 12, 1997, the TCI stockholders authorized the Board to issue
         two new series of the Company's common stock, par value $1.00 per
         share, (and a corresponding increase in the total number of authorized
         shares of common stock) to be designated Tele-Communications, Inc.
         Series A Telephony Group common stock and Tele-Communications, Inc.
         Series B Telephony Group common stock (collectively, the "Telephony
         Group Stock"). The Telephony Group Stock, if issued, would be intended
         to reflect the separate performance of Telephony Group, which
         initially consists of the Company's investments in certain entities
         engaged in the domestic wireline and wireless telephony businesses. A
         total of 750 million shares of Series A Telephony Group Stock and 75
         million shares of Series B Telephony Group Stock were authorized. As
         of March 24, 1997, no shares of Telephony Group Stock have been
         issued.


                                                                    (continued)



                                     II-61
<PAGE>   126


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements




         Upon authorization of the Telephony Group Stock and until shares of
         Telephony Group Stock are issued, the investments attributed to
         Telephony Group will be included in TCI Group. The TCI Group Stock
         will continue to reflect all of the assets, liabilities and common
         stockholders' equity value of the Company attributable to Telephony
         Group, in addition to the separate performance of the Company's
         domestic cable distribution business; telephony distribution and
         communications business (other than the investments attributed to
         Telephony Group); international cable, telephony and programming
         businesses; technology/venture capital business; and any other
         business of the Company not attributed to either Liberty Media Group
         or Telephony Group. As shares of Telephony Group Stock are issued and
         distributed or sold, the percentage of the common stockholders' equity
         value of the Company attributable to Telephony Group that is or is
         intended to be reflected in the TCI Group Stock will be reduced
         accordingly. The composition of Liberty Media Group was not affected
         by the authorization, and will not be affected by the issuance, of
         Telephony Group Stock.

(2)      Summary of Significant Accounting Policies

         Cash and Cash Equivalents

         Cash and cash equivalents consist of investments which are readily
         convertible into cash and have maturities of three months or less at
         the time of acquisition.

         Receivables

         Receivables are reflected net of an allowance for doubtful accounts.
         Such allowance at December 31, 1996 and 1995 was not material.

         Program Rights

         Prepaid program rights are amortized on a film-by-film basis over the
         specific number of exhibitions. Committed film inventory and program
         rights payable are recorded at the estimated costs of the programs
         when the film is available for airing less prepayments. These amounts
         are amortized on a film-by-film basis over the specific number of
         exhibitions.

         Investments

         All marketable equity securities held by the Company are classified as
         available-for-sale and are carried at fair value. Unrealized holding
         gains and losses on securities classified as available-for-sale are
         carried net of taxes as a separate component of stockholders' equity.
         Realized gains and losses are determined on a specific-identification
         basis.


                                                                    (continued)



                                     II-62
<PAGE>   127

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements





         Other investments in which the ownership interest is less than 20% and
         are not considered marketable securities are generally carried at
         cost. For those investments in affiliates in which the Company's
         voting interest is 20% to 50%, the equity method of accounting is
         generally used. Under this method, the investment, originally recorded
         at cost, is adjusted to recognize the Company's share of the net
         earnings or losses of the affiliates as they occur rather than as
         dividends or other distributions are received, limited to the extent
         of the Company's investment in, advances to and commitments for the
         investee. The Company's share of net earnings or losses of affiliates
         includes the amortization of the difference between the Company's
         investment and its share of the net assets of the investee.
         Recognition of gains on sales of properties to affiliates accounted
         for under the equity method is deferred in proportion to the Company's
         ownership interest in such affiliates.

         Changes in the Company's proportionate share of the underlying equity
         of a subsidiary or equity method investee, which result from the
         issuance of additional equity securities by such subsidiary or equity
         investee, generally are recognized as gains or losses in the Company's
         consolidated statements of operations.

         Long-Lived Assets

         (a)      Property and Equipment

                  Property and equipment is stated at cost, including
                  acquisition costs allocated to tangible assets acquired.
                  Construction costs, including interest during construction
                  and applicable overhead, are capitalized. During 1996, 1995
                  and 1994, interest capitalized was not material.

                  Depreciation is computed on a straight-line basis using
                  estimated useful lives of 3 to 15 years for distribution
                  systems, 3 to 40 years for support equipment and buildings.

                  Repairs and maintenance are charged to operations, and
                  renewals and additions are capitalized. At the time of
                  ordinary retirements, sales or other dispositions of
                  property, the original cost and cost of removal of such
                  property are charged to accumulated depreciation, and
                  salvage, if any, is credited thereto. Gains or losses are
                  only recognized in connection with the sales of properties in
                  their entirety.

         (b)      Franchise Costs

                  Franchise costs include the difference between the cost of
                  acquiring cable television systems and amounts allocated to
                  their tangible assets. Such amounts are generally amortized
                  on a straight-line basis over 40 years. Costs incurred by the
                  Company in negotiating and renewing franchise agreements are
                  amortized on a straight-line basis over the life of the
                  franchise, generally 10 to 20 years.


                                                                    (continued)



                                     II-63
<PAGE>   128

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements





         In March of 1995, the Financial Accounting Standards Board (the
         "FASB") issued Statement of Financial Accounting Standards No. 121,
         Accounting for the Impairment of Long-Lived Assets and for Long-Lived
         Assets to Be Disposed Of ("Statement No. 121"), effective for fiscal
         years beginning after December 15, 1995. Statement No. 121 requires
         impairment losses to be recorded on long-lived assets used in
         operations when indicators of impairment are present and the
         undiscounted cash flows estimated to be generated by those assets are
         less than the assets' carrying amount. Statement No. 121 also
         addresses the accounting for long-lived assets that are expected to be
         disposed of. The Company adopted Statement No. 121 effective January
         1, 1996. Such adoption did not have a significant effect on the
         financial position or results of operations of the Company.

         Pursuant to Statement No. 121, the Company periodically reviews the
         carrying amounts of its long-lived assets, franchise costs and certain
         other assets to determine whether current events or circumstances
         warrant adjustments to such carrying amounts. The Company considers
         historical and expected future net operating losses to be its primary
         indicators of potential impairment. Assets are grouped and evaluated
         for impairment at the lowest level for which there are identifiable
         cash flows that are largely independent of the cash flows of other
         groups of assets ("Assets"). The Company deems Assets to be impaired
         if the Company is unable to recover the carrying value of such Assets
         over their expected remaining useful life through a forecast of
         undiscounted future operating cash flows directly related to the
         Assets. If Assets are deemed to be impaired, the loss is measured as
         the amount by which the carrying amount of the Assets exceeds their
         fair value. The Company generally measures fair value by considering
         sales prices for similar assets or by discounting estimated future
         cash flows. Considerable management judgment is necessary to estimate
         discounted future cash flows. Accordingly, actual results could vary
         significantly from such estimates.

         Interest Rate Derivatives

         Amounts receivable or payable under derivative financial instruments
         used to manage interest rate risks arising from the Company's
         financial liabilities are recognized as interest expense. Gains and
         losses on early terminations of derivatives are included in the
         carrying amount of the related debt and amortized as yield adjustments
         over the remaining term of the derivative financial instruments. The
         Company does not use such instruments for trading purposes.

         Minority Interests

         Recognition of minority interests' share of losses of consolidated
         subsidiaries is limited to the amount of such minority interests'
         allocable portion of the common equity of those consolidated
         subsidiaries. Further, the minority interests' share of losses is not
         recognized if the minority holders of common equity of consolidated
         subsidiaries have the right to cause the Company to repurchase such
         holders' common equity.


                                                                    (continued)



                                     II-64
<PAGE>   129
                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         Included in minority interests in equity of consolidated subsidiaries
         is $902 million and $49 million in 1996 and 1995, respectively, of
         preferred stocks (and accumulated dividends thereon) of certain
         subsidiaries. The current dividend requirements on these preferred
         stocks aggregate $47 million per annum and such dividend requirements
         are reflected as minority interests in the accompanying consolidated
         statements of operations.

         Foreign Currency Translation

         All balance sheet accounts of foreign investments are translated at
         the current exchange rate as of the end of the accounting period.
         Statement of operations items are translated at average currency
         exchange rates. The resulting translation adjustment is recorded as a
         separate component of stockholders' equity.

         Net Sales from Electronic Retailing Services

         Revenue includes merchandise sales reduced by incentive discounts and
         sales returns to arrive at net sales from electronic retailing
         services. Revenue is recorded for credit card sales upon transaction
         authorization, and for check sales upon receipt of customer payment,
         which does not vary significantly from the time goods are shipped. The
         Company's sales policy allows merchandise to be returned at the
         customer's discretion, generally up to 30 days.

         Stock Based Compensation

         Statement of Financial Accounting Standards No. 123, Accounting for
         Stock-Based Compensation ("Statement No. 123") was issued by the FASB
         in October 1995. Statement No. 123 establishes financial accounting
         and reporting standards for stock-based employee compensation plans as
         well as transactions in which an entity issues its equity instruments
         to acquire goods or services from non-employees. As allowed by
         Statement No. 123, the Company continues to account for stock-based
         employee compensation pursuant to APB Opinion No. 25. The Company has
         included the disclosures required by Statement No. 123 in note 11.

         Earnings (Loss) Per Common and Common Equivalent Share

         (a)      TCI Class A and B Common Stock

                  Loss per common share attributable to common stockholders for
                  the period from January 1, 1995 through the Distribution was
                  computed by dividing net loss attributable to common
                  stockholders by the weighted average number of common shares
                  outstanding (648.2 million). Common stock equivalents were
                  not included in the computation of weighted average shares
                  outstanding because their inclusion would be anti-dilutive.


                                                                    (continued)



                                     II-65
<PAGE>   130

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



                  Primary earnings per common and common equivalent share
                  attributable to common stockholders for the year ended
                  December 31, 1994 was computed by dividing net earnings
                  attributable to common stockholders by the weighted average
                  number of common and common equivalent shares outstanding
                  (540.8 million).

                  Fully diluted earnings per common and common equivalent share
                  attributable to common stockholders for the year ended
                  December 31, 1994 was computed by dividing earnings
                  attributable to common stockholders by the weighted average
                  number of common and common equivalent shares outstanding
                  (540.8 million). Shares issuable upon conversion of the
                  Convertible Preferred Stock, Series C ("Series C Preferred
                  Stock") (see note 9) have not been included in the
                  computation of weighted average shares because their effect
                  would be anti-dilutive.

         (b)      TCI Group Stock

                  The loss attributable to TCI Group stockholders per common
                  share for the year ended December 31, 1996 and for the period
                  from the Distribution to December 31, 1995 was computed by
                  dividing net loss attributable to TCI Group Series A and
                  Series B common stockholders by the weighted average number
                  of common shares outstanding of TCI Group Stock during the
                  period (664.8 million and 656.4 million, respectively).
                  Common stock equivalents were not included in the computation
                  of weighted average shares outstanding because their
                  inclusion would be anti-dilutive.

         (c)      Liberty Group Stock

                  Primary earnings attributable to Liberty Media Group
                  stockholders per common and common equivalent share for the
                  year ended December 31, 1996 was computed by dividing net
                  earnings attributable to Liberty Media Group Series A and
                  Series B common stockholders by the weighted average number
                  of common and common equivalent shares outstanding of Liberty
                  Media Group Series A and Series B common stock during the
                  period, as adjusted for the effect of the Liberty Group Stock
                  Dividend (266.3 million).

                  Fully diluted earnings attributable to Liberty Media Group
                  stockholders per common and common equivalent share for the
                  year ended December 31, 1996 was computed by dividing
                  earnings attributable to Liberty Media Group Series A and
                  Series B common stockholders by the weighted average number
                  of common and common equivalent shares outstanding of Liberty
                  Media Group Series A and Series B common stock during the
                  period, as adjusted for the effect of the Liberty Group Stock
                  Dividend (272.4 million). Shares issuable upon conversion of
                  the Series C Preferred Stock, the Convertible Preferred
                  Stock, Series D (the "Series D Preferred Stock"), and the
                  Redeemable Convertible Liberty Media Group Preferred Stock,
                  Series H have been included in the computation of weighted
                  average shares.


                                                                    (continued)



                                     II-66
<PAGE>   131
                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


                  The loss attributable to Liberty Media Group stockholders per
                  common share for the period from the Distribution to December
                  31, 1995 was computed by dividing net loss attributable to
                  Liberty Media Group Series A and Series B common stockholders
                  by the weighted average number of common shares outstanding
                  of Liberty Group Stock during the period, as adjusted for the
                  effect of the Liberty Group Stock Dividend (246.1 million).
                  Common stock equivalents were not included in the computation
                  of weighted average shares outstanding because their
                  inclusion would be anti-dilutive.

         Estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities 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.

         Reclassifications

         Certain amounts have been reclassified for comparability with the 1996
         presentation.

(3)      Supplemental Disclosures to Consolidated Statements of Cash Flows

         Cash paid for interest was $1,056 million, $965 million and $758
         million for the years ended December 31, 1996, 1995 and 1994,
         respectively. Cash paid for income taxes was $25 million in 1996, $63
         million in 1995 and was not material in 1994.

         Significant noncash investing and financing activities are reflected
         in the following table. See also note 7 for the impact of the spin-off
         of TCI Satellite Entertainment, Inc.


<TABLE>
<CAPTION>
                                                                           Years ended
                                                                           December 31,
                                                                -------------------------------
                                                                 1996         1995        1994
                                                                -------      ------      ------
                                                                       amounts in millions
<S>                                                             <C>           <C>         <C>  
Cash paid for acquisitions:
    Fair value of assets acquired                               $ 4,998       3,571       1,921
    Liabilities assumed, net of current assets                   (1,811)       (445)       (648)
    Deferred tax liability recorded in acquisitions              (1,379)     (1,083)       (190)
    Minority interests in equity of acquired entities              (113)         49         (35)
    Note receivable from related party assumed                       --          --          15
    Common stock and preferred stock issued in acquisitions        (457)     (1,615)       (808)
    Preferred stock of subsidiaries issued in acquisitions         (640)         --          --
    Common stock issued to subsidiaries                              --          --         285
    Unrealized gains on available-for-sale securities of
      acquired entities                                              --          --        (182)
                                                                -------      ------      ------
      Cash paid for acquisitions                                $   598         477         358
                                                                =======      ======      ======
</TABLE>

                                                                    (continued)



                                     II-67
<PAGE>   132
                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>

                                                                            Years ended
                                                                            December 31,
                                                                ------------------------------------
                                                                  1996          1995         1994
                                                                ---------    ----------   ----------
                                                                         amounts in millions

<S>                                                             <C>          <C>          <C>
Exchange of consolidated subsidiaries for 
    note receivable and equity investments                      $     894            --           --
                                                                =========    ==========   ==========

Conversion of debt into additional minority 
    interest in consolidated subsidiary                         $      --            14           --
                                                                =========    ==========   ==========

Assets contributed for interest in limited 
    liability company                                           $      --             3           --
                                                                =========    ==========   ==========

Issuance of subsidiary stock for equity 
    investment                                                  $      --            11           --
                                                                =========    ==========   ==========
</TABLE>



(4)      Investments in Affiliates

         The Company has various investments accounted for under the equity
         method. The following table includes the Company's carrying value and
         percentage ownership of the more significant investments at December
         31, 1996.

<TABLE>
<CAPTION>
                                                                          December 31, 1996
                                                                ------------------------------------
                                                                Percentage                 Carrying
                                                                 Ownership                   Value
                                                                ----------                 ---------
                                                                                       amounts in millions
<S>                                                             <C>                      <C>   
Sprint Spectrum Holding Company, L.P., MinorCo, L.P.
     and PhillieCo, L.P.                                        30% - 35.3%               $     830
Teleport Communications Group, Inc. ("TCG")                        31.1%                        276
Home Shopping Network, Inc. ("HSN")                                19.9%                        142
BDTV INC. and BDTV II, INC.                                         99%                         200
Telewest Communications plc ("Telewest")                            27%                         488
Various foreign equity investments (other than Telewest)           var.                         422
Discovery Communications, Inc.                                      49%                         118
QVC, Inc.                                                           43%                         104
</TABLE>

                                                                     (continued)



                                     II-68
<PAGE>   133

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Summarized unaudited financial information for affiliates is as
         follows:


<TABLE>
<CAPTION>
                                          December 31,
                                       ------------------
                                        1996        1995
                                       -------     ------
Combined Financial Position            amounts in millions
<S>                                    <C>         <C>   
   Property and equipment, net         $ 4,770      3,464
   Franchise costs, net                  3,392      1,302
   Other assets, net                    13,287      8,127
                                       -------     ------

     Total assets                      $21,449     12,893
                                       =======     ======

   Debt                                $ 8,657      5,438
   Due to TCI                               42         47
   Other liabilities                     5,539      1,803
   Owners' equity                        7,211      5,605
                                       -------     ------

      Total liabilities and equity     $21,449     12,893
                                       =======     ======
</TABLE>

<TABLE>
<CAPTION>
                                       Years ended December 31,
                                   -------------------------------
                                     1996        1995        1994
                                   -------      ------      ------
Combined Operations                       amounts in millions

   <S>                             <C>          <C>         <C>
   Revenue                         $ 5,996       4,540       3,033
   Operating expenses               (5,488)     (3,956)     (2,678)
   Depreciation and
       amortization                 (1,037)       (542)       (261)
                                   -------      ------      ------
       Operating income (loss)        (529)         42          94
   Interest expense                   (631)       (349)       (112)
   Other, net                         (369)       (151)         13
                                   -------      ------      ------
       Net loss                    $(1,529)       (458)         (5)
                                   =======      ======      ======
</TABLE>


         The Company is a partner in a series of partnerships formed to engage
         in the business of providing wireless communications services, using
         the radio spectrum for broadband personal communications services
         ("PCS"), to residential and business customers nationwide, using the
         "Sprint" brand (the "PCS Ventures"). The PCS Ventures include Sprint
         Spectrum and MinorCo, L.P. (collectively, the "Sprint PCS
         Partnerships") and PhillieCo, L.P. ("PhillieCo"). The partners of each
         of the Sprint PCS Partnerships are subsidiaries of Sprint Corporation
         ("Sprint"), Comcast Corporation, Cox Communications, Inc. ("Cox") and
         the Company. The partners of PhillieCo are subsidiaries of Sprint, Cox
         and the Company. The Company has a 30% partnership interest in each of
         the Sprint PCS Partnerships and a 35.3% interest as a partner in
         PhillieCo.




                                     II-69
<PAGE>   134

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         The Sprint PCS Partnerships have licenses, and have affiliated with
         other entities (including PhillieCo) that have licenses, to provide
         PCS service to MTAs (or metropolitan trading areas) covering over 190
         million "Pops" (or population equivalents), based on the Donnelley
         Marketing Service estimate of the December 31, 1995 population of the
         relevant geographic areas. The Sprint PCS Partnerships' licenses,
         which cover 29 markets, were acquired in an auction conducted by the
         Federal Communications Commission ("FCC") that ended in March 1995,
         for an aggregate license cost of approximately $2.1 billion. The
         Sprint PCS Partnerships have invested in (acquiring a 49% interest)
         and affiliated with American PCS, L.P. ("APC"), which owns a PCS
         license for and operates a PCS system in the Baltimore/Washington,
         D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds
         a PCS license for the Los Angeles/San Diego MTA and currently operates
         a PCS system in San Diego, California. The Sprint PCS Partnerships may
         invest in other entities that hold PCS Licenses. PhillieCo holds the
         license for the Philadelphia MTA, which was acquired at a license cost
         of $85 million. During December 1996, the Sprint PCS Partnerships
         initiated the commercial launch of PCS service in seven markets.

         From inception through 1996, the four partners have contributed
         approximately $3.0 billion to the Sprint PCS Partnerships (of which
         the Company contributed an aggregate of approximately $0.9 billion,
         including approximately $0.2 billion during the year ended December
         31, 1996.) The remaining capital that the Sprint PCS Partnerships will
         require to fund the construction of the PCS systems and the
         commitments made to APC and Cox-California will be substantial. The
         partners had agreed in forming the Sprint PCS Partnerships to
         contribute up to an aggregate of approximately $4.2 billion of equity
         thereto, from inception through fiscal 1999, subject to certain
         requirements. The Company expects that the remaining approximately
         $1.2 billion of such amount (of which the Company's share is
         approximately $0.4 billion) will be contributed by the end of the
         second quarter of 1998 (although there can be no assurance that any
         additional capital will be contributed). The Company expects that the
         Sprint PCS Partnerships will require additional equity thereafter.

         TCG, a competitive local exchange carrier, conducted an initial public
         offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000
         shares of Class A common stock at $16.00 per share to the public for
         aggregate net proceeds of approximately $410,000,000. As a result of
         the TCG IPO, the Company's ownership interest in TCG was reduced from
         approximately 35% to approximately 31%. Accordingly, the Company
         recognized a gain amounting to $12 million (before deducting deferred
         income tax expense of approximately $5 million).

         As of April 29, 1996, Liberty Media Group, The News Corporation
         Limited ("News Corp.") and TINTA formed two sports programming
         ventures. In the United States, Liberty Media Group and News Corp.
         formed Liberty/Fox U.S. Sports LLC ("Fox Sports") into which Liberty
         Media Group contributed interests in its national and regional sports
         networks and into which News Corp. contributed its fx cable network
         and certain other assets. Liberty Media Group received a 50% interest
         in Fox Sports and $350 million in cash.

                                                                    (continued)



                                     II-70
<PAGE>   135

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Internationally, News Corp. and a limited liability company
         ("Liberty/TINTA") formed by Liberty Sports, Inc., a wholly-owned
         subsidiary of Liberty Media Group, and TINTA formed a venture ("Fox
         Sports International") to operate previously existing sports services
         in Latin America and Australia and a variety of new sports services
         throughout the world, except in Asia and in the United Kingdom, Japan
         and New Zealand where prior arrangements preclude an immediate
         collaboration. Liberty/TINTA owns 50% of Fox Sports International with
         News Corp. owning the other 50%. News Corp. contributed various
         international sports rights and certain trademark rights.
         Liberty/TINTA contributed Prime Deportiva, a Spanish language sports
         service distributed in Latin American and in Hispanic markets in the
         United States; an interest in Torneos y Competencias S.A., an
         Argentinean sports programming and production business; various
         international sports and satellite transponder rights and cash.
         Liberty/TINTA also contributed its 50% interest in Premier Sports and
         All-Star Sports. Both are Australian 24-hour sports services available
         via multichannel, multipoint distribution systems or cable television.
         Fox Sports International is accounted for using the equity method.

         As part of the formation of Fox Sports International, Liberty/TINTA is
         entitled to receive from News Corp. 7.5% of the outstanding stock of
         Star Television Limited. Upon delivery of such stock to Liberty/TINTA,
         News Corp. is entitled to receive from Liberty/TINTA $20 million and
         rights under various Asian sports programming agreements. Star
         Television Limited operates a satellite-delivered television platform
         in Asia.

         Pursuant to an agreement among Liberty Media Group, Barry Diller and
         certain of their respective affiliates entered into in August 1995 and
         amended in August 1996 (the "BDTV Agreement"), Liberty Media Group
         contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the
         "Option") to purchase 2 million shares of Class B common stock of
         Silver King Communications, Inc. ("Silver King") (which shares
         represented voting control of Silver King at such time) and $3,500,000
         in cash, representing the exercise price of the Option. BDTV-I is a
         corporation formed by Liberty Media Group and Mr. Diller pursuant to
         the BDTV Agreement, in which Liberty Media Group owns over 99% of the
         equity and none of the voting power (except for protective rights with
         respect to certain fundamental corporate actions) and Mr. Diller owns
         less than 1% of the equity and all of the voting power. BDTV-I
         exercised the option shortly after its contribution, thereby becoming
         the controlling stockholder of Silver King. Such change in control of
         Silver King had been approved by the FCC in June 1996, subject,
         however, to the condition that the equity interest of Liberty Media
         Group in Silver King not exceed 21.37% without the prior approval of
         the FCC (the "FCC Order").


                                                                    (continued)



                                     II-71
<PAGE>   136

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Pursuant to an Agreement and Plan of Exchange and Merger entered into
         in August 1996, Silver King acquired Home Shopping Network, Inc.
         ("HSN") by merger of HSN with a subsidiary of Silver King in December
         1996 (the "HSN Merger") where HSN is the surviving corporation and a
         subsidiary of Silver King following the HSN Merger. Liberty Media
         Group accounted for the HSN Merger as a sale of a portion of its
         investment in HSN and accordingly, recorded a pre-tax gain of
         approximately $47 million. In order to effect the HSN Merger in
         compliance with the FCC Order, Liberty Media Group agreed to defer
         receiving certain shares of Silver King that would otherwise have
         become issuable to it in the HSN Merger until such time as it was
         permitted to own such shares. As a result, the HSN Merger was
         structured so that Liberty Media Group received (i) 7,809,111 shares
         of Class B common stock of Silver King, all of which shares Liberty
         Media Group contributed to BDTV II INC. ("BDTV-II"), (ii) the
         contractual right (the "Contingent Right") to be issued up to an
         additional 2,591,752 shares of Class B common stock of Silver King
         from time to time upon the occurrence of certain events which would
         allow Liberty Media Group to own additional shares in compliance with
         the FCC Order (including events resulting in the dilution of Liberty
         Media Group's percentage equity interest), and (iii) 739,141 shares of
         Class B common stock and 17,566,702 shares of common stock of HSN
         (representing approximately 19.9% of the equity of HSN). BDTV-II is a
         corporation formed by Liberty Media Group and Barry Diller pursuant to
         the BDTV Agreement, in which the relative equity ownership and voting
         power of Liberty Media Group and Mr. Diller are substantially the same
         as their respective equity ownership and voting power in BDTV-I.

         As a result of the HSN Merger, HSN is no longer a subsidiary of
         Liberty Media Group and therefore, the financial results of HSN will
         no longer be consolidated with the financial results of Liberty Media
         Group. Although Liberty Media Group no longer possesses voting control
         over HSN, it continues to have an indirect equity interest in HSN
         through its ownership of the equity securities of BDTV-I and BDTV-II
         as well as a direct interest in HSN which would be exchangeable into
         shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II are
         accounted for using the equity method.

         Telewest is a company that is currently operating and constructing
         cable television and telephone systems in the United Kingdom ("UK").
         Telewest was formed on October 3, 1995 upon the merger (the "TeleWest
         Merger") of TeleWest Communications plc ("TeleWest Communications")
         with SBC (CableComms) (UK). Prior to the TeleWest Merger, the Company
         had an effective ownership interest of approximately 36% in TeleWest
         Communications. As a result of the TeleWest Merger, the Company
         recognized a gain of approximately $165 million (before deducting
         deferred income taxes of $58 million), which gain represents the
         difference between the Company's recorded cost for TeleWest
         Communications and the Company's 27% effective proportionate share of
         Telewest's net assets.

         Telewest contributed $109 million, $70 million and $43 million of the
         Company's share of its affiliates' losses during the years ended
         December 31, 1996, 1995 and 1994, respectively. In addition, the
         Company has other less significant equity method investments in video
         distribution and programming businesses located in the UK, other parts
         of Europe, Asia, Latin America and certain other foreign countries. In
         the aggregate, such other equity method investments accounted for $79
         million, $62 million and $50 million of the Company's share of its
         affiliates' losses in 1996, 1995 and 1994, respectively.

                                                                    (continued)



                                     II-72
<PAGE>   137

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         As a result of TeleWest Communications' November 1994 initial public
         offering and the associated dilution of the Company's ownership
         interest of TeleWest Communications, the Company recognized a gain
         amounting to $161 million (before deducting the related tax expense of
         $57 million).

         Certain of the Company's affiliates are general partnerships and any
         subsidiary of the Company that is a general partner in a general
         partnership is, as such, liable as a matter of partnership law for all
         debts (other than non-recourse debts) of that partnership in the event
         liabilities of that partnership were to exceed its assets.

(5)      Investment in Time Warner

         At December 31, 1995, TCI owned shares of TBS common stock and shares
         of TBS preferred stock that were convertible into TBS common stock.
         The Company's total holdings represented an approximate 7.5% voting
         interest for those matters which preferred and common voted as a
         single class. On October 10, 1996, Time Warner and TBS consummated a
         merger (the "TBS/Time Warner Merger") whereby TBS shareholders
         received 0.75 of a Time Warner common share for each TBS Class A and
         Class B common share held, and each holder of TBS Class C preferred
         stock received 0.80 of a Time Warner common share for each of the 6
         shares of TBS Class B common stock into which each share of Class C
         preferred stock could have been converted.

         Time Warner, TBS, TCI and Liberty Media Corporation ("Liberty")
         entered into an Agreement Containing Consent Order with the Federal
         Trade Commission ("FTC") dated August 14, 1996, as amended on
         September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC
         Consent Decree, among other things, Liberty agreed to exchange the
         shares of Time Warner common stock to be received in the TBS/Time
         Warner Merger for shares of a separate series of Time Warner common
         stock with limited voting rights (the "TW Exchange Stock"). Holders of
         the TW Exchange Stock are entitled to one one-hundredth (l/100th) of a
         vote for each share with respect to the election of directors. Holders
         of the TW Exchange Stock will not have any other voting rights, except
         as required by law or with respect to limited matters, including
         amendments of the terms of the TW Exchange Stock adverse to such
         holders. Subject to the federal communications laws, each share of the
         TW Exchange Stock will be convertible at any time at the option of the
         holder on a one-for-one basis for a share of Time Warner common stock.
         Holders of TW Exchange Stock are entitled to receive dividends ratably
         with the Time Warner common stock and to share ratably with the
         holders of Time Warner common stock in assets remaining for common
         stockholders upon dissolution, liquidation or winding up of Time
         Warner.

         In connection with the TBS/Time Warner Merger, the Company received
         approximately 50.6 million shares of the TW Exchange Stock in exchange
         for its TBS holdings. As a result of the TBS/Time Warner Merger, the
         Company recognized a pre-tax gain of approximately $1.5 billion in the
         fourth quarter of 1996.

         At December 31, 1996, the Company's investment in Time Warner, carried
         at cost, had an aggregate fair value of approximately $2 billion based
         upon the market value of the marketable common stock into which it is
         convertible. 


                                                                    (continued)



                                     II-73
<PAGE>   138

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         Subject to a number of conditions, including receipt of a ruling from
         the Internal Revenue Service ("IRS") that such dividend would be tax
         free to the Liberty Media Group stockholders, TCI agreed that it would
         distribute in the form of a stock dividend (the "Spin-Off") to the
         Liberty Media Group stockholders the stock of a new company ("Spinco")
         which would hold the TW Exchange Stock and the business of Southern
         Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary of
         Liberty Media Group which distributes the TBS SuperStation signal in
         the United States and Canada. The level of Liberty Media Group's
         ownership interest in Time Warner will be restricted until the
         Spin-Off occurs, at which time, such restriction would be eased for
         Spinco.

         If the Spin-Off occurs, certain control stockholders of TCI would
         exchange the Spinco common stock they receive for a Spinco convertible
         preferred security which would only be entitled to vote on major
         corporate transactions involving Spinco.

         In connection with the TBS/Time Warner Merger, Liberty and Time Warner
         entered into, among other agreements, an agreement providing for the
         grant to Time Warner of an option (the "Contract Option") to enter
         into a contract with Southern (the "Distribution Contract") pursuant
         to which Southern would provide Time Warner with certain uplinking and
         distribution services relating to WTBS and would assist Time Warner in
         converting WTBS from a superstation into a copyright paid cable
         programming service. The Contract Option will be granted no later than
         the fifth business day following the earlier of May 31, 1997, the
         receipt of a favorable IRS ruling and the determination that the IRS
         ruling will not be obtained. On the date of grant, Time Warner will
         issue to Southern, in consideration for the Contract Option and
         certain noncompetition covenants, an aggregate of 5.0 million shares
         of TW Exchange Stock and $66,666,700, payable to Time Warner's option
         in cash or TW Exchange Stock. If Time Warner exercises the Contract
         Option and enters into the Distribution Contract, Time Warner will be
         obligated to make quarterly payments to Southern in an amount which,
         when added to Southern's net cash flow, would aggregate approximately
         $213.3 million on a present value basis discounted to the effective
         date of the Distribution Contract.

(6)      Acquisitions

         On July 31, 1996, pursuant to certain agreements entered into among
         TCIC, a subsidiary of TCI, TCI, Viacom International, Inc. and Viacom,
         Inc. ("Viacom"), TCIC acquired all of the common stock of a subsidiary
         of Viacom ("Cable Sub") which owned Viacom's cable systems and related
         assets (the "Viacom Acquisition").

         The transaction was structured as a tax-free reorganization in which
         Cable Sub transferred all of its non-cable assets, as well as all of
         its liabilities other than current liabilities, to a new subsidiary of
         Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom
         Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility
         (the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following
         these transfers, Cable Sub retained cable assets with a value at
         closing of approximately $2.326 billion and the obligation to repay
         the Loan Proceeds. Neither Viacom nor New Viacom Sub has any
         obligation with respect to repayment of the Loan Proceeds.


                                                                    (continued)



                                     II-74
<PAGE>   139

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Prior to the consummation of the Viacom Acquisition, Viacom offered to
         the holders of shares of Viacom Class A Common Stock and Viacom Class
         B Common Stock (collectively, "Viacom Common Stock") the opportunity
         to exchange (the "Exchange Offer") a portion of their shares of Viacom
         Common Stock for shares of Class A Common Stock, par value $100 per
         share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following
         the completion of the Exchange Offer, TCIC acquired from Cable Sub
         shares of Cable Sub Class B Common Stock (the "Share Issuance") for
         $350 million (which was used to reduce Cable Sub's obligations under
         the Loan Facility). At the time of the Share Issuance, the Cable Sub
         Class A Stock received by Viacom stockholders pursuant to the Exchange
         Offer automatically converted into 5% Class A Senior Cumulative
         Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") of
         Cable Sub with a stated value of $100 per share (the "Stated Value").
         The Exchangeable Preferred Stock is exchangeable, at the option of the
         holder commencing after the fifth anniversary of the date of issuance,
         for shares of Series A TCI Group Stock at an exchange rate of 5.447
         shares of Series A TCI Group Stock for each share of Exchangeable
         Preferred Stock exchanged. The Exchangeable Preferred Stock is subject
         to redemption, at the option of Cable Sub, after the fifth anniversary
         of the date of issuance, initially at a redemption price of $102.50
         per share and thereafter at prices declining ratably annually to $100
         per share on and after the eighth anniversary of the date of issuance,
         plus accrued and unpaid dividends to the date of redemption. The
         Exchangeable Preferred Stock is also subject to mandatory redemption
         on the tenth anniversary of the date of issuance at a price equal to
         the Stated Value per share plus accrued and unpaid dividends. Amounts
         payable by Cable Sub in satisfaction of its optional or mandatory
         redemption obligations with respect to the Exchangeable Preferred
         Stock may be made in cash or, at the election of Cable Sub, in shares
         of Series A TCI Group Stock, or in any combination of the foregoing.

         The Viacom Acquisition has been accounted for by the purchase method.
         Accordingly, the results of operations of Cable Sub have been
         consolidated with those of the Company since the date of acquisition,
         and the Company recorded Cable Sub's assets and liabilities at fair
         value. On a pro forma basis, the Company's revenue, net loss, and net
         loss per share of TCI Group Stock would have been increased by $280
         million, $55 million and $.08, respectively, for the year ended
         December 31, 1996; and revenue, net loss, net loss per share of TCI
         Group Stock and net loss per share of TCI Class A Common Stock would
         have been increased by $446 million, $115 million, $.07 and $.10,
         respectively, for the year ended December 31, 1995 had Cable Sub been
         consolidated with the Company on January 1, 1995. The foregoing
         unaudited pro forma financial information is based upon historical
         results of operations adjusted for acquisition costs and, in the
         opinion of management, is not necessarily indicative of the results
         had the Company operated Cable Sub since January 1, 1995.

         As of January 26, 1995, TCI, TCIC and TeleCable Corporation
         ("TeleCable") consummated a transaction, whereby TeleCable was merged
         into TCIC. The aggregate $1.6 billion purchase price was satisfied by
         TCIC's assumption of approximately $300 million of TeleCable's net
         liabilities and the issuance to TeleCable's shareholders of
         approximately 42 million shares of TCI Class A common stock and 1
         million shares of Series D Preferred Stock with an aggregate initial
         liquidation value of $300 million (see note 9).

                                                                    (continued)



                                     II-75


<PAGE>   140
                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         On April 25, 1995, TINTA acquired a 51% ownership interest in
         Cablevision for a purchase price of $282 million, before liabilities
         assumed. The purchase price was paid with cash consideration of $195
         million and TINTA's issuance of $87 million principal amount of
         secured negotiable promissory notes payable to the selling
         shareholders. TINTA has an option during the two-year period ended
         April 25, 1997 to increase its ownership interest in Cablevision up to
         80% at a cost per subscriber similar to the initial purchase price,
         adjusted however for certain fluctuations in applicable foreign
         currency exchange rates.

(7)      Spin-Off of TCI Satellite Entertainment, Inc.

         Through December 4, 1996, the Company had an investment in a direct
         broadcast satellite partnership, PRIMESTAR Partners L.P.
         ("Primestar"), which the Company accounted for under the equity
         method. Primestar provides programming and marketing support to each
         of its cable partners who provide satellite television service to
         their customers. On December 4, 1996, the Company distributed (the
         "Satellite Spin-off") to the holders of shares of TCI Group Stock all
         of the issued and outstanding common stock of TCI Satellite
         Entertainment, Inc. ("Satellite"). At the time of the Satellite
         Spin-off, Satellite's assets and operations included the Company's
         interest in Primestar, the Company's business of distributing
         Primestar programming and two communications satellites. As a result
         of the Satellite Spin-off, Satellite's operations are no longer
         consolidated with the Company's. In addition, the Satellite Spin-off
         effected a change in the conversion rate for each of the Company's
         equity and debt securities that are convertible into Series A TCI
         Group Stock. See notes 8, 9 and 11.

         Summarized financial information of Satellite as of and through the
         date of the Satellite Spin-off is as follows (amounts in millions):


<TABLE>
<S>                                             <C>
Financial Position
   Cash, receivables and other assets           $   104
   Investment in PRIMESTAR Partners L.P.             32
   Property and equipment, net                    1,111
                                                -------
                                                $ 1,247
                                                =======

   Accounts payable and accrued liabilities     $    60
   Due to PRIMESTAR Partners L.P.                   458
   Due to TCI                                       324
   Equity                                           405
                                                -------
                                                $ 1,247
                                                =======
Operations
   Revenue                                      $   377
   Operating expenses                              (373)
   Depreciation                                    (166)
                                                -------
     Loss before income tax benefit                (162)
   Income tax benefit                                53
     Net loss                                   $  (109)
                                                =======
</TABLE>


                                                                    (continued)



                                     II-76


<PAGE>   141



                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(8)      Debt

         Debt is summarized as follows:

<TABLE>
<CAPTION>
                                     Weighted average                   December 31,
                                     interest rate at          ------------------------------
                                     December 31, 1996            1996              1995
                                     -----------------         ------------    --------------
                                                                    amounts in millions
<S>                                         <C>                <C>             <C>
Debt of subsidiaries:                
    Notes payable                           8.3%               $      9,308             7,713
    Bank credit facilities                  6.6%                      4,813             3,854
    Commercial paper                        6.1%                        638             1,469
    Convertible notes (a)                   9.5%                         43                45
    Other debt                                                          124               130
                                                               ------------    --------------
                                                               $     14,926            13,211
                                                               ============    ==============
</TABLE>


         (a)      These convertible notes, which are stated net of unamortized
                  discount of $178 million and $186 million at December 31,
                  1996 and 1995, respectively, mature on December 18, 2021. The
                  notes require (so long as conversion of the notes has not
                  occurred) an annual interest payment through 2003 equal to
                  1.85% of the face amount of the notes. During 1996, certain
                  of these notes were converted into 1,623,800 shares of Series
                  A TCI Group Stock and 608,925 shares of Series A Liberty
                  Group Stock. During 1995 and 1994, certain of these notes
                  were converted into 3,416 shares and 2,350,000 shares of TCI
                  Class A common stock, respectively. At December 31, 1996, the
                  notes were convertible, at the option of the holders, into an
                  aggregate of 37,083,773 shares of Series A TCI Group Stock
                  and 13,906,404 shares of Series A Liberty Group Stock (as
                  adjusted to give effect to the Liberty Group Stock Dividend).

         During the year ended December 31, 1996, in order to reduce future
         interest costs, the Company redeemed certain notes payable which had
         an aggregate principle balance of $904 million and fixed interest
         rates ranging from 7.88% to 10.44% (the "Redemption"). In connection
         with the Redemption, the Company recognized a loss on early
         extinguishment of debt of $62 million. Such loss related to prepayment
         penalties amounting to $60 million and the retirement of deferred loan
         costs.

         Also, during the year ended December 31, 1996, certain subsidiaries of
         the Company terminated, at such subsidiaries' option, certain
         revolving bank credit facilities with aggregate commitments of
         approximately $2 billion and refinanced certain other bank credit
         facilities. In connection with such termination and refinancings, the
         Company recognized a loss on early extinguishment of debt of $9
         million related to the retirement of deferred loan costs. At December
         31, 1996, subsidiaries of the Company had approximately $1.8 billion
         in unused lines of credit, excluding amounts related to lines of
         credit which provide availability to support commercial paper.

         The bank credit facilities and various other debt instruments of the
         Company's subsidiaries generally contain restrictive covenants which
         require, among other things, the maintenance of certain earnings,
         specified cash flow and financial ratios (primarily the ratios of cash
         flow to total debt and cash flow to debt service, as defined), and
         include certain limitations on indebtedness, investments, guarantees,
         dispositions, stock repurchases and/or dividend payments.

                                                                    (continued)



                                     II-77
<PAGE>   142

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         As security for borrowings under one of its bank credit facilities,
         the Company has pledged 116,853,195 shares of Series A TCI Group Stock
         held by a subsidiary of the Company. As security for borrowings under
         another of its credit facilities, TCI has pledged a portion of its
         Time Warner common stock.

         The fair value of the debt of the Company's subsidiaries is estimated
         based on 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. The fair value of debt, which has a carrying
         value of $14,926 million, was $15,523 million at December 31, 1996.

         In order to achieve the desired balance between variable and fixed
         rate indebtedness, the Company has entered into various interest rate
         exchange agreements pursuant to which it (i) pays fixed interest rates
         (the "Fixed Rate Agreements") ranging from 7.2% to 9.3% and receives
         variable interest rates on notional amounts of $310 million at
         December 31, 1996 and (ii) pays variable interest rates (the "Variable
         Rate Agreements") and receives fixed interest rates ranging from 4.8%
         to 7.4% on notional amounts of $1,750 million at December 31, 1996.
         During the years ended December 31, 1996, 1995 and 1994, the Company's
         net payments pursuant to the Fixed Rate Agreements were $14 million,
         $13 million and $26 million, respectively; and the Company's net
         receipts (payments) pursuant to the Variable Rate Agreements were $15
         million, (less than $1 million), and $36 million, respectively. During
         the year ended December 31, 1996, the Company terminated certain
         Variable Rate Agreements with an aggregate notional amount of $700
         million. The Company received $16 million upon such terminations.
         After giving effect to the Company's interest rate exchange
         agreements, approximately 49% of the Company's indebtedness bears
         interest at fixed rates.

         The Company's Fixed Rate Agreements and Variable Rate Agreements
         expire as follows (amounts in millions, except percentages):

<TABLE>
<CAPTION>

                Fixed Rate Agreements                               Variable Rate Agreements
     -------------------------------------------        ---------------------------------------------
     Expiration         Interest Rate    Notional       Expiration        Interest Rate     Notional
        Date             To Be Paid       Amount           Date           To Be Received     Amount
     ----------         -------------    -------        ----------        --------------    ---------
<S>                      <C>             <C>            <C>                   <C>           <C>
October 1997             7.2%-9.3%       $   80         April 1997               7.0%       $     200
December 1997                8.7%           230         September 1998         4.8%-5.4%          450
                                         ------          April 1999              7.4%              50
                                         $  310         February 2000          5.8%-6.6%          300
                                         ======          March 2000            5.8%-6.0%          675
                                                        September 2000         5.1%                75
                                                                                            ---------
                                                                                            $   1,750
                                                                                            =========
</TABLE>


         The Company is exposed to credit losses for the periodic settlements
         of amounts due under these interest rate exchange agreements in the
         event of nonperformance by the other parties to the agreements.
         However, the Company does not anticipate that it will incur any
         material credit losses because it does not anticipate nonperformance
         by the counterparties.


                                                                    (continued)



                                     II-78
<PAGE>   143

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         The fair value of the interest rate exchange agreements is the
         estimated amount that the Company would pay or receive to terminate
         the agreements at December 31, 1996, taking into consideration current
         interest rates and assuming the current creditworthiness of the
         counterparties. At December 31, 1996, the Company would be required to
         pay an estimated $15 million to terminate the Variable Rate Agreements
         and an estimated $7 million to terminate the Fixed Rate Agreements.

         Certain of TCI's subsidiaries are required to maintain unused
         availability under bank credit facilities to the extent of outstanding
         commercial paper. Also, certain of TCI's subsidiaries pay fees ranging
         from 1/4% to 1/2% per annum on the average unborrowed portion of the
         total amount available for borrowings under bank credit facilities.

         Annual maturities of debt for each of the next five years are as
         follows (amounts in millions):

<TABLE>
                  <S>                 <C>                
                  1997                $   1,418*
                  1998                      490
                  1999                      721
                  2000                      766
                  2001                    1,079
</TABLE>

                  * Includes $638 million of commercial paper.

(9)      Redeemable Preferred Stocks

         The conversion rates identified below for the redeemable preferred
         stocks that are convertible into Series A TCI Group Stock were
         adjusted, as applicable, on December 4, 1996 as a result of the
         Satellite Spin-off. See note 7. The conversion rates for the
         redeemable preferred stocks that are convertible into Series A Liberty
         Group Stock have been adjusted to give effect to the Liberty Group
         Stock Dividend. See note 1.

         Convertible Preferred Stock, Series C. TCI issued 70,575 shares of a
         series of TCI Series Preferred Stock designated "Convertible Preferred
         Stock, Series C," par value $.01 per share, as partial consideration
         for an acquisition by TCI. There were 80,000 shares of Series C
         Preferred Stock authorized and 70,575 shares outstanding at December
         31, 1996.

         Each share of Series C Preferred Stock is convertible, at the option
         of the holders, into 116.24 shares of Series A TCI Group Stock and 37
         shares of Series A Liberty Group Stock, subject to anti-dilution
         adjustments. The dividend, liquidation and redemption features of the
         Series C Preferred Stock will be determined by reference to the
         liquidation value of the Series C Preferred Stock, which as of any
         date of determination is equal, on a per share basis, to the sum of
         (i) $2,375, plus (ii) all dividends accrued on such share through the
         dividend payment date on or immediately preceding such date of
         determination to the extent not paid on or before such date, plus
         (iii), for purposes of determining liquidation and redemption
         payments, all unpaid dividends accrued on the sum of clauses (i) and
         (ii) above, to such date of determination.


                                                                    (continued)



                                     II-79
<PAGE>   144

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Subject to the prior preferences and other rights of any class or
         series of TCI preferred stock ranking pari passu with the Series C
         Preferred Stock, the holders of Series C Preferred Stock are entitled
         to receive and, subject to any prohibition or restriction contained in
         any instrument evidencing indebtedness of TCI, TCI is obligated to pay
         preferential cumulative cash dividends out of funds legally available
         therefor. Dividends accrue cumulatively at an annual rate of 5-1/2% of
         the liquidation value per share, whether or not such dividends are
         declared or funds are legally or contractually available for payment
         of dividends, except that if TCI fails to redeem shares of Series C
         Preferred Stock required to be redeemed on a redemption date,
         dividends will thereafter accrue cumulatively at an annual rate of 15%
         of the liquidation value per share. Accrued dividends are payable
         quarterly on January 1, April 1, July 1 and October 1 of each year,
         commencing on the first dividend payment date after the issuance of
         the Series C Preferred Stock. Dividends not paid on any dividend
         payment date will be added to the liquidation value on such date and
         remain a part thereof until such dividends and all dividends accrued
         thereon are paid in full. Dividends accrue on unpaid dividends at the
         rate of 5-1/2% per annum, unless such dividends remain unpaid for two
         consecutive quarters in which event such rate will increase to 15% per
         annum. The Series C Preferred Stock ranks prior to the Series A TCI
         Group Stock, Series A Liberty Group Stock and Class B Preferred Stock
         and pari passu with the Series F Preferred Stock with respect to the
         declaration and payment of dividends.

         Upon the dissolution, liquidation or winding up of TCI, holders of the
         Series C Preferred Stock will be entitled to receive from the assets
         of TCI available for distribution to stockholders an amount in cash,
         per share, equal to the liquidation value. The Series C Preferred
         Stock will rank prior to the TCI common stock and Class B Preferred
         Stock and pari passu with the Series F Preferred Stock as to any such
         distributions.

         The Series C Preferred Stock is subject to optional redemption at any
         time after the seventh anniversary of its issuance, in whole or in
         part, by TCI at a redemption price, per share, equal to the then
         liquidation value of the Series C Preferred Stock. Subject to the
         rights of any other class or series of the Company's preferred stock
         ranking pari passu with the Series C Preferred Stock, the Series C
         Preferred Stock is required to be redeemed by the Company at any time
         after such seventh anniversary at the option of the holder, in whole
         or in part (provided that the aggregate liquidation value of the
         shares to be redeemed is in excess of $1 million), in each case at a
         redemption price, per share, equal to the liquidation value.

                                                                    (continued)



                                     II-80
<PAGE>   145

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         For so long as any dividends are in arrears on the Series C Preferred
         Stock or any class or series of TCI preferred stock ranking pari passu
         with the Series C Preferred Stock and until all dividends accrued up
         to the immediately preceding dividend payment date on the Series C
         Preferred Stock and such parity stock shall have been paid or declared
         and set apart so as to be available for payment in full thereof and
         for no other purpose, TCI may not redeem or otherwise acquire any
         shares of Series C Preferred Stock, any such parity stock or any class
         or series of its preferred stock ranking junior (including the TCI
         common stock and the Series C Preferred Stock) unless all then
         outstanding shares of Series C Preferred Stock and such parity stock
         are redeemed. If TCI fails to redeem shares of Series C Preferred
         Stock required to be redeemed on a redemption date, and until all such
         shares are redeemed in full, TCI may not redeem any such parity stock
         or junior stock, or otherwise acquire any shares of such stock or
         Series C Preferred Stock. Nothing contained in the two immediately
         preceding sentences shall prevent TCI from acquiring (i) shares of
         Series C Preferred Stock and any such parity stock pursuant to a
         purchase or exchange offer made to holders of all outstanding shares
         of Series C Preferred Stock and such parity stock, if (a) as to
         holders of all outstanding shares of Series C Preferred Stock, the
         terms of the purchase or exchange offer for all such shares are
         identical, (b) as to holders for all outstanding shares of a
         particular series or class of parity stock, the terms of the purchase
         or exchange offer for all such shares are identical and (c) as among
         holders of all outstanding shares of Series C Preferred Stock and
         parity stock, the terms of each purchase or exchange offer are
         substantially identical relative to the respective liquidation prices
         of the shares of Series C Preferred Stock and each series or class of
         such parity stock, or (ii) shares of Series C Preferred Stock, parity
         stock or junior stock in exchange for, or through the application of
         the proceeds of the sale of, shares of junior stock.

         The Series C Preferred Stock is subject to restrictions on transfer
         although it has certain customary registration rights with respect to
         the underlying shares of TCI Group and Liberty Group Stock. The Series
         C Preferred Stock may vote on all matters submitted to a vote of the
         holders of the TCI common stock, has one vote for each share of TCI
         Group and Liberty Group Stock into which the shares of Series C
         Preferred Stock are converted for such purpose, and may vote as a
         single class with the TCI common stock. The Series C Preferred Stock
         has no other voting rights except as required by the Delaware General
         Corporation Law ("DGCL") and except that the consent of the holders of
         record of shares representing at least two-thirds of the liquidation
         value of the outstanding shares of the Series C Preferred Stock is
         necessary to (i) amend the designation, rights, preferences and
         limitations of the Series C Preferred Stock as set forth in the TCI
         Charter and (ii) to create or designate any class or series of TCI
         preferred stock that would rank prior to the Series C Preferred Stock.

         Convertible Preferred Stock, Series D. The Company issued 1,000,000
         shares of a series of TCI Series Preferred Stock designated
         "Convertible Preferred Stock, Series D", par value $.01 per share, as
         partial consideration for the merger between TCIC and TeleCable (see
         note 6). At December 31, 1996, there were 997,222 shares of Series D
         Preferred Stock outstanding.

                                                                    (continued)



                                     II-81
<PAGE>   146

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         The holders of the Series D Preferred Stock shall be entitled to
         receive, when and as declared by the Board out of unrestricted funds
         legally available therefor, cumulative dividends, in preference to
         dividends on any stock that ranks junior to the Series D Preferred
         Stock (currently the TCI Group Stock, the Liberty Group Stock and the
         Class B Preferred Stock), that shall accrue on each share of Series D
         Preferred stock at the rate of 5-1/2% per annum of the liquidation
         value ($300 per share). Dividends are cumulative, and in the event
         that dividends are not paid in full on two consecutive dividend
         payment dates or in the event that TCI fails to effect any required
         redemption of Series D Preferred Stock, accrue at the rate of 10% per
         annum of the liquidation value. The Series D Preferred Stock ranks on
         parity with the Series C Preferred Stock and the Series F Preferred
         Stock.

         Each share of Series D Preferred Stock is convertible into 10 shares
         of Series A TCI Group Stock and 3.5 shares of Series A Liberty Group
         Stock, subject to adjustment upon certain events specified in the
         certificate of designation establishing Series D Preferred Stock. In
         addition to the aforementioned shares of TCI common stock, holders of
         Series D Preferred Stock are entitled to one share of Satellite common
         stock for each share of Series D Preferred Stock converted. Such
         shares of Satellite common stock represent the number of shares of
         Satellite common stock that they would have received had they
         converted their Series D Preferred Stock into TCI Group Stock prior to
         the Satellite Spin-off. To the extent any cash dividends are not paid
         on any dividend payment date, the amount of such dividends will be
         deemed converted into shares of TCI common stock at a conversion rate
         equal to 95% of the then current market price of common stock, and
         upon issuance of common stock to holders of Series D Preferred Stock
         in respect of such deemed conversion, such dividend will be deemed
         paid for all purposes.

         Shares of Series D Preferred Stock are redeemable for cash at the
         option of the holder at any time after the tenth anniversary of the
         issue date at a price equal to the liquidation value in effect as of
         the date of the redemption. Shares of Series D Preferred Stock may
         also be redeemed for cash at the option of TCI after the fifth
         anniversary of the issue date at such redemption price or after the
         third anniversary of the issue date if the market value per share
         exceeds certain defined levels for periods specified in the
         certificate of designation.

         If TCI fails to effect any required redemption of Series D Preferred
         Stock, the holders thereof will have the option to convert their
         shares of Series D Preferred Stock into common stock at a conversion
         rate of 95% of the then current market value of common stock, provided
         that such option may not be exercised unless the failure to redeem
         continues for more than a year.

         Except as required by law, holders of Series D Preferred Stock are not
         entitled to vote on any matters submitted to a vote of the
         stockholders of TCI.


                                                                    (continued)



                                     II-82
<PAGE>   147

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Convertible Redeemable Participating Preferred Stock, Series F. The
         Company is authorized to issue 500,000 shares of Series F Preferred
         Stock, par value $.01 per share. Subsidiaries of TCI hold all the
         issued and outstanding shares (278,307 shares). Immediately prior to
         the record date for the Distribution, the Company caused each of its
         subsidiaries holding Subsidiary Shares to exchange such shares for
         shares of Series F Preferred Stock having an aggregate value of not
         less than that of the Subsidiary Shares so exchanged. Subsidiaries of
         TCI exchanged all of the Subsidiary Shares for 355,141 shares of
         Series F Preferred Stock. Subsequent to such exchange, a holder of
         78,077 shares of Series F Preferred Stock converted its holdings into
         100,524,364 shares of Series A TCI Group Stock.

         Each holder of Series F Preferred Stock has the right to receive upon
         conversion 1,496.65 shares of Series A TCI Group Stock. The
         anti-dilution provisions of the Series F Preferred Stock provide that
         the conversion rate of the Series F Preferred Stock will be adjusted
         by increasing the number of shares of Series A TCI Group Stock
         issuable upon conversion in the event of any non-cash dividend or
         distribution of the Series A TCI Group Stock to give effect to the
         value of the securities, assets or other property so distributed;
         however, no such adjustment shall entitle the holder to receive the
         actual security, asset or other property so distributed upon the
         conversion of shares of Series F Preferred Stock.

         The holders of the Series F Preferred Stock are entitled to
         participate, on an as-converted basis, with the holders of the Series
         A TCI Group Stock, with respect to any cash dividends or distribution
         declared and paid on the Series A TCI Group Stock. Dividends or
         distribution on the Series A TCI Group Stock which are not paid in
         cash would result in the adjustment of the applicable conversion rate
         as described above.

         Upon the dissolution, liquidation or winding up of the Company,
         holders of the Series F Preferred Stock will be entitled to receive
         from the assets of the Company available for distribution to
         stockholders an amount, in cash or property or a combination thereof,
         per share of Series F Preferred Stock, equal to the sum of (x) $.01
         and (y) the amount to be distributed per share of Series A TCI Group
         Stock in such liquidation, dissolution or winding up multiplied by the
         applicable conversion rate of a share of Series F Preferred Stock.

         The Series F Preferred Stock is subject to optional redemption by the
         Company at any time after its issuance, in whole or in party, at a
         redemption price, per share, equal to the issue price of a share of
         Series F Preferred Stock (as adjusted in respect of stock splits,
         reverse splits and other events affecting the shares of Series F
         Preferred Stock), plus any dividends which have been declared but are
         unpaid as of the date fixed for such redemption. The Company may elect
         to pay the redemption price (or designated portion thereof) of the
         shares of Series F Preferred Stock called for redemption by issuing to
         the holder thereof, in respect of its shares to be redeemed, a number
         of shares of Series A TCI Group Stock equal to the aggregate
         redemption price (or designated portion thereof) of such shares
         divided by the average of the last sales prices of the Series A TCI
         Group Stock for a period specified, and subject to the adjustments
         described, in the certificate of designation establishing the Series F
         Preferred Stock.


                                                                    (continued)



                                     II-83
<PAGE>   148

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G
         Preferred Stock") and Redeemable Convertible Liberty Media Group
         Preferred Stock, Series H ("Series H Preferred Stock"). In January,
         1996, TCI issued 7,259,380 shares of a series of TCI Series Preferred
         Stock designated "Redeemable Convertible TCI Group Preferred Stock,
         Series G" and 7,259,380 shares of a series of TCI Series Preferred
         Stock designated "Redeemable Convertible Liberty Media Group Preferred
         Stock, Series H" as consideration for an acquisition. At December 31,
         1996, there were 6,695,427 shares of each of Series G Preferred Stock
         and Series H Preferred Stock outstanding.

         The initial liquidation value for the Series G Preferred Stock and
         Series H Preferred Stock is $21.60 per share and $5.40 per share,
         respectively, subject in both cases, to increase in an amount equal to
         aggregate accrued but unpaid dividends, if any. Dividends will begin
         to accrue on the Series G and Series H Preferred Stock on the first
         anniversary of issuance of the Series G and Series H Preferred Stock,
         and will thereafter be payable semi-annually commencing August 1,
         1997, at the rate of 4% per annum on the liquidation value. Any
         dividends paid on the Series G and Series H Preferred Stock may be
         paid, at TCI's election, in cash or shares of TCI Group Stock.
         Additional dividends will accrue on unpaid dividends initially at a
         rate of 4% per annum. The dividend rate on dividends that remain
         unpaid for six months will increase to 8.625% per annum.

         Each share of Series G Preferred Stock is convertible at the option of
         the holder at any time prior to the close of business on the last
         business day prior to redemption into 1.19 shares of Series A TCI
         Group Stock and each share of Series H Preferred Stock is convertible
         at any time prior to the close of business on the last business day
         prior to redemption into .2625 shares of Series A Liberty Group Stock.
         However, the shares of Series A Liberty Group Stock issuable upon
         conversion of the Series H Preferred Stock shall be adjusted to
         provide for the Liberty Group Stock Dividend. The conversion rights of
         Series G and Series H Preferred Stock are subject to adjustment in
         certain circumstances.

         Among other such adjustments, if the Liberty Group Stock, or any other
         redeemable capital stock of TCI into which either series of Preferred
         Stock may be convertible ("Redeemable Capital Stock"), is redeemed in
         full by TCI (the "Redemption Event"), then, except as otherwise
         described below, the shares of such Series G and Series H Preferred
         Stock will thereafter be convertible into the kind and amount of
         consideration that would have been received in such Redemption Event
         by a holder of the number of shares of Redeemable Capital Stock that
         would have been issuable upon conversion of such shares of Series G
         and Series H Preferred Stock, if they had been converted in full
         immediately prior to such Redemption Event.

                                                                    (continued)


                                     II-84
<PAGE>   149

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         However, if any series of Redeemable Capital Stock into which a series
         of Series G or Series H Preferred Stock is then convertible is
         redeemed in full by TCI in exchange for securities of another issuer
         ("Redemption Securities"), TCI may elect to provide the holders of
         such Series G or Series H Preferred Stock with the right to exchange
         such Series G or Series H Preferred Stock, concurrently with the
         Redemption Event, for preferred stock of such other issuer ("Mirror
         Preferred Stock"). Such Mirror Preferred Stock shall be convertible
         into Redemption Securities and shall otherwise have terms and
         conditions comparable to the Series G or Series H Preferred Stock
         exchanged. If TCI provides such an exchange right, any holder that
         does not then choose to participate in such exchange will continue to
         hold such Series G or Series H Preferred Stock but such holder will
         lose the conversion right with respect to the Redeemable Capital Stock
         redeemed in the Redemption Event and will not have any right to
         receive Redemption Securities in lieu thereof. A holder that
         participates in such exchange will receive Mirror Preferred Stock
         convertible into Redemption Securities, but will no longer hold the
         Series G or Series H Preferred Stock so exchanged.

         An alternative provision will apply if, at the time of exercise of any
         such exchange right provided by TCI, the holder of the applicable
         series of Series G or Series H Preferred Stock would be entitled to
         receive on conversion any property in addition to the Redeemable
         Capital Stock being redeemed. In that case, holders that choose to
         participate in the exchange will receive both Mirror Preferred Stock
         issued by the issuer of the Redemption Securities of the other issuer
         and a new preferred stock of TCI convertible into such additional
         property. In such event, the Mirror Preferred Stock and such new TCI
         preferred stock will have a combined liquidation value equal to the
         liquidation value of the Series G or Series H Preferred Stock
         exchanged and will otherwise have terms and conditions comparable to
         such Series G or Series H Preferred Stock.

         The Series G and Series H Preferred Stock are redeemable at TCI's
         option, in whole or in part, any time on or after February 1, 2001.
         The Series G and Series H Preferred Stock will be redeemable in full
         on February 1, 2016, to the extent then outstanding. In all cases, the
         redemption price per share will be the liquidation value thereof,
         including the amount of any accrued but unpaid dividends thereon, to
         and including the redemption date.

         The Series G and Series H Preferred Stock will rank prior to TCI
         common stock and the TCI Class B Preferred Stock and pari passu with
         all other currently outstanding classes and series of TCI preferred
         stock with respect to the declaration and payment of dividends and in
         liquidation.

         The Series G and Series H Preferred Stock will vote in any general
         election of directors of TCI and will have one vote per share for such
         purposes and will vote as a single class with the TCI common stock,
         the TCI Class B Preferred Stock and any other class or series of TCI
         Preferred Stock entitled to vote in any general election of directors.
         The Series G and Series H Preferred Stock will have no other voting
         rights except as required by the DGCL.




                                     II-85
<PAGE>   150


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(10)     Company-Obligated Mandatorily Redeemable Preferred Securities of 
         Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC

         In January 1996, TCI Communications Financing I ("Trust I"), an
         indirect wholly-owned subsidiary of the Company, issued $16 million in
         common securities to TCIC, and issued $500 million of 8.72% Trust
         Originated Preferred SecuritiesSM (the "Trust I Preferred Securities"
         and together with the common securities, the "Trust I Securities") to
         the public. Trust I exists for the exclusive purposes of issuing Trust
         I Securities and investing the proceeds thereof into an aggregate
         principal amount of $516 million of 8.72% Subordinated Deferrable
         Interest Notes due January 31, 2045 (the "8.72% Subordinated Debt
         Securities") of TCIC. The 8.72% Subordinated Debt Securities are
         unsecured obligations of TCIC and are subordinate and junior in right
         of payment to certain other indebtedness of the Company. Upon
         redemption of the 8.72% Subordinated Debt Securities, the Trust I
         Preferred Securities will be mandatorily redeemable. TCIC effectively
         provides a full and unconditional guarantee of Trust I's obligations
         under the Trust I Preferred Securities.

         In May 1996, TCI Communications Financing II ("Trust II"), an indirect
         wholly-owned subsidiary of the Company, issued $16 million in common
         securities to TCIC, and issued $500 million of 10% Trust Preferred
         Securities (the "Trust II Preferred Securities" and together with the
         common securities, the "Trust II Securities") to the public. Trust II
         exists for the exclusive purposes of issuing Trust II Securities and
         investing the proceeds thereof into an aggregate principal amount of
         $516 million of 10% Subordinated Deferrable Interest Notes due May 31,
         2045 (the "10% Subordinated Debt Securities") of TCIC. The 10%
         Subordinated Debt Securities are unsecured obligations of TCIC and are
         subordinate and junior in right of payment to certain other
         indebtedness of the Company. Upon redemption of the 10% Subordinated
         Debt Securities, the Trust II Preferred Securities will be mandatorily
         redeemable. TCIC effectively provides a full and unconditional
         guarantee of Trust II's obligations under the Trust II Preferred
         Securities.

         The Trust I and Trust II Preferred Securities are presented together
         in a separate line item in the accompanying consolidated balance sheet
         captioned "Company-obligated mandatorily redeemable preferred
         securities of subsidiary trusts holding solely subordinated debt
         securities of TCI Communications, Inc." Dividends accrued on the Trust
         I and Trust II Preferred Securities are included in minority interests
         in losses (earnings) of consolidated subsidiaries in the accompanying
         consolidated statements of operations.

 (11)    Stockholders' Equity

         Common Stock

         The Series A TCI Group Stock and Series A Liberty Group Stock each
         have one vote per share, and the Series B TCI Group Stock and Series B
         Liberty Group Stock each have ten votes per share. Each share of
         Series B TCI Group Stock is convertible, at the option of the holder,
         into one share of Series A TCI Group Stock, and each share of Series B
         Liberty Group Stock is convertible, at the option of the holder, into
         one share of Series A Liberty Group Stock. See note 1.


                                                                    (continued)



                                     II-86
<PAGE>   151

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         The rights of holders of the TCI Group Stock upon liquidation of TCI
         are based upon the ratio of the aggregate market capitalization, as
         defined, of the TCI Group Stock to the aggregate market
         capitalization, as defined, of the TCI Group Stock and the Liberty
         Group Stock.

         Similarly, the rights of holders of the Liberty Group Stock upon
         liquidation of TCI are based upon the ratio of the aggregate market
         capitalization, as defined, of the Liberty Group Stock to the
         aggregate market capitalization, as defined, of the Liberty Group
         Stock and the TCI Group Stock.

         Employee Benefit Plans

         The Company has several employee stock purchase plans (the "Plans") to
         provide employees an opportunity for ownership in the Company and to
         create a retirement fund. Terms of the Plans generally provide for
         employees to contribute up to 10% of their compensation to a trust for
         investment in TCI Group Stock and Liberty Media Group Stock. The
         Company, by annual resolution of the Board, generally contributes up
         to 100% of the amount contributed by employees. Certain of the
         Company's subsidiaries have their own employee benefit plans.
         Contributions to all plans aggregated $35 million, $28 million and $21
         million for 1996, 1995 and 1994, respectively.

         Preferred Stock

         Class A Preferred Stock. The Company is authorized to issue 700,000
         shares of Class A Preferred Stock, par value $.01 per share.
         Subsidiaries of TCI held all of the issued and outstanding shares of
         such stock, amounting to 592,797 shares. The holders of the Class A
         Preferred Stock exchanged such Subsidiary Shares for shares of Series
         F Preferred Stock immediately prior to the record date of the
         Distribution. See note 1.

         Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock.
         The Company is authorized to issue 1,675,096 shares of Class B
         Preferred Stock and 1,620,026 of such shares are issued and
         outstanding.

         Dividends accrue cumulatively (but without compounding) at an annual
         rate of 6% of the stated liquidation value of $100 per share (the
         "Stated Liquidation Value"), whether or not such dividends are
         declared or funds are legally available for payment of dividends.
         Accrued dividends will be payable annually on March 1 of each year (or
         the next succeeding business day if March 1 does not fall on a
         business day), and, in the sole discretion of the Board, may be
         declared and paid in cash, in shares of Series A TCI Group Stock or in
         any combination of the foregoing. Accrued dividends not paid as
         provided above on any dividend payment date will accumulate and such
         accumulated unpaid dividends may be declared and paid in cash, shares
         of Series A TCI Group Stock or any combination thereof at any time
         (subject to the rights of any senior stock and, if applicable, to the
         concurrent satisfaction of any dividend arrearages on any class or
         series of TCI preferred stock ranking on a parity with the Class B
         Preferred Stock with respect to dividend rights) with reference to any
         regular dividend payment date, to holders of record of Class B
         Preferred Stock as of a special record date fixed by the Board (which
         date may not be more than 45 days nor less than 10 days prior to the
         date fixed for the payment of such accumulated unpaid dividends). The
         Class B Preferred Stock ranks junior to the Series F Preferred Stock
         with respect to the declaration and payment of dividends.

                                                                    (continued)



                                     II-87
<PAGE>   152

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         If all or any portion of a dividend payment is to be paid through the
         issuance and delivery of shares of Series A TCI Group Stock, the
         number of such shares to be issued and delivered will be determined by
         dividing the amount of the dividend to be paid in shares of Series A
         TCI Group Stock by the Average Market Price of the Series A TCI Group
         Stock. For this purpose, "Average Market Price" means the average of
         the daily last reported sale prices (or, if no sale price is reported
         on any day, the average of the high and low bid prices on such day) of
         a share of Series A TCI Group Stock for the period of 20 consecutive
         trading days ending on the tenth trading day prior to the regular
         record date or special record date, as the case may be, for the
         applicable dividend payment.

         In the event of any liquidation, dissolution or winding up of TCI, the
         holders of Class B Preferred Stock will be entitled, after payment of
         preferential amounts on any class or series of stock ranking prior to
         the Class B Preferred Stock with respect to liquidating distributions,
         to receive from the assets of TCI available for distribution to
         stockholders an amount in cash or property or a combination thereof,
         per share, equal to the Stated Liquidation Value thereof, plus all
         accumulated and accrued but unpaid dividends thereon to and including
         the redemption date. TCI does not have any mandatory obligation to
         redeem the Class B Preferred Stock as of any fixed date, at the option
         of the holders or otherwise.

         Subject to the prior preferences and other rights of any class or
         series of TCI preferred stock, the Class B Preferred Stock will be
         exchangeable at the option of TCI in whole but not in part at any time
         for junior subordinated debt securities of TCI ("Junior Exchange
         Notes"). The Junior Exchange Notes will be issued pursuant to an
         indenture (the "Indenture"), to be executed by TCI and a qualified
         trustee to be chosen by TCI.

         If TCI exercises its optional exchange right, each holder of
         outstanding shares of Class B Preferred Stock will be entitled to
         receive in exchange therefor newly issued Junior Exchange Notes of a
         series authorized and established for the purpose of such exchange,
         the aggregate principal amount of which will be equal to the aggregate
         Stated Liquidation Value of the shares of Class B Preferred Stock so
         exchanged by such holder, plus all accumulated and accrued but unpaid
         dividends thereon to and including the exchange date. The Junior
         Exchange Notes will be issuable only in principal amounts of $100 or
         any integral multiple thereof and a cash adjustment will be paid to
         the holder for any excess principal that would otherwise be issuable.
         The Junior Exchange Notes will mature on the fifteenth anniversary of
         the date of issuance and will be subject to earlier redemption at the
         option of TCI, in whole or in part, for a redemption price equal to
         the principal amount thereof plus accrued but unpaid interest.
         Interest will accrue, and be payable annually, on the principal amount
         of the Junior Exchange Notes at a rate per annum to be determined
         prior to issuance by adding a spread of 215 basis points to the
         "Fifteen Year Treasury Rate" (as defined in the Indenture). Interest
         will accrue on overdue principal at the same rate, but will not accrue
         on overdue interest.

         The Junior Exchange Notes will represent unsecured general obligations
         of TCI and will be subordinated in right of payment to all Senior Debt
         (as defined in the Indenture). Accordingly, holders of Class B
         Preferred Stock who receive Junior Exchange Notes in exchange therefor
         may have difficulty selling such Notes.

                                                                    (continued)



                                     II-88
<PAGE>   153

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         For so long as any dividends are in arrears on the Class B Preferred
         Stock or any class or series of TCI preferred stock ranking pari passu
         with the Class B Preferred Stock which is entitled to payment of
         cumulative dividends prior to the redemption, exchange, purchase or
         other acquisition of the Class B Preferred Stock, and until all
         dividends accrued up to the immediately preceding dividend payment
         date on the Class B Preferred Stock and such parity stock shall have
         been paid or declared and set apart so as to be available for payment
         in full thereof and for no other purpose, neither TCI nor any
         subsidiary thereof may redeem, exchange, purchase or otherwise acquire
         any shares of Class B Preferred Stock, any such parity stock or any
         class or series of its capital stock ranking junior to the Class B
         Preferred Stock (including the TCI common stock), or set aside any
         money or assets for such purpose, unless all of the outstanding shares
         of Class B Preferred Stock and such parity stock are redeemed. If TCI
         fails to redeem or exchange shares of Class B Preferred Stock on a
         date fixed for redemption or exchange, and until such shares are
         redeemed or exchanged in full, TCI may not redeem or exchange any
         parity stock or junior stock, declare or pay any dividend on or make
         any distribution with respect to any junior stock or set aside money
         or assets for such purpose and neither TCI nor any subsidiary thereof
         may purchase or otherwise acquire any Class B Preferred Stock, parity
         stock or junior stock or set aside money or assets for any such
         purpose. The failure of TCI to pay any dividends on any class or
         series of parity stock or to redeem or exchange on any date fixed for
         redemption or exchange any shares of Class B Preferred Stock shall not
         prevent TCI from (i) paying any dividends on junior stock solely in
         shares of junior stock or the redemption purchase or other acquisition
         of junior stock solely in exchange for (together with cash adjustment
         for fractional shares, if any) or (but only in the case of a failure
         to pay dividends on any parity stock) through the application of the
         proceeds from the sale of, shares of junior stock; or (ii) the payment
         of dividends on any parity stock solely in shares of parity stock
         and/or junior stock or the redemption, exchange, purchase or other
         acquisition of Class B Preferred Stock or parity stock solely in
         exchange for (together with a cash adjustment for fractional shares,
         if any), or (but only in the case of failure to pay dividends on any
         parity stock) through the application of the proceeds from the sale
         of, parity stock and/or junior stock.

         The Class B Preferred Stock will vote in any general election of
         directors, will have one vote per share for such purpose and will vote
         as a single class with the TCI common stock and any class or series of
         TCI preferred stock entitled to vote in any general election of
         directors. The Class B Preferred Stock will have no other voting
         rights except as required by the DGCL.

         Series Preferred Stock. The TCI Series Preferred Stock is issuable,
         from time to time, in one or more series, with such designations,
         preferences and relative participating, option or other special
         rights, qualifications, limitations or restrictions thereof, as shall
         be stated and expressed in a resolution or resolutions providing for
         the issue of such series adopted by the Board. The Company is
         authorized to issue 50,000,000 shares of Series Preferred Stock.

         All shares of any one series of the TCI Series Preferred Stock are
         required to be alike for every particular and all shares are required
         to rank equally and be identical in all respects, except insofar as
         they may vary with respect to matters which the Board is expressly
         authorized by the TCI Charter to determine in the resolution or
         resolutions proving for the issue of any series of the TCI Series
         Preferred Stock.

                                                                    (continued)



                                     II-89
<PAGE>   154

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Redeemable Convertible Preferred Stock, Series E. The Company is
         authorized to issue 400,000 shares of Redeemable Convertible Preferred
         Stock, Series E, par value $.01. Subsidiaries of TCI held all of the
         issued and outstanding shares of such stock, amounting to 246,402
         shares. The holders of the Series E Preferred Stock exchanged such
         Subsidiary Shares for shares of Series F Preferred Stock immediately
         prior to the record date of the Distribution.

         Stock Options

         In 1994, the Company adopted the Tele-Communications, Inc. 1994 Stock
         Incentive Plan (the "1994 Plan"). The Plan provided for awards to be
         made in respect of a maximum of 16 million shares of TCI Class A
         common stock. Awards may be made as grants of stock options, stock
         appreciation rights, restricted shares, stock units or any combination
         thereof.

         The 1994 Plan was adjusted to provide that the number and type of
         shares subject to future awards consists of a number of shares of
         Series A TCI Group Stock equal to the number of shares of Class A
         common stock subject to future awards immediately prior to the
         Distribution and a number of shares of Series A Liberty Group Stock
         equal to one-fourth of the number of shares of Class A common stock
         subject to future awards immediately prior to Distribution. Following
         the Distribution, the Compensation Committee of TCI may in its
         discretion grant awards, including awards of options on, or stock
         appreciation rights respecting, shares of Series A TCI Group Stock,
         Series A Liberty Group Stock, or combinations thereof, in such amounts
         and types as it determines in accordance with the terms of the 1994
         Plan, as adjusted.

         In 1995, the Company adopted the Tele-Communications, Inc. 1995
         Employee Stock Incentive Plan (the "1995 Plan"). In addition, the
         Company has established the Tele-Communications, Inc. 1996 Stock
         Incentive Plan (the "1996 Plan" and together with the 1994 Plan and
         the 1995 Plan, the "Incentive Plans") which was approved by
         stockholders at the TCI 1996 annual meeting. The 1996 Plan provides
         (i) for stock-based awards to be made in respect of a maximum of 16
         million shares of Series A TCI Group Stock and a maximum of 6 million
         shares of Series A Liberty Group Stock (subject to certain adjustments
         described below) and (ii) for cash awards in amounts determined by the
         TCI compensation committee. Series A TCI Group Stock and Series A
         Liberty Group Stock shall be hereinafter collectively referred to as
         the "Common Stock".

         Awards may be made as grants of stock options ("Options"), stock
         appreciation rights ("SARs"), restricted shares ("Restricted Shares"),
         stock units ("Stock Units"), performance awards ("Performance
         Awards"), or any combination thereof (collectively, "Awards"). Shares
         in respect of which Awards are made may be either authorized but
         unissued shares of Common Stock or issued shares reacquired by the
         Company, including shares purchased in the open market. Shares of
         Common Stock that are subject to Awards that expire, terminate or are
         annulled for any reason without having been exercised (or, with
         respect to Tandem SARs deemed exercised, by virtue of the exercise of
         a related Option), or are Restricted Shares or Stock Units that are
         forfeited prior to becoming vested, or are subject to Awards of SAR's
         that are exercised for cash, will return to the pool of such shares
         available for grant under the 1996 Plan.

                                                                    (continued)



                                     II-90
<PAGE>   155

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         In connection with the Distribution, each holder of an outstanding
         option or stock appreciation right received an additional option or
         stock appreciation right, as applicable, covering a number of shares
         of Series A Liberty Group Stock equal to one-fourth of the number of
         shares of Class A common stock theretofore subject to the outstanding
         option or stock appreciation right, and the outstanding option or
         stock appreciation right would continue in effect as an option or
         stock appreciation right covering the same number of shares of Series
         A TCI Group Stock (as redesignated) that were theretofore subject to
         the option or stock appreciation right. The aggregate pre-adjustment
         strike price of the outstanding options or stock appreciation rights
         was allocated between the outstanding options or stock appreciation
         rights and the newly issued options or stock appreciation rights in a
         ratio determined by the Compensation Committee. The following
         descriptions of stock options and/or stock appreciation rights have
         been adjusted to reflect such change.

         Awards of Series A TCI Group Stock made under the Incentive Plans were
         adjusted in connection with the Satellite Spin-off such that
         immediately prior to the Satellite Spin-off, each option was divided
         into two separately exercisable options: (i) an option to purchase
         Satellite Series A common stock (an "Add-on Satellite Option"),
         exercisable for the number of shares of Satellite Series A common
         stock that would have been issued in the Satellite Spin-off in respect
         of the shares of Series A TCI Group Stock subject to the applicable
         TCI option, if such TCI option had been exercised in full immediately
         prior to the record date of the Satellite Spin-off, and containing
         substantially equivalent terms as the existing TCI option, and (ii) an
         option to purchase Series A TCI Group Stock (an "Adjusted TCI
         Option"), exercisable for the same number of shares of Series A TCI
         Group Stock as the corresponding TCI option had been. The aggregate
         exercise price of each TCI option was allocated between the Add-on
         Satellite Option and the Adjusted TCI Option into which it is divided,
         and all other terms of the Add-on Satellite Option and Adjusted TCI
         Option will in all material respects be the same as such TCI option.
         Similar adjustments were made to the outstanding TCI SARs, resulting
         in the holders thereof holding Adjusted TCI SARs and Add-on Satellite
         SARs instead of TCI SARs, effective immediately prior to the Satellite
         Spin-off.

         As a result of the foregoing, certain persons who remain TCI employees
         or non-employee directors after the Satellite Spin-off and certain
         persons who were TCI employees prior to the Satellite Spin-off but
         became Satellite employees after the Satellite Spin-off hold both
         Adjusted TCI Options and separate Add-on Satellite Options and/or hold
         both Adjusted TCI SARs and separate Add-on Satellite SARs. The
         obligations with respect to the Adjusted TCI Options, Add-on Satellite
         Options, Adjusted TCI SARs and Add-on Satellite SARs held by TCI
         employees and non-employee directors following the Satellite Spin-off
         are obligations solely of TCI. The obligations with respect to the
         Adjusted TCI Options, Add-on Satellite Options, Adjusted TCI SARs and
         Add-on Satellite SARs held by persons who are Satellite employees at
         the time of the Satellite Spin-off and following the Satellite
         Spin-off are no longer TCI employees are obligations solely of
         Satellite. Prior to the Satellite Spin-off, TCI and Satellite entered
         into an agreement to sell to each other from time to time at the then
         current market price shares of Series A TCI Group Stock and Satellite
         Series A common stock, respectively, as necessary to satisfy their
         respective obligations under such securities.

                                                                    (continued)


                                     II-91
<PAGE>   156

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         As a result of the Liberty Stock Dividend, options to purchase shares
         of Liberty Group Stock were increased by one option for each two
         options previously granted, and the exercise price was also adjusted
         accordingly. The folowing Liberty Group Stock option disclosures have
         been adjusted to reflect such changes.

         The following table presents the number and weighted average exercise
         price ("WAEP") of certain options in tandem with SARs to purchase
         Class A common stock, Series A TCI Group Stock and Series A Liberty 
         Group Stock pursuant to the Incentive Plans:


<TABLE>
<CAPTION>
                                                                                                Series A
                                                   Class A                Series A              Liberty
                                                   common                TCI Group               Group
                                                   stock       WAEP       Stock        WAEP      Stock          WAEP
                                                -----------    ----     ----------     ----    ---------        ----
<S>                                             <C>            <C>      <C>            <C>     <C>              <C>
Outstanding at                                    8,309,336   $16.61            --                    --
    January 1, 1994
      Granted                                     3,220,000    22.00            --                    --
      Assumed                                        54,600    19.56            --                    --
      Exercised                                    (217,483)   17.26            --                    --
      Canceled                                      (45,625)   20.13            --                    --
                                                -----------             ----------             --------- 
Outstanding at 
    December 31, 1994                            11,320,828    18.13            --                    --
      Converted from                            (11,218,866)   18.15    11,218,866    $13.58          --
        Class A options
      Adjustment for                                     --                     --             4,207,056       $12.10
        Distribution
      Granted                                            --              7,507,500     16.99   3,879,000        15.95
      Exercised                                     (91,962)   16.07      (933,516)    12.45    (340,504)       11.11
      Canceled                                      (10,000)   17.25       (90,500)    13.07     (33,936)       11.66
                                                -----------             ----------             --------- 

Outstanding at 
    December 31, 1995                                    --             17,702,350     15.08   7,711,616        14.08
      Exercised                                          --               (196,300)    12.70     (87,730)       11.89
      Canceled                                           --               (132,200)    15.35     (27,900)       12.68
                                                -----------             ----------             ---------
                                                                                                        
Outstanding at 
   December 31, 1996                                     --             17,373,850     12.97   7,595,986        14.11
                                                ===========             ==========             =========   
Exercisable at December 31, 1994                  3,053,348    16.35            --                    --
                                                ===========             ==========             =========   
Exercisable at December 31, 1995                         --              4,717,230     12.87   1,774,222        11.48
                                                ===========             ==========             =========       
Exercisable at December 31, 1996                         --              8,189,828     11.89   3,290,718        12.71
                                                ===========             ==========             =========   
    Vesting Period                                                         4-5 yrs               4-5 yrs
                                                                        ==========             =========   
</TABLE>

         On December 13, 1995, pursuant to the 1994 Plan, the Company awarded
         330,000 restricted shares of Series A TCI Group common stock and
         45,000 restricted shares of Series A Liberty Group Stock to certain
         officers and other key employees of the Company. Such restricted
         shares vest as to 50% on December 13, 2000 and as to the remaining 50%
         on December 13, 2001.

         SARs with respect to 1,357,875 shares of Series A TCI Group Stock and
         533,811 shares of Series A Liberty Group Stock were outstanding at
         December 31, 1996. These rights have an adjusted strike price of $0.52
         and $0.54 per share, respectively, and become exercisable and vest
         evenly over seven years, beginning March 28, 1991. The SARs expire on
         March 28, 2001. The Company has the option of paying the holder in
         stock or cash. During the year ended December 31, 1996, SARs with
         respect to 65,625 shares of Series A TCI Group Stock were exercised.

                                                                     (continued)



                                     II-92
<PAGE>   157

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         On August 3, 1995, stockholders of the Company approved the Director
         Stock Option Plan (the "DSOP") including the grant, effective as of
         November 16, 1994, to each person that as of that date was a member of
         the Board and was not an employee of the Company or any of its
         subsidiaries, of options to purchase 50,000 shares of TCI Class A
         common stock. Pursuant to the DSOP, options to purchase 300,000 shares
         of TCI Class A common stock were granted at an exercise price of $22.00
         per share. Such options had a weighted average fair value of $16.49 on
         the date of grant. Options issued pursuant to the DSOP vest and become
         exercisable over a five-year period from the date of grant and expire
         10 years from the date of grant. During the year ended December 31,
         1995, options to purchase 50,000 shares of Series A TCI Group Stock and
         options to purchase 18,750 shares of Series A Liberty Group Stock with
         a WAEP of $16.50 and $14.67, respectively, were canceled. During the
         year ended December 31, 1996, options to purchase 150,000 shares of
         Series A TCI Group Stock and options to purchase 56,250 shares of
         Series A Liberty Group stock were issued pursuant to the DSOP. Such
         option had a weighted average fair value of $9.83 and $11.51,
         respectively, on the date of grant.

         At December 31, 1996, 400,000 options with respect to TCI Group Stock
         granted pursuant to the DSOP were outstanding, 100,000 of which were
         exercisable. Such options had a range of exercise prices of $12.25 to
         $16.99, with a WAEP of $14.06, and a weighted average remaining
         contractual life of 8.63 years.

         At December 31, 1996, 150,000 options with respect to Liberty Group
         Stock granted pursuant to the DSOP were outstanding, 37,500 of which
         were exercisable. Such options had a range of exercise prices of $14.67
         to $17.50, with a WAEP of $15.65, and a weighted average remaining
         contractual life of 8.63 years.

         The estimated fair values noted above are based on the Black-Scholes
         model and are stated in current annualized dollars on a present value
         basis. The key assumptions used in the model for purposes of these
         calculations include the following: (a) a discount rate equal to the
         10-year Treasury rate on the date of grant; (b) a 35% volatility
         factor, (c) the 10-year option term; (d) the closing price of the
         respective common stock on the date of grant; and (e) an expected
         dividend rate of zero. The actual value that the subject directors may
         realize will depend upon the extent to which the stock price exceeds
         the exercise price on the date the options are exercised. Accordingly,
         the value realized by such directors will not necessarily be the value
         determined by the model.

         Estimated compensation relating to restricted stock awards, options
         with tandem SARs and SARs has been recorded through December 31, 1996
         pursuant to APB Opinion No. 25. Such estimate is subject to future
         adjustment based upon market value, and ultimately, on the final
         determination of market value when the rights are exercised or the
         restricted stock awards are vested. Had the Company accounted for its
         stock based compensation pursuant to the fair value based accounting
         method in Statement No. 123, the amount of compensation would not have
         been materially different from what has been reflected in the
         accompanying consolidated financial statements.

         Other

         In connection with the exercise of a stock option by an
         officer/director of Liberty, a note was given to Liberty as partial
         payment of the exercise price. This note bore interest at 7.54% per
         annum. The Company recorded the net assumed note receivable, amounting
         to $15 million, from such officer as a reduction of stockholders'
         equity. On October 27, 1994, such officer tendered to the Company
         634,917 shares of TCI Class B common stock in full payment of
         principal and interest amounting to $15 million.

         The excess of consideration received on debentures converted or
         options exercised over the par value of the stock issued is credited
         to additional paid-in capital.

         At December 31, 1996, there were 127,607,438 shares of Series A TCI
         Group Stock and 30,090,303 shares of Series A Liberty Group Stock (as
         adjusted to give effect to the Liberty Group Stock Dividend) reserved
         for issuance under exercise privileges related to options, convertible
         debt securities and convertible preferred stock and upon vesting of
         the restricted stock awards described in this note 11 and in notes 8
         and 9. In addition, one share of Series A TCI Group Stock is reserved
         for each outstanding share of Series B TCI Group Stock and one share
         of Series A Liberty Group Stock is reserved for each outstanding share
         of Series B Liberty Group Stock. See note 1 for the effect of the
         Distribution on the conversion rights of holders of convertible
         securities.


                                                                    (continued)



                                     II-93
<PAGE>   158

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(12)     Transactions with Officers and Directors

         Effective January 31, 1996, a director of the Company purchased
         one-third of the Company's interest in two limited partnerships and
         obtained two ten-year options to purchase the Company's remaining
         partnership interests. The purchase price for the one-third
         partnership interests was 37.209 shares of WestMarc Communications,
         Inc. ("WestMarc", a wholly-owned subsidiary of the Company) Series C
         Cumulative Compounding Preferred Stock owned by such director, and the
         purchase price for the ten-year options was $100 for each option. All
         options are exercisable for cash in the aggregate amount of
         $3,000,000.

         On July 1, 1996, pursuant to a Restricted Stock Award Agreement, an
         executive officer of TCI was transferred all of TCI's right title and
         interest in and to 62 shares of the 12% Series C Cumulative
         Compounding Preferred Stock of WestMarc owned by TCI. Such preferred
         stock has a liquidation value of $1,999,500 and is subject to
         forfeiture by such officer in the event of certain circumstances from
         the date of grant through December 13, 2005.

         Effective December 1, 1996, an executive officer of the Company and an
         executive officer of TCIC were each granted options representing 1.0%
         of the Company's common equity in TCI Telephony Services, Inc., a
         consolidated subsidiary of the Company, ("Telephony Services"). The
         aggregate exercise price for each such option is equal to 1.0% of (i)
         the Company's cumulative investment in Telephony Services as of
         December 1, 1996, adjusted for a 6% per annum interest factor from the
         date each such investment was made to the date of such exercise, less
         (ii) the sum of (x) $500 million and (y) the amount of the tax
         benefits generated by Telephony Services (up to $500 million) as and
         when used by TCI. Each such executive officer was also granted a
         similar option representing 1.0% of the Company's common equity in TCI
         Wireline, Inc., another consolidated subsidiary of the Company,
         ("Wireline"). The aggregate exercise price for each such Wireline
         option is equal to 1.0% of the Company's cumulative investment in
         Wireline as of December 1, 1996, adjusted for a 6% per annum interest
         factor from the date each such investment was made to the date of such
         exercise. Any exercise by one of such executive officers of all or
         part of one of such options (as to either the Telephony Services
         option or the Wireline option) would need to be accompanied by the
         exercise by such executive officer of a pro rata portion of the other
         such option. All of such options vest 20% per annum beginning February
         1, 1997, and will expire on February 1, 2006.

         Effective December 1, 1996, two executive officers of the Company and
         an executive officer of TCIC were each granted options representing
         1.0% of the Company's common equity in TCI.NET, Inc., a consolidated
         subsidiary of the Company. The aggregate exercise price for each such
         TCI.NET, Inc. option is equal to 1.0% of the Company's cumulative
         investment in TCI.NET, Inc. as of December 31, 1996, adjusted for a 6%
         per annum interest factor from the date each such investment was made
         to the date of such exercise price. Such options vest 20% per annum
         beginning February 1, 1997 and expire on February 1, 2006.

                                                                    (continued)



                                     II-94
<PAGE>   159

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         On the date of the Satellite Spin-off, the Company granted options to
         two of its executive officers to purchase 1.0% and an option to an
         employee of TCIC to acquire 0.5% of Satellite's issued and outstanding
         common stock. The exercise price for each such option is equal to 1.0%
         or 0.5%, as applicable, of the Company's net investment in Satellite
         on the date of the Satellite Spin-off. Such options vest 20% per annum
         beginning February 1, 1997 and expire on February 1, 2006.

         Estimated compensation relating to the aforementioned restricted stock
         award and options has been recorded through December 31, 1996 pursuant
         to APB Opinion No. 25. Such estimate is subject to future adjustment
         based upon market value, and ultimately, on the final determination of
         market value when the rights are exercised or the restricted stock
         awards are vested. Had the Company accounted for its stock based
         compensation pursuant to the fair value based accounting method in
         Statement No. 123, the amount of compensation would not have been
         materially different from what has been reflected in the accompanying
         consolidated financial statements.

(13)     Sale of Subsidiary Stock

         On July 18, 1995, TINTA completed an initial public offering (the
         "IPO") in which it sold 20 million shares of TINTA Series A common
         stock to the public for consideration of $16.00 per share aggregating
         $320 million, before deducting related expenses (approximately $19
         million). The shares sold to the public represented 17% of TINTA's
         total issued and outstanding common stock. Also in July 1995, TINTA
         issued 687,500 shares of TINTA Series A common stock as partial
         consideration for a 35% ownership interest in Torneos Y Competencias
         S.A., an Argentine sports programming company (the "TYC Acquisition").
         As a result of the IPO and the TYC Acquisition, the Company recognized
         a gain amounting to $123 million.

         In June 1995, Flextech issued share capital for cash and preferred
         shares of Thomson Directories Limited. In connection with such
         issuance, the Company recorded a $51 million increase to stockholders'
         equity and a $93 million increase to minority interests in equity of
         consolidated subsidiaries. No gain was recognized in the Company's
         consolidated statement of operations due primarily to the existence of
         the Company's contingent obligations to repurchase certain of the
         Flextech share capital.

(14)     Income Taxes

         TCI files a consolidated Federal income tax return with all of its 80%
         or more owned subsidiaries. Consolidated subsidiaries in which the
         Company owns less than 80% each file a separate income tax return. TCI
         and such subsidiaries calculate their respective tax liabilities on a
         separate return basis which are combined in the accompanying
         consolidated financial statements.

                                                                    (continued)



                                     II-95
<PAGE>   160

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         Income tax benefit (expense) for the years ended December 31, 1996,
         1995 and 1994 consists of:


<TABLE>
<CAPTION>
                                 Current   Deferred    Total
                                 -------   --------    -----
                                     amounts in millions
<S>                               <C>       <C>       <C>
Year ended December 31, 1996:
  Federal                         $ (25)     (175)     (200)
  State and local                   (13)      (49)      (62)
                                  -----      ----      ----
                                  $ (38)     (224)     (262)
                                  =====      ====      ====

Year ended December 31, 1995:
  Federal                         $ (23)      130       107
  State and local                   (10)       23        13
                                  -----      ----      ----
                                  $ (33)      153       120
                                  =====      ====      ====

Year ended December 31, 1994:
  Federal                         $ (69)      (29)      (98)
  State and local                   (14)       (8)      (22)
                                  -----      ----      ----
                                  $ (83)      (37)     (120)
                                  =====      ====      ====
</TABLE>

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

<TABLE>
<CAPTION>
                                                             Years ended
                                                              December 31,
                                                       ------------------------
                                                       1996      1995      1994
                                                       ----      ----      ----
                                                           amounts in millions
<S>                                                   <C>        <C>      <C>
Computed "expected" tax benefit (expense)             $(189)      102       (64)
Amortization not deductible for tax purposes            (22)      (25)      (13)
Minority interest in losses (earnings) of
    consolidated subsidiaries                            (3)        9        (3)
Gain on sale of subsidiary stock                         --        43        --
Recognition of losses of consolidated partnership        --        --       (10)
State and local income taxes, net of federal
    income tax benefit                                  (49)       (4)      (20)
Valuation allowance on foreign corporation               --        --       (10)
Other                                                     1        (5)       --
                                                      -----      ----      ----
                                                      $(262)      120      (120)
                                                      =====      ====      ====
</TABLE>


                                                                    (continued)



                                     II-96
<PAGE>   161

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at 
         December 31, 1996 and 1995 are presented below:


<TABLE>
<CAPTION>
                                                                         December 31,
                                                                    --------------------
                                                                     1996         1995
                                                                    -------      -------
                                                                     amounts in millions
<S>                                                                 <C>          <C>    
Deferred tax assets:
    Net operating loss carryforwards                                $   679          583
      Less - valuation allowance                                       (121)        (121)
    Investment tax credit carryforwards                                 118          118
      Less - valuation allowance                                        (41)         (41)
    Alternative minimum tax credit carryforwards                         95           95
    Investments in affiliates, due principally to losses of
      affiliates recognized for financial statement purposes in
      excess of losses recognized for income tax purposes               232          176
    Future deductible amounts principally due to
      non-deductible accruals                                            79           90
    Other                                                                11           10
                                                                    -------      -------

         Net deferred tax assets                                      1,052          910
                                                                    -------      -------

Deferred tax liabilities:
    Property and equipment, principally due to
      differences in depreciation                                     1,193        1,111
    Franchise costs, principally due to differences in
      amortization                                                    4,676        3,569
    Investment in affiliates, due principally to
      undistributed earnings of affiliates                              917          499
    Intangible assets, principally due to differences in
      amortization                                                       36           42
    Leases capitalized for tax purposes                                  90           53
    Other                                                               152          220
                                                                    -------      -------
         Total gross deferred tax liabilities                         7,064        5,494
                                                                    -------      -------

         Net deferred tax liability                                 $ 6,012      $ 4,584
                                                                    =======      =======


</TABLE>

         The valuation allowance for deferred tax assets as of December 31,
         1996 was $162 million. Such balance did not change from December 31,
         1995.

         At December 31, 1996, the Company had net operating loss carryforwards
         for income tax purposes aggregating approximately $1,499 million of
         which, if not utilized to reduce taxable income in future periods,
         $136 million expires in 2003, $117 million in 2004, $355 million in
         2005, $288 million in 2006, $138 million in 2009, $167 million in 2010
         and $298 million in 2011. Certain subsidiaries of the Company had
         additional net operating loss carryforwards for income tax purposes
         aggregating approximately $236 million and these net operating losses
         are subject to certain rules limiting their usage.

         At December 31, 1996, the Company had remaining available investment
         tax credits of approximately $63 million which, if not utilized to
         offset future Federal income taxes payable, expire at various dates
         through 2005. Certain subsidiaries of the Company had additional
         investment tax credit carryforwards aggregating approximately $55
         million and these investment tax credit carryforwards are subject to
         certain rules limiting their usage.


                                                                    (continued)




                                    II-97
<PAGE>   162

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Certain of the Federal income tax returns of TCI and its subsidiaries
         which filed separate income tax returns are presently under
         examination by the IRS for the years 1992 through 1995 (the "IRS
         Examinations"). Certain income tax issues related to the years
         1981-1991 have been resolved in the Company's favor. The IRS has until
         April 1997 to appeal such decisions (the "IRS Appeals"). In the
         opinion of management, any additional tax liability, not previously
         provided for, resulting from the IRS Examinations or the IRS Appeals,
         ultimately determined to be payable, should not have a material
         adverse effect on the consolidated financial position of the Company.

(15)     Commitments and Contingencies

         On October 5, 1992, Congress enacted the Cable Television Consumer
         Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993
         and 1994, the FCC adopted certain rate regulations required by the
         1992 Cable Act and imposed a moratorium on certain rate increases. As
         a result of such actions, the Company's basic and tier service rates
         and its equipment and installation charges (the "Regulated Services")
         are subject to the jurisdiction of local franchising authorities and
         the FCC. Basic and tier service rates are evaluated against
         competitive benchmark rates as published by the FCC, and equipment and
         installation charges are based on actual costs. Any rates for
         Regulated Services that exceeded the benchmarks were reduced as
         required by the 1993 and 1994 rate regulations. The rate regulations
         do not apply to the relatively few systems which are subject to
         "effective competition" or to services offered on an individual
         service basis, such as premium movie and pay-per-view services.

         The Company believes that it has complied in all material respects
         with the provisions of the 1992 Cable Act, including its rate setting
         provisions. However, the Company's rates for Regulated Services are
         subject to review by the FCC, if a complaint has been filed, or the
         appropriate franchise authority, if such authority has been certified.
         If, as a result of the review process, a system cannot substantiate
         its rates, it could be required to retroactively reduce its rates to
         the appropriate benchmark and refund the excess portion of rates
         received. Any refunds of the excess portion of tier service rates
         would be retroactive to the date of complaint. Any refunds of the
         excess portion of all other Regulated Service rates would be
         retroactive to one year prior to the implementation of the rate
         reductions.

         The Company is obligated to pay fees for the rights to exhibit certain
         films that are released by various producers through 2009 (the "Film
         Licensing Obligations"). Based on customer levels at December 31,
         1996, these agreements require minimum payments aggregating
         approximately $571 million. The aggregate amount of the Film Licensing
         Obligations under other license agreements is not currently estimable
         because such amount is dependent upon the number of qualifying films
         released theatrically by certain motion picture studios as well as the
         domestic theatrical exhibition receipts upon the release of such
         qualifying films. Nevertheless, the Company's aggregate payments under
         the Film Licensing Obligations could prove to be significant.

         The Company has made certain financial commitments related to the
         acquisition of sports program rights through 2004. At December 31,
         1996, such commitments aggregated $226 million.

                                                                    (continued)



                                     II-98
<PAGE>   163

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



         The Company has guaranteed notes payable and other obligations of
         affiliated and other companies with outstanding balances of
         approximately $278 million at December 31, 1996. Although there can be
         no assurance, management of the Company believes that it will not be
         required to meet its obligations under such guarantees, or if it is
         required to fulfill any of such guarantees, that they will not be
         material to the Company.

         The Company leases business offices, has entered into converter lease
         agreements, pole rental agreements and transponder lease agreements
         and uses certain equipment under lease arrangements. Rental expense
         under such arrangements amounted to $187 million, $142 million and $82
         million in 1996, 1995 and 1994, respectively.

         Future minimum lease payments under noncancellable operating leases
for each of the next five years are summarized as follows (amounts in
millions):

<TABLE>
                  <S>                 <C>
                  1997                $      173
                  1998                       163
                  1999                       149
                  2000                       126
                  2001                       116
                  Thereafter                 354
</TABLE>

         It is expected that, in the normal course of business, expiring leases
         will be renewed or replaced by leases on other properties; thus, it is
         anticipated that future minimum lease commitments will not be less
         than the amount shown for 1997.

         Certain key employees of the Company hold restricted stock awards,
         options and options with tandem SARs to acquire shares of certain
         subsidiaries' common stock. Estimates of the compensation related to
         the restricted stock awards and options and/or SARs have been recorded
         in the accompanying consolidated financial statements pursuant to APB
         Opinion No. 25. Such estimates are subject to future adjustment based
         upon the market value of the respective common stock and, ultimately,
         on the final market value when the rights are exercised or the
         restricted stock awards are vested. Had the Company accounted for its
         stock based compensation pursuant to the fair value based accounting
         method in Statement No. 123, the amount of compensation would not have
         been materially different from what has been reflected in the
         accompanying consolidated financial statements.

         Estimates of compensation relating to phantom stock appreciation
         rights ("PSARs") granted to employees of a subsidiary of TCI have been
         recorded in the accompanying combined financial statements, but is
         subject to future adjustment based upon a valuation model derived from
         such subsidiary's cash flow, working capital and debt. Effective
         January 1, 1994, these employees have a put right that requires such
         subsidiary to purchase their respective PSARs. The subsidiary may call
         the PSARs on or after January 1, 1996.

         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 amounts, if
         any, which may be required to satisfy such contingencies will not be
         material in relation to the accompanying consolidated financial
         statements.

                                                                    (continued)



                                     II-99
<PAGE>   164
                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements




(16)     Information about the Company's Operations

         The following is selected information about the Company's operations
         for the years ended December 31, 1996, 1995 and 1994. Separate amounts
         of the Company's home shopping service have been provided to enhance
         the readers understanding of the Company.

<TABLE>
<CAPTION>
                                         Programming
                                  ----------------------
                        Communi- Electronic Other      Intersegment
                        cations  Retailing Programming Eliminations Total
                        -------- --------- ----------- ------------ -----
1996                                   amounts in millions
<S>                      <C>         <C>     <C>        <C>       <C>
Revenue                  $ 6,790      984        355     (107)      8,022
                         =======     ====      =====     ====      ======

Operating income
    (loss)               $   546       36         50       --         632
                         =======     ====      =====     ====      ======

Depreciation and
    amortization         $ 1,555       37         24       --       1,616
                         =======     ====      =====     ====      ======

Capital expenditures
                         $ 2,043        5          7       --       2,055
                         =======     ====      =====     ====      ======

Identifiable assets      $27,154      442      2,617       31      30,244
                         =======     ====      =====     ====      ======

1995

Revenue                  $ 5,153      920        521      (88)      6,506
                         =======     ====      =====     ====      ======

Operating income
    (loss)               $   653      (85)       (26)      --         542
                         =======     ====      =====     ====      ======

Depreciation and
    amortization         $ 1,274       43         55       --       1,372
                         =======     ====      =====     ====      ======

Capital expenditures
                         $ 1,733       13         36       --       1,782
                         =======     ====      =====     ====      ======

Identifiable assets      $23,059      725      1,793       --      25,577
                         =======     ====      =====     ====      ======

1994

Revenue                  $ 4,043      432        240      (33)      4,682
                         =======     ====      =====     ====      ======

Operating income
   (loss)                $   781        9         (2)      --         788
                         =======     ====      =====     ====      ======

Depreciation and
   amortization          $   992       15         11       --       1,018
                         =======     ====      =====     ====      ======

Capital
   expenditures          $ 1,239       19          6       --       1,264
                         =======     ====      =====     ====      ======

Identifiable assets      $17,121      739      1,448      (32)     19,276
                         =======     ====      =====     ====      ======
</TABLE>

                                                                    (continued)





                                    II-100
<PAGE>   165

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(17)     Quarterly Financial Information (Unaudited)


<TABLE>
<CAPTION>
                                                                1st           2nd           3rd           4th
                                                              Quarter       Quarter       Quarter       Quarter
                                                             ---------     ---------     ---------      ---------
                                                                              amounts in millions,
1996:                                                                      except per share amounts
<S>                                                          <C>           <C>           <C>            <C>  
  Revenue:
     As previously reported                                   $  1,959         2,022         2,135
     Adjustment to reclassify franchise fee revenue                (67)          (70)          (74)
     Adjustment to reclassify shipping and handling 
       revenue                                                     (27)           --            --
     Adjustment to reflect optical fiber leases as 
       capital leases                                               (4)           (4)           (3)
                                                             ---------     ---------     ---------
     As adjusted                                              $  1,861         1,948         2,058          2,155
                                                              ========     =========     =========      =========

  Operating income:
     As previously reported                                   $    176           173           223
     Adjustment to reflect optical fiber leases as 
       capital leases                                               (4)           (4)           (3)
                                                             ---------     ---------     ---------
     As adjusted                                              $    172           169           220             71
                                                              ========     =========     =========      =========

  Net earnings (loss):
     As previously reported                                   $   (118)         (184)         (136)
     Adjustment to reflect optical fiber leases as 
       capital leases                                               (3)           (3)           (2)
                                                             ---------     ---------     ---------
     As adjusted                                              $   (121)         (187)         (138)           724
                                                              ========     =========     =========      =========

  Primary earnings (loss) attributable to common 
     stockholders per common and common 
     equivalent share:

       Series A and Series B TCI Group Stock:
         As previously reported                               $  (.22)          (.29)         (.24)
         Adjustment to reflect optical fiber leases as
           capital leases                                           --          (.01)         (.01)
                                                             ---------     ---------     ---------
         As adjusted                                          $  (.22)          (.30)         (.25)         (.46)
                                                              =======      =========     =========     =========

       Series A and Series B Liberty Group Stock (a)          $   .06            .02           .07          3.83

  Fully diluted earnings (loss) attributable to common 
     stockholders per common and common 
     equivalent share:

       Series A and Series B TCI Group Stock:
         As previously reported                               $  (.22)          (.29)         (.24)
         Adjustment to reflect optical fiber leases as
           capital leases                                           --          (.01)         (.01)
                                                             ---------     ---------     ----------
         As adjusted                                          $  (.22)          (.30)         (.25)         (.46)
                                                              =======      =========     =========     =========

       Series A and Series B Liberty Group Stock (a)          $   .06            .02           .07          3.74

1995:

  Revenue:
     As previously reported                                   $  1,524         1,674         1,761          1,892
     Adjustment to reclassify franchise fee revenue                (56)          (62)          (63)           (65)
     Adjustment to reclassify shipping and handling 
           revenue                                                 (22)          (26)          (23)           (28)
                                                             ---------     ---------     ---------      ---------
     As adjusted                                              $  1,446         1,586         1,675          1,799
                                                              ========     =========     =========      =========

  Operating income                                            $    180           135           176             51
  Net earnings (loss)                                         $    (44)          (95)           32            (64)
  Primary and fully diluted earnings (loss) 
     attributable to common stockholders per 
     common and common equivalent share:

       TCI Class A and Class B common stock                   $  (.08)          (.16)          .12            N/A
       Series A and Series B TCI Group Stock                       N/A           N/A      $   (.09)         (.07)
       Series A and Series B Liberty Group Stock (a)               N/A           N/A      $   (.02)         (.09)
</TABLE>

          ------------------
          (a)     Adjusted to give effect to the Liberty Group Stock Dividend.


                                    II-101
<PAGE>   166





                          INDEPENDENT AUDITORS' REPORT




The Board of Directors and Stockholders
Tele-Communications, Inc.:


We have audited and reported separately herein on the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries as of December 31,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996.

We have also audited the accompanying combined balance sheets of Liberty Media
Group (a combination of certain assets of Tele-Communications, Inc., as defined
in note 1) as of December 31, 1996 and 1995, and the related combined
statements of operations, equity, and cash flows for each of the years in the
three-year period ended December 31, 1996.  These combined financial statements
are the responsibility of the Company's management.  Our responsibility is to
express an opinion on these combined financial statements based on our audits.

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

The combined financial statements of Liberty Media Group are presented for
purposes of additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries.  As more fully described in note 1,
the combined financial statements of Liberty Media Group are intended to
reflect the performance of the businesses of Tele-Communications, Inc., which
produce and distribute cable television programming services.  The combined
financial statements of Liberty Media Group should be read in conjunction with
the consolidated financial statements of Tele-Communications, Inc. and
subsidiaries.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Liberty Media Group
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.





                                                 KPMG Peat Marwick LLP




Denver, Colorado
March 24, 1997


                                    II-102
<PAGE>   167

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)



                            Combined Balance Sheets

                           December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                                          1996                  1995
                                                                      -------------         -------------
Assets                                                                         amounts in thousands
------                                                                                             
<S>                                                                  <C>                    <C>
Cash and cash equivalents                                            $  317,359                41,225

Trade and other receivables, net                                         24,796               107,180

Inventories, net                                                             --               103,968

Prepaid expenses                                                          1,150                14,176

Prepaid program rights                                                   32,063                32,170

Committed film inventory                                                 20,092                29,931

Investments in affiliates, accounted for under the
  equity method, and related receivables (note 4)                       545,121               299,331

Investment in Time Warner, Inc. ("Time Warner")
  (note 5)                                                            2,016,799                    --

Investment in Turner Broadcasting System, Inc.
  ("TBS") (note 5)                                                           --               945,282

Other investments and related receivables (note 6)                       81,537               110,791

Property and equipment, at cost:
  Land                                                                       39                21,254
  Support equipment and buildings                                        17,756               180,051
  Computer and broadcast equipment                                           --                44,962
                                                                     ----------             ---------
                                                                         17,795               246,267
  Less accumulated depreciation                                           7,846                42,233
                                                                     ----------             ---------
                                                                          9,949               204,034
                                                                     ----------             ---------
Intangibles:
  Excess cost over acquired net assets                                    8,755               364,995
  Other intangibles                                                          --               279,467
  Cable distribution fees                                                    --               115,746
                                                                     ----------             ---------
                                                                          8,755               760,208
  Less accumulated amortization                                           2,126               142,741
                                                                     ----------             ---------
                                                                          6,629               617,467
                                                                     ----------             ---------

Other assets, at cost, net of amortization                                3,457                12,081
                                                                     ----------             ---------

                                                                     $3,058,952             2,517,636
                                                                     ==========             =========
</TABLE>


                                                                     (continued)





                                     II-103
<PAGE>   168

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)



                       Combined Balance Sheets, continued

                           December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                               1996               1995
                                                          --------------   -----------------
Liabilities and Combined Equity                                  amounts in thousands
-------------------------------                                                                     
<S>                                                       <C>                      <C>
Accounts payable and accrued liabilities                  $       19,397             261,237

Accrued compensation relating to phantom stock
    appreciation rights (note 10)                                 17,758               2,183

Program rights payable                                            33,700              34,864

Deferred revenue                                                   6,166              50,803

Debt (note 7)                                                      1,620             250,990

Deferred income taxes (note 8)                                   582,089             201,909

Other liabilities                                                     --              14,261
                                                          --------------   -----------------

       Total liabilities                                         660,730             816,247
                                                          --------------   -----------------

Minority interests in equity of consolidated
    subsidiaries                                                   1,052              87,960

Combined equity (note 9):
  Combined equity                                              2,355,021           1,336,125
  Due to TCI Group                                                42,149               7,496
  Unrealized holding gains for available-for-sale                            
    securities, net of taxes                                          --             269,808
                                                          --------------   -----------------
                                                               2,397,170           1,613,429
                                                          --------------   -----------------

Commitments and contingencies (note 10)
                                                                             
                                                          $    3,058,952           2,517,636
                                                          ==============   =================
</TABLE>



See accompanying notes to combined financial statements.





                                     II-104
<PAGE>   169

                   "LIBERTY MEDIA GROUP" (a combination of
                    certain assets, as defined in note 1)


                       Combined Statements of Operations

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                        1996            1995            1994      
                                                                      ----------      ---------       ---------
                                                                                 amounts in thousands,
                                                                                except per share amounts
<S>                                                                   <C>             <C>             <C>
Revenue:
  Net sales from electronic retailing services                        $  984,117        919,796       1,014,384
  Programming services:                       
    From TCI Group (note 9)                                              106,734         79,738          64,660
    From others                                                          248,508        441,312         292,371
                                                                      ----------      ---------       ---------
                                                                       1,339,359      1,440,846       1,371,415
                                                                      ----------      ---------       ---------

Cost of sales, operating costs and expenses:
  Cost of sales                                                          605,116        602,849         618,972
  Operating                                                              265,586        426,445         325,565
  Selling, general and administrative                                    282,265        372,216         340,462
  Charges by TCI Group (note 9)                                           21,915         23,899          14,180
  Compensation relating to phantom rights and stock
    appreciation rights (notes 9 and 10)                                  17,353         11,686              --
  Adjustment to compensation relating to stock     
    appreciation rights (note 9)                                              --             --          (8,574)
  Restructuring charges                                                       --         16,846              --
  Depreciation                                                            15,543         24,769          22,574
  Amortization                                                            45,149         73,242          26,762
                                                                      ----------      ---------       ---------
                                                                      $1,252,927      1,551,952       1,339,941
                                                                      ----------      ---------       ---------
     
    Operating income (loss)                                               86,432       (111,106)         31,474

Other income (expense):
 Interest expense                                                        (16,671)       (17,395)        (10,333)
 Interest expense to TCI Group                                                --         (1,920)         (2,348)
 Dividend and interest income, primarily from affiliates                  22,040         11,552          20,249
                                                                                                               
 Share of earnings (losses) of affiliates (note 4)                         7,524        (15,092)         30,833
                                                                                                               
 Minority interests in lossess (earnings) of consolidated
 subsidiaries                                                            (13,257)        34,518         (10,083)
    Gain (loss) on disposition of assets (note 5)                      1,537,408         (2,195)        181,088
 Litigation settlements                                                       --         (9,003)             --
    Other, net                                                               575             17          (2,375)
                                                                      ----------      ---------       ---------
                                                                       1,537,619            482         207,031
                                                                      ----------      ---------       ---------
    
    Earnings (loss) before income taxes                                1,624,051       (110,624)        238,505

Income tax benefit (expense) (note 8)                                   (567,655)        54,292        (103,941)
                                                                      ----------      ---------       ---------

    Net earnings (loss)                                               $1,056,396        (56,332)        134,564
                                                                      ==========      =========       =========

Primary earnings (loss) per common and common equivalent
   share (note 2)                                                     $     3.97           (.11)
                                                                      ==========      =========     

Fully diluted earnings (loss) per common and common
   equivalent share (note 2)                                          $     3.88           (.11)
                                                                      ==========      =========     
</TABLE>


See accompanying notes to combined financial statements.





                                     II-105
<PAGE>   170

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                         Combined Statements of Equity

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                                      Unrealized
                                                                                     holding gains
                                                                                   for available-for-            Total
                                                 Combined            Due to         sale securities,            combined
                                                  equity            TCI Group          net of taxes              equity 
                                                ----------          ---------          ------------             ---------
                                                                           amounts in thousands
<S>                                             <S>                 <C>                  <C>                   <C>
Balance at December 31, 1993                    $1,185,381              2,738                    --             1,188,119
  Unrealized holding gains for
    available-for-sale securities as of                 --                 --               292,918               292,918
    January 1, 1994
  Net earnings                                     134,564                 --                    --               134,564
  Sale of programming to TCI Group                 (64,660)                --                    --               (64,660)
  Cost allocations from TCI Group                   14,180                 --                    --                14,180
  Accrued cable distribution fees to TCI
    Group from Home Shopping Network,
    Inc. ("HSN")                                        --             28,170                    --                28,170
  Allocation of compensation relating to
    stock appreciation rights                       (8,574)                --                    --                (8,574)
  Interest expense allocation from TCI
    Group                                            2,348                 --                    --                 2,348
  Intergroup tax allocation                         78,238                 --                    --                78,238
  Acquisition of Prime Ticket Networks,            210,796                 --                    --               210,796
    L.P.
  Net cash transfers to TCI Group                 (160,833)            (2,184)                   --              (163,017)
  Change in unrealized holding gains for
    available-for-sale securities                       --                 --              (194,729)             (194,729)
                                                ----------          ---------            ----------             ---------
Balance at December 31, 1994                     1,391,440             28,724                98,189             1,518,353
  Net loss                                         (56,332)                --                    --               (56,332)
  Sale of programming to TCI Group                 (43,079)           (36,659)                   --               (79,738)
  Cost allocations from TCI Group                   14,480              9,419                    --                23,899
  Cable distribution fees paid to TCI
    Group from HSN                                      --            (26,540)                   --               (26,540)
  Allocation of compensation relating to
    stock appreciation rights                        6,765              2,738                    --                 9,503
  Interest expense allocation from TCI
    Group                                            1,786                134                    --                 1,920
  Intergroup tax allocation                            435               (407)                   --                    28
  Deferred tax assets transferred to TCI
    Group                                          (13,717)                --                    --               (13,717)
  Deferred tax assets transferred to TCI
    Group upon implementation of tax
    sharing agreement (note 8)                      (2,410)                --                    --                (2,410)
  Net cash transferred from TCI Group               17,637             30,087                    --                47,724
  Contribution to combined equity for
    acquisitions                                    19,120                 --                    --                19,120
  Change in unrealized holding gains for
    available-for-sale securities                       --                 --               171,619               171,619
                                                ----------          ---------            ----------             ---------
Balance at December 31, 1995                     1,336,125              7,496               269,808             1,613,429
  Net earnings                                   1,056,396                 --                    --             1,056,396
  Repurchase of Liberty Group Stock                (37,500)                --                    --               (37,500)
  Sale of programming to TCI Group                      --           (106,734)                   --              (106,734)
  Cost allocations from TCI Group                       --             21,915                    --                21,915
  Cable distribution fees paid to TCI Group from                                       
    HSN                                                 --              2,620                    --                 2,620
  Adjustment to allocation of compensation                         
    relating to stock appreciation rights               --             (2,789)                   --                (2,789)
  Allocation of payment of compensation relating                                       
    to stock appreciation rights                        --               (192)                   --                  (192)
  Intergroup tax allocation                             --             32,042                    --                32,042 
  Net cash transfers from TCI Group                     --             87,791                    --                87,791 
  Recognition of previously unrealized gains on                    
    available-for-sale securities                       --                 --              (355,922)             (355,922)
  Change in unrealized holding gains on                                                                                   
    available-for-sale securities                       --                 --                86,114                86,114 
                                                ----------          ---------            ----------             ---------
Balance at December 31, 1996                    $2,355,021             42,149                    --             2,397,170
                                                ==========          =========            ==========             =========
</TABLE>

See accompanying notes to combined financial statements.





                                     II-106
<PAGE>   171

                            "LIBERTY MEDIA GROUP"
           (a combination of certain assets, as defined in note 1)



                      Combined Statements of Cash Flows

                 Years ended December 31, 1996, 1995 and 994

<TABLE>
<CAPTION>
                                                                            1996              1995           1994 
                                                                         ----------        ---------       ---------
                                                                                       amounts in thousands
                                                                                            (see note 3)
<S>                                                                     <C>                <C>             <C>
Cash flows from operating activities:
  Net earnings (loss)                                                    $1,056,396         (56,332)         134,564
  Adjustments to reconcile net earnings (loss) to net cash
    provided by operating activities:
       Depreciation and amortization                                         60,692           98,011          49,336
       Compensation relating to phantom rights and stock
          appreciation rights                                                17,353           11,686              --
       Adjustment to compensation relating to stock appreciation
          rights                                                                 --               --          (8,574)
       Payment of compensation relating to phantom rights and
          stock appreciation rights                                          (1,218)              --              --
       Share of losses (earnings) of affiliates, net                         (7,524)          15,092         (30,833)
       Deferred income tax expense (benefit)                                542,613          (53,900)         25,703
       Intergroup tax allocation                                             32,042               28              --
       Noncash interest expense                                               4,097            1,920              --
       Minority interests in earnings (losses)                               13,257          (34,518)         10,083
       Litigation settlements                                                    --            9,003              --
       Payments of litigation settlements                                    (3,725)         (30,313)             --
       Loss (gain) on disposition of assets                              (1,537,408)           2,195        (181,088)
       Other noncash charges                                                 (1,003)           4,501           1,491
       Changes in operating assets and liabilities, net of the
          effect of acquisitions:
            Change in receivables                                           (40,180)         (11,851)        (13,437)
            Change in inventories                                             1,180            7,895         (18,455) 
            Change in prepaid expenses                                       (6,182)         (16,658)        (10,418)
            Change in payables, accruals and deferred revenue                19,461           54,937          48,810
                                                                         ----------        ---------       ---------

                Net cash provided by operating activities                   149,851            1,696           7,182
                                                                         ----------        ---------       ---------

Cash flows from investing activities:
  Cash paid for acquisitions                                                (55,000)         (36,596)             --
  Capital expended for property and equipment                               (11,734)         (48,700)        (32,455)
  Additional investments in and loans to affiliates and others              (36,044)         (69,479)        (23,856)
  Return of capital from affiliates                                           6,144           20,009           9,880
  Collections on loans to affiliates and others                               1,918            2,501         149,162
  Cash paid for cable distribution fees                                     (31,529)         (43,875)        (71,871)
  Proceeds from disposition of assets                                        27,623              373         180,429
  Other investing activities                                                 (7,572)          14,168          (2,245)
                                                                         ----------        ---------       ---------

                Net cash provided (used) by investing activities           (106,194)        (161,599)        209,044
                                                                         ----------        ---------       ---------

Cash flows from financing activities:
  Borrowings of debt                                                        278,899          222,549          46,859
  Repayments of debt                                                       (333,906)         (50,284)       (139,096)
  Change in cash transfers from TCI Group                                     5,592         (34,655)        (149,442)
  Repurchase of Liberty Group Stock                                         (37,500)              --              --
  Contributions by minority shareholders of subsidiaries                    319,457            2,084           6,272
  Distributions to minority shareholders of subsidiaries                        (65)          (1,529)           (400)
                                                                         ----------        ---------       ---------

                Net cash provided (used) by financing activities            232,477          138,165        (235,807)
                                                                         ----------        ---------       ---------

                   Net increase (decrease) in cash and cash
                      equivalents                                           276,134          (21,738)        (19,581)

                   Cash and cash equivalents at beginning of year            41,225           62,963          82,544
                                                                         ----------        ---------       ---------

                   Cash and cash equivalents at end of year              $  317,359           41,225          62,963
                                                                         ==========        =========       =========
</TABLE>

See accompanying notes to combined financial statements.







                                    II-107
<PAGE>   172

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


                        December 31, 1996,1995 and 1994


(1)      Basis of Presentation

         The accompanying combined financial statements include the accounts of
         the subsidiaries and assets of Tele- Communications, Inc. ("TCI") that
         are attributed to Liberty Media Group, as defined below.  All
         significant intercompany accounts and transactions have been
         eliminated.

         On August 3, 1995, the stockholders of TCI authorized the Board of
         Directors of TCI (the "Board") to issue two new series of stock
         ("Liberty Group Stock") which reflect the separate performance of
         TCI's business which produces and distributes cable television
         programming services ("Liberty Media Group").  Additionally, the
         stockholders of TCI approved the redesignation of the previously
         authorized TCI Class A and Class B common stock into Series A TCI
         Group and Series B TCI Group common stock ("TCI Group Stock").
         Liberty Media Group's programming services include production,
         acquisition and distribution through all available formats and media
         of branded entertainment, educational and informational programming
         and software, including multimedia products.  Additionally, Liberty
         Media Group is engaged in electronic retailing, direct marketing,
         advertising sales relating to programming services, infomercials and
         transaction processing.

         The issuance of Liberty Group Stock did not result in any transfer of
         assets or liabilities of TCI or any of its subsidiaries or affect the
         rights of holders of TCI's or any of its subsidiaries' debt.  On
         August 10, 1995, TCI distributed, in the form of a dividend, one share
         of Liberty Group Stock for each four shares of TCI Group Stock owned.
         Such distribution (the "Distribution") represented one hundred percent
         of the equity value attributable to Liberty Media Group.

         As of December 31, 1996, the TCI Group Stock reflects the separate
         performance of TCI's subsidiaries and assets not attributed to Liberty
         Media Group, including (i) TCI's Domestic Cable and Communications
         unit, (ii) TCI's International Cable and Programming unit and (iii)
         TCI's Technology/Venture Capital unit.  Such subsidiaries and assets
         are collectively referred to as "TCI Group".  Intercompany balances
         resulting from transactions with such units are reflected as
         borrowings from or loans to TCI Group and, prior to the Distribution,
         are included in combined equity in the accompanying combined financial
         statements.  See note 9.

         Notwithstanding the attribution of assets and liabilities, equity and
         items of income and expense to Liberty Media Group for purposes of
         preparing its combined financial statements, the change in the capital
         structure of TCI does not affect the ownership or the respective legal
         title to assets or responsibility for liabilities of TCI or any of its
         subsidiaries.  TCI and its subsidiaries will each continue to be
         responsible for their respective liabilities.  Holders of Liberty
         Group Stock are holders of common stock of TCI and continue to be
         subject to risks associated with an investment in TCI and all of its
         businesses, assets and liabilities.  The issuance of Liberty Group
         Stock did not affect the rights of creditors of TCI.

                                                                     (continued)





                                     II-108
<PAGE>   173

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Financial effects arising from any portion of TCI that affect the
         consolidated results of operations or financial condition of TCI could
         affect the combined results of operations or financial condition of
         Liberty Media Group and the market price of shares of Liberty Group
         Stock.  In addition, net losses of any portion of TCI, dividends and
         distributions on, or repurchases of, any series of common stock, and
         dividends on, or certain repurchases of preferred stock would reduce
         funds of TCI legally available for dividends on all series of common
         stock.  Accordingly, Liberty Media Group financial information should
         be read in conjunction with the TCI consolidated financial
         information.

         Dividends on Liberty Group Stock are payable at the sole discretion of
         the Board out of the lesser of all assets of TCI legally available for
         dividends and the available dividend amount with respect to Liberty
         Media Group, as defined.  Determinations to pay dividends on Liberty
         Group Stock will be based primarily upon the financial condition,
         results of operations and business requirements of Liberty Media Group
         and TCI as a whole.

         After the Distribution, existing preferred stock and debt securities
         of TCI that were convertible into or exchangeable for shares of TCI
         Class A common stock were, as a result of the operation of
         antidilution provisions, adjusted so that there will be delivered upon
         their conversion or exchange (in addition to the same number of shares
         of redesignated Series A TCI Group Stock as were theretofore issuable
         thereunder) the number of shares of Series A Liberty Group Stock that
         would have been issuable in the Distribution with respect to the TCI
         Class A common stock issuable upon conversion or exchange had such
         conversion or exchange occurred prior to the record date for the
         Distribution.  Options to purchase TCI Class A common stock
         outstanding at the time of the Distribution were adjusted by issuing
         to the holders of such options separate options to purchase that
         number of shares of Series A Liberty Group Stock which the holder
         would have been entitled to receive had the holder exercised such
         option to purchase TCI Class A common stock prior to the record date
         for the Distribution and reallocating a portion of the aggregate
         exercise price of the previously outstanding options to the newly
         issued options to purchase Series A Liberty Group Stock.

         The issuance of shares of Series A Liberty  Group Stock upon such
         conversion, exchange or exercise of such convertible securities will
         not result in any transfer of funds or other assets from TCI Group to
         Liberty Media Group in consideration of such issuance.  In the case of
         the exercise of such options to purchase Series A Liberty Group Stock,
         the proceeds received upon the exercise of such options will be
         attributed to Liberty Media Group.

         Effective January 13, 1997, TCI issued a stock dividend to holders of
         Liberty Group Stock consisting of one share of Series A Liberty Group
         Stock for every two shares of Series A Liberty Group Stock owned and
         one share of Series A Liberty Group Stock for every two shares of
         Series B Liberty Group Stock owned (the "Liberty Group Stock
         Dividend").  The Liberty Group Stock Dividend has been treated as a
         stock split, and accordingly, all share and per share amounts have
         been retroactively restated to reflect the Liberty Group Stock
         Dividend.


                                                                     (continued)





                                     II-109
<PAGE>   174

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



(2)      Summary of Significant Accounting Policies

         Cash and Cash Equivalents

         Cash equivalents consist of investments which are readily convertible
         into cash and have maturities of three months or less at the time of
         acquisition.

         Receivables

         Receivables are reflected net of an allowance for doubtful accounts.
         Such allowance at December 31, 1996 and 1995 was not material.

         Program Rights

         Prepaid program rights are amortized on a film-by-film basis over the
         specific number of exhibitions.  Committed film inventory and program
         rights payable are recorded at the estimated costs of the programs
         when the film is available for airing less prepayments.  These amounts
         are amortized on a film-by-film basis over the specific number of
         exhibitions.

         Investments

         All marketable equity securities held by Liberty Media Group are
         classified as available-for-sale and are carried at fair value.
         Unrealized holding gains and losses on securities classified as
         available-for-sale are carried net of taxes as a separate component of
         combined equity.  Realized gains and losses are determined on a
         specific-identification basis.

         Other investments in which the ownership interest is less than 20% and
         are not considered marketable securities are generally carried at
         cost.  For those investments in affiliates in which Liberty Media
         Group's voting interest is 20% to 50%, the equity method of accounting
         is generally used.  Under this method, the investment, originally
         recorded at cost, is adjusted to recognize Liberty Media Group's share
         of net earnings or losses of the affiliates as they occur rather then
         as dividends or other distributions are received, limited to the
         extent of Liberty Media Group's investment in, advances to and
         commitments for the investee.  Liberty Media Group's share of net
         earnings or losses of affiliates includes the amortization of the
         difference between Liberty Media Group's investment and its share of
         the net assets of the investee.  However, recognition of gains on
         sales of properties to affiliates accounted for under the equity
         method is deferred in proportion to Liberty Media Group's ownership
         interest in such affiliates.

         Changes in Liberty Media Group's proportionate share of the underlying
         equity of a subsidiary or equity method investee, which result from
         the issuance of additional equity securities by such subsidiary or
         equity investee, generally are recognized as gains or losses in
         Liberty Media Group's consolidated statements of operations.





                                     II-110
<PAGE>   175

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Long-Lived Assets

         (a)     Property and Equipment

                 Property and equipment, including significant improvements, is
                 stated at cost which includes acquisition costs allocated to
                 tangible assets acquired.

                 Depreciation is computed on a straight-line basis using
                 estimated useful lives of 3 to 40 years for support equipment
                 and buildings (furniture and other equipment are depreciated
                 from 3 to 8 years and buildings and improvements are
                 depreciated from 20 to 40 years).

                 Repairs and maintenance and any gains or losses on disposition
                 of assets are included in operations.

         (b)     Excess Cost Over Acquired Net Assets

                 Excess cost over acquired net assets consists of the
                 difference between the cost of acquiring programming entities
                 and amounts assigned to their tangible assets.  Such amounts
                 are amortized on a straight-line basis over 30 years.

In March of 1995, the Financial Accounting Standards Board (the "FASB") issued
         Statement of Financial Accounting Standards No. 121, Accounting for
         the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
         Disposed Of ("Statement No. 121"), effective for fiscal years
         beginning after December 15, 1995.  Statement No. 121 requires
         impairment losses to be recorded on long-lived assets used in
         operations when indicators of impairment are present and the
         undiscounted cash flows estimated to be generated by those assets are
         less than the assets' carrying amount.  The accounting for long-lived
         assets that are expected to be disposed are also addressed in
         Statement No. 121.  Liberty Media Group adopted Statement No. 121
         effective January 1, 1996.  Such adoption did not have a significant
         effect on the financial position or results of operations of Liberty
         Media Group.

         Pursuant to Statement No. 121, Liberty Media Group periodically
         reviews the carrying amount of its long-lived assets and certain other
         assets to determine whether current events or circumstances warrant
         adjustments to such carrying amounts.  Liberty Media Group considers
         historical and expected future net operating losses to be its primary
         indicators of potential impairment.  Assets are grouped and evaluated
         for impairment at the lowest level for which there are identifiable
         cash flows that are largely independent of the cash flows of other
         groups of assets ("Assets").  Liberty Media Group deems Assets to be
         impaired if Liberty Media Group is unable to recover the carrying
         value of such Assets over their expected remaining useful life through
         a forecast of undiscounted future operating cash flows directly
         related to the Assets.  If Assets are deemed to be impaired, the loss
         is measured as the amount by which the carrying amount of the Assets
         exceeds their fair value.  Liberty Media Group generally measures fair
         value by considering sales prices for similar assets or by discounting
         estimated future cash flows. Considerable management judgment is
         necessary to estimate discounted future cash flows.  Accordingly,
         actual results could vary significantly from such estimates.

                                                                     (continued)





                                     II-111
<PAGE>   176

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Minority Interests

         Recognition of minority interests' share of losses of consolidated
         subsidiaries is limited to the amount of such minority interests'
         allocable portion of the common equity of those consolidated
         subsidiaries.  Further, the minority interests' share of losses is not
         recognized if the minority holders of common equity of consolidated
         subsidiaries have the right to cause Liberty Media Group to repurchase
         such holders' common equity.

         Deferred Revenue

         Deferred revenue represents advance billings primarily to home
         satellite dish owners and providers.  Such revenue is recognized in
         the month service is provided.

         Net Sales From Electronic Retailing Services

         Revenue includes merchandise sales reduced by incentive discounts and
         sales returns to arrive at net sales from electronic retailing
         services.  Revenue is recorded for credit card sales upon transaction
         authorization, and for check sales upon receipt of customer payment,
         which does not vary significantly from the time goods are shipped.
         Liberty Media Group's sales policy allows merchandise to be returned
         at the customer's discretion, generally up to 30 days.

         Stock Based Compensation

         Statement of Financial Accounting Standards No. 123, Accounting for
         Stock-Based Compensation ("Statement No.  123") was issued by the FASB
         in October 1995.  Statement No. 123 establishes financial accounting
         and reporting standards for stock-based employee compensation plans as
         well as transactions in which an entity issues its equity instruments
         to acquire goods or services from non-employees.  As allowed by
         Statement No. 123, Liberty Media Group continues to account for
         stock-based employee compensation pursuant to APB Opinion No. 25.  See
         note 9.

         Earnings (Loss) Per Common and Common Equivalent Share

         Primary earnings attributable to Liberty Media Group stockholders per
         common share for the year ended December 31, 1996 was computed by
         dividing net earnings attributable to Liberty Media Group Series A and
         Series B common stockholders by the weighted average number of common
         shares of Liberty Media Group Series A and Series B common stock
         outstanding during the period, as adjusted for the effect of the
         Liberty Group Stock Dividend (266.3 million).  Common stock
         equivalents were not included in the computation because their
         inclusion would be anti-dilutive to TCI.


                                                                     (continued)


                                     II-112
<PAGE>   177

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Fully diluted earnings attributable to Liberty Media Group
         stockholders per common and common equivalent share for the year ended
         December 31, 1996 was computed by dividing earnings attributable to
         Liberty Media Group Series A and Series B common stockholders by the
         weighted average number of common and common equivalent shares
         outstanding of Liberty Media Group Series A and Series B common stock
         during the period, as adjusted for the effect of the Liberty Group
         Stock Dividend (272.4 million).  Shares issuable upon conversion of
         TCI's Convertible Preferred Stock, Series C; Convertible Preferred
         Stock, Series D; and Redeemable Convertible Liberty Media Group
         Preferred Stock, Series H have been included in the computation of
         weighted average shares.

         The loss per common share for the period from the Distribution to
         December 31, 1995 was computed by dividing net loss attributable to
         Liberty Media Group Series A and Series B common stockholders by the
         weighted average number of common shares of Liberty Media Group Series
         A and Series B common stock outstanding during the period, as adjusted
         for the effect of the Liberty Group Stock Dividend (246.1 million).
         Common stock equivalents were not included in the computation of
         weighted average shares outstanding because their inclusion would be
         anti-dilutive.

         Earnings per common share are omitted from the statements of
         operations for the periods from January 1, 1995 through the
         Distribution and for the year ended December 31, 1994 as Liberty Group
         Stock was not part of the capital structure of TCI until August 10,
         1995, the date of the Distribution.

         Estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities 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.

         Reclassifications

         Certain amounts have been reclassified for comparability with the 1996
         presentation.

(3)      Supplemental Disclosures to Combined Statements of Cash Flows

         Cash paid for interest was $16,032,000, $14,968,000 and $8,853,000 for
         the years ended December 31, 1996, 1995 and 1994, respectively.  Cash
         paid for income taxes during the years ended December 31, 1996, 1995
         and 1994 was $1,553,000, $1,707,000 and $83,267,000, respectively.  In
         addition, Liberty Media Group received income tax refunds amounting to
         $14,648,000 and $11,258,000 during the years ended December 31, 1996
         and 1995, respectively.


                                                                     (continued)





                                     II-113
<PAGE>   178

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Significant noncash investing and financing activities are as follows:

<TABLE>
<CAPTION>
                                                                    Years  ended
                                                                     December 31,            
                                                       -------------------------------------
                                                         1996           1995          1994 
                                                       -------        -------       --------
                                                                  amounts in thousands
<S>                                                   <C>            <C>           <C>
Cash paid for acquisitions:
  Fair value of assets acquired                        $55,000         35,329        302,043
  Net liabilities assumed                                   --           (934)       (21,350)
  Contribution to combined equity from TCI
     for acquisition                                        --        (19,120)      (210,796)
  Deferred tax asset (liability) recorded in
     acquisition                                            --          1,084        (69,897)
  Minority interests in equity of acquired
     entities                                               --         20,237             --
                                                       -------        -------       --------
       Cash paid for acquisitions                      $55,000         36,596             --
                                                       =======        =======       ========

Exchange of consolidated subsidiaries for
     note receivable and equity investments           $574,104             --             --
                                                       =======        =======       ========

Conversion of debt into additional minority           $     --         14,215             --
                                                       =======        =======       ========

 Assets contributed for interest in limited
  liability company                                   $     --          2,633             --
                                                       =======        =======       ========
</TABLE>


(4)      Investments in Affiliates

         Summarized unaudited results of operations for affiliates accounted
for under the equity method are as follows:

<TABLE>
<CAPTION>
                                                                            December 31,
                                                              --------------------------------------
                                                                     1996                  1995
                                                              ----------------      ----------------
                                                                         amounts in thousands
<S>                                                           <C>                          <C>
Combined Financial Position
---------------------------

  Property and equipment, net                                 $        524,949               340,072
  Program rights                                                       360,129               256,255
  Cable distribution rights                                            276,342               184,160
  Due from Liberty Media Group                                              --                11,313
  Other intangibles                                                  2,892,021             1,174,738
  Other assets                                                       1,619,096               989,993
                                                              ----------------    ------------------
                                                                                      
          Total assets                                        $      5,672,537             2,956,531
                                                              ================        ==============
                                                                                      
  Debt                                                        $      1,811,509             1,359,471
  Due to Liberty Media Group                                             9,239                 1,654
  Program rights payable                                               162,212                92,287
  Other liabilities                                                  1,939,108               924,812
  Owners' equity                                                     1,750,469               578,307
                                                              ----------------        --------------
                                                                                      
          Total liabilities and equity                        $      5,672,537             2,956,531
                                                              ================    ==================
</TABLE>

                                                                     (continued)





                                     II-114
<PAGE>   179

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements




<TABLE>
<CAPTION>
                                                                     Years ended
                                                                     December 31,                
                                                ---------------------------------------------------
                                                       1996              1995            1994      
                                                ----------------- ----------------- --------------- 
                                                                 amounts in thousands
<S>                                             <C>                      <C>             <C>
Combined Operations
-------------------

  Revenue                                       $       3,392,548         2,632,908       2,152,341
  Operating expenses                                   (3,167,329)       (2,338,703)     (1,880,754)
  Depreciation and amortization                          (153,325)         (137,663)        (90,780)
                                                ----------------- ----------------- --------------- 

          Operating income                                 71,894           156,542         180,807

  Interest expense                                       (103,321)         (107,506)        (31,900)
  Other, net                                             (187,787)          (95,446)       (117,014)
                                                ----------------- ----------------- --------------- 

  Net earnings (loss)                           $        (219,214)          (46,410)         31,893
                                                ================= ================= ===============
</TABLE>


         The following table reflects the carrying value of Liberty Media
         Group's investments, accounted for under the equity method, including
         related receivables:

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                       ----------------------------
                                                                         1996                1995
                                                                       --------             -------
                                                                         amounts in thousands
                <S>                                                    <C>                  <C>
                Discovery Communications, Inc.
                   ("Discovery")                                       $117,724             117,373
                QVC, Inc. ("QVC")                                       103,855              81,160
                Sunshine Network ("Sunshine") (a)                            --               8,221
                SportsChannel Chicago ("Chicago") (a)                        --              29,722
                Home Team Sports Limited Partnership
                   ("HTS") (a)                                               --               3,514
                International Cable Channels Partnership,
                   Ltd. ("ICCP")                                          9,411              11,563
                Premier Sports (a)                                           --               4,212
                Bet Holdings, Inc. ("BET")                               20,225              15,353
                Courtroom Television Network ("Court")                    2,160               7,711
                Liberty/Fox U.S. Sports LLC
                   ("Fox Sports") (a)                                   (21,964)                 --
                Superstar/Netlink Group LLC
                   ("Superstar/Netlink") (b)                            (37,236)                 --
                DMX Inc. ("DMX")                                          2,331                  --
                HSN (c)                                                 141,921                  --
                BDTV INC. and BDTV II INC. (c)                          199,701                  --
                Other                                                     6,993              20,502
                                                                       --------             -------
                                                                       $545,121             299,331
                                                                       ========             =======
</TABLE>



                                                                     (continued)





                                     II-115
<PAGE>   180

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         (a)     As of April 29, 1996, Liberty Media Group, The News
                 Corporation Limited ("News Corp.") and Tele- Communications
                 International, Inc. ("TINTA"), a consolidated subsidiary of
                 TCI, formed two sports programming ventures.  In the United
                 States, Liberty Media Group and News Corp. formed Fox Sports
                 into which Liberty Media Group contributed interests in its
                 national and regional sports networks and into which News
                 Corp. contributed its fx cable network and certain other
                 assets.  Liberty Media Group received a 50% interest in Fox
                 Sports and $350 million in cash.

                 Internationally, News Corp. and Liberty/TINTA LLC
                 ("Liberty/TINTA"), a limited liability corporation owned 50%
                 by Liberty Media Group and 50% by TINTA, formed a venture
                 ("Fox Sports International") to operate previously existing
                 sports services in Latin American and Australia and a variety
                 of new sports services throughout the world except in Asia and
                 in the United Kingdom, Japan and New Zealand where prior
                 arrangements preclude an immediate collaboration.
                 Liberty/TINTA owns 50% of Fox Sports International with News
                 Corp. owning the other 50%.  News Corp. contributed various
                 international sports rights and certain trademark rights.
                 Liberty/TINTA contributed Prime Deportiva, a Spanish language
                 sports service distributed in Latin American and in Hispanic
                 markets in the United States; an interest in Torneos y
                 Competencias S.A., an Argentinean sports programming and
                 production business; various international sports and
                 satellite transponder rights and cash.  Liberty/TINTA also
                 contributed its 50% interest in Premier Sports and All-Star
                 Sports.  Both are Australian 24-hour sports services available
                 via multi-channel, multi-point distribution systems or cable
                 television.  Liberty/TINTA is accounted for using the equity
                 method.

                 As part of the formation of Fox Sports International,
                 Liberty/TINTA is entitled to receive from News Corp. 7.5% of
                 the outstanding stock of Star Television Limited.  Upon
                 delivery of such stock to Liberty/TINTA, News Corp. is
                 entitled to receive from Liberty/TINTA $20 million and rights
                 under various Asian sports programming agreements.  Star
                 Television Limited operates a satellite-delivered television
                 platform in Asia.

         (b)     On April 1, 1996, United Video Satellite Group, Inc. ("UVSG")
                 and Liberty Media Group formed Superstar/Netlink, a limited
                 liability company of UVSG's Superstar Satellite Entertainment
                 combined with Netlink USA's ("Netlink") retail business.
                 Liberty Media Group and UVSG each own 50% of
                 Superstar/Netlink.  As of April 1, 1996, Netlink's retail
                 business no longer consolidates with the financial results of
                 Liberty Media Group.


                                                                     (continued)





                                     II-116
<PAGE>   181

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         (c)     Pursuant to an agreement among Liberty Media Group, Barry
                 Diller and certain of their respective affiliates entered into
                 in August 1995 and amended in August 1996 (the "BDTV
                 Agreement"), Liberty Media Group contributed to BDTV INC.
                 ("BDTV-I"), in August 1996, an option (the "Option") to
                 purchase 2 million shares of Class B common stock of Silver
                 King Communications, Inc. ("Silver King") (which shares
                 represented voting control of Silver King at such time) and
                 $3,500,000 in cash, representing the exercise price of the
                 Option.  BDTV-I is a corporation formed by Liberty Media Group
                 and Mr. Diller pursuant to the BDTV Agreement, in which
                 Liberty Media Group owns over 99% of the equity and none of
                 the voting power (except for protective rights with respect to
                 certain fundamental corporate actions) and Mr. Diller owns
                 less than 1% of the equity and all of the voting power.
                 BDTV-I exercised the option shortly after its contribution,
                 thereby becoming the controlling stockholder of Silver King.
                 Such change in control of Silver King had been approved by the
                 Federal Communications Commission ("FCC") in June 1996,
                 subject, however, to the condition that the equity interest of
                 Liberty Media Group in Silver King not exceed 21.37% without
                 the prior approval of the FCC (the "FCC Order").

                 Pursuant to an Agreement and Plan of Exchange and Merger
                 entered into in August 1996, Silver King acquired HSN by
                 merger of HSN with a subsidiary of Silver King in December
                 1996 (the "HSN Merger") where HSN is the surviving corporation
                 and a subsidiary of Silver King following the HSN Merger.
                 Liberty Media Group accounted for the HSN Merger as a sale of
                 a portion of its investment in HSN and accordingly, recorded a
                 pre-tax gain of approximately $47 million.  In order to effect
                 the HSN Merger in compliance with the FCC Order, Liberty Media
                 Group agreed to defer receiving certain shares of Silver King
                 that would otherwise have become issuable to it in the HSN
                 Merger until such time as it was permitted to own such shares.
                 As a result, the HSN Merger was structured so that Liberty
                 Media Group received (i) 7,809,111 shares of Class B common
                 stock of Silver King, all of which shares Liberty Media Group
                 contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual
                 right (the "Contingent Right") to be issued up to an
                 additional 2,591,752 shares of Class B common stock of Silver
                 King from time to time upon the occurrence of certain events
                 which would allow Liberty Media Group to own additional shares
                 in compliance with the FCC Order (including events resulting
                 in the dilution of Liberty Media Group's percentage equity
                 interest), and (iii) 739,141 shares of Class B common stock
                 and 17,566,702 shares of common stock of HSN (representing
                 approximately 19.9% of the equity of HSN).  BDTV-II is a
                 corporation formed by Liberty Media Group and Barry Diller
                 pursuant to the BDTV Agreement, in which the relative equity
                 ownership and voting power of Liberty Media Group and Mr.
                 Diller are substantially the same as their respective equity
                 ownership and voting power in BDTV-I.


                                                                     (continued)





                                     II-117
<PAGE>   182

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



                 As a result of the HSN Merger, HSN is no longer a subsidiary
                 of Liberty Media Group and therefore, the financial results of
                 HSN will no longer be consolidated with the financial results
                 of Liberty Media Group.  Although Liberty Media Group no
                 longer possesses voting control over HSN, it continues to have
                 an indirect equity interest in HSN through its ownership of
                 the equity securities of BDTV-I and BDTV-II as well as a
                 direct interest in HSN which would be exchangeable into shares
                 of Silver King.  Accordingly, HSN, BDTV-I and BDTV-II are
                 accounted for using the equity method.

         The following table reflects Liberty Media Group's share of earnings
         (losses) of each of the aforementioned affiliates:

<TABLE>
<CAPTION>
                                                                    Years ended
                                                                    December 31,              
                                                      ---------------------------------------
                                                       1996            1995             1994 
                                                      ------         --------          ------
                                                               amounts in thousands
<S>                                                  <C>             <C>              <C>
Discovery                                                $351           4,191           7,093
QVC                                                    22,720           2,261          10,830
Sunshine                                                  634           2,524           1,376
Chicago                                                 3,065           6,560           6,465
HTS                                                       397             744             531
ICCP                                                   (2,755)         (1,973)         (1,469)
Premier Sports                                         (3,199)         (8,478)             --
BET                                                     4,872           4,158           3,071
Court                                                  (2,543)        (21,064)             --
Liberty/TINTA                                          (6,603)             --              --
Superstar/Netlink                                      10,754              --              --
DMX                                                   (13,617)             --              --
BDTV-I and BDTV-II                                       (954)             --              --
Other (a)                                              (5,598)         (4,015)          2,936
                                                      ------         --------          ------

                                                      $ 7,524        (15,092)          30,833
                                                      =======        =======           ======
</TABLE>

         (a)     Included in other investments is Liberty Media Group's 49.9%
                 partnership interest in QE+ Ltd. ("QE+"), a limited
                 partnership which distributes STARZ!, a first-run movie
                 premium programming service launched in 1994.  Entities
                 attributed to TCI Group hold the remaining 50.1% partnership
                 interest.


                                                                     (continued)





                                     II-118
<PAGE>   183

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



                 The QE+ limited partnership agreement provides that TCI Group
                 will be required to make special capital contributions to QE+
                 through July 1, 2005, up to a maximum amount of $350 million,
                 approximately $203 million of which was paid through December
                 31, 1996.  QE+ is obligated to pay TCI Group a preferred
                 return of 10% per annum on the first $200 million of its
                 special capital contributions beginning five years from the
                 date of the contribution or five years from January 1, 1996,
                 whichever is later.  Any TCI Group special capital
                 contributions in excess of $200 million will be entitled to a
                 preferred return of 10% per annum from the date of the
                 contribution.  QE+ is required to apply 75% of its available
                 cash flow, as defined, to repay the TCI Group special capital
                 contributions and any preferred return payable thereon.  To
                 the extent such special capital contributions are insufficient
                 to fund the cash requirements of QE+, TCI Group and Liberty
                 Media Group will each have the option to fund such cash
                 requirements in proportion to their respective ownership
                 percentages.

                 Liberty Media Group also has the right to acquire an
                 additional 10.1% general partnership interest in QE+ based on
                 a formula designed to approximate the fair value of such
                 interest.  Such right is exercisable for a period of ten years
                 beginning January 1, 1999 after QE+ has had positive cash flow
                 for two consecutive calendar quarters.  The right is
                 exercisable only after all special capital contributions from
                 TCI Group have been repaid, including any preferred return as
                 discussed above.

                 Encore Media Corporation ("Encore") (90% owned by Liberty
                 Media Group) earns management fees from QE+ equal to 20% of
                 managed costs, as defined. In addition, effective July 1,
                 1995, Liberty Media Group started earning a "Content Fee" for
                 certain services provided to QE+ equal to 4% of the gross
                 revenue of QE+.  Such Content Fees aggregated $3,735,000 and
                 $972,000 for the year ended December 31, 1996 and the six
                 months ended December 31, 1995, respectively, and are included
                 in revenue from TCI Group in the combined statements of
                 operations.  The Content Fee agreement expires on June 30,
                 2001, subject to renewal on an annual basis thereafter.
                 Payment of the Content Fee will be subordinated to the
                 repayment of the contributions made by TCI Group and the
                 preferred return thereon.

         Certain of Liberty Media Group's affiliates are general partnerships
         and any subsidiary of Liberty Media Group that is a general partner in
         a general partnership is, as such, liable as a matter of partnership
         law for all debts (other than non-recourse debts) of that partnership
         in the event liabilities of that partnership were to exceed its
         assets.


                                                                     (continued)





                                     II-119
<PAGE>   184

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



(5)      Investment in Time Warner

         At December 31, 1995, Liberty Media Group owned shares of TBS common
         stock and shares of TBS preferred stock that were convertible into TBS
         common stock.  Liberty Media Group's total holdings represented an
         approximate 7.5% voting interest for those matters which preferred and
         common stock voted as a single class.  On October 10, 1996, Time
         Warner and TBS consummated a merger (the "TBS/Time Warner Merger")
         whereby TBS shareholders received 0.75 of a Time Warner common share
         for each TBS Class A and Class B common share held, and each holder of
         TBS Class C preferred stock received 0.80 of a Time Warner common
         share for each of the 6 shares of TBS Class B common stock into which
         each share of Class C preferred stock could have been converted.

         Time Warner, TBS, TCI and Liberty Media Corporation ("Liberty")
         entered into an Agreement Containing Consent Order with the Federal
         Trade Commission ("FTC") dated August 14, 1996, as amended on
         September 4, 1996 (the "FTC Consent Decree").  Pursuant to the FTC
         Consent Decree, among other things, Liberty agreed to exchange the
         shares of Time Warner common stock to be received in the TBS/Time
         Warner Merger for shares of a separate series of Time Warner common
         stock with limited voting rights (the "TW Exchange Stock").  Holders
         of the TW Exchange Stock are entitled to one one-hundredth (l/100th)
         of a vote for each share with respect to the election of directors.
         Holders of the TW Exchange Stock will not have any other voting
         rights, except as required by law or with respect to limited matters,
         including amendments of the terms of the TW Exchange Stock adverse to
         such holders.  Subject to the federal communications laws, each share
         of the TW Exchange Stock will be convertible at any time at the option
         of the holder on a one-for-one basis for a share of Time Warner common
         stock.  Holders of TW Exchange Stock are entitled to receive dividends
         ratably with the Time Warner common stock and to share ratably with
         the holders of Time Warner common stock in assets remaining for common
         stockholders upon dissolution, liquidation or winding up of Time
         Warner.

         In connection with the TBS/Time Warner Merger, Liberty Media Group
         received approximately 50.6 million shares of the TW Exchange Stock in
         exchange for its TBS holdings.  As a result of the TBS/Time Warner
         Merger, Liberty Media Group recognized a pre-tax gain of approximately
         $1.5 billion in the fourth quarter of 1996.

         At December 31, 1996, Liberty Media Group's investment in Time Warner,
         carried at cost, had an aggregate fair value of approximately $2
         billion based upon the market value of the marketable common stock
         into which it is convertible.

         As security for borrowings under one of its credit facilities, Liberty
         Media Group pledged a portion of its TBS common stock.  Upon
         consummation of the TBS/Time Warner Merger, the revolving credit
         agreement was amended and provides as security for this indebtedness
         the TW Exchange Stock received for the previously pledged TBS Class B
         Common Stock.  See note 7.





                                     II-120
<PAGE>   185

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Subject to a number of conditions, including receipt of a ruling from
         the Internal Revenue Service ("IRS") that such dividend would be tax
         free to the Liberty Media Group stockholders, TCI agreed that it would
         distribute in the form of a stock dividend (the "Spin-Off") to the
         Liberty Media Group stockholders the stock of a new company ("Spinco")
         which would own, directly or indirectly, the TW Exchange Stock and the
         business of Southern Satellite Systems, Inc. ("Southern"), a wholly
         owned subsidiary of Liberty Media Group which distributes the TBS
         SuperStation ("WTBS") signal in the United States and Canada.  The
         level of Liberty Media Group's ownership interest in Time Warner will
         be restricted until the Spin-Off occurs, at which time, such
         restriction would be eased for Spinco.

         If the Spin-Off occurs, certain control stockholders of TCI would
         exchange the Spinco common stock they receive for a Spinco convertible
         preferred security which would only be entitled to vote on major
         corporate transactions involving Spinco.

         In connection with the TBS/Time Warner Merger, Liberty and Time Warner
         entered into, among other agreements, an agreement providing for the
         grant to Time Warner of an option (the "Contract Option") to enter
         into a contract with Southern (the "Distribution Contract") pursuant
         to which Southern would provide Time Warner with certain uplinking and
         distribution services relating to WTBS and would assist Time Warner in
         converting WTBS from a superstation into a copyright paid cable
         programming service.  The Contract Option will be granted no later
         than the fifth business day following the earlier of May 31, 1997, the
         receipt of a favorable IRS ruling and the determination that the IRS
         ruling will not be obtained.  On the date of grant, Time Warner will
         issue to Southern, in consideration for the Contract Option and
         certain noncompetition covenants, an aggregate of 5.0 million shares
         of TW Exchange Stock and $66,666,700, payable to Time Warner's option
         in cash or TW Exchange Stock.  If Time Warner exercises the Contract
         Option and enters into the Distribution Contract, Time Warner will be
         obligated to make quarterly payments to Southern in an amount which,
         when added to Southern's net cash flow, would aggregate approximately
         $213.3 million on a present value basis discounted to the effective
         date of the Distribution Contract.

(6)      Other Investments

         Other investments and related receivables are summarized as follows:

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                         ---------------------------------
                                                                             1996                1995
                                                                         -------------        ------------
                                                                                 amounts in thousands
          <S>                                                            <C>                       <C>
          Marketable equity securities, at fair value                    $         790              16,681

          Convertible debt, at cost, which approximates fair value
                                                                                23,000              23,000

          Other investments, at cost, and related receivables
                                                                                57,747              71,110
                                                                         -------------     ---------------

                                                                         $      81,537             110,791
                                                                         =============     ===============
</TABLE>

                                                                     (continued)





                                     II-121
<PAGE>   186

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Management of Liberty Media Group estimates that the market value,
         calculated utilizing a variety of approaches including multiple of
         cash flow, per subscriber value, a value of comparable public or
         private businesses or publicly quoted market prices, of all of Liberty
         Media Group's other investments aggregated $162 million and $192
         million at December 31, 1996 and December 31, 1995, respectively.  No
         independent external appraisals were conducted for those assets.

(7)      Debt

         Debt is summarized as follows:


<TABLE>
<CAPTION>
                                                                                December 31,
                                                                    -----------------------------------
                                                                         1996                 1995    
                                                                    -------------          ------------
                                                                             amounts in thousands
          <S>                                                       <C>                         <C>
          Note payable to bank (a)                                  $       1,620                    --
          Bank credit facility (b)                                             --                30,000
          Note payable to partnership                                          --                 5,654
          Notes payable to bank                                                --               206,600
          Other debt, with varying rates and maturities
                                                                               --                 8,736
                                                                    -------------          ------------

                                                                    $       1,620               250,990
                                                                    =============           ===========
</TABLE>


         (a)     Payable by Encore Media Corporation

                 This note payable provides for borrowings up to $50 million
                 through September 30, 1999, at which time the commitment is
                 required to be reduced in eight equal, quarterly amounts
                 through June 30, 2001.  Interest on borrowings under the note
                 is tied to, at Encore's option, the bank's prime rate plus an
                 applicable margin or the London Interbank Offered Rate plus an
                 applicable margin (8.25% at December 31, 1996).  Encore is
                 required to pay a commitment fee which varies based on
                 Encore's leverage ratio.  The note is secured by substantially
                 all of Encore's assets.

         (b)     Payable by Communications Capital Corp. ("CCC")

                 This revolving credit agreement, as amended, provides for
                 borrowings up to $325 million through August of 1997.
                 Borrowings under such agreement bear interest at optional
                 measures which approximate the prime rate.  As security for
                 this indebtedness, Liberty Media Group pledged substantially
                 all of its TBS Class B common stock.  Upon consummation of the
                 TBS/Time Warner Merger, the revolving credit agreement was
                 amended and provides as security for this indebtedness the TW
                 Exchange Stock received for the previously pledged TBS Class B
                 Common Stock. CCC must pay an annual commitment fee of .3125%
                 of the unfunded portion of the commitment.





                                                                     (continued)





                                     II-122
<PAGE>   187

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         The fair value of Liberty Media Group's debt is estimated based on the
         quoted market prices for the same or similar issues or on the current
         rates offered to Liberty Media Group for debt of the same remaining
         maturities.  The fair market value of such debt approximated its
         carrying value at December 31, 1996.

(8)      Income Taxes

         TCI files a consolidated Federal income tax return with all of its 80%
         or more owned subsidiaries.  Consolidated subsidiaries in which TCI
         owns less than 80% each file a separate tax return.  TCI and such
         subsidiaries calculate their respective tax liabilities on a separate
         return basis.  Income tax expense for Liberty Media Group is based
         upon those items in the consolidated tax calculations of TCI
         applicable to Liberty Media Group.  Intergroup tax allocation
         represents an apportionment of tax expense or benefit (other than
         deferred taxes) and alternative minimum taxes to Liberty Media Group
         in relation to its amount of taxable earnings or losses.  Prior to the
         Distribution, the payable or receivable arising from the intergroup
         tax allocation has been reflected as an increase or decrease in
         combined equity.  Subsequent to the Distribution, such amounts are
         reflected as borrowings from or loans to TCI Group.

         A tax sharing agreement (the "Tax Sharing Agreement") among entities
         attributed to Liberty Media Group, TCI and certain subsidiaries of TCI
         was implemented effective July 1, 1995.  The Tax Sharing Agreement
         formalizes certain of the elements of a pre-existing tax sharing
         arrangement and contains additional provisions regarding the
         allocation of certain consolidated income tax attributes and the
         settlement procedures with respect to the intercompany allocation of
         current tax attributes.  The Tax Sharing Agreement encompasses U.S.
         federal, state, local and foreign tax consequences and relies upon the
         U.S. Internal Revenue Code of 1986 as amended, and any applicable
         state, local and foreign tax law and related regulations.  Beginning
         on the July 1, 1995 effective date, Liberty Media Group is responsible
         to TCI for its share of current consolidated income tax liabilities.
         TCI is responsible to Liberty Media Group to the extent that Liberty
         Media Group's income tax attributes generated after the effective date
         are utilized by TCI to reduce its consolidated income tax liabilities.
         Accordingly, all tax attributes generated by Liberty Media Group's
         operations after the effective date including, but not limited to, net
         operating losses, tax credits, deferred intercompany gains, and the
         tax basis of assets are inventoried and tracked for the entities
         comprising Liberty Media Group.  In connection with the implementation
         of the Tax Sharing Agreement, Liberty Media Group recorded a decrease
         to its deferred income tax liability and an increase to its combined
         equity of $2,410,000.

                                                                     (continued)





                                     II-123
<PAGE>   188

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Income tax benefit (expense) consists of:

<TABLE>
<CAPTION>
                                                                        Current        Deferred         Total
                                                                        -------        --------         -----
                                                                                 amounts in thousands
         <S>                                                        <C>             <C>            <C>
         Year ended December 31, 1996:
           State and local intergroup tax expense allocation        $    (1,251)           (95,417)       (96,668)
           Federal intergroup tax expense allocation                    (23,791)          (447,196)      (470,987)
                                                                    -----------           --------       -------- 
                                                                    $   (25,042)          (542,613)      (567,655)
                                                                    ===========           ========       ======== 
         Year ended December 31, 1995:
           State and local intergroup tax benefit (expense)
              allocation                                            $    (2,192)             8,920          6,728
           Federal intergroup tax benefit allocation                      2,584             44,980         47,564
                                                                    -----------           --------       -------- 
                                                                    $       392             53,900         54,292
                                                                    ===========           ========       ======== 
         Year  ended December 31, 1994:
           State and local intergroup tax expense allocation        $   (16,699)            (4,742)       (21,441)
           Federal intergroup tax expense allocation                    (61,539)           (20,961)       (82,500)
                                                                    -----------           --------       -------- 
                                                                    $   (78,238)           (25,703)      (103,941)
                                                                    ===========           ========       ======== 
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  Year ended December 31,        
                                                                        ---------------------------------------- 
                                                                          1996            1995           1994  
                                                                        ----------      ----------   ----------- 
                                                                                amounts in thousands
         <S>                                                            <C>             <C>          <C>
         Computed expected tax benefit (expense)                        $(568,418)         38,726        (83,477)
         Dividends excluded for income tax purposes                         2,114           1,116          1,134
         Minority interest of consolidated subsidiaries                    (4,735)         13,333         (3,548)
         Amortization not deductible for income tax purposes               (3,765)         (5,723)        (4,774)
         Excess executive compensation                                         --             688             --
         State and local income taxes, net of
            federal income tax benefit                                    (61,250)          2,043        (13,937)
         Change in allocated state tax rate                                    --           2,353             --
         Recognition of difference in income tax basis of
           investments in consolidated subsidiaries                        66,735              --            920
         Other, net                                                         1,664           1,756           (259)
                                                                        ---------       ----------   ----------- 
                                                                        $(567,655)          54,292      (103,941)
                                                                        =========       ==========   =========== 
</TABLE>


                                                                     (continued)





                                     II-124
<PAGE>   189

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31, 1996 and 1995 are presented below:

<TABLE>
<CAPTION>
                                                                                  December 31,      
                                                                           ------------------------ 
                                                                             1996             1995 
                                                                           --------         ------- 
                                                                             amounts in thousands
         <S>                                                               <C>              <C>
         Deferred tax assets:
           Net operating and capital loss carryforwards                      $9,264          36,254
           Charitable contribution carryforward                                 166             733
           Inventory costs                                                       --          10,339
           Provision for returns and allowance                                   --           9,460
           Future deductible amount attributable to
             accrued stock appreciation rights and
             deferred compensation                                            6,927           3,094
           Property and equipment, due principally to
             differences in depreciation                                      5,475           6,087
           Intangible assets, due principally to
             differences in amortization                                      1,428              --
           Other future deductible amounts due
             principally to non-deductible accruals                             395             996
                                                                           --------         ------- 

           Deferred tax assets                                               23,655          66,963
                                                                           --------         ------- 

         Deferred tax liabilities:
           Lease obligations, capitalized for income
             tax purposes                                                    17,075          18,249
           Intangible assets, due principally to
             differences in amortization                                         --           3,392
           Investments in affiliates, due principally
             to undistributed earnings of affiliates                        588,669         247,231
                                                                           --------         ------- 

           Deferred tax liabilities                                         605,744         268,872
                                                                           --------         ------- 

           Net deferred tax liabilities                                    $582,089         201,909
                                                                           ========         =======
</TABLE>

         There was no valuation allowance for deferred tax assets as of
December 31, 1996 and 1995.

         At December 31, 1996, Liberty Media Group had net operating and
         capital loss carryforwards for income tax purposes aggregating
         approximately $50,049,000 which, if not utilized to reduce taxable
         income in future periods, expire as follows: $2,352,000 in 2003,
         $478,000 in 2004, $11,345,000 in 2005, $22,528,000 in 2006 and
         $13,346,000 in 2007.

         Pursuant to the Tax Sharing Agreement, Liberty Media Group has already
         received benefit for approximately $26,625,000 of the net operating
         loss carryforward disclosed above.  Liberty Media Group is responsible
         to TCI to the extent this amount of net operating loss carryforward is
         utilized by TCI in future periods.

                                                                     (continued)





                                     II-125
<PAGE>   190

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



(9)      Combined Equity

         General

         The rights of holders of the Liberty Group Stock upon liquidation of
         TCI are  based upon the ratio of the aggregate market capitalization,
         as defined, of the Liberty Group Stock to the aggregate market
         capitalization, as defined, of the TCI Group Stock and the Liberty
         Group Stock.

         Stock Options and Stock Appreciation Rights

         Estimates of the compensation relating to options and/or stock
         appreciation rights granted to employees of Liberty Media Group are
         allocated to Liberty Media Group and have been recorded in the
         accompanying combined financial statements pursuant to APB Opinion No.
         25. Such estimates are subject to future adjustment based upon the
         market value of Series A TCI Group Stock and the Series A Liberty Group
         Stock and, ultimately, on the final determination of market value when
         the rights are exercised.  Had Liberty Media Group accounted for its
         stock based compensation pursuant to the fair value based accounting
         method in Statement No. 123, the amount of compensation would not have
         been materially different from what has been reflected in the
         accompanying combined financial statements.  Prior to the Distribution,
         the payable or receivable arising from the compensation related to the
         options and/or stock appreciation rights has been reflected as an
         increase or decrease in combined equity.  Subsequent to the
         Distribution, such amounts are reflected as borrowings from or loans to
         TCI Group.

         Transactions with TCI and Other Related Parties

         Certain TCI corporate general and administrative costs are charged to
         Liberty Media Group at rates set at the beginning of the year based on
         projected utilization for that year.  The utilization-based charges
         are set at levels that management believes to be reasonable and that
         approximate the costs Liberty Media Group would incur for comparable
         services on a stand-alone basis.  During the years ended December 31,
         1996 and 1995, Liberty Media Group was allocated $2,723,000 and
         $3,066,000, respectively, in corporate general and administrative
         costs by TCI Group.

         Entities included in Liberty Media Group lease satellite transponder
         facilities from TCI Group.  Charges by TCI Group for such arrangements
         and other related operating expenses for the years ended December 31,
         1996, 1995 and 1994 aggregated $11,946,000, $14,709,000 and
         $7,542,000, respectively.

         Certain subsidiaries attributed to Liberty Media Group produce and/or
         distribute sports and other programming to cable television operators
         (including TCI Group) and others.  Charges to TCI Group are based upon
         customary rates charged to others.

         HSN pays a commission to TCI Group for merchandise sales to customers
         who are subscribers of TCI Group's cable systems.  Aggregate
         commissions and charges by TCI Group were $7,187,000, $6,124,000 and
         $6,638,000 for the years ended December 31, 1996, 1995 and 1994,
         respectively.

                                                                     (continued)





                                     II-126
<PAGE>   191

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         TCI Group manages certain treasury activities for Liberty Media Group
         on a centralized basis.  Previously, cash receipts of certain
         businesses attributed to Liberty Media Group were remitted to TCI
         Group and certain cash disbursements of Liberty Media Group were
         funded by TCI Group on a daily basis.  Prior to the Distribution, the
         net amounts of such cash activities are included in combined equity.
         Subsequent to the Distribution, such cash activities are included in
         borrowings from or loans to TCI Group or, if determined by the Board,
         as an equity contribution to Liberty Media Group.

         The Board could determine from time to time that debt of TCI not
         incurred by entities attributed to Liberty Media Group or preferred
         stock and the proceeds thereof should be specifically attributed to
         and reflected on the combined financial statements of Liberty Media
         Group to the extent that the debt is incurred or the preferred stock
         is issued for the benefit of Liberty Media Group.

         For all periods prior to the Distribution, all financial impacts of
         equity offerings are attributed entirely to TCI Group.  After the
         Distribution, all financial impacts of issuances of additional shares
         of TCI Group Stock will be attributed entirely to TCI Group, and all
         financial impacts of issuances of additional shares of Liberty Group
         Stock, the proceeds of which are attributed to Liberty Media Group,
         will to such extent be reflected entirely in the combined financial
         statements of Liberty Media Group.  Financial impacts of dividends or
         other distributions on, and purchases of, TCI Group Stock will be
         attributed entirely to TCI Group, and financial impacts of dividends
         or other distributions of Liberty Group Stock will be attributed
         entirely to Liberty Media Group.  Financial impacts of repurchases of
         Liberty Group Stock the consideration for which is charged to Liberty
         Media Group will be reflected entirely in the combined financial
         statements of Liberty Media Group, and financial impacts of
         repurchases of Liberty Group Stock the consideration for which is
         charged to TCI Group will be attributed entirely to TCI Group.

         Subsequent to the Distribution, borrowings from or loans to TCI Group
         bear interest at such rates and have repayment schedules and other
         terms as are established by the Board.  The Board expects to make such
         determinations, either in specific instances or by setting generally
         applicable policies from time to time, after consideration of such
         factors as it deems relevant, including, without limitation, the use
         of proceeds by and creditworthiness of the recipient Group, the
         capital expenditure plans and investment opportunities available to
         each Group and the availability, cost and time associated with
         alternative financing sources.

(10)     Commitments and Contingencies

         Liberty Media Group is obligated to pay fees for the rights to exhibit
         certain films that are released by various producers through 2009 (the
         "Film Licensing Obligations").  Based on subscriber levels at December
         31, 1996, these agreements require minimum payments aggregating
         approximately $194 million.  The aggregate amount of the Film
         Licensing Obligations under these license agreements is not currently
         estimable because such amount is dependent upon the number of
         qualifying films released theatrically by certain motion picture
         studios as well as the domestic theatrical exhibition receipts upon
         the release of such qualifying films.  Nevertheless, required
         aggregate payments under the Film Licensing Obligations could prove to
         be significant.

                                                                     (continued)





                                     II-127
<PAGE>   192

                             "LIBERTY MEDIA GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Liberty Media Group leases business offices, has entered into
         transponder lease agreements and uses certain equipment under lease
         arrangements.  Rental expense under such arrangements amounted to
         $40,039,000, $47,569,000 and $34,274,000 for the years ended December
         31, 1996, 1995 and 1994, respectively.

         Future minimum lease payments under noncancellable operating leases
         for each of the next five years are summarized as follows (amounts in
         thousands):

<TABLE>
         <S>                           <C>
         1997                          $     20,227
         1998                                20,256
         1999                                14,881
         2000                                12,825
         2001                                10,507
         Thereafter                          23,751
</TABLE>

         It is expected that in the normal course of business, leases that
         expire will be renewed or replaced by leases on other properties;
         thus, it is anticipated that future minimum lease commitments will not
         be less than the amounts shown for 1997.

         Estimates of compensation relating to phantom stock appreciation
         rights ("PSARs") granted to employees of a subsidiary of Liberty Media
         Group have been recorded in the accompanying combined financial
         statements, but is subject to future adjustment based upon a valuation
         model derived from such subsidiary's cash flow, working capital and
         debt.  Effective January 1, 1994, these employees have a put right
         that requires such subsidiary to purchase their respective PSARs.  The
         subsidiary may call the PSARs on or after January 1, 1996.





                                     II-128
<PAGE>   193
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Tele-Communications, Inc.:


We have audited and reported separately herein on the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries as of December 31,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996.

We have also audited the accompanying combined balance sheets of TCI Group (a
combination of certain assets of Tele-Communications, Inc., as defined in note
1) as of December 31, 1996 and 1995, and the related combined statements of
operations, equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.

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

The combined financial statements of TCI Group are presented for purposes of
additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries. As more fully described in note 1,
the combined financial statements of TCI Group are intended to reflect the
performance of the remaining businesses of Tele-Communications, Inc., which
have not been attributed to Liberty Media Group. Liberty Media Group includes
the businesses of Tele-Communications, Inc., which produce and distribute cable
television programming services. The combined financial statements of TCI Group
should be read in conjunction with the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries.

As more fully described in note 1 to the combined financial statements, TCI
Group has accounted for its interest in Liberty Media Group in a manner similar
to the equity method of accounting for all periods that TCI Group had an
interest in Liberty Media Group that, in our opinion, should be consolidated
with TCI Group to conform to generally accepted accounting principles. If TCI
Group's interest in Liberty Media Group were consolidated with TCI Group, the
combined financial position, combined results of operations, and combined cash
flows of TCI Group would equal the consolidated financial position,
consolidated results of operations, and consolidated cash flows of
Tele-Communications, Inc. and subsidiaries, which financial statements are
included separately herein.

In our opinion, except for the effects of not consolidating TCI Group's
interest in Liberty Media Group as discussed in the preceding paragraph, the
combined financial statements referred to in the second paragraph above present
fairly, in all material respects, the financial position of TCI Group as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996,
in conformity with generally accepted accounting principles.


                                       KPMG Peat Marwick LLP

Denver, Colorado
March 24, 1997


                                    II-129
<PAGE>   194

                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                            Combined Balance Sheets

                           December 31, 1996 and 1995


<TABLE>
                                                       1996      1995
                                                     -------   -------
Assets                                              amounts in millions
<S>                                                  <C>            <C>
Cash                                                 $    56        77

Trade and other receivables, net                         423       300

Prepaid expenses                                          80        51

Prepaid program rights                                    17        19

Committed film inventory                                 116        92

Investments in affiliates, accounted for under the
   equity method, and related receivables (note 6)     2,457     2,073

Property and equipment, at cost:
   Land                                                   77        67
   Distribution systems                               10,072     9,536
   Support equipment and buildings                     1,529     1,213
                                                     -------   -------
                                                      11,678    10,816
   Less accumulated depreciation                       4,160     3,611
                                                     -------   -------
                                                       7,518     7,205
                                                     -------   -------

Franchise costs                                       17,875    14,322
   Less accumulated amortization                       2,439     2,092
                                                     -------   -------
                                                      15,436    12,230
                                                     -------   -------

Other assets, net of amortization                      1,051     1,012
                                                     -------   -------

                                                     $27,154    23,059
                                                     =======   =======
</TABLE>


                                                                    (continued)


                                    II-130
<PAGE>   195
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                       Combined Balance Sheets, continued


                           December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                         1996        1995
                                                       --------    --------
Liabilities and Combined Equity                         amounts in millions
<S>                                                    <C>              <C>
Accounts payable                                       $    216         148

Accrued interest                                            274         228

Accrued programming expense                                 313         272

Other accrued expenses                                      787         911

Debt (note 9)                                            14,924      12,960

Deferred income taxes (note 15)                           5,430       4,382

Other liabilities                                           235         181
                                                       --------    --------

      Total liabilities                                  22,179      19,082
                                                       --------    --------

Minority interests in equity of consolidated
   subsidiaries                                           1,454         563

Redeemable preferred stock (note 10)                        658         478

Company-obligated mandatorily redeemable
   preferred securities of subsidiary trusts ("Trust
   Securities") holding solely subordinated debt
   securities of TCI Communications, Inc. ("TCIC")
   (note 11)                                              1,000          --

Combined equity (note 12):
   Combined equity, including preferred stocks of
     Tele-Communications, Inc. ("TCI")                    1,864       2,884
   Cumulative foreign currency translation
     adjustment                                              26          (9)
   Unrealized holding gains for available-for-sale
     securities, net of taxes                                15          68
   Due from Liberty Media Group                             (42)         (7)
                                                       --------    --------

        Combined equity                                   1,863       2,936
                                                       --------    --------

Commitments and contingencies (note 17)                $ 27,154      23,059
                                                       ========    ========
</TABLE>


See accompanying notes to combined financial statements.


                                    II-131
<PAGE>   196
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                       Combined Statements of Operations

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                             1996       1995       1994
                                                            -------    -------    -------
                                                                 amounts in millions,
                                                               except per share amounts
<S>           <C>                                           <C>          <C>        <C>  
Revenue (note 7)                                            $ 6,790      5,145      4,068

Operating costs and expenses:
   Operating                                                  2,651      1,735      1,289
   Programming charges from Liberty Media Group (note 16)       107         80         65
   Selling, general and administrative                        1,942      1,382        944
   Charges to Liberty Media Group (note 16)                     (22)       (24)       (14)
   Compensation (adjustment to compensation)
      relating to options and stock appreciation
      rights                                                    (30)        45         (5)
   Restructuring charges                                         41         --         --
   Depreciation                                               1,077        874        694
   Amortization                                                 478        400        307
                                                            -------    -------    -------
                                                              6,244      4,492      3,280
                                                            -------    -------    -------

        Operating income                                        546        653        788

Other income (expense):
   Interest expense                                          (1,080)      (993)      (786)
   Interest income                                               42         41         21
   Interest income from Liberty Media Group                      --          2          2
   Gain on sale of subsidiary stock (note 14)                    --        123         --
   Gain on sale of stock by equity investee (note 6)             12        165        161
   Share of losses of affiliates, net (note 6)                 (469)      (178)      (117)
   Gain (loss) on disposition of assets                          56         51        (13)
   Loss on early extinguishment of debt (note 9)                (71)        (6)        (9)
   Minority interests in losses (earnings) of
      consolidated subsidiaries, net                            (54)       (18)         6
   Other, net                                                   (66)       (21)       (15)
                                                            -------    -------    -------
                                                             (1,630)      (834)      (750)
                                                            -------    -------    -------

        Earnings (loss) before income taxes                  (1,084)      (181)        38

Income tax benefit (expense) (note 15)                          306         66        (60)
                                                            -------    -------    -------

        Loss before earnings (loss) of Liberty
          Media Group through the date of
          Distribution (note 1)                                (778)      (115)       (22)

Earnings (loss) of Liberty Media Group through
      the date of Distribution (note 1)                          --        (29)       135
                                                            -------    -------    -------

        Net earnings (loss) (note 7)                           (778)      (144)       113

Dividend requirements on preferred stocks                       (35)       (34)       (14)
                                                            -------    -------    -------

        Net earnings (loss) attributable to
          common stockholders                               $  (813)      (178)        99
                                                            =======    =======    =======

Loss attributable to common stockholders per
   common share (notes 4 and 7)                             $ (1.22)      (.16)
                                                            =======    =======
</TABLE>


See accompanying notes to combined financial statements.


                                    II-132
<PAGE>   197
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                         Combined Statements of Equity


                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                                             TCI        
                                                                                            Group       
                                                                                          unrealized    
                                                                                            holding     
                                                                                             gains      
                                                   Combined     Cumulative     Note       (losses) for  
                                                    equity,      foreign     receivable    available-   
                                                   including     currency      from         for-sale    
                                                   preferred    translation   related      securities,  
                                                    stocks      adjustment     party      net of taxes  
                                                   ---------    -----------  ----------   ------------  
                                                                  amounts in millions
<S>                                                 <C>           <C>        <C>               
Balance at December 31, 1993                        $ 2,174           (29)       (15)             --    
   Unrealized holding gains for                                                                         
     available-for-sale securities as of January                                                        
     1, 1994                                             --            --         --              22    
   Net earnings (loss)                                  113            --         --              --    
   Purchase of programming from Liberty Media                                                           
     Group                                               --            --         --              --    
   Cost allocations to Liberty Media Group               --            --         --              --    
   Accrued cable distribution fees to TCI from                                                          
     Home Shopping Network, Inc. ("HSN")                 --            --         --              --    
   Allocation to Liberty Media Group of                                                                 
     compensation related to stock appreciation                                                         
     rights                                              --            --         --              --    
   Interest income from Liberty Media Group              --            --         --              --    
   Intergroup tax allocation                             --            --         --              --    
   Net cash transfers from Liberty Media Group           --            --         --              --    
   Change in unrealized holding gains for                                                               
     available-for-sale securities                       --            --         --             (26)   
   Foreign currency translation adjustment               --            25         --              --    
   Payment of preferred stock dividends                 (14)           --         --              --    
   Issuance of TCI common stock for investments         130            --         --              --    
   Fees incurred in acquisition                         (13)           --         --              --    
   Issuance of TCI preferred stock for                                                                  
     acquisition by Liberty Media Group                 168            --         --              --    
   Acquisition by Liberty Media Group                    --            --         --              --    
   Conversion of redeemable preferred stock              18            --         --              --    
   Issuance of TCI Class A common stock upon                                                            
     conversion of notes                                  3            --         --              --    
   Issuance of TCI Class A common stock upon                                                            
     exercise of stock options                            3            --         --              --    
   Acquisition and retirement of TCI common stock        (2)           --         --              --    
   Repayment of note receivable from related                                                            
     party with TCI common stock                        (15)           --         15              --    
                                                    -------       -------    -------         -------    
                                                                                                        
Balance at December 31, 1994                        $ 2,565            (4)        --              (4)   
                                                    -------       -------    -------         -------    

<CAPTION>
                                                   
                                                               Liberty
                                                                Media
                                                                Group
                                                              unrealized
                                                      Due       holding     Interest
                                                      from     gains for       in
                                                     Liberty   available-    Liberty
                                                     Media     for-sale       Media    Combined
                                                     Group     securities     Group     equity
                                                     -------   ----------   --------   --------
                                                               amounts in millions
<S>                                                      <C>                 <C>           <C>
Balance at December 31, 1993                             (3)        --       (1,185)       942
   Unrealized holding gains for                     
     available-for-sale securities as of January    
     1, 1994                                             --        293         (293)        22
   Net earnings (loss)                                   --         --         (135)       (22)
   Purchase of programming from Liberty Media       
     Group                                               --         --           65         65
   Cost allocations to Liberty Media Group               --         --          (14)       (14)
   Accrued cable distribution fees to TCI from      
     Home Shopping Network, Inc. ("HSN")                (28)        --           --        (28)
   Allocation to Liberty Media Group of             
     compensation related to stock appreciation     
     rights                                              --         --            8          8
   Interest income from Liberty Media Group              --         --           (2)        (2)
   Intergroup tax allocation                             --         --          (78)       (78)
   Net cash transfers from Liberty Media Group            2         --          161        163
   Change in unrealized holding gains for           
     available-for-sale securities                       --       (195)         195        (26)
   Foreign currency translation adjustment               --         --           --         25
   Payment of preferred stock dividends                  --         --           --        (14)
   Issuance of TCI common stock for investments          --         --           --        130
   Fees incurred in acquisition                          --         --           --        (13)
   Issuance of TCI preferred stock for              
     acquisition by Liberty Media Group                  --         --         (168)        --
   Acquisition by Liberty Media Group                    --         --          (43)       (43)
   Conversion of redeemable preferred stock              --         --           --         18
   Issuance of TCI Class A common stock upon        
     conversion of notes                                 --         --           --          3
   Issuance of TCI Class A common stock upon        
     exercise of stock options                           --         --           --          3
   Acquisition and retirement of TCI common stock        --         --           --         (2)
   Repayment of note receivable from related                              
     party with TCI common stock                         --         --           --         --
                                                    -------    -------      -------    -------
                                                    
Balance at December 31, 1994                            (29)        98       (1,489)     1,137
                                                    -------    -------      -------    -------
</TABLE>
                                                                     (continued)
                                    II-133
<PAGE>   198
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                   Combined Statements of Equity (continued)


                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                                             TCI
                                                                                            Group        
                                                                                          unrealized     
                                                                                            holding      
                                                                                             gains       
                                                   Combined     Cumulative     Note       (losses) for   
                                                    equity,      foreign     receivable    available-    
                                                   including     currency      from         for-sale     
                                                   preferred    translation   related      securities,   
                                                    stocks      adjustment     party      net of taxes   
                                                   ---------    -----------  ----------   ------------   
                                                                  amounts in millions

<S>                                                 <C>             <C>         <C>             <C>   
Balance at December 31, 1994                        $ 2,565         (4)         --               (4)  
   Net loss                                            (144)        --          --               --   
   Purchase of programming from Liberty Media                                                         
     Group                                               --         --          --               --   
   Cost allocations to Liberty Media Group               --         --          --               --   
   Cable distribution fees received from HSN             --         --          --               --   
   Allocation of compensation relating to stock                                                       
     appreciation rights                                 --         --          --               --   
   Interest income from Liberty Media Group              --         --          --               --   
   Deferred tax assets transferred from Liberty                                                       
     Media Group                                         --         --          --               --   
   Turner Broadcasting System, Inc. ("TBS")                                                           
     stock received in acquisition transferred                                                        
     to Liberty Media Group                              --         --          --               --   
   Net cash transfers to Liberty Media Group             --         --          --               --   
   Change in unrealized gains for                                                                     
     available-for-sale securities                       --         --          --               72   
   Foreign currency translation adjustment               --         (5)         --               --   
   Accreted dividends on TCI preferred stock                                                          
     subject to mandatory redemption requirements       (24)        --          --               --   
   Payment of TCI preferred stock dividends             (10)        --          --               --   
   Issuance of TCI Class A common stock for                                                           
     acquisitions and investments                     1,378         --          --               --   
   Issuance of TCI Class A common stock for                                                           
     acquisition by Liberty Media Group                  10         --          --               --   
   Cash paid by TCI Group for investment by                                                           
     Liberty Media Group contributed to Liberty                                                       
     Media Group combined equity                         --         --          --               --   
   Proceeds from issuances of TCI Class A common                                                      
     stock in public and private offerings              431         --          --               --   
   Distribution of TCI Series A and Series B                                                          
     Liberty Media Group common stock to TCI                                                          
     common stockholders                             (1,364)        --          --               --   
   Costs associated with Distribution to                                                              
     stockholders                                        (8)        --          --               --   
   Adjustment to reflect elimination of                                                               
     reporting delay with respect to certain                                                          
     foreign subsidiaries                                (1)        --          --               --   
   Deferred tax assets transferred from Liberty                                                       
     Media Group upon implement- ation of tax                                                         
     sharing agreement                                   --         --          --               --   
   Issuance of common stock by subsidiary                                                             
     (note 14)                                           51         --          --               --   
                                                    -------    -------       -----          -------   
                                                                                                      
Balance at December 31, 1995                        $ 2,884         (9)         --               68   
                                                    -------    -------       -----          -------   

<CAPTION>
                                                   
                                                               Liberty
                                                                Media
                                                                Group
                                                              unrealized
                                                      Due       holding     Interest
                                                      from     gains for       in
                                                     Liberty   available-    Liberty
                                                     Media     for-sale       Media    Combined
                                                     Group     securities     Group     equity
                                                     -------   ----------   --------   --------
                                                               amounts in millions

<S>                                                     <C>         <C>      <C>         <C>     
Balance at December 31, 1994                            (29)        98        (1,489)     1,137  
   Net loss                                              --         --            29       (115) 
   Purchase of programming from Liberty Media                                                    
     Group                                               37         --            43         80  
   Cost allocations to Liberty Media Group               (9)        --           (15)       (24) 
   Cable distribution fees received from HSN             27         --            --         27  
   Allocation of compensation relating to stock                                                  
     appreciation rights                                 (3)        --            (7)       (10) 
   Interest income from Liberty Media Group              --         --            (2)        (2) 
   Deferred tax assets transferred from Liberty                                                  
     Media Group                                         --         --            14         14  
   Turner Broadcasting System, Inc. ("TBS")                                                      
     stock received in acquisition transferred                                                   
     to Liberty Media Group                              --         --            (7)        (7) 
   Net cash transfers to Liberty Media Group            (30)        --           (18)       (48) 
   Change in unrealized gains for                                                                
     available-for-sale securities                       --        108          (108)        72  
   Foreign currency translation adjustment               --         --            --         (5) 
   Accreted dividends on TCI preferred stock                                                     
     subject to mandatory redemption requirements        --         --            --        (24) 
   Payment of TCI preferred stock dividends              --         --            --        (10) 
   Issuance of TCI Class A common stock for                                                      
     acquisitions and investments                        --         --            --      1,378  
   Issuance of TCI Class A common stock for                                                      
     acquisition by Liberty Media Group                  --         --           (10)        --  
   Cash paid by TCI Group for investment by                                                      
     Liberty Media Group contributed to Liberty                                                  
     Media Group combined equity                         --         --            (2)        (2) 
   Proceeds from issuances of TCI Class A common                                                 
     stock in public and private offerings               --         --            --        431  
   Distribution of TCI Series A and Series B                                                     
     Liberty Media Group common stock to TCI                                                     
     common stockholders                                 --       (206)        1,570         --  
   Costs associated with Distribution to                                                         
     stockholders                                        --         --            --         (8) 
   Adjustment to reflect elimination of                                                          
     reporting delay with respect to certain                                                     
     foreign subsidiaries                                --         --            --         (1) 
   Deferred tax assets transferred from Liberty                                                  
     Media Group upon implement- ation of tax                                                    
     sharing agreement                                   --         --             2          2  
   Issuance of common stock by subsidiary                                                        
     (note 14)                                           --         --            --         51  
                                                    -------    -------       -------    -------  
                                                                                                 
Balance at December 31, 1995                             (7)        --            --      2,936  
                                                    -------    -------       -------    -------  
</TABLE>
                                                                     (continued)

See accompanying notes to combined financial statements.


                                    II-134
<PAGE>   199
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                   Combined Statements of Equity (continued)

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                                             TCI
                                                                                            Group        
                                                                                          unrealized     
                                                                                            holding      
                                                                                             gains       
                                                   Combined     Cumulative     Note       (losses) for   
                                                    equity,      foreign     receivable    available-    
                                                   including     currency      from         for-sale     
                                                   preferred    translation   related      securities,   
                                                    stocks      adjustment     party      net of taxes   
                                                   ---------    -----------  ----------   ------------   
                                                                  amounts in millions
<S>                                                 <C>          <C>           <C>          <C>         
Balance at December 31, 1995                        $ 2,884         (9)         --               68  
   Net loss                                            (778)        --          --               --  
   Purchase of programming from Liberty Media                                                        
     Group                                               --         --          --               --  
   Cost allocations to Liberty Media Group               --         --          --               --  
   Cable distribution fees received from HSN             --         --          --               --  
   Allocation of compensation relating to stock                                                      
     appreciation rights                                 --         --          --               --  
   Allocation of payment of compensation                                                             
     relating to stock appreciation rights               --         --          --               --  
   Intergroup tax allocation                             --         --          --               --  
   Net cash transfers to Liberty Media Group             --         --          --               --  
   Recognition of unrealized holding gains on                                                        
     available-for-sale securities                       --         --          --              (72) 
   Recognition of unrealized holding losses on                                                       
     available-for-sale securities                       --         --          --               64  
   Change in unrealized gains for                                                                    
     available-for-sale securities                       --         --          --              (45) 
   Foreign currency translation adjustment               --         35          --               --  
   Accreted dividends on TCI preferred stock                                                         
     subject to mandatory redemption requirements       (25)        --          --               --  
   Payment of TCI preferred stock dividends             (10)        --          --               --  
   Issuance of TCI common stock for acquisition         265         --          --               --  
   Issuance of common stock upon conversion of                                                       
     notes                                                2         --          --               --  
   Issuance of common stock upon conversion of                                                       
     preferred stock                                     16         --          --               --  
   Exchange of cost investment for TCI Group                                                         
     common stock                                       (85)        --          --               --  
   Spin-off of TCI Satellite Entertainment,                                                          
     Inc. (note 8)                                     (405)        --          --               --  
                                                    -------    -------       -----          -------  
                                                                                                     
Balance at December 31, 1996                        $ 1,864         26          --               15  
                                                    =======    =======       =====          =======  

<CAPTION>                                          
                                                   
                                                               Liberty
                                                                Media
                                                                Group
                                                              unrealized
                                                      Due       holding     Interest
                                                      from     gains for       in
                                                     Liberty   available-    Liberty
                                                     Media     for-sale       Media    Combined
                                                     Group     securities     Group     equity
                                                     -------   ----------   --------   --------
                                                              amounts in millions
<S>                                                      <C>     <C>         <C>        <C>    
Balance at December 31, 1995                             (7)      --              --      2,936  
   Net loss                                              --       --              --       (778) 
   Purchase of programming from Liberty Media                                                    
     Group                                              107       --              --        107  
   Cost allocations to Liberty Media Group              (22)      --              --        (22) 
   Cable distribution fees received from HSN             (3)      --              --         (3) 
   Allocation of compensation relating to stock                                                  
     appreciation rights                                  3       --              --          3  
   Allocation of payment of compensation                                                         
     relating to stock appreciation rights                1       --              --          1  
   Intergroup tax allocation                            (32)      --              --        (32) 
   Net cash transfers to Liberty Media Group            (89)      --              --        (89) 
   Recognition of unrealized holding gains on                                                    
     available-for-sale securities                       --       --              --        (72) 
   Recognition of unrealized holding losses on                                                   
     available-for-sale securities                       --       --              --         64  
   Change in unrealized gains for                                                                
     available-for-sale securities                       --       --              --        (45) 
   Foreign currency translation adjustment               --       --              --         35  
   Accreted dividends on TCI preferred stock                                                     
     subject to mandatory redemption requirements        --       --              --        (25) 
   Payment of TCI preferred stock dividends              --       --              --        (10) 
   Issuance of TCI common stock for acquisition          --       --              --        265  
   Issuance of common stock upon conversion of                                                   
     notes                                               --       --              --          2  
   Issuance of common stock upon conversion of                                                   
     preferred stock                                     --       --              --         16  
   Exchange of cost investment for TCI Group                                                     
     common stock                                        --       --              --        (85) 
   Spin-off of TCI Satellite Entertainment,                                                      
     Inc. (note 8)                                       --       --              --       (405) 
                                                    -------    -----         -------    -------  
                                                                                                 
Balance at December 31, 1996                            (42)      --              --      1,863  
                                                    =======    =====         =======    =======  
</TABLE>


See accompanying notes to combined financial statements.


                                    II-135
<PAGE>   200
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                       Combined Statements of Cash Flows

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                     1996      1995       1994
                                                                   -------    -------    -------
                                                                        amounts in millions
                                                                            (see note 5)
<S>                                                                <C>           <C>         <C> 
Cash flows from operating activities:
    Loss before earnings or loss of Liberty Media Group*           $  (778)      (115)       (22)
    Adjustments to reconcile loss before earnings or loss
       of Liberty Media Group to net cash provided by operating
       activities:
         Depreciation and amortization                               1,555      1,274      1,001
         Compensation (adjustment to compensation) relating
             to options and stock appreciation rights                  (30)        45         (5)
         Payments of compensation relating to options
             and stock appreciation rights                              (2)        (9)        --
         Restructuring charges                                          41         --         --
         Payments of restructuring charges                              (8)        --         --
         Intergroup tax allocation                                     (32)        --         --
         Share of losses of affiliates                                 469        178        117
         Gain on sale of subsidiary stock                               --       (123)        --
         Gain on sale of stock by equity investee                      (12)      (165)      (161)
         Loss (gain) on disposition of assets                          (56)       (51)        13
         Loss on early extinguishment of debt                           71          6          9
         Minority interests in earnings (losses)                        54         18         (6)
         Deferred income tax expense (benefit)                        (319)       (99)        --
         Other noncash charges (credits)                                 7        (15)        (2)
         Changes in operating assets and liabilities,
             net of the effect of acquisitions:
               Change in receivables                                   (75)       (58)         4
               Change in prepaids                                      (22)       (56)       (50)
               Change in accruals and payables                         176         85         77
               Change in accrued interest                               45         40         26
                                                                   -------    -------    -------

                Net cash provided by operating activities            1,084        955      1,001
                                                                   -------    -------    -------

Cash flows from investing activities:
    Cash paid for acquisitions                                        (543)      (440)      (541)
    Capital expended for property and equipment                     (2,043)    (1,733)    (1,249)
    Proceeds from disposition of assets                                313        148         41
    Additional investments in and loans to affiliates and others      (804)    (1,064)      (434)
    Repayment of loans to affiliates and others                        677         18         33
    Change in due from Liberty Media Group                              (6)        22          2
    Sale of Liberty Media Group common stock to
      Liberty Media Group                                               38         --         --
    Change in interest in Liberty Media Group                           --         13        148
    Other investing activities                                          10       (111)       (26)
                                                                   -------    -------    -------

                Net cash used in investing activities               (2,358)    (3,147)    (2,026)
                                                                   -------    -------    -------

Cash flows from financing activities:
    Borrowings of debt                                               7,884      7,929      4,648
    Repayments of debt                                              (7,635)    (6,517)    (3,612)
    Prepayment penalties                                               (60)        --         --
    Proceeds from sale of subsidiary stock                             223        445         --
    Payment of dividends on subsidiary preferred
      stock and Trust Securities                                       (95)        (6)        (6)
    Payment of preferred stock dividends                               (35)       (24)        (4)
    Issuances of common stock                                           --        431          1
    Issuance of Trust Securities                                       971
    Costs associated with Distribution to stockholders                  --         (8)        --
    Other financing activities                                          --          8         --
                                                                   -------    -------    -------

                Net cash provided by financing activities            1,253      2,258      1,027
                                                                   -------    -------    -------

                Net increase (decrease) in cash                        (21)        66          2

                  Cash at beginning of year                             77         11          9
                                                                   -------    -------    -------

                  Cash at end of year                              $    56         77         11
                                                                   =======    =======    =======
</TABLE>

* Net earnings or loss of Liberty Media Group does not provide or use funds.

See accompanying notes to combined financial statements.


                                    II-136
<PAGE>   201
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

                        December 31, 1996, 1995 and 1994


(1)      Basis of Presentation

         The accompanying combined financial statements include the accounts of
         the subsidiaries and assets of TCI that are attributed to TCI Group,
         as defined below. All significant intercompany accounts and
         transactions have been eliminated. Preferred stock of TCI, which is
         owned by subsidiaries of TCI, eliminates in combination. Common stock
         of TCI held be subsidiaries is included in combined equity.

         On August 3, 1995, the stockholders of TCI authorized the Board of
         Directors of TCI (the "Board") to issue two new series of stock
         ("Liberty Group Stock") which reflect the separate performance of
         TCI's business which produces and distributes cable television
         programming services ("Liberty Media Group"). Additionally, the
         stockholders, of TCI approved the redesignation of the previously
         authorized Class A and Class B common stock into Series A TCI Group
         and Series B TCI Group common stock ("TCI Group Stock"). Issuance of
         the Liberty Group Stock did not result in any transfer of assets or
         liabilities of TCI or any of its subsidiaries or affect the rights of
         holders of TCI's or any of its subsidiaries' debt. On August 10, 1995,
         TCI distributed, in the form of a dividend, one share of Liberty Group
         Stock for each four shares of TCI Group Stock owned. Such distribution
         (the "Distribution") represented one hundred percent of the equity
         value attributable to Liberty Media Group.

         As of December 31, 1996, the TCI Group Stock reflects the separate
         performance of TCI's subsidiaries and assets not attributed to Liberty
         Media Group, including TCI's Domestic Cable and Communications unit,
         International Cable and Programming unit ("TINTA") and
         Technology/Venture Capital unit. Such subsidiaries and assets are
         collectively referred to as "TCI Group".

         Notwithstanding the attribution of assets and liabilities, equity and
         items of income and expense to TCI Group for purposes of preparing its
         combined financial statements, the change in the capital structure of
         TCI does not affect the ownership or the respective legal title to
         assets or responsibility for liabilities of TCI or any of its
         subsidiaries. TCI and its subsidiaries each continue to be responsible
         for their respective liabilities. Holders of TCI Group Stock are
         holders of common stock of TCI and continue to be subject to risks
         associated with an investment in TCI and all of its businesses, assets
         and liabilities. The issuance of Liberty Group Stock did not affect
         the rights of creditors of TCI.

         Financial effects arising from any portion of TCI that affect the
         consolidated results of operations or financial condition of TCI could
         affect the combined results of operations or financial condition of
         TCI Group and the market price of shares of the TCI Group Stock. In
         addition, net losses of any portion of TCI, dividends or distributions
         on, or repurchases of, any series of common stock, and dividends on,
         or certain repurchases of preferred stock would reduce the funds of
         TCI legally available for dividends on all series of common stock.
         Accordingly, TCI Group financial information should be read in
         conjunction with the TCI consolidated financial information.


                                                                    (continued)


                                    II-137
<PAGE>   202
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Dividends on the TCI Group Stock are payable at the sole discretion of
         the Board out of the lesser of assets of TCI legally available for
         dividends and the available dividend amount with respect to TCI Group,
         as defined. Determinations to pay dividends on TCI Group Stock are
         based primarily upon the financial condition, results of operations
         and business requirements of TCI Group and TCI as a whole.

         After the Distribution, existing preferred stock and debt securities
         of TCI that were convertible into or exchangeable for shares of TCI
         Class A common stock were, as a result of the operation of
         antidilution provisions, adjusted so that there will be delivered upon
         their conversion or exchange (in addition to the same number of shares
         of redesignated Series A TCI Group Stock as were theretofore issuable
         thereunder) the number of shares of Series A Liberty Group Stock that
         would have been issuable in the Distribution with respect to the TCI
         Class A common stock issuable upon conversion or exchange had such
         conversion or exchange occurred prior to the record date for the
         Distribution. Options to purchase TCI Class A common stock outstanding
         at the time of the Distribution were adjusted by issuing to the
         holders of such options separate options to purchase that number of
         shares of Series A Liberty Group Stock which the holder would have
         been entitled to receive had the holder exercised such option to
         purchase TCI Class A common stock prior to the record date for the
         Distribution and reallocating a portion of the aggregate exercise
         price of the previously outstanding options to the newly issued
         options to purchase Series A Liberty Group Stock. The issuance of
         shares of Series A Liberty Group Stock upon such conversion, exchange
         or exercise of such convertible securities will not result in any
         transfer of funds or other assets from TCI Group to Liberty Media
         Group or a reduction in any Inter-Group Interest, as defined below,
         that then may exist, in consideration of such issuance. In the case of
         the exercise of such options to purchase Series A Liberty Group Stock,
         the proceeds received upon the exercise of such options will be
         attributed to Liberty Media Group.

         A number of wholly-owned subsidiaries which are part of TCI Group
         owned shares of TCI Class A common stock and TCI preferred stock
         ("Subsidiary Shares"). Because the distribution of the Liberty Group
         Stock was made as a dividend to all holders of TCI's Class A common
         stock and Class B common stock and, pursuant to the anti-dilution
         provisions set forth therein, to the holders of securities convertible
         into TCI Class A common stock and TCI Class B common stock upon the
         conversion thereof, shares of Liberty Group Stock would otherwise have
         been issued and become issuable in respect of the Subsidiary Shares
         held by these subsidiaries and would have been attributed to TCI
         Group. The Liberty Group Stock issued in connection with the
         Distribution constituted 100% of the equity value thereof to the
         holders of TCI Class A common stock and TCI Class B common stock, and
         TCI Group did not initially have any interest in Liberty Media Group
         represented by any outstanding shares of Liberty Group Stock (an
         "Inter-Group Interest"). Therefore, TCI determined to exchange all of
         the outstanding Subsidiary Shares for shares of a new series of Series
         Preferred Stock designated Convertible Redeemable Participating
         Preferred Stock, Series F (the "Series F Preferred Stock"). See note
         10. The rights, privileges and preferences of the Series F Preferred
         Stock did not entitle its holders to receive Liberty Group Stock in
         the Distribution or upon conversion of the Series F Preferred Stock.


                                                                    (continued)


                                    II-138
<PAGE>   203
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Prior to the Distribution, TCI Group had a 100% Inter-Group Interest
         in Liberty Media Group. Following the Distribution, TCI Group no
         longer has an Inter-Group Interest in Liberty Media Group. For periods
         in which an Inter-Group Interest exists, TCI Group would account for
         its Inter-Group Interest in a manner similar to the equity method of
         accounting. For periods after the Distribution and before the creation
         of an Inter-Group Interest, TCI Group would not reflect any interest
         in Liberty Media Group. An Inter-Group Interest would be created only
         if a subsequent transfer of cash or other property from TCI Group to
         Liberty Media Group is specifically designated by the Board as being
         made to create an Inter-Group Interest or if outstanding shares of
         Liberty Group Stock are purchased with funds attributable to TCI
         Group. Management of TCI believes that generally accepted accounting
         principles require that Liberty Media Group be consolidated with TCI
         Group for all periods that an Inter-Group Interest exists. If Liberty
         Media Group were consolidated with TCI Group, the combined financial
         position, combined results of operations, and combined cash flows of
         TCI Group would equal the consolidated financial position,
         consolidated results of operations and consolidated cash flows of TCI
         and subsidiaries, which financial statements are included separately
         herein. Management of TCI has elected to present the accompanying
         combined financial statements in a manner that does not comply with
         generally accepted accounting principles for the periods in which TCI
         Group had an Inter-Group Interest in Liberty Media Group.

         Effective January 13, 1997, the Company issued a stock dividend to
         holders of Liberty Group Stock consisting of one share of Series A
         Liberty Group Stock for every two shares of Series A Liberty Group
         Stock owned and one share of Series A Liberty Group Stock for every
         two shares of Series B Liberty Group Stock owned (the "Liberty Group
         Stock Dividend").

(2)      Telephony Group Stock Proposal

         On March 12, 1997, the TCI stockholders authorized the Board to issue
         two new series of TCI's common stock, par value $1.00 per share, (and
         a corresponding increase in the total number of authorized shares of
         common stock) to be designated Tele-Communications, Inc. Series A
         Telephony Group common stock and Tele-Communications, Inc. Series B
         Telephony Group common stock (collectively, the "Telephony Group
         Stock"). A total of 750 million shares of Series A Telephony Group
         Stock and 75 million shares of Series B Telephony Group Stock were
         authorized. As of March 24, 1997, no shares of Telephony Group Stock
         have been issued.


                                                                    (continued)


                                    II-139
<PAGE>   204
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         The Telephony Group Common Stock, if issued, will be intended to
         reflect the separate performance of Telephony Group, which initially
         consist of TCI's principal investments in the domestic wireless and
         wireline telephony businesses (the "Telephony Business"). These
         investments consist primarily of TCI's investment in a series of
         partnerships formed to engage in the business of providing wireless
         communications services using the radio spectrum for broadband
         personal communications services ("PCS") to residential and business
         customers nationwide using the "Sprint" brand (the "PCS Ventures"),
         and TCI's investment in Teleport Communications Group Inc., a Delaware
         corporation ("TCG"). The PCS Ventures include Sprint Spectrum Holding
         Company, L.P. and MinorCo, L.P. (collectively, the "Sprint PCS
         Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of
         each of the Sprint PCS Partnerships are subsidiaries of Sprint
         Corporation ("Sprint"), Comcast Corporation ("Comcast"), Cox
         Communications, Inc. ("Cox") and TCI. The partners of PhillieCo are
         subsidiaries of Sprint, Cox and TCI. TCI has a 30% interest as a
         partner in each of the Sprint PCS Partnerships and a 35.3% interest as
         a partner in PhillieCo. TCG is a competitive local exchange carrier
         that offers a wide range of local telecommunications services in major
         metropolitan markets nationwide, primarily to businesses, long
         distance carriers and resellers, and wireless communications
         companies. TCI has a 31.1% equity interest (which represents a 36.4%
         voting interest) in the outstanding common stock of TCG. The Telephony
         Group also includes a 50% partnership interest in Kansas City Fiber
         Network, L.P. and a 40% partnership interest in NHT Partnership, which
         are competitive access providers serving the Kansas City and Buffalo
         metropolitan areas, respectively. Each of the foregoing investments is
         owned directly or indirectly by TCI Telephony Services, Inc., a
         Delaware corporation and an indirectly wholly owned subsidiary of TCI
         ("TTS-Delaware"). All assets and liabilities of TTS-Delaware and its
         subsidiaries (collectively, "TCI Telephony") will be attributed to
         Telephony Group.

         Beyond its current investments, TCI Telephony has the right, but not
         the obligation, to acquire TCI's developmental stage cable telephony
         business, which provides wireline residential telephony services
         (i.e., conventional telephony service or "POTS" and related services)
         via TCI's cable plant to residential and small business customers in
         certain of the geographic areas served by TCI's cable television
         systems (the "ResTel Business"). The right to acquire the ResTel
         Business may be exercised by TCI Telephony in whole or in part (by
         geographic area) and at any time or from time to time, as applicable,
         provided that TCI Telephony is at the time of exercise a subsidiary of
         TCI and TCI is then conducting such business. The method of
         determining the purchase price for the ResTel Business, and the
         arrangements between Telephony Group and TCI Group for the use by TCI
         Telephony of TCI Group's underlying cable plant to conduct the ResTel
         Business, have not yet been determined by the Board and, when
         determined, may not be the price or arrangements that either TCI
         Telephony or TCI Group could have obtained in an arms-length
         transaction. TCI Telephony is currently in the process of studying the
         customer acceptance and economic attractiveness of the ResTel
         Business.


                                                                    (continued)


                                    II-140
<PAGE>   205
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         TCI Telephony also has the right to acquire TCI's interests in the
         business, currently being conducted by TCI's subsidiary, Western
         Tele-Communications, Inc., of providing long-distance transport of
         video, voice and data traffic and other telecommunications services
         primarily to inter-exchange carriers on a wholesale basis using a
         digital broadband microwave network located throughout a 14-state
         region in the western United States (the "WTCI Business"). Such right
         may be exercised at any time, provided that TCI Telephony is then a
         subsidiary of TCI and TCI is then conducting such business, at a price
         based on the fair market value of such business (as determined by the
         Board).

         If TCI Telephony exercises its right to acquire the ResTel Business
         (in whole or in part) or its right to acquire the WTCI Business,
         payment of the applicable purchase price may be in funds generated by
         Telephony Group (whether through external financings, future
         operations or sales of assets), in funds borrowed from TCI or
         otherwise through the issuance of debt or preferred equity securities
         by TCI Telephony to TCI or other potential financing opportunities;
         provided, however that the Board has determined that, in the case of
         Telephony Group's acquisition of the ResTel Business, the payment of
         such purchase price will not be made through an increase in the
         Inter-Group Interest (as defined below) of TCI Group in Telephony
         Group. Whether or not TCI Telephony will exercise its right to acquire
         the ResTel Business (in whole or in part) will depend upon a number of
         factors, including the penetration rates for the service in the
         geographic area or areas in which the service has been commercially
         launched (with the penetration rate being the percentage that the
         number of subscribers to the service in such geographic area
         represents of the homes technically capable of subscribing to the
         service), the cost of providing the service at the penetration rate
         achieved in that area, and the ability of TCI Telephony to fund the
         continued development and ongoing operation of the ResTel Business in
         that area. With regard to the WTCI Business, the factors that may
         affect whether TCI Telephony will exercise its acquisition right
         include the costs to acquire and operate the business and TCI
         Telephony's ability to fund such costs.

         Telephony Group would also include such other assets and liabilities
         of TCI Group as the Board may in the future determine to attribute to
         Telephony Group and such other businesses, assets and liabilities as
         the Company or any of its subsidiaries may in the future acquire for
         the Telephony Group, as determined by the Board. It is currently the
         intention of the Company that any businesses, assets and liabilities
         so attributed to Telephony Group in the future would be businesses,
         assets and liabilities of, or related to, the interests of TCI and its
         subsidiaries in the Telephony Business.


                                                                    (continued)


                                    II-141
<PAGE>   206
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Authorized shares of Telephony Group Stock may be issued at the
         discretion of the Board in one or more public offerings, as
         consideration for acquisitions or investments, to employees of TCI
         pursuant to employee benefit plans or otherwise as compensation, as a
         distribution to holders of TCI Group Stock, or for any other proper
         corporate purpose. Such authorized shares of Telephony Group Stock may
         be issued in the form of shares of Series A Telephony Group Stock
         and/or Series B Telephony Group Stock (subject to there being a
         sufficient number of authorized and unissued shares of the applicable
         series of Telephony Group Stock). The proceeds of any future issuance
         of shares of Telephony Group Stock may be allocated either to TCI
         Group (in which case the percentage of the common stockholders' equity
         value of the Company attributable to Telephony Group that is, or is
         intended to be, reflected in TCI Group Stock will be reduced
         accordingly) or to Telephony Group (in which case the percentage of
         the common stockholders equity value of TCI attributable to Telephony
         Group that is represented by the outstanding shares of Telephony Group
         Stock will increase accordingly). TCI does not currently intend to
         distribute shares of Telephony Group Stock to holders of TCI Group
         Stock.

         Upon authorization of the Telephony Group Stock and until shares of
         Telephony Group Stock are issued, the investments attributed to
         Telephony Group will be included in TCI Group. The TCI Group Stock
         will continue to reflect all of the assets, liabilities and common
         stockholders' equity value of TCI attributable to Telephony Group, in
         addition to the separate performance of TCI's domestic cable and
         telephony distribution and communications businesses (other than the
         investments attributed to the Telephony Group); international cable,
         telephony and programming businesses; technology/venture capital
         business and any other businesses and assets of TCI not attributed to
         either Liberty Media Group or Telephony Group. The common
         stockholders' equity value of TCI attributable to Telephony Group
         that, at any relevant time, is attributed to TCI Group and,
         accordingly, not represented by outstanding Telephony Group Stock is
         referred to as the "Inter-Group Interest" of TCI Group in Telephony
         Group. Prior to the issuance of any shares of Telephony Group Stock,
         the Inter-Group Interest of TCI Group in Telephony Group will be 100%.
         As shares of Telephony Group Stock are issued and distributed or sold,
         TCI Group's Inter-Group Interest in Telephony Group will be reduced
         accordingly.

(3)      Summary of Significant Accounting Policies

         Cash and Cash Equivalents

         Cash and cash equivalents consist of investments which are readily
         convertible into cash and have maturities of three months or less at
         the time of acquisition.

         Receivables

         Receivables are reflected net of an allowance for doubtful accounts.
         Such allowance at December 31, 1996 and 1995 was not material.

         Investments

         All marketable equity securities held by TCI Group are classified as
         available-for-sale and are carried at fair value. Unrealized holding
         gains and losses on securities classified as available-for-sale are
         carried net of taxes as a separate component of combined equity.
         Realized gains and losses are determined on a specific-identification
         basis.


                                                                    (continued)


                                    II-142
<PAGE>   207
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Other investments in which the ownership interest is less than 20% but
         are not considered marketable securities are generally carried at
         cost. For those investments in affiliates in which TCI Group's voting
         interest is 20% to 50%, the equity method of accounting is generally
         used. Under this method, the investment, originally recorded at cost,
         is adjusted to recognize TCI Group's share of the net earnings or
         losses of the affiliates as they occur rather than as dividends or
         other distributions are received, limited to the extent of TCI Group's
         investment in, advances to and commitments for the investee. TCI
         Group's share of net earnings or losses of affiliates includes the
         amortization of the difference between TCI Group's investment and its
         share of the net assets of the investee. Recognition of gains on sales
         of properties to affiliates accounted for under the equity method is
         deferred in proportion to TCI Group's ownership interest in such
         affiliates.

         Changes in TCI Group's proportionate share of the underlying equity of
         a subsidiary or equity method investee, which result from the issuance
         of additional equity securities by such subsidiary or equity investee,
         generally are recognized as gains or losses in TCI Group's combined
         statements of operations.

         Long-Lived Assets

         (a)      Property and Equipment

                  Property and equipment is stated at cost, including
                  acquisition costs allocated to tangible assets acquired.
                  Construction costs, including interest during construction
                  and applicable overhead, are capitalized. During 1996, 1995
                  and 1994, interest capitalized was not material.

                  Depreciation  is computed on a  straight-line  basis using
                  estimated  useful lives of 3 to 15 years for  distribution
                  systems and 3 to 40 years for support equipment and 
                  buildings.

                  Repairs and maintenance are charged to operations, and
                  renewals and additions are capitalized. At the time of
                  ordinary retirements, sales or other dispositions of
                  property, the original cost and cost of removal of such
                  property are charged to accumulated depreciation, and
                  salvage, if any, is credited thereto. Gains or losses are
                  only recognized in connection with the sales of properties in
                  their entirety.

         (b)      Franchise Costs

                  Franchise costs include the difference between the cost of
                  acquiring cable television systems and amounts allocated to
                  their tangible assets. Such amounts are generally amortized
                  on a straight-line basis over 40 years. Costs incurred by TCI
                  Group in negotiating and renewing franchise agreements are
                  amortized on a straight-line basis over the life of the
                  franchise, generally 10 to 20 years.


                                                                    (continued)


                                    II-143
<PAGE>   208
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         In March of 1995, the Financial Accounting Standards Board (the
         "FASB") issued Statement of Financial Accounting Standards No. 121,
         Accounting for the Impairment of Long-Lived Assets and for Long-Lived
         Assets to Be Disposed Of ("Statement No. 121"), effective for fiscal
         years beginning after December 15, 1995. Statement No. 121 requires
         impairment losses to be recorded on long-lived assets used in
         operations when indicators of impairment are present and the
         undiscounted cash flows estimated to be generated by those assets are
         less than the assets' carrying amount. Statement No. 121 also
         addresses the accounting for long-lived assets that are expected to be
         disposed of. TCI Group adopted Statement No. 121 effective January 1,
         1996. Such adoption did not have a significant effect on the financial
         position or results of operations of TCI Group.

         Pursuant to Statement No. 121, TCI Group periodically reviews the
         carrying amounts of its long-lived assets, franchise costs and certain
         other assets to determine whether current events or circumstances
         warrant adjustments to such carrying amounts. TCI Group considers
         historical and expected future net operating losses to be its primary
         indicators of potential impairment. Assets are grouped and evaluated
         for impairment at the lowest level for which there are identifiable
         cash flows that are largely independent of the cash flows of other
         groups of assets ("Assets"). TCI Group deems Assets to be impaired if
         TCI Group is unable to recover the carrying value of such Assets over
         their expected remaining useful life through a forecast of
         undiscounted future operating cash flows directly related to the
         Assets. If Assets are deemed to be impaired, the loss is measured as
         the amount by which the carrying amount of the Assets exceeds their
         fair value. TCI Group generally measures fair value by considering
         sales prices for similar assets or by discounting estimated future
         cash flows. Considerable management judgment is necessary to estimate
         discounted future cash flows. Accordingly, actual results could vary
         significantly from such estimates.

         Interest Rate Derivatives

         Amounts receivable or payable under derivative financial instruments
         used to manage interest rate risks arising from TCI Group's financial
         liabilities are recognized as interest expense. Gains and losses on
         early terminations of derivatives are included in the carrying amount
         of the related debt and amortized as yield adjustments over the
         remaining terms of the derivative financial instruments. TCI Group
         does not use such instruments for trading purposes.

         Minority Interests

         Recognition of minority interests' share of losses of consolidated
         subsidiaries is limited to the amount of such minority interests'
         allocable portion of the common equity of those consolidated
         subsidiaries. Further, the minority interests' share of losses is not
         recognized if the minority holders of common equity of consolidated
         subsidiaries have the right to cause TCI Group to repurchase such
         holders' common equity.

                                                                    (continued)


                                    II-144
<PAGE>   209
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Included in minority interests in equity of consolidated subsidiaries
         is $902 million and $49 million in 1996 and 1995, respectively, of
         preferred stocks (and accumulated dividends thereon) of certain
         subsidiaries. The current dividend requirements on these preferred
         stocks aggregate $47 million per annum and such dividend requirements
         are reflected as minority interests in the accompanying combined
         statements of operations.

         Foreign Currency Translation

         All balance sheet accounts of foreign investments are translated at
         the current exchange rate as of the end of the accounting period.
         Statement of operations items are translated at average currency
         exchange rates. The resulting translation adjustment is recorded as a
         separate component of combined equity.

         Stock Based Compensation

         Statement of Financial Accounting Standards No. 123, Accounting for
         Stock-Based Compensation ("Statement No. 123") was issued by the FASB
         in October 1995. Statement No. 123 establishes financial accounting
         and reporting standards for stock-based employee compensation plans as
         well as transactions in which an entity issues its equity instruments
         to acquire goods or services from non-employees. As allowed by
         Statement No. 123, TCI Group continues to account for stock-based
         compensation pursuant to APB Opinion No. 25. See note 12.

         Estimates

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

         Reclassifications

         Certain amounts have been reclassified for comparability with the 1996
         presentation.

(4)      Loss Per Common Share

         The loss attributable to common stockholders per common share for the
         year ended December 31, 1996 and for the period from the Distribution
         to December 31, 1995 was computed by dividing net loss attributable to
         TCI Group Series A and Series B common stockholders by the weighted
         average number of common shares outstanding of TCI Group Series A and
         Series B Stock during the period (664.8 million and 656.4 million,
         respectively). Common stock equivalents were not included in the
         computation of weighted average shares outstanding because their
         inclusion would be anti-dilutive.

                                                                    (continued)


                                    II-145
<PAGE>   210
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Earnings or loss per common and common equivalent share are omitted
         from the combined statements of operations for the period from January
         1, 1995 through the Distribution and for the year ended December 31,
         1994 as TCI Group Stock was not part of the capital structure of TCI
         until August 10, 1995, the date of the Distribution.

(5)      Supplemental Disclosures to Combined Statements of Cash Flows

         Cash paid for interest was $1,035 million, $953 million and $758
         million for the years ended December 31, 1996, 1995 and 1994,
         respectively. Cash paid for income taxes was $23 million in 1996, $61
         million in 1995 and was not material in 1994.

         Significant noncash investing and financing activities are reflected
         in the following table. See also note 8 for the impact of the spin-off
         of TCI Satellite Entertainment, Inc.

<TABLE>
<CAPTION>
                                                     Years ended December 31,
                                                    1996       1995       1994
                                                   -------    -------    -------
                                                        amounts in millions
<S>                                                <C>          <C>          <C>
Cash paid for acquisitions:
    Fair value of assets acquired                  $ 4,943      3,540        694
    Liabilities assumed, net of current assets      (1,811)      (457)       (10)
    Deferred tax liability recorded in
      acquisitions                                  (1,379)    (1,083)       (34)
    Minority interests in equity of acquired
      entities                                        (113)        43        (35)
    Common stock and preferred stock issued in
      acquisitions                                    (457)    (1,605)      (298)
    Preferred stock of subsidiaries issued in
      acquisitions                                    (640)        --         --
    Contribution to combined equity of Liberty
      Media Group from TCI Group for acquisition        --          2        211
    Fees incurred in acquisition                        --         --         13
                                                   -------    -------    -------

      Cash paid for acquisitions                   $   543        440        541
                                                   =======    =======    =======

Exchange of consolidated subsidiaries for
    equity investment                              $   274         --         --
                                                   =======    =======    =======

Issuance of subsidiary stock for equity
    investment                                     $    --         11         --
                                                   =======    =======    =======
</TABLE>


                                                                    (continued)


                                    II-146
<PAGE>   211
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

(6)      Investments in Affiliates

         TCI Group has various investments accounted for under the equity
         method. The following table includes TCI Group's carrying value and
         percentage ownership of the more significant investments at December
         31, 1996.

<TABLE>
<CAPTION>
                                                              December 31, 1996
                                                         --------------------------
                                                          Percentage      Carrying
                                                          Ownership         Value
                                                         -----------      ---------
                                                                     amounts in millions
<S>                                                      <C>              <C>      
         PCS Ventures                                    30% - 35.3%      $     830
         TCG                                                31.1%               276
         Telewest Communications plc 
           ("Telewest")                                       27%               488
         Various foreign equity investments (other 
           than Telewest)                                     var.              422
</TABLE>

         Summarized unaudited results of operations for affiliates accounted
         for under the equity method are as follows:

<TABLE>
<CAPTION>
                                      December 31,
                                   -----------------
Combined Financial Position          1996     1995
                                   -------   -------
                                  amounts in millions
<S>                                <C>         <C>  
Property and equipment, net        $ 4,262     3,126
Franchise costs, net                 3,392     1,302
Other assets, net                    8,327     5,587
                                   -------   -------

    Total assets                   $15,981    10,015
                                   =======   =======

Debt                               $ 6,849     4,079
Due to TCI Group                        37        44
Other liabilities                    3,866       930
Owners' equity                       5,229     4,962
                                   -------   -------

    Total liabilities and equity   $15,981    10,015
                                   =======   =======
</TABLE>

<TABLE>
<CAPTION>
                                   Years ended December 31,
                                -----------------------------
Combined Operations              1996       1995       1994
                                -------    -------    -------
                                     amounts in millions
<S>                             <C>          <C>          <C>
Revenue                         $ 2,941      1,948        896
Operating expenses               (2,825)    (1,736)      (849)
Depreciation and amortization      (886)      (405)      (170)
                                -------    -------    -------

  Operating loss                   (770)      (193)      (123)

Interest expense                   (527)      (242)       (81)
Other, net                         (194)       (56)       130
                                -------    -------    -------

  Net loss                      $(1,491)      (491)       (74)
                                =======    =======    =======
</TABLE>


                                                                    (continued)


                                    II-147
<PAGE>   212
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         The Sprint PCS Partnerships have licenses, and have affiliated with
         other entities (including PhillieCo) that have licenses, to provide
         PCS service to MTAs (or metropolitan trading areas) covering over 190
         million "Pops" (or population equivalents), based on the Donnelley
         Marketing Service estimate of the December 31, 1995 population of the
         relevant geographic areas. The Sprint PCS Partnerships' licenses,
         which cover 29 markets, were acquired in an auction conducted by the
         FCC that ended in March 1995, for an aggregate license cost of
         approximately $2.1 billion. The Sprint PCS Partnerships have invested
         in (acquiring a 49% interest) and affiliated with American PCS, L.P.
         ("APC"), which owns a PCS license for and operates a PCS system in the
         Baltimore/Washington, D.C. MTA, and Cox California PCS, L.P.
         ("Cox-California"), which holds a PCS license for the Los Angeles/San
         Diego MTA and currently operates a PCS system in San Diego,
         California. The Sprint PCS Partnerships may invest in other entities
         that hold PCS Licenses. PhillieCo holds the license for the
         Philadelphia MTA, which was acquired at a license cost of $85 million.
         During December 1996, the Sprint PCS Partnerships initiated the
         commercial launch of PCS service in seven markets.

         From inception through 1996, the four partners have contributed
         approximately $3.0 billion to the Sprint PCS Partnerships (of which
         the Company contributed an aggregate of approximately $0.9 billion,
         including approximately $0.2 billion during the year ended December
         31, 1996.) The remaining capital that the Sprint PCS Partnerships will
         require to fund the construction of the PCS systems and the
         commitments made to APC and Cox-California will be substantial. The
         partners had agreed in forming the Sprint PCS Partnerships to
         contribute up to an aggregate of approximately $4.2 billion of equity
         thereto, from inception through fiscal 1999, subject to certain
         requirements. The Company expects that the remaining approximately
         $1.2 billion of such amount (of which the Company's share is
         approximately $0.4 billion) will be contributed by the end of the
         second quarter of 1998 (although there can be no assurance that any
         additional capital will be contributed). The Company expects that the
         Sprint PCS Partnerships will require additional equity thereafter.

         TCG, a competitive local exchange carrier, conducted an initial public
         offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000
         shares of Class A common stock at $16.00 per share to the public for
         aggregate net proceeds of approximately $410,000,000. As a result of
         the TCG IPO, TCI Group's ownership interest in TCG was reduced from
         approximately 35% to approximately 31%. Accordingly, TCI Group
         recognized a gain amounting to $12 million (before deducting deferred
         income tax expense of approximately $5 million).

         As of April 29, 1996, the News Corporation ("News Corp.) and a limited
         liability company ("Liberty/TINTA") formed by Liberty Media Group, and
         TINTA formed a venture ("Fox Sports International") to operate a
         variety of sports services throughout the world, except in Asia and in
         the United Kingdom, Japan and New Zealand where prior arrangements
         preclude an immediate collaboration. Liberty/TINTA owns 50% of Fox
         Sports International with New Corp. owning the other 50%. News Corp.
         contributed various international sports rights and certain trademark
         rights. Liberty/TINTA contributed certain Latin American and
         Argentinean sports programming services, various international sports
         and satellite transponder rights and cash. Liberty/TINTSA also
         contributed its 50% interest in Premier Sports and All-Star Sports.



                                                                    (continued)


                                    II-148
<PAGE>   213
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Telewest is a company that is currently operating and constructing
         cable television and telephone systems in the United Kingdom ("UK").
         Telewest was formed on October 3, 1995 upon the merger (the "TeleWest
         Merger") of TeleWest Communications plc ("TeleWest Communications")
         with SBC (CableComms) (UK). Prior to the TeleWest Merger, TCI Group
         had an effective ownership interest of approximately 36% in TeleWest
         Communications. As a result of the TeleWest Merger, TCI Group
         recognized a gain of $165 million (before deducting the related tax
         expense of $58 million), which gain represents the difference between
         TCI Group's recorded cost for TeleWest Communications and TCI Group's
         27% effective proportionate share of Telewest's net assets.

         Telewest contributed $109 million, $70 million and $43 million of TCI
         Group's share of its affiliates' losses during the years ended
         December 31, 1996, 1995 and 1994, respectively. In addition, TCI Group
         has other less significant equity method investments in video
         distribution and programming businesses located in the UK, other parts
         of Europe, Asia, Latin America and certain other foreign countries. In
         the aggregate, such other equity method investments accounted for $79
         million, $62 million and $50 million of TCI Group's share of its
         affiliates' losses in 1996, 1995 and 1994, respectively.

         As a result of the TeleWest Communications' November 23, 1994 initial
         public offering and the associated dilution of TCI Group's ownership
         interest of TeleWest Communications, TCI Group recognized a gain
         amounting to $161 million (before deducting the related tax expense of
         $57 million).

         Certain of TCI Group's affiliates are general partnerships and any
         subsidiary of TCI Group that is a general partner in a general
         partnership is, as such, liable as a matter of partnership law for all
         debts of that partnership in the event liabilities of that partnership
         were to exceed its assets.

(7)      Acquisitions

         On July 31, 1996, pursuant to certain agreements entered into between
         TCI Group, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCI
         Group acquired all of the common stock of a subsidiary of Viacom
         ("Cable Sub") which owned Viacom's cable systems and related assets
         (the "Viacom Acquisition").

         The transaction was structured as a tax-free reorganization in which
         Cable Sub transferred all of its non-cable assets, as well as all of
         its liabilities other than current liabilities, to a new subsidiary of
         Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom
         Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility
         (the "Loan Facility") arranged by TCI Group and Cable Sub. Following
         these transfers, Cable Sub retained cable assets with a value at
         closing of approximately $2.326 billion and the obligation to repay
         the Loan Proceeds borrowed under the Loan Facility. Neither Viacom nor
         New Viacom Sub has any obligation with respect to repayment of the
         Loan Proceeds.


                                                                    (continued)


                                    II-149
<PAGE>   214
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Prior to the consummation of the Viacom Acquisition, Viacom offered to
         the holders of shares of Viacom Class A Common Stock and Viacom Class
         B Common Stock (collectively, "Viacom Common Stock") the opportunity
         to exchange (the "Exchange Offer") a portion of their shares of Viacom
         Common Stock for shares of Class A Common Stock, par value $100 per
         share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following
         the completion of the Exchange Offer, TCI Group acquired from Cable
         Sub shares of Cable Sub Class B Common Stock (the "Share Issuance")
         for $350 million (which was used to reduce Cable Sub's obligations
         under the Loan Facility). At the time of the Share Issuance, the Cable
         Sub Class A Stock received by Viacom stockholders pursuant to the
         Exchange Offer automatically converted into 5% Class A Senior
         Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred
         Stock") of Cable Sub with a stated value of $100 per share (the
         "Stated Value"). The Exchangeable Preferred Stock is exchangeable, at
         the option of the holder commencing after the fifth anniversary of the
         date of issuance, for shares of Series A TCI Group Stock at an
         exchange rate of 5.447 shares of Series A TCI Group Stock for each
         share of Exchangeable Preferred Stock exchanged. The Exchangeable
         Preferred Stock is subject to redemption, at the option of Cable Sub,
         after the fifth anniversary of the date of issuance, initially at a
         redemption price of $102.50 per share and thereafter at prices
         declining ratably annually to $100 per share on and after the eighth
         anniversary of the date of issuance, plus accrued and unpaid dividends
         to the date of redemption. The Exchangeable Preferred Stock is also
         subject to mandatory redemption on the tenth anniversary of the date
         of issuance at a price equal to the Stated Value per share plus
         accrued and unpaid dividends. Amounts payable by Cable Sub in
         satisfaction of its optional or mandatory redemption obligations with
         respect to the Exchangeable Preferred Stock may be made in cash or, at
         the election of Cable Sub, in shares of Series A TCI Group Stock, or
         in any combination of the foregoing.

         The Viacom Acquisition has been accounted for by the purchase method.
         Accordingly, the results of operations of Cable Sub have been
         consolidated with those of TCI Group since the date of acquisition,
         and TCI Group recorded Cable Sub's assets and liabilities at fair
         value. On a pro forma basis, TCI Group's revenue, net loss, and net
         loss per share of TCI Group Stock would have been increased by $280
         million, $55 million, and $.08, respectively, for the year ended
         December 31, 1996; and revenue, net loss, and net loss per share of
         TCI Group Stock would have been increased by $440 million, $115
         million, and $.07, respectively, for the year ended December 31, 1995
         had Cable Sub been consolidated with TCI Group on January 1, 1995. The
         foregoing unaudited pro forma financial information is based upon
         historical results of operations adjusted for acquisition costs and,
         in the opinion of management, is not necessarily indicative of the
         results had TCI Group operated Cable Sub since January 1, 1995.

         As of January 26, 1995, TCI Group and TeleCable Corporation
         ("TeleCable") consummated a transaction, whereby TeleCable was merged
         into TCI Group. The aggregate $1.6 billion purchase price was
         satisfied by TCIC's assumption of approximately $300 million of
         TeleCable's net liabilities and the issuance to TeleCable's
         shareholders of approximately 42 million shares of TCI Class A common
         stock and 1 million shares of TCI Convertible Preferred Stock, Series
         D (the "Series D Preferred Stock") with an aggregate initial
         liquidation value of $300 million (see note 10).


                                                                    (continued)


                                    II-150
<PAGE>   215
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         On April 25, 1995, TINTA acquired a 51% ownership interest in
         Cablevision for a purchase price of $282 million, before liabilities
         assumed. The purchase price was paid with cash consideration of $195
         million and TINTA's issuance of $87 million principal amount of
         secured negotiable promissory notes payable to the selling
         shareholders. TINTA has an option during the two-year period ended
         April 25, 1997 to increase its ownership interest in Cablevision up to
         80% at a cost per subscriber similar to the initial purchase price,
         adjusted however for certain fluctuations in applicable foreign
         currency exchange rates.

(8)      Spin-Off of TCI Satellite Entertainment, Inc.

         Through December 4, 1996, TCI Group had an investment in a direct
         broadcast satellite partnership, PRIMESTAR Partners L.P.
         ("Primestar"), which TCI Group accounted for under the equity method.
         Primestar provides programming and marketing support to each of its
         cable partners who provide satellite television service to their
         customers. On December 4, 1996, TCI Group distributed (the "Satellite
         Spin-off") to the holders of shares of TCI Group Stock all of the
         issued and outstanding common stock of TCI Satellite Entertainment,
         Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's
         assets and operations included TCI Group's interest in Primestar, TCI
         Group's business of distributing Primestar programming and two
         communications satellites. As a result of the Satellite Spin-off,
         Satellite's operations are no longer consolidated with TCI Group's. In
         addition, the Satellite Spin-off effected a change in the conversion
         rate for each of TCI Group's equity and debt securities that are
         convertible into Series A TCI Group Stock. See notes 9, 10 and 12.

         Summarized financial information of Satellite as of and through the
         date of the Satellite Spin-off is as follows (amounts in millions):

<TABLE>
<S>                                           <C>    
Financial Position
   Cash, receivables and other assets         $   104
   Investment in PRIMESTAR Partners L.P.           32
   Property and equipment, net                  1,111
                                              -------

                                              $ 1,247
                                              =======

   Accounts payable and accrued liabilities   $    60
   Due to PRIMESTAR Partners L.P.                 458
   Due to TCI                                     324
   Equity                                         405
                                              -------
                                              $ 1,247
                                              =======

Operations

   Revenue                                    $   377
   Operating expenses                            (373)
   Depreciation                                  (166)
                                              -------

      Loss before income tax benefit             (162)

   Income tax benefit                              53

      Net loss                                $  (109)
                                              =======
</TABLE>


                                                                    (continued)


                                    II-151
<PAGE>   216
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

(9)      Debt

         Debt is summarized as follows:

<TABLE>
<CAPTION>
                                    Weighted average           December 31,
                                    interest rate at       ------------------
                                    December 31, 1996        1996       1995
                                    -----------------      -------     ------
                                                           amounts in millions
<S>                                       <C>              <C>          <C>  
           Notes payable                  8.3%             $ 9,308      7,713
           Bank credit facilities         6.6%               4,811      3,617
           Commercial paper               6.1%                 638      1,469
           Convertible notes (a)          9.5%                  43         45
           Other debt                                          124        116
                                                           -------     ------
                                                           $14,924     12,960
                                                           =======     ======
</TABLE>

         (a)      These convertible notes, which are stated net of unamortized
                  discount of $178 million and $186 million at December 31,
                  1996 and 1995, respectively, mature on December 18, 2021. The
                  notes require (so long as conversion of the notes has not
                  occurred) an annual interest payment through 2003 equal to
                  1.85% of the face amount of the notes. At December 31, 1996,
                  the notes were convertible, at the option of the holders,
                  into an aggregate of 37,083,773 shares of Series A TCI Group
                  Stock and 13,906,404 shares of Series A Liberty Group Stock.
                  See note 1.

         During the year ended December 31, 1996, in order to reduce future
         interest costs, TCI Group redeemed certain notes payable which had an
         aggregate principle balance of $904 million and fixed interest rates
         ranging from 7.88% to 10.44% (the "Redemption"). In connection with
         the Redemption, TCI Group recognized a loss on early extinguishment of
         debt of $62 million. Such loss related to prepayment penalties
         amounting to $60 million and the retirement of deferred loan costs.

         During the year ended December 31, 1996, certain subsidiaries of TCI
         Group terminated, at such subsidiaries' option, certain revolving bank
         credit facilities with aggregate commitments of approximately $2
         billion and refinanced certain other bank credit facilities. In
         connection with such termination and refinancings, TCI Group
         recognized a loss on early extinguishment of debt of $9 million
         related to the retirement of deferred loan costs. At December 31,
         1996, subsidiaries of TCI Group had approximately $1.4 billion in
         unused lines of credit, excluding amounts related to lines of credit
         which provide availability to support commercial paper.

         The bank credit facilities and various other debt instruments
         attributable to the TCI Group generally contain restrictive covenants
         which require, among other things, the maintenance of certain
         earnings, specified cash flow and financial ratios (primarily the
         ratios of cash flow to total debt and cash flow to debt service, as
         defined), and include certain limitations on indebtedness,
         investments, guarantees, dispositions, stock repurchases and/or
         dividend payments.

                                                                    (continued)


                                    II-152
<PAGE>   217
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         As security for borrowings under one of TCI Group's bank credit
         facilities, TCI Group has pledged 116,853,195 shares of Series A TCI
         Group Stock held by a subsidiary of TCI Group.

         The fair value of the debt attributable to the TCI Group is estimated
         based on the quoted market prices for the same or similar issues or on
         the current rates offered to the TCI Group for debt of the same
         remaining maturities. The fair value of debt, which has a carrying
         value of $14,924 million, was $15,521 million at December 31, 1996.

         In order to achieve the desired balance between variable and fixed
         rate indebtedness, TCI Group has entered into various interest rate
         exchange agreements pursuant to which it (i) pays fixed interest rates
         (the "Fixed Rate Agreements") ranging from 7.2% to 9.3% and receives
         variable interest rates on notional amounts of $310 million at
         December 31, 1996 and (ii) pays variable interest rates (the "Variable
         Rate Agreements") and receives fixed interest rates ranging from 4.8%
         to 7.4% on notional amounts of $1,750 million at December 31, 1996.
         During the years ended December 31, 1996, 1995 and 1994, TCI Group's
         net payments pursuant to the Fixed Rate Agreements were $14 million,
         $13 million and $26 million, respectively; and TCI Group's net
         receipts (payments) pursuant to the Variable Rate Agreements were $15
         million, (less than $1 million), and $36 million, respectively. During
         the year ended December 31, 1996, TCI Group terminated certain
         Variable Rate Agreements with an aggregate notional amount of $700
         million. TCI Group received $16 million upon such terminations. After
         giving effect to TCI Group's interest rate exchange agreements,
         approximately 49% of TCI Group's indebtedness bears interest at fixed
         rates.

         TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire
         as follows (amounts in millions, except percentages):

<TABLE>
<CAPTION>
                        Fixed Rate Agreements                      Variable Rate Agreements
            -----------------------------------------     ------------------------------------------
            Expiration      Interest Rate    Notional     Expiration      Interest Rate     Notional
               Date           To Be Paid      Amount         Date         To Be Received      Amount
            ----------      -------------    --------     ==========      --------------    --------
           <S>                <C>             <C>        <C>                  <C>            <C>    
           October 1997       7.2%-9.3%       $   80     April 1997              7.0%        $  200
           December 1997         8.7%            230     September 1998       4.8%-5.4%         450
                                              ------
                                                         April 1999              7.4%            50
                                              $  310     February 2000        5.8%-6.6%         300
                                              ======
                                                         March 2000           5.8%-6.0%         675
                                                         September 2000          5.1%            75
                                                                                             ------
                                                                                             $1,750
                                                                                             ======
</TABLE>


         TCI Group is exposed to credit losses for the periodic settlements of
         amounts due under these interest rate exchange agreements in the event
         of nonperformance by the other parties to the agreements. However, TCI
         Group does not anticipate that it will incur any material credit
         losses because it does not anticipate nonperformance by the
         counterparties.


                                                                    (continued)


                                    II-153
<PAGE>   218

                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         The fair value of the interest rate exchange agreements is the
         estimated amount that TCI Group would pay or receive to terminate the
         agreements at December 31, 1996, taking into consideration current
         interest rates and assuming the current creditworthiness of the
         counterparties. At December 31, 1996, TCI Group would be required to
         pay an estimated $15 million to terminate the Variable Rate Agreements
         and an estimated $7 million to terminate the Fixed Rate Agreements.

         Certain subsidiaries attributed to the TCI Group are required to
         maintain unused availability under bank credit facilities to the
         extent of outstanding commercial paper. Also, certain of TCI Group's
         subsidiaries pay fees ranging from 1/4% to 1/2% per annum on the
         average unborrowed portion of the total amount available for
         borrowings under bank credit facilities.

         Annual maturities of debt for each of the next five years are as
         follows (amounts in millions):

<TABLE>
                    <S>                             <C>       
                    1997                            $   1,418*
                    1998                                  490
                    1999                                  721
                    2000                                  766
                    2001                                1,077
</TABLE>

                    *Includes $638 million of commercial paper.

(10)     Redeemable Preferred Stock

         The conversion rates identified below for the redeemable preferred
         stocks that are convertible into Series A TCI Group Stock were
         adjusted, as applicable, on December 4, 1996 as a result of the
         Satellite Spin-off. See note 7. The conversion rates for the
         redeemable preferred stocks that are convertible into Series A Liberty
         Group Stock have been adjusted to give effect to the Liberty Group
         Stock Dividend. See note 1.

         Convertible Preferred Stock, Series C ("Series C Preferred Stock").
         TCI issued 70,575 shares of a series of TCI Series Preferred Stock
         designated "Convertible Preferred Stock, Series C," par value $.01 per
         share, as partial consideration for an acquisition by TCI. There were
         80,000 shares of Series C Preferred Stock authorized and 70,575 shares
         outstanding at December 31, 1996.

         Each share of Series C Preferred Stock is convertible, at the option
         of the holders, into 116.24 shares of Series A TCI Group Stock and 37
         shares of Series A Liberty Group Stock, subject to anti-dilution
         adjustments. The dividend, liquidation and redemption features of the
         Series C Preferred Stock will be determined by reference to the
         liquidation value of the Series C Preferred Stock, which as of any
         date of determination is equal, on a per share basis, to the sum of
         (i) $2,375, plus (ii) all dividends accrued on such share through the
         dividend payment date on or immediately preceding such date of
         determination to the extent not paid on or before such date, plus
         (iii), for purposes of determining liquidation and redemption
         payments, all unpaid dividends accrued on the sum of clauses (i) and
         (ii) above, to such date of determination.


                                                                    (continued)


                                    II-154
<PAGE>   219
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Subject to the prior preferences and other rights of any class or
         series of TCI preferred stock ranking pari passu with the Series C
         Preferred Stock, the holders of Series C Preferred Stock are entitled
         to receive and, subject to any prohibition or restriction contained in
         any instrument evidencing indebtedness of TCI, TCI is obligated to pay
         preferential cumulative cash dividends out of funds legally available
         therefor. Dividends accrue cumulatively at an annual rate of 5-1/2% of
         the liquidation value per share, whether or not such dividends are
         declared or funds are legally or contractually available for payment
         of dividends, except that if TCI fails to redeem shares of Series C
         Preferred Stock required to be redeemed on a redemption date,
         dividends will thereafter accrue cumulatively at an annual rate of 15%
         of the liquidation value per share. Accrued dividends are payable
         quarterly on January 1, April 1, July 1 and October 1 of each year,
         commencing on the first dividend payment date after the issuance of
         the Series C Preferred Stock. Dividends not paid on any dividend
         payment date will be added to the liquidation value on such date and
         remain a part thereof until such dividends and all dividends accrued
         thereon are paid in full. Dividends accrue on unpaid dividends at the
         rate of 5-1/2% per annum, unless such dividends remain unpaid for two
         consecutive quarters in which event such rate will increase to 15% per
         annum. The Series C Preferred Stock ranks prior to the TCI common
         stock and Class B Preferred Stock and pari passu with the Series F
         Preferred Stock with respect to the declaration and payment of
         dividends.

         Upon the dissolution, liquidation or winding up of TCI, holders of the
         Series C Preferred Stock will be entitled to receive from the assets
         of TCI available for distribution to stockholders an amount in cash,
         per share, equal to the liquidation value. The Series C Preferred
         Stock will rank prior to the TCI common stock and Class B Preferred
         Stock and pari passu with the Series F Preferred Stock as to any such
         distributions.

         The Series C Preferred Stock is subject to optional redemption at any
         time after the seventh anniversary of its issuance, in whole or in
         part, by TCI at a redemption price, per share, equal to the then
         liquidation value of the Series C Preferred Stock. Subject to the
         rights of any other class or series of TCI's preferred stock ranking
         pari passu with the Series C Preferred Stock, the Series C Preferred
         Stock is required to be redeemed by TCI at any time after such seventh
         anniversary at the option of the holder, in whole or in part (provided
         that the aggregate liquidation value of the shares to be redeemed is
         in excess of $1 million), in each case at a redemption price, per
         share, equal to the liquidation value.


                                                                    (continued)


                                    II-155
<PAGE>   220
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         For so long as any dividends are in arrears on the Series C Preferred
         Stock or any class or series of TCI preferred stock ranking pari passu
         with the Series C Preferred Stock and until all dividends accrued up
         to the immediately preceding dividend payment date on the Series C
         Preferred Stock and such parity stock shall have been paid or declared
         and set apart so as to be available for payment in full thereof and
         for no other purpose, TCI may not redeem or otherwise acquire any
         shares of Series C Preferred Stock, any such parity stock or any class
         or series of its preferred stock ranking junior (including the TCI
         common stock and Series C Preferred Stock) unless all then outstanding
         shares of Series C Preferred Stock and such parity stock are redeemed.
         If TCI fails to redeem shares of Series C Preferred Stock required to
         be redeemed on a redemption date, and until all such shares are
         redeemed in full, TCI may not redeem any such parity stock or junior
         stock, or otherwise acquire any shares of such stock or Series C
         Preferred Stock. Nothing contained in the two immediately preceding
         sentences shall prevent TCI from acquiring (i) shares of Series C
         Preferred Stock and any such parity stock pursuant to a purchase or
         exchange offer made to holders of all outstanding shares of Series C
         Preferred Stock and such parity stock, if (a) as to holders of all
         outstanding shares of Series C Preferred Stock, the terms of the
         purchase or exchange offer for all such shares are identical, (b) as
         to holders for all outstanding shares of a particular series or class
         of parity stock, the terms of the purchase or exchange offer for all
         such shares are identical and (c) as among holders of all outstanding
         shares of Series C Preferred Stock and parity stock, the terms of each
         purchase or exchange offer are substantially identical relative to the
         respective liquidation prices of the shares of Series C Preferred
         Stock and each series or class of such parity stock, or (ii) shares of
         Series C Preferred Stock, parity stock or junior stock in exchange
         for, or through the application of the proceeds of the sale of, shares
         of junior stock.

         The Series C Preferred Stock is subject to restrictions on transfer
         although it has certain customary registration rights with respect to
         the underlying shares of TCI Group and Liberty Media Group common
         stock. The Series C Preferred Stock may vote on all matters submitted
         to a vote of the holders of the TCI common stock, has one vote for
         each share of TCI Group and Liberty Media Group Stock into which the
         shares of Series C Preferred Stock are converted for such purpose, and
         may vote as a single class with the TCI common stock. The Series C
         Preferred Stock has no other voting rights except as required by the
         Delaware General Corporation Law ("DGCL") and except that the consent
         of the holders of record of shares representing at least two-thirds of
         the liquidation value of the outstanding shares of the Series C
         Preferred Stock is necessary to (i) amend the designation, rights,
         preferences and limitations of the Series C Preferred Stock as set
         forth in the TCI Charter and (ii) to create or designate any class or
         series of TCI preferred stock that would rank prior to the Series C
         Preferred Stock.

         Convertible Preferred Stock, Series D. TCI issued 1,000,000 shares of
         a series of TCI Series Preferred Stock designated "Convertible
         Preferred Stock, Series D", par value $.01 per share, as partial
         consideration for the merger between TCIC and TeleCable (see note 7).
         At December 31, 1996, there were 997,222 shares of Series D Preferred
         Stock outstanding.


                                                                    (continued)


                                    II-156
<PAGE>   221
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         The holders of the Series D Preferred Stock shall be entitled to
         receive, when and as declared by the Board out of unrestricted funds
         legally available therefor, cumulative dividends, in preference to
         dividends on any stock that ranks junior to the Series D Preferred
         Stock (currently the TCI Group Stock, the Liberty Group Stock, and the
         Class B Preferred Stock), that shall accrue on each share of Series D
         Preferred stock at the rate of 5-1/2% per annum of the liquidation
         value ($300 per share). Dividends are cumulative, and in the event
         that dividends are not paid in full on two consecutive dividend
         payment dates or in the event that TCI fails to effect any required
         redemption of Series D Preferred Stock, accrue at the rate of 10% per
         annum of the liquidation value. The Series D Preferred Stock ranks on
         parity with the Series F Preferred Stock and the Series C Preferred
         Stock.

         Each share of Series D Preferred Stock is convertible into 10 shares
         of Series A TCI Group Stock and 3.5 shares of Series A Liberty Group
         Stock, subject to adjustment upon certain events specified in the
         certificate of designation establishing Series D Preferred Stock. In
         addition to the aforementioned shares of TCI common stock, holders of
         Series D Preferred Stock are entitled to one share of Satellite common
         stock for each share of Series D Preferred Stock converted. Such
         shares of Satellite common stock represent the number of shares of
         Satellite common stock that they would have received had they
         converted their Series D Preferred Stock into TCI Group Stock prior to
         the Satellite Spin-off. To the extent any cash dividends are not paid
         on any dividend payment date, the amount of such dividends will be
         deemed converted into shares of common stock at a conversion rate
         equal to 95% of the then current market price of common stock, and
         upon issuance of common stock to holders of Series D Preferred Stock
         in respect of such deemed conversion, such dividend will be deemed
         paid for all purposes. See note 1.

         Shares of Series D Preferred Stock are redeemable for cash at the
         option of the holder at any time after the tenth anniversary of the
         issue date at a price equal to the liquidation value in effect as of
         the date of the redemption. Shares of Series D Preferred Stock may
         also be redeemed for cash at the option of TCI after the fifth
         anniversary of the issue date at such redemption price or after the
         third anniversary of the issue date if the market value per share
         exceeds certain defined levels for periods specified in the
         certificate of designation.

         If TCI fails to effect any required redemption of Series D Preferred
         Stock, the holders thereof will have the option to convert their
         shares of Series D Preferred Stock into common stock at a conversion
         rate of 95% of the then current market value of common stock, provided
         that such option may not be exercised unless the failure to redeem
         continues for more than a year.

         Except as required by law, holders of Series D Preferred Stock are not
         entitled to vote on any matters submitted to a vote of the
         stockholders of TCI.


                                                                    (continued)


                                    II-157
<PAGE>   222
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Convertible Redeemable Participating Preferred Stock, Series F. TCI
         Group is authorized to issue 500,000 shares of Series F Preferred
         Stock, par value $.01 per share. Subsidiaries of TCI hold all the
         issued and outstanding shares (278,307 shares). Immediately prior to
         the record date for the Distribution, TCI Group caused each of its
         subsidiaries holding Subsidiary Shares to exchange such shares for
         shares of Series F Preferred Stock having an aggregate value of not
         less than that of the Subsidiary Shares so exchanged. Subsidiaries of
         TCI exchanged all of the Subsidiary Shares for 355,141 shares of
         Series F Preferred Stock. Subsequent to such exchange, a holder of
         78,077 shares of Series F Preferred Stock converted its holdings into
         100,524,364 shares of Series A TCI Group Stock. Such shares of Series
         A TCI Group Stock are reflected as a reduction in combined equity in
         the accompanying combined financial statements.

         Each holder of Series F Preferred Stock has the right to receive upon
         conversion 1,496.65 shares of Series A TCI Group Stock. The
         anti-dilution provisions of the Series F Preferred Stock provide that
         the conversion rate of the Series F Preferred Stock will be adjusted
         by increasing the number of shares of Series A TCI Group Stock
         issuable upon conversion in the event of any non-cash dividend or
         distribution of the Series A TCI Group Stock to give effect to the
         value of the securities, assets or other property so distributed;
         however, no such adjustment shall entitle the holder to receive the
         actual security, asset or other property so distributed upon the
         conversion of shares of Series F Preferred Stock.

         The holders of the Series F Preferred Stock are entitled to
         participate, on an as-converted basis, with the holders of the Series
         A TCI Group Stock, with respect to any cash dividends or distribution
         declared and paid on the Series A TCI Group Stock. Dividends or
         distribution on the Series A TCI Group Stock which are not paid in
         cash would result in the adjustment of the applicable conversion rate
         as described above.

         Upon the dissolution, liquidation or winding up of TCI, holders of the
         Series F Preferred Stock will be entitled to receive from the assets
         of TCI available for distribution to stockholders an amount, in cash
         or property or a combination thereof, per share of Series F Preferred
         Stock, equal to the sum of (x) $.01 and (y) the amount to be
         distributed per share of Series A TCI Group Stock in such liquidation,
         dissolution or winding up multiplied by the applicable conversion rate
         of a share of Series F Preferred Stock.

         The Series F Preferred Stock is subject to optional redemption by TCI
         at any time after its issuance, in whole or in part, at a redemption
         price, per share, equal to the issue price of a share of Series F
         Preferred Stock (as adjusted in respect of stock splits, reverse
         splits and other events affecting the shares of Series F Preferred
         Stock), plus any dividends which have been declared but are unpaid as
         of the date fixed for such redemption. TCI may elect to pay the
         redemption price (or designated portion thereof) of the shares of
         Series F Preferred Stock called for redemption by issuing to the
         holder thereof, in respect of its shares to be redeemed, a number of
         shares of Series A TCI Group Stock equal to the aggregate redemption
         price (or designated portion thereof) of such shares divided by the
         average of the last sales prices of the Series A TCI Group Stock for a
         period specified, and subject to the adjustments described, in the
         certificate of designation establishing the Series F Preferred Stock.

                                                                    (continued)


                                    II-158
<PAGE>   223
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G
         Preferred Stock") and Redeemable Convertible Liberty Media Group
         Preferred Stock, Series H ("Series H Preferred Stock"). In January,
         1996, TCI issued 7,259,380 shares of a series of TCI Series Preferred
         Stock designated "Redeemable Convertible TCI Group Preferred Stock,
         Series G" and 7,259,380 shares of a series of TCI Series Preferred
         Stock designated "Redeemable Convertible Liberty Media Group Preferred
         Stock, Series H" as consideration for an acquisition. At December 31,
         1996, there were 6,695,427 shares of each of Series G Preferred Stock
         and Series H Preferred Stock outstanding.

         The initial liquidation value for the Series G Preferred Stock and
         Series H Preferred Stock is $21.60 per share and $5.40 per share,
         respectively, subject in both cases, to increase in an amount equal to
         aggregate accrued but unpaid dividends, if any. Dividends will begin
         to accrue on the Series G and Series H Preferred Stock on the first
         anniversary of issuance of the Series G and Series H Preferred Stock,
         and will thereafter be payable semi-annually commencing August 1,
         1997, at the rate of 4% per annum on the liquidation value. Any
         dividends paid on the Series G and Series H Preferred Stock may be
         paid, at TCI's election, in cash or shares of TCI Group Stock.
         Additional dividends will accrue on unpaid dividends initially at a
         rate of 4% per annum. The dividend rate on dividends that remain
         unpaid for six months will increase to 8.625% per annum.

         Each share of Series G Preferred Stock is convertible at the option of
         the holder at any time prior to the close of business on the last
         business day prior to redemption into 1.19 shares of Series A TCI
         Group Stock and each share of Series H Preferred Stock is convertible
         at any time prior to the close of business on the last business day
         prior to redemption into .2625 shares of Series A Liberty Group Stock.
         However, the shares of Series A Liberty Group Stock issuable upon
         conversion of the Series H Preferred Stock shall be adjusted to
         provide for the Liberty Group Stock Dividend. The conversion rights of
         Series G and Series H Preferred Stock are subject to adjustment in
         certain circumstances.

         Among other such adjustments, if the Liberty Group Stock, or any other
         redeemable capital stock of TCI into which either series of Preferred
         Stock may be convertible ("Redeemable Capital Stock"), is redeemed in
         full by TCI (the "Redemption Event"), then, except as otherwise
         described below, the shares of such Series G and Series H Preferred
         Stock will thereafter be convertible into the kind and amount of
         consideration that would have been received in such Redemption Event
         by a holder of the number of shares of Redeemable Capital Stock that
         would have been issuable upon conversion of such shares of Series G
         and Series H Preferred Stock, if they had been converted in full
         immediately prior to such Redemption Event.


                                                                    (continued)


                                    II-159
<PAGE>   224
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         However, if any series of Redeemable Capital Stock into which a series
         of Series G or Series H Preferred Stock is then convertible is
         redeemed in full by TCI in exchange for securities of another issuer
         ("Redemption Securities"), TCI may elect to provide the holders of
         such Series G or Series H Preferred Stock with the right to exchange
         such Series G or Series H Preferred Stock, concurrently with the
         Redemption Event, for preferred stock of such other issuer ("Mirror
         Preferred Stock"). Such Mirror Preferred Stock shall be convertible
         into Redemption Securities and shall otherwise have terms and
         conditions comparable to the Series G or Series H Preferred Stock
         exchanged. If TCI provides such an exchange right, any holder that
         does not then choose to participate in such exchange will continue to
         hold such Series G or Series H Preferred Stock but such holder will
         loose the conversion right with respect to the Redeemable Capital
         Stock redeemed in the Redemption Event and will not have any right to
         receive Redemption Securities in lieu thereof. A holder that
         participates in such exchange will receive Mirror Preferred Stock
         convertible into Redemption Securities, but will no longer hold the
         Series G or Series H Preferred Stock so exchanged.

         An alternative provision will apply if, at the time of exercise of any
         such exchange right provided by TCI, the holder of the applicable
         series of Series G or Series H Preferred Stock would be entitled to
         receive on conversion any property in addition to the Redeemable
         Capital Stock being redeemed. In that case, holders that choose to
         participate in the exchange will receive both Mirror Preferred Stock
         issued by the issuer of the Redemption Securities of the other issuer
         and a new preferred stock of TCI convertible into such additional
         property. In such event, the Mirror Preferred Stock and such new TCI
         preferred stock will have a combined liquidation value equal to the
         liquidation value of the Series G or Series H Preferred Stock
         exchanged and will otherwise have terms and conditions comparable to
         such Series G or Series H Preferred Stock.

         The Series G and Series H Preferred Stock are redeemable at TCI's
         option, in whole or in part, any time on or after February 1, 2001.
         The Series G and Series H Preferred Stock will be redeemable in full
         on February 1, 2016, to the extent then outstanding. In all cases, the
         redemption price per share will be the liquidation value thereof,
         including the amount of any accrued but unpaid dividends thereon, to
         and including the redemption date.

         The Series G and Series H Preferred Stock will rank prior to TCI
         common stock and the TCI Class B Preferred Stock and pari passu with
         all other currently outstanding classes and series of TCI preferred
         stock with respect to the declaration and payment of dividends and in
         liquidation.

         The Series G and Series H Preferred Stock will vote in any general
         election of directors of TCI and will have one vote per share for such
         purposes and will vote as a single class with the TCI common stock,
         the TCI Class B Preferred Stock and any other class or series of TCI
         Preferred Stock entitled to vote in any general election of directors.
         The Series G and Series H Preferred Stock will have no other voting
         rights except as required by the DGCL.


                                                                    (continued)


                                    II-160
<PAGE>   225
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

(11)     Company-Obligated Mandatorily Redeemable Preferred Securities of 
           Subsidiary Trusts Holding Solely Subordinated Debt Securities of 
           TCIC

         In January 1996, TCI Communications Financing I ("Trust I"), an
         indirect wholly-owned subsidiary of TCI Group, issued $16 million in
         common securities to TCIC, a subsidiary of TCI Group, and issued $500
         million of 8.72% Trust Originated Preferred SecuritiesSM (the "Trust I
         Preferred Securities" and together with the common securities, the
         "Trust I Securities") to the public. Trust I exists for the exclusive
         purposes of issuing Trust I Securities and investing the proceeds
         thereof into an aggregate principal amount of $516 million of 8.72%
         Subordinated Deferrable Interest Notes due January 31, 2045 (the
         "8.72% Subordinated Debt Securities") of TCIC. The 8.72% Subordinated
         Debt Securities are unsecured obligations of TCIC and are subordinate
         and junior in right of payment to certain other indebtedness of TCI
         Group. Upon redemption of the 8.72% Subordinated Debt Securities, the
         Trust I Preferred Securities will be mandatorily redeemable. TCIC
         effectively provides a full and unconditional guarantee of Trust I's
         obligations under the Trust I Preferred Securities.

         In May 1996, TCI Communications Financing II ("Trust II"), an indirect
         wholly-owned subsidiary of TCI Group, issued $16 million in common
         securities to TCIC, and issued $500 million of 10% Trust Preferred
         Securities (the "Trust II Preferred Securities" and together with the
         common securities, the "Trust II Securities") to the public. Trust II
         exists for the exclusive purposes of issuing Trust II Securities and
         investing the proceeds thereof into an aggregate principal amount of
         $516 million of 10% Subordinated Deferrable Interest Notes due May 31,
         2045 (the "10% Subordinated Debt Securities") of TCIC. The 10%
         Subordinated Debt Securities are unsecured obligations of TCIC and are
         subordinate and junior in right of payment to certain other
         indebtedness of TCI Group. Upon redemption of the 10% Subordinated
         Debt Securities, the Trust II Preferred Securities will be mandatorily
         redeemable. TCIC effectively provides a full and unconditional
         guarantee of Trust II's obligations under the Trust II Preferred
         Securities.

         The Trust I and Trust II Preferred Securities are presented together
         in a separate line item in the accompanying combined balance sheet
         captioned "Company-obligated mandatorily redeemable preferred
         securities of subsidiary trusts holding solely subordinated debt
         securities of TCI Communications, Inc." Dividends accrued on the Trust
         I and Trust II Preferred Securities are included in minority interests
         in losses (earnings) of consolidated subsidiaries in the accompanying
         combined statements of operations.

(12)     Combined Equity

         General

         The rights of holders of the TCI Group Stock upon liquidation of TCI
         are based upon the ratio of the aggregate market capitalization, as
         defined, of the TCI Group Stock to the aggregate market
         capitalization, as defined, of the TCI Group Stock and the Liberty
         Group Stock.


                                                                    (continued)


                                    II-161
<PAGE>   226
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Employee Benefit Plans

         TCI has several employee stock purchase plans (the "Plans") to provide
         employees an opportunity for ownership in TCI and to create a
         retirement fund. Terms of the Plans generally provide for employees to
         contribute up to 10% of their compensation to a trust for investment
         in TCI common stock. TCI, by annual resolution of the Board, generally
         contributes up to 100% of the amount contributed by employees. Certain
         of TCI's subsidiaries have their own employee benefit plans.
         Contributions to all plans aggregated $35 million, $28 million and $21
         million for 1996, 1995 and 1994, respectively.

         Preferred Stock

         Class A Preferred Stock. TCI is authorized to issue 700,000 shares of
         Class A Preferred Stock, par value $.01 per share. Subsidiaries of TCI
         held all of the issued and outstanding shares of such stock, amounting
         to 592,797 shares. The holders of the Class A Preferred Stock
         exchanged such Subsidiary Shares for shares of Series F Preferred
         Stock immediately prior to the record date of the Distribution.

         Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock.
         TCI is authorized to issue 1,675,096 shares of Class B Preferred Stock
         and 1,620,026 of such shares are issued and outstanding.

         Dividends accrue cumulatively (but without compounding) at an annual
         rate of 6% of the stated liquidation value of $100 per share (the
         "Stated Liquidation Value"), whether or not such dividends are
         declared or funds are legally available for payment of dividends.
         Accrued dividends will be payable annually on March 1 of each year (or
         the next succeeding business day if March 1 does not fall on a
         business day), and, in the sole discretion of the Board, may be
         declared and paid in cash, in shares of Series A TCI Group Stock or in
         any combination of the foregoing. Accrued dividends not paid as
         provided above on any dividend payment date will accumulate and such
         accumulated unpaid dividends may be declared and paid in cash, shares
         of Series A TCI Group Stock or any combination thereof at any time
         (subject to the rights of any senior stock and, if applicable, to the
         concurrent satisfaction of any dividend arrearages on any class or
         series of TCI preferred stock ranking on a parity with the Class B
         Preferred Stock with respect to dividend rights) with reference to any
         regular dividend payment date, to holders of record of Class B
         Preferred Stock as of a special record date fixed by the Board (which
         date may not be more than 45 days nor less than 10 days prior to the
         date fixed for the payment of such accumulated unpaid dividends). The
         Class B Preferred Stock ranks junior to the Series F Preferred Stock
         with respect to the declaration and payment of dividends.


                                                                    (continued)


                                    II-162
<PAGE>   227
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         If all or any portion of a dividend payment is to be paid through the
         issuance and delivery of shares of Series A TCI Group Stock, the
         number of such shares to be issued and delivered will be determined by
         dividing the amount of the dividend to be paid in shares of Series A
         TCI Group Stock by the Average Market Price of the Series A TCI Group
         Stock. For this purpose, "Average Market Price" means the average of
         the daily last reported sale prices (or, if no sale price is reported
         on any day, the average of the high and low bid prices on such day) of
         a share of Series A TCI Group Stock for the period of 20 consecutive
         trading days ending on the tenth trading day prior to the regular
         record date or special record date, as the case may be, for the
         applicable dividend payment.

         In the event of any liquidation, dissolution or winding up of TCI, the
         holders of Class B Preferred Stock will be entitled, after payment of
         preferential amounts on any class or series of stock ranking prior to
         the Class B Preferred Stock with respect to liquidating distributions,
         to receive from the assets of TCI available for distribution to
         stockholders an amount in cash or property or a combination thereof,
         per share, equal to the stated liquidation value thereof, plus all
         accumulated and accrued but unpaid dividends thereon to and including
         the redemption date. TCI does not have any mandatory obligation to
         redeem the Class B Preferred Stock as of any fixed date, at the option
         of the holders or otherwise.

         Subject to the prior preferences and other rights of any class or
         series of TCI preferred stock, the Class B Preferred Stock will be
         exchangeable at the option of TCI in whole but not in part at any time
         for junior subordinated debt securities of TCI ("Junior Exchange
         Notes"). The Junior Exchange Notes will be issued pursuant to an
         indenture (the "Indenture"), to be executed by TCI and a qualified
         trustee to be chosen by TCI.

         If TCI exercises its optional exchange right, each holder of
         outstanding shares of Class B Preferred Stock will be entitled to
         receive in exchange therefor newly issued Junior Exchange Notes of a
         series authorized and established for the purpose of such exchange,
         the aggregate principal amount of which will be equal to the aggregate
         Stated Liquidation Value of the shares of Class B Preferred Stock so
         exchanged by such holder, plus all accumulated and accrued but unpaid
         dividends thereon to and including the exchange date. The Junior
         Exchange Notes will be issuable only in principal amounts of $100 or
         any integral multiple thereof and a cash adjustment will be paid to
         the holder for any excess principal that would otherwise be issuable.
         The Junior Exchange Notes will mature on the fifteenth anniversary of
         the date of issuance and will be subject to earlier redemption at the
         option of TCI, in whole or in part, for a redemption price equal to
         the principal amount thereof plus accrued but unpaid interest.
         Interest will accrue, and be payable annually, on the principal amount
         of the Junior Exchange Notes at a rate per annum to be determined
         prior to issuance by adding a spread of 215 basis points to the
         "Fifteen Year Treasury Rate" (as defined in the Indenture). Interest
         will accrue on overdue principal at the same rate, but will not accrue
         on overdue interest.

         The Junior Exchange Notes will represent unsecured general obligations
         of TCI and will be subordinated in right of payment to all Senior Debt
         (as defined in the Indenture). Accordingly, holders of Class B
         Preferred Stock who receive Junior Exchange Notes in exchange therefor
         may have difficulty selling such Notes.


                                                                    (continued)


                                    II-163
<PAGE>   228
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         For so long as any dividends are in arrears on the Class B Preferred
         Stock or any class or series of TCI preferred stock ranking pari passu
         with the Class B Preferred Stock which is entitled to payment of
         cumulative dividends prior to the redemption, exchange, purchase or
         other acquisition of the Class B Preferred Stock, and until all
         dividends accrued up to the immediately preceding dividend payment
         date on the Class B Preferred Stock and such parity stock shall have
         been paid or declared and set apart so as to be available for payment
         in full thereof and for no other purpose, neither TCI nor any
         subsidiary thereof may redeem, exchange, purchase or otherwise acquire
         any shares of Class B Preferred Stock, any such parity stock or any
         class or series of its capital stock ranking junior to the Class B
         Preferred Stock (including the TCI common stock), or set aside any
         money or assets for such purpose, unless all of the outstanding shares
         of Class B Preferred Stock and such parity stock are redeemed. If TCI
         fails to redeem or exchange shares of Class B Preferred Stock on a
         date fixed for redemption or exchange, and until such shares are
         redeemed or exchanged in full, TCI may not redeem or exchange any
         parity stock or junior stock, declare or pay any dividend on or make
         any distribution with respect to any junior stock or set aside money
         or assets for such purpose and neither TCI nor any subsidiary thereof
         may purchase or otherwise acquire any Class B Preferred Stock, parity
         stock or junior stock or set aside money or assets for any such
         purpose. The failure of TCI to pay any dividends on any class or
         series of parity stock or to redeem or exchange on any date fixed for
         redemption or exchange any shares of Class B Preferred Stock shall not
         prevent TCI from (i) paying any dividends on junior stock solely in
         shares of junior stock or the redemption purchase or other acquisition
         of junior stock solely in exchange for (together with cash adjustment
         for fractional shares, if any) or (but only in the case of a failure
         to pay dividends on any parity stock) through the application of the
         proceeds from the sale of, shares of junior stock; or (ii) the payment
         of dividends on any parity stock solely in shares of parity stock
         and/or junior stock or the redemption, exchange, purchase or other
         acquisition of Class B Preferred Stock or parity stock solely in
         exchange for (together with a cash adjustment for fractional shares,
         if any), or (but only in the case of failure to pay dividends on any
         parity stock) through the application of the proceeds from the sale
         of, parity stock and/or junior stock.

         The Class B Preferred Stock will vote in any general election of
         directors, will have one vote per share for such purpose and will vote
         as a single class with the TCI common stock and any other class or
         series of TCI preferred stock entitled to vote in any general election
         of directors. The Class B Preferred Stock will have no other voting
         rights except as required by the DGCL.

         Series Preferred Stock. The TCI Series Preferred Stock is issuable,
         from time to time, in one or more series, with such designations,
         preferences and relative participating, option or other special
         rights, qualifications, limitations or restrictions thereof, as shall
         be stated and expressed in a resolution or resolutions providing for
         the issue of such series adopted by the Board. The Company is
         authorized to issue 50,000,000 shares of Series Preferred Stock.


                                                                    (continued)


                                    II-164
<PAGE>   229
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         All shares of any one series of the TCI Series Preferred Stock are
         required to be alike for every particular and all shares are required
         to rank equally and be identical in all respects, except insofar as
         they may vary with respect to matters which the Board is expressly
         authorized by the TCI Charter to determine in the resolution or
         resolutions providing for the issue of any series of the TCI Series
         Preferred Stock.

         Redeemable Convertible Preferred Stock, Series E. per share. TCI is
         authorized to issue 400,000 shares of Redeemable Convertible Preferred
         Stock, Series E, par value $.01. Subsidiaries of TCI held all of the
         issued and outstanding shares of such stock, amounting to 246,402
         shares. The holders of the Series E Preferred Stock exchanged such
         Subsidiary Shares for shares of Series F Preferred Stock immediately
         prior to the record date of the Distribution.

         Stock Options and Stock Appreciation Rights

         Certain key employees of TCI Group hold options with tandem stock
         appreciation rights to acquire Series A TCI Group Stock and Series A
         Liberty Group Stock as well as restricted stock awards of Series A TCI
         Group Stock and Series A Liberty Group Stock. Estimates of the
         compensation relating to the options and/or stock appreciation rights
         as well as restricted stock awards granted to such employees are
         allocated to TCI Group and have been recorded in the accompanying
         combined financial statements pursuant to APB Opinion No. 25. Such
         estimates are subject to future adjustment based upon the market value
         of Series A TCI Group Stock and Series A Liberty Group Stock (see note
         1) and, ultimately, on the final determination of market value when the
         rights are exercised or the restricted shares are vested. Had TCI Group
         accounted for its stock based compensation pursuant to the fair value
         based accounting method in Statement No. 123, the amount of
         compensation would not have been materially different from what has
         been reflected in the accompanying combined financial statements.

(13)     Transaction with Officers and Directors

         Effective January 31, 1996, a director of TCI purchased one-third of
         TCI Group's interest in two limited partnerships and obtained two
         ten-year options to purchase TCI Group's remaining partnership
         interests. The purchase price for the one-third partnership interest
         was 37.209 shares of WestMarc Communications, Inc. ("WestMarc", a
         wholly-owned subsidiary of TCI Group) Series C Cumulative Compounding
         Preferred Stock owned by such director, and the purchase price for the
         ten-year option was $100 for each option. All options are exercisable
         for cash in the aggregate amount of $3,000,000.

         On July 1, 1996, pursuant to a Restricted Stock Award Agreement, an
         executive officer of TCI was transferred all of TCI's right title and
         interest in and to 62 shares of the 12% Series C Cumulative
         Compounding Preferred Stock of WestMarc owned by TCI. Such preferred
         stock has a liquidation value of $1,999,500 and is subject to
         forfeiture by such officer in the event of certain circumstances from
         the date of grant through December 13, 2005.

                                                                    (continued)


                                    II-165
<PAGE>   230
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Effective December 1, 1996, an executive officer of the Company and an
         executive officer of TCIC were each granted options representing 1.0%
         of the Company's common equity in TCI Telephony Services, Inc., a
         consolidated subsidiary of the Company, ("Telephony Services"). The
         aggregate exercise price for each such option is equal to 1.0% of (i)
         the Company's cumulative investment in Telephony Services as of
         December 1, 1996, adjusted for a 6% per annum interest factor from the
         date each such investment was made to the date of such exercise, less
         (ii) the sum of (x) $500 million and (y) the amount of the tax
         benefits generated by Telephony Services (up to $500 million) as and
         when used by TCI. Each such executive officer was also granted a
         similar option representing 1.0% of the Company's common equity in TCI
         Wireline, Inc., another consolidated subsidiary of the Company,
         ("Wireline"). The aggregate exercise price for each such Wireline
         option is equal to 1.0% of the Company's cumulative investment in
         Wireline as of December 1, 1996, adjusted for a 6% per annum interest
         factor from the date each such investment was made to the date of such
         exercise. Any exercise by one of such executive officers of all or
         part of one of such options (as to either the Telephony Services
         option or the Wireline option) would need to be accompanied by the
         exercise by such executive officer of a pro rata portion of the other
         such option. All of such options will vest and become exercisable in
         five equal annual installments, with the first annual installment
         vesting on February 1, 1997, and will expire on February 1, 2006.

         Effective December 1, 1996, two executive officers of the Company and
         an executive officer of TCIC were each granted options representing
         1.0% of the Company's common equity in TCI.NET, Inc., a consolidated
         subsidiary of the Company. The aggregate exercise price for each such
         TCI.NET, Inc. option is equal to 1.0% of the Company's cumulative
         investment in TCI.NET, Inc. as of December 31, 1996, adjusted for a 6%
         per annum interest factor from the date each such investment was made
         to the date of such exercise price. Such options vest 20% per annum
         beginning February 1, 1997 and expire on February 1, 2006.

         On the date of the Satellite Spin-off, the Company granted options to
         two of its executive officers to purchase 1.0% and an option to an
         employee of TCIC to acquire 0.5% of Satellite's issued and outstanding
         common stock. The exercise price for each such option is equal to 1.0%
         or 0.5%, as applicable, of the Company's net investment in Satellite
         on the date of the Satellite Spin-off. Such options vest 20% per annum
         beginning February 1, 1997 and expire on February 1, 2006.

         Estimated compensation relating to the aforementioned restricted stock
         award and options has been recorded through December 31, 1996 pursuant
         to APB Opinion No. 25. Such estimate is subject to future adjustment
         based upon market value, and ultimately, on the final determination of
         market value when the rights are exercised or the restricted stock
         awards are vested. Had TCI Group accounted for its stock based
         compensation pursuant to the fair value based accounting method in
         Statement No. 123, the amount of compensation would not have been
         materially different from what has been reflected in the accompanying
         combined financial statements.


                                                                    (continued)


                                    II-166
<PAGE>   231
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

(14)     Sale of Subsidiary Stock

         On July 18, 1995, TINTA completed an initial public offering (the
         "IPO") in which it sold 20 million shares of TINTA Series A common
         stock to the public for consideration of $16.00 per share aggregating
         $320 million, before deducting related expenses (approximately $19
         million). The shares sold to the public represented 17% of TINTA's
         total issued and outstanding common stock. Also in July 1995, TINTA
         issued 687,500 Shares of TINTA Series A common stock as partial
         consideration for a 35% ownership interest in Torneos Y Competencias
         S.A., an Argentine sports programming company (the "TYC Acquisition").
         As a result of the IPO and the TYC Acquisition, TCI Group recognized a
         nonrecurring gain amounting to $123 million.

         In June 1995, Flextech issued share capital for cash and preferred
         shares of Thomson Directories Limited. In connection with such
         issuance, TCI Group recorded a $51 million increase to stockholders'
         equity and a $93 million increase to minority interest in equity of
         consolidated subsidiaries. No gain was recognized in TCI Group's
         combined statement of operations due primarily to the existence of TCI
         Group's contingent obligations to repurchase certain of the Flextech
         share capital.

(15)     Income Taxes

         TCI files a consolidated Federal income tax return with all of its 80%
         or more owned subsidiaries. Consolidated subsidiaries in which TCI
         owns less than 80% each file a separate income tax return. TCI and
         such subsidiaries calculate their respective tax liabilities on a
         separate return basis which are combined in the accompanying combined
         financial statements.

         A tax sharing agreement (the "Tax Sharing Agreement") among entities
         attributed to TCI Group and certain other subsidiaries of TCI was
         implemented effective July 1, 1995. The Tax Sharing Agreement
         formalizes certain of the elements of a pre-existing tax sharing
         arrangement and contains additional provisions regarding the
         allocation of certain consolidated income tax attributes and the
         settlement procedures with respect to the intercompany allocation of
         current tax attributes. The Tax Sharing Agreement encompasses U.S.
         federal, state, local and foreign tax consequences and relies upon the
         U.S. Internal Revenue Code of 1986 as amended, and any applicable
         state, local and foreign tax law and related regulations. Beginning on
         the July 1, 1995 effective date, TCI Group is responsible to TCI for
         its share of current consolidated income tax liabilities. TCI is
         responsible to TCI Group to the extent that TCI Group's income tax
         attributes generated after the effective date are utilized by TCI to
         reduce its consolidated income tax liabilities. Accordingly, all tax
         attributes generated by TCI Group's operations after the effective
         date including, but not limited to, net operating losses, tax credits,
         deferred intercompany gains, and the tax basis of assets are
         inventoried and tracked for the entities comprising TCI Group. In
         connection with the implementation of the Tax Sharing Agreement, TCI
         Group recorded an increase to its deferred income tax liability and a
         decrease to its combined equity of $2 million.


                                                                    (continued)


                                    II-167
<PAGE>   232
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Income tax benefit (expense) for the years ended December 31, 1996,
         1995 and 1994 consists of:

<TABLE>
<CAPTION>
                                      Current    Deferred    Total
                                      -------    --------   -------
                                            amounts in millions
<S>                                   <C>            <C>        <C>
Year ended December 31, 1996:
         Federal                      $    (2)       273        271
         State and local                  (11)        46         35
                                      -------    -------    -------
                                      $   (13)       319        306
                                      =======    =======    =======

Year ended December 31, 1995:
         Federal                      $   (26)        85         59
         State and local                   (8)        14          6
                                      -------    -------    -------
                                      $   (34)        99         65
                                      =======    =======    =======

Year ended December 31, 1994:
         Federal                      $   (49)        (4)       (53)
         State and local                  (11)         4         (7)
                                      -------    -------    -------
                                      $   (60)        --        (60)
                                      =======    =======    =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                                -----------------------------
                                                 1996       1995       1994
                                                -------    -------    -------
                                                     amounts in millions
<S>                                             <C>             <C>       <C> 
Computed "expected" tax benefit 
    (expense)                                   $   379         63        (13)
Amortization not deductible for tax 
    purposes                                        (18)       (19)       (12)
Minority interest in earnings of consolidated
    subsidiaries                                      2         (3)        (3)
Gain on sale of subsidiary stock                     --         43         --
Gain recognized for tax purposes on exchange
    of assets                                        --        (12)        --
Gain recognized for tax purposes on sale of
    investments                                     (61)        --         --
State and local income taxes, net of federal
    income tax benefit                               12         (6)        (9)
Recognition of losses of consolidated
    partnership                                      --         --        (10)
Valuation allowance on foreign corporation           --         --        (10)
Other                                                (8)        (1)        (3)
                                                -------    -------    -------
                                                $   306         65        (60)
                                                =======    =======    =======
</TABLE>


                                                                    (continued)


                                    II-168
<PAGE>   233
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31, 1996 and 1995 are presented below:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                  ------------------
                                                                   1996        1995
                                                                  -------    -------
                                                                  amounts in millions
<S>                                                               <C>            <C>
Deferred tax assets:
    Net operating loss carryforwards                              $   670        547
      Less-valuation allowance                                       (121)      (121)
    Investment tax credit carryforwards                               118        118
      Less-valuation allowance                                        (41)       (41)
    Alternative minimum tax credit carryforwards                       95         95
    Investments in affiliates, due principally to losses of
      affiliates recognized for financial statement purposes in
      excess of losses recognized for income tax purposes             232        176
    Future deductible amounts principally due to
      non-deductible accruals                                          72         86
    Other                                                               3         --
                                                                  -------    -------
          Net deferred tax assets                                   1,028        860
                                                                  -------    -------

Deferred tax liabilities:
    Property and equipment, principally due to
      differences in depreciation                                   1,199      1,099
    Franchise costs, principally due to differences in
      amortization                                                  4,676      3,566
    Investment in affiliates, due principally to
      undistributed earnings of affiliates                            329        263
    Intangible assets, principally due to differences
      in amortization                                                  36         42
    Leases capitalized for tax purposes                                72         53
    Other                                                             146        219
                                                                  -------    -------
          Total gross deferred tax liabilities                      6,458      5,242
                                                                  -------    -------

          Net deferred tax liability                              $ 5,430      4,382
                                                                  =======    =======
</TABLE>

         The valuation allowance for deferred tax assets as of December 31,
         1996 and 1995 was $162 million.

         The tax attributes disclosed above are those determined pursuant to
         the Tax Sharing Agreement.

         At December 31, 1996, TCI Group had net operating loss carryforwards
         for income tax purposes aggregating approximately $1,493 million of
         which, if not utilized to reduce taxable income in future periods,
         $134 million expires in 2003, $117 million in 2004, $344 million in
         2005, $279 million in 2006, $138 million in 2009, $155 million in 2010
         and $326 million in 2011. Certain subsidiaries of TCI Group had
         additional net operating loss carryforwards for income tax purposes
         aggregating approximately $236 million and these net operating losses
         are subject to certain rules limiting their usage. Pursuant to the Tax
         Sharing Agreement, TCI Group has received benefit for approximately
         $54 million of the net operating loss carryforward disclosed above.
         TCI Group is responsible to TCI to the extent such amounts are
         utilized by TCI Group in future periods.


                                                                    (continued)


                                    II-169
<PAGE>   234
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         At December 31, 1996, TCI Group had remaining available investment tax
         credits of approximately $63 million which, if not utilized to offset
         future Federal income taxes payable, expire at various dates through
         2005. Certain subsidiaries of TCI Group had additional investment tax
         credit carryforwards aggregating approximately $55 million and these
         investment tax credit carryforwards are subject to certain rules
         limiting their usage.

         Certain of the Federal income tax returns of TCI and its subsidiaries
         which filed separate income tax returns are presently under
         examination by the Internal Revenue Service ("IRS") for the years 1992
         through 1995 (the "IRS Examinations"). Certain income tax issues
         related to the years 1981-1991 have been resolved in TCI's favor. The
         IRS has until April 1997 to appeal such decisions (the "IRS Appeals").
         In the opinion of management, any additional tax liability, not
         previously provided for, resulting from the IRS Examinations or the
         IRS Appeals, ultimately determined to be payable, should not have a
         material adverse effect on the combined financial position of TCI
         Group.

(16)     Transactions with Liberty Media Group and Other Related Parties

         Certain TCI corporate general and administrative costs are charged to
         Liberty Media Group at rates set at the beginning of the year based on
         projected utilization for that year. The utilization-based charges are
         set at levels that management believes to be reasonable and that
         approximate the costs Liberty Media Group would incur for comparable
         services on a stand alone basis. During the years ended December 31,
         1996 and 1995, Liberty Media Group was allocated $3 million and $3
         million, respectively, in corporate general and administrative costs
         by TCI Group.

         TCI Group has a 50.1% partnership interest in QE+Ltd Limited
         Partnership ("QE+"), which distributes STARZ!, a first-run movie
         premium programming service launched in 1994. Entities attributed to
         Liberty Media Group hold the remaining 49.9% partnership interest. TCI
         Group consolidates its interest in QE+.

         The QE+ limited partnership agreement provides that TCI Group will be
         required to make special capital contributions to QE+ through July 1,
         2005, up to a maximum amount of $350 million, approximately $203
         million of which was paid through December 31, 1996. QE+ is obligated
         to pay TCI Group a preferred return of 10% per annum on the first $200
         million of its special capital contributions beginning five years from
         the date of the contribution or five years from January 1, 1996,
         whichever is later. Any TCI Group special capital contributions in
         excess of $200 million will be entitled to a preferred return of 10%
         per annum from the date of the contribution. QE+ is required to apply
         75% of its available cash flow, as defined, to repay the TCI Group
         special capital contributions and any preferred return payable
         thereon. To the extent such special capital contributions are
         insufficient to fund the cash requirements of QE+, TCI Group and
         Liberty Media Group will each have the option to fund such cash
         requirements in proportion to their respective ownership percentages.

                                                                    (continued)


                                    II-170
<PAGE>   235
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Liberty Media Group also has the right to acquire an additional 10.1%
         general partnership interest in QE+ based on a formula designed to
         approximate the fair value of such interest. Such right is exercisable
         for a period of ten years beginning January 1, 1999 after QE+ has had
         positive cash flow for two consecutive calendar quarters. The right is
         exercisable only after all special capital contributions from TCI
         Group have been repaid, including any preferred return as discussed
         above.

         Encore Media Corporation (90% owned by Liberty Media Group) earns
         management fees from QE+ equal to 20% of managed costs, as defined. In
         addition, effective July 1, 1995, Liberty Media Group started earning
         a "Content Fee" for certain services provided to QE+ equal to 4% of
         the gross revenue of QE+. Such Content Fees aggregated $4 million for
         the year ended December 31, 1996 and $1 million for the six months
         ended December 31, 1995. The Content Fee agreement expires on June 30,
         2001, subject to renewal on an annual basis thereafter. Payment of the
         Content Fee will be subordinated to the repayment of the contributions
         made by TCI Group and the preferred return thereon.

         Entities included in Liberty Media Group lease satellite transponder
         facilities from TCI Group. Charges by TCI Group for such arrangements
         and other related operating expenses for the years ended December 31,
         1996, 1995 and 1994, aggregated $12 million, $15 million and $8
         million, respectively.

         Certain subsidiaries attributed to Liberty Media Group produce and/or
         distribute sports and other programming to cable television operators
         (including TCI Group) and others. Charges to TCI Group are based upon
         customary rates charged to others.

         HSN pays a commission to TCI Group for merchandise sales to customers
         who are subscribers of TCI Group's cable systems. Aggregate
         commissions and charges to TCI Group were $7 million, $6 million and
         $7 million for the years ended December 31, 1996, 1995 and 1994,
         respectively.

         TCI Group manages certain treasury activities for Liberty Media Group
         on a centralized basis. Previously, cash receipts of certain
         businesses attributed to Liberty Media Group were remitted to TCI
         Group and certain cash disbursements of Liberty Media Group were
         funded by TCI Group on a daily basis. Prior to the Distribution, the
         net amounts of such cash activities are included in investment in
         Liberty Media Group in the accompanying combined financial statements.
         Subsequent to the Distribution, such cash activities are included in
         borrowings from or loans to TCI Group or, if determined by the Board,
         as an equity contribution to be reflected as an Inter-Group Interest
         to Liberty Media Group.

         The Board could determine from time to time that debt of TCI Group not
         incurred by entities attributed to Liberty Media Group or preferred
         stock and the proceeds thereof should be specifically attributed to
         and reflected on the combined financial statements of Liberty Media
         Group to the extent that the debt is incurred or the preferred stock
         is issued for the benefit of Liberty Media Group.

                                                                    (continued)


                                    II-171
<PAGE>   236
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         For all periods prior to the Distribution, all financial impacts of
         equity offerings were attributed entirely to TCI Group. After the
         Distribution, all financial impacts of issuances of additional shares
         of TCI Group Stock will be attributed entirely to TCI Group, all
         financial impacts of issuances of additional shares of Liberty Group
         Stock the proceeds of which are attributed to the Liberty Media Group
         will be reflected entirely in the combined financial statements of
         Liberty Media Group. Financial impacts of dividends or other
         distributions on, and purchases of, TCI Group Stock will be attributed
         entirely to TCI Group, and financial impacts of dividends or other
         distributions on Liberty Group Stock will be attributed entirely to
         Liberty Media Group. Financial impacts of repurchases of Liberty Group
         Stock, the consideration for which is charged to Liberty Media Group,
         will be reflected entirely in the combined financial statements of
         Liberty Media Group, and the financial impacts of repurchases of
         Liberty Group Stock the consideration for which is charged to TCI
         Group, will be attributed entirely to TCI Group.

         Subsequent to the Distribution, borrowings from or loans to TCI Group
         bear interest at such rates and have repayment schedules and other
         terms as are established by the Board. The Board expects to make such
         determinations, either in specific instances or by setting generally
         applicable policies from time to time, after consideration of such
         factors as it deems relevant, including, without limitation, the use
         of proceeds by and creditworthiness of the recipient Group, the
         capital expenditure plans and investment opportunities available to
         each Group and the availability, cost and time associated with
         alternative financing sources.

(17)     Commitments and Contingencies

         On October 5, 1992, Congress enacted the Cable Television Consumer
         Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993
         and 1994, the FCC adopted certain rate regulations required by the
         1992 Cable Act and imposed a moratorium on certain rate increases. As
         a result of such actions, TCI Group's basic and tier service rates and
         its equipment and installation charges (the "Regulated Services") are
         subject to the jurisdiction of local franchising authorities and the
         FCC. Basic and tier service rates are evaluated against competitive
         benchmark rates as published by the FCC, and equipment and
         installation charges are based on actual costs. Any rates for
         Regulated Services that exceeded the benchmarks were reduced as
         required by the 1993 and 1994 rate regulations. The rate regulations
         do not apply to the relatively few systems which are subject to
         "effective competition" or to services offered on an individual
         service basis, such as premium movie and pay-per-view services.

         TCI Group believes that it has complied in all material respects with
         the provisions of the 1992 Cable Act, including its rate setting
         provisions. However, TCI Group's rates for regulated services are
         subject to review by the FCC, if a complaint has been filed, or the
         appropriate franchise authority, if such authority has been certified.
         If, as a result of the review process, a system cannot substantiate
         its rates, it could be required to retroactively reduce its rates to
         the appropriate benchmark and refund the excess portion of rates
         received. Any refunds of the excess portion of tier service rates
         would be retroactive to the date of complaint. Any refunds of the
         excess portion of all other Regulated Service rates would be
         retroactive to one year prior to the implementation of the rate
         reductions.


                                                                    (continued)


                                    II-172
<PAGE>   237
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         TCI Group is obligated to pay fees for the rights to exhibit certain
         films that are released by various producers through December 31, 2005
         (the "Film Licensing Obligations"). Based on customer levels at
         December 31, 1996, these agreements require minimum payments
         aggregating $377 million. The aggregate amount of the Film Licensing
         Obligations is not currently estimable because such amount is
         dependent upon the number of qualifying films released theatrically by
         certain motion picture studios as well as the domestic theatrical
         exhibition receipts upon the release of such qualifying films.
         Nevertheless, TCI Group's required aggregate payments under the Film
         Licensing Obligations could prove to be significant.

         TCI Group has guaranteed notes payable and other obligations of
         affiliated and other companies with outstanding balances of
         approximately $278 million at December 31, 1996. Although there can be
         no assurance, management of TCI Group believes that it will not be
         required to meet its obligations under such guarantees, or if it is
         required to meet any of such obligations, that they will not be
         material to TCI Group.

         TCI Group has made certain financial commitments related to the
         acquisition of sports program rights through 2004. At December 31,
         1996, such commitments aggregated $226 million.

         TCI Group leases business offices, has entered into converter lease
         agreements, pole rental agreements and transponder lease agreements and
         uses certain equipment under lease arrangements. Rental expense under
         such arrangements amounted to $163 million, $114 million and $75
         million in 1996, 1995 and 1994, respectively.

         Future minimum lease payments under noncancellable operating leases
         for each of the next five years are summarized as follows (amounts in
         millions):

<TABLE>
                  <S>            <C>    
                  1997           $      155
                  1998                  145
                  1999                  137
                  2000                  114
                  2001                  106
                  Thereafter            331
</TABLE>

         It is expected that, in the normal course of business, expiring leases
         will be renewed or replaced by leases on other properties; thus, it is
         anticipated that future minimum lease commitments will not be less
         than the amount shown for 1997.

         Certain key employees of TCI Group hold restricted stock awards,
         options and options with tandem SARs to acquire shares of certain
         subsidiaries' common stock. Estimates of the compensation related to
         the restricted stock awards and options and/or SARs have been recorded
         in the accompanying consolidated financial statements pursuant to APB
         Opinion No. 25. Such estimates are subject to future adjustment based
         upon the market value of the respective common stock and, ultimately,
         on the final market value when the rights are exercised. Had TCI Group
         accounted for its stock based compensation pursuant to the fair value
         based accounting method in Statement No. 123, the amount of
         compensation would not have been materially different from what has
         been reflected in the accompanying combined financial statements.


                                                                    (continued)


                                    II-173
<PAGE>   238
                                  "TCI GROUP"
            (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

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


                                    II-174
<PAGE>   239
                                   PART III.


       The information required by Part III (Items 10, 11, 12 and 13) has been
incorporated herein by reference to the Company's definitive Proxy Statement
(the "1997 Proxy Statement") to be used in connection with the 1997 Annual
Meeting of Stockholders as set forth below, in accordance with General
Instruction G(3) of Form 10-K.

Item 10.      Directors and Executive Officers of the Registrant.

       Information relating to directors and executive officers of the Company
is set forth in the sections entitled "Election of Directors Proposal" and
"Concerning Management" in the 1997 Proxy Statement and is incorporated herein
by reference.

Item 11.      Executive Compensation.

       Information regarding compensation of officers and directors of the
Company is set forth in the section entitled "Executive Compensation" in the
1997 Proxy Statement and is incorporated herein by reference.

Item 12.      Security Ownership of Certain Beneficial Owners and Management.

       Information regarding ownership of certain of the Company's securities
is set forth in the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the 1997 Proxy Statement and is incorporated herein
by reference.

Item 13.      Certain Relationships and Related Transactions.

       Information regarding certain relationships and related transactions
with the Company is set forth in the section entitled "Certain Relationships
and Related Transactions" in the 1997 Proxy Statement and is incorporated
herein by reference.




                                    III-1
<PAGE>   240
                                    PART IV.


Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) (1)  Financial Statements

<TABLE>
<CAPTION>
Included in Part II of this Report:                                      Page No.
                                                                         --------
<S>                                                                    <C>
Tele-Communications, Inc.:                                             
                                                                       
         Independent Auditors' Report                                       II-50
                                                                       
         Consolidated Balance Sheets,                                  
            December 31, 1996 and 1995                                 II-51 to II-52
                                                                       
         Consolidated Statements of Operations,                        
            Years ended December 31, 1996, 1995 and 1994               II-53 to II-54
                                                                       
         Consolidated Statements of Stockholders' Equity,              
            Years ended December 31, 1996, 1995 and 1994               II-55 to II-57
                                                                       
         Consolidated Statements of Cash Flows,                        
            Years ended December 31, 1996, 1995 and 1994                      II-58
                                                                       
         Notes to Consolidated Financial Statements,                   
            December 31, 1996, 1995 and 1994                           II-59 to II-101
                                                                       
"Liberty Media Group":                                                 
                                                                       
         Independent Auditors' Report                                       II-102
                                                                       
         Combined Balance Sheets,                                      
            December 31, 1996 and 1995                                 II-103 to II-104
                                                                       
         Combined Statements of Operations,                            
            Years ended December 31, 1996, 1995 and 1994                      II-105
                                                                       
         Combined Statements of Equity,                                
            Years ended December 31, 1996, 1995 and 1994                      II-106
                                                                       
         Combined Statements of Cash Flows,                            
            Years ended December 31, 1996, 1995 and 1994                      II-107
                                                                       
         Notes to Combined Financial Statements,                       
            December 31, 1996, 1995 and 1994                           II-108 to II-128
</TABLE>



                                     IV-1

<PAGE>   241
<TABLE>
<S>                                                                    <C>
"TCI Group":                                                           
                                                                       
         Independent Auditors' Report                                       II-129
                                                                       
         Combined Balance Sheets,                                      
            December 31, 1996 and 1995                                 II-130 to II-131
                                                                       
         Combined Statements of Operations,                            
            Years ended December 31, 1996, 1995 and 1994                      II-132
                                                                       
         Combined Statements of Equity,                                
            Years ended December 31, 1996, 1995 and 1994               II-133 to II-135
                                                                       
         Combined Statements of Cash Flows,                            
            Years ended December 31, 1996, 1995 and 1994                      II-136
                                                                       
         Notes to Combined Financial Statements,                       
            December 31, 1996, 1995 and 1994                           II-137 to II-174
</TABLE>





                                      IV-2
<PAGE>   242
(a) (2)  Financial Statement Schedules


Included in Part IV of this Report:

<TABLE>
<CAPTION>
(i)      Financial Statement Schedules required to be filed:             Page No.
                                                                         --------
<S>      <C>                                                           <C>
         Independent Auditors' Report                                       IV-15
                                                                       
         Schedule I - Condensed Information as to the                  
            Financial Position of the Registrant, December 31, 1996    
               and 1995; Condensed Information as to the Operations    
               and Cash Flows of the Registrant, Years ended           
               December 31, 1996, 1995 and 1994                        IV-16 to IV-18
                                                                       
         Schedule II - Valuation and Qualifying Accounts,              
            Years ended December 31, 1996, 1995 and 1994                    IV-19
                                                                       
(ii)     Separate financial statements  for Telewest                   
            Communications plc:                                        
                                                                       
         Consolidated Financial Statements                             
         ---------------------------------                             
                                                                       
            Independent Auditors' Report                                      IV-20
                                                                       
            Consolidated Statements of Operations                             IV-21
                                                                       
            Consolidated Balance Sheets                                       IV-22
                                                                       
            Consolidated Statements of Cash Flows                             IV-23
                                                                       
            Consolidated Statement of Shareholders' Equity                    IV-24
                                                                       
            Notes to Consolidated Financial Statements                 IV-25 to IV-38
                                                                       
(iii)    Separate financial statements for Sprint Spectrum             
            Holding Company, L.P. and Subsidiaries                     
                                                                       
         Consolidated Financial Statements                             
         ---------------------------------                             
                                                                       
            Independent Auditors' Report                                      IV-39
                                                                       
            Report of Independent Accountants                                 IV-40
                                                                       
            Consolidated Balance Sheets                                       IV-41
                                                                       
            Consolidated Statements of Operations                             IV-42

            Consolidated Statements of Changes in                      
                Partners' Capital                                             IV-43
                                                                       
            Consolidated Statements of Cash Flows                             IV-44
                                                                       
            Notes to Consolidated Financial Statements                 IV-45 to IV-58
</TABLE>





                                      IV-3
<PAGE>   243
(a) (3)  Exhibits

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

3 - Articles of Incorporation and Bylaws:

      3.1    The Restated Certificate of Incorporation, dated August 4, 1994,
                 as amended on August 4, 1994, August 16, 1994, October 11,
                 1994, October 21, 1994, January 26, 1995, August 3, 1995,
                 August 3, 1995, January 25, 1996 and January 25, 1996.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December  31,
                       1995 (Commission File No. 0-20421).

      3.2    The Bylaws as adopted June 16, 1994.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1994, as amended by Form 10-K/A (Commission File No.
                       0-20421).

10 - Material Contracts:

    10.1     Tele-Communications, Inc. 1994 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Form S-4
                       Registration Statement (Commission File No. 33-54263).

    10.2     Tele-Communications, Inc. 1995 Employee Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.3     Tele-Communications, Inc. 1996 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.4     Restated and Amended Employment Agreement, dated as of November 1,
                 1992, between the Company and Bob Magness.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1992, as amended by Form 10-K/A for the year ended
                       December 31, 1992 (Commission File No. 0-5550).

    10.5     Assignment and Assumption Agreement, dated as of August 4, 1994,
                 among TCI/Liberty Holding Company, Tele- Communications, Inc.
                 and Bob Magness.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1994, as amended by Form 10-K/A (Commission File No.
                       0-20421).

    10.6     Restated and Amended Employment Agreement, dated as of November 1,
                 1992, between the Company and John C.  Malone.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1992, as amended by Form 10-K/A for the year ended
                       December 31, 1992 (Commission File No. 0-5550).

                                                                     (continued)





                                      IV-4
<PAGE>   244
10 - Material contracts, continued:

    10.7     Assignment and Assumption Agreement, dated as of August 4, 1994,
                 among TCI/Liberty Holding Company, Tele- Communications, Inc.
                 and John C. Malone.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1994, as amended by Form 10-K/A (Commission File No.
                       0-20421).

    10.8     Restricted Stock Award Agreement, made as of December 10, 1992,
                 among Tele-Communications, Inc., Donne F.  Fisher and WestMarc
                 Communications, Inc.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1992, as amended by Form 10-K/A for the year ended
                       December 31, 1992 (Commission File No. 0-5550).

    10.9     Consulting Agreement, dated as of January 1, 1996, between
                 Tele-Communications, Inc. and Donne F. Fisher.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.10    Consulting Agreement, dated as March 11, 1995, between
                 Tele-Communications, Inc. and J.C. Sparkman.*

    10.11    Deferred Compensation Plan for Non-Employee Directors, effective
                 on November 1, 1992.* Incorporated herein by reference to
                 the Company's Annual Report on Form 10-K for the year ended
                       December 31, 1992, as amended by Form 10-K/A for the
                       year ended December 31, 1992 (Commission File No.
                       0-5550).

    10.12    Amended and Restated Employment Agreement, dated as of July 18,
                 1995, among Tele-Communications, Inc., Tele-Communications
                 International, Inc. and Fred A. Vierra.*
                    Incorporated herein by reference to Tele-Communications
                       International, Inc.'s Registration Statement on Form S-1
                       (Commission File No. 33-80491).

    10.13    Employment Agreement, dated as of January 1, 1993, between
                 Tele-Communications, Inc. and Larry E. Romrell.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K dated December 31, 1994, as amended
                       by Form 10-K/A (Commission File No. 0-20421).

    10.14    Assignment and Assumption Agreement, dated as of August 4, 1994,
                 among TCI/Liberty Holding Company, Tele- Communications, Inc.
                 and Larry E. Romrell.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K dated December 31, 1994, as amended
                       by Form 10-K/A (Commission File No. 0-20421).

    10.15    Form of 1992 Non-Qualified Stock Option and Stock Appreciation
                 Rights Agreement.* 
                    Incorporated herein by reference to the Company's Annual 
                    Report on Form 10-K for the year ended December 31, 1993, 
                    as amended by Form 10-K/A for the year ended December 31, 
                    1993 (Commission File No. 0-5550).

                                                                     (continued)





                                      IV-5
<PAGE>   245
10 - Material contracts, continued:


    10.16    Form of 1993 Non-Qualified Stock Option and Stock Appreciation
                 Rights Agreement.* 
                    Incorporated herein by reference to the Company's Annual 
                      Report on Form 10-K for the year ended December 31, 1993,
                      as amended by Form 10-K/A for the year ended December 31,
                      1993 (Commission File No. 0-5550).

    10.17    Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement, dated as of November 12, 1993, by and between
                 Tele-Communications, Inc. and Jerome   H. Kern.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1993, as amended by Form 10-K/A for the year ended
                       December 31, 1993 (Commission File No. 0-5550).

    10.18    Form of Assumption and Amended and Restated Stock Option Agreement
                 between the Company, Liberty Media Corporation and grantee
                 relating to stock appreciation rights granted pursuant to
                 letter dated September 17, 1991.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.19    Form of Assumption and Amended and Restated Stock Option Agreement
                 between the Company, Liberty Media Corporation and grantee
                 relating to the assumption of options and related stock
                 appreciation rights granted under the Liberty Media
                 Corporation 1991 Stock Incentive Plan pursuant to letter dated
                 July 26, 1993.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.20    Assumption and Amended and Restated Stock Option Agreement between
                 the Company, TCI/Liberty Holding Company and a director of
                 Tele-Communications, Inc. relating to assumption of options
                 and related stock appreciation rights granted outside of an
                 employee benefit plan pursuant to Tele-Communications, Inc.'s
                 1993 Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.21    Form of Assumption and Amended and Restated Stock Option Agreement
                 between the Company, TCI/Liberty Holding Company and grantee
                 relating to assumption of options and related stock
                 appreciation rights granted under Tele-Communications, Inc.'s
                 1992 Stock Incentive Plan pursuant to Tele-Communications,
                 Inc.'s 1993 Non-Qualified Stock Option and Stock Appreciation
                 Rights Agreement.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

                                                                     (continued)





                                      IV-6
<PAGE>   246
10 - Material contracts, continued:


    10.22    Form of Assumption and Amended and Restated Stock Option Agreement
                 between the Company, TCI/Liberty Holding Company and grantee
                 relating to assumption of grants pursuant to the Agreement and
                 Plan of Merger dated June 6, 1991 between United Artists
                 Entertainment Company and Tele-Communications, Inc.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.23    Form of letter dated September 17, 1991 from Liberty Media
                 Corporation to grantee relating to grant of stock appreciation
                 rights.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.24    Form of letter dated July 26, 1993 from Liberty Media Corporation
                 to grantee relating to grant of options and stock appreciation
                 rights.*
                    Incorporated by reference to Tele-Communications, Inc.'s
                       Post Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.25    Form of Assumption and Amended and Restated Stock Option Agreement
                 between the Company, TCI/Liberty Holding Company and grantee
                 relating to assumption of options and related stock
                 appreciation rights under Tele- Communications, Inc.'s 1992
                 Stock Incentive Plan pursuant to Tele-Communications, Inc.'s
                 1992 Non- Qualified Stock Option and Stock Appreciation Rights
                 Agreement.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.26    Forms of Assumption and Amended and Restated Stock Option
                 Agreements relating to options granted under the United
                 Artists Entertainment Company 1988 Incentive and Non-Qualified
                 Stock Option Plan and executed by employees who did not have
                 employment agreements with United Artists Entertainment
                 Company.*
                    Incorporated herein by reference to Tele-Communications,
                       Inc.'s Post-Effective Amendment No. 1 to Form S-4
                       Registration Statement on Form S-8 Registration
                       Statement (Commission File No. 33- 43009).

    10.27    Form of Indemnification Agreement.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1993, as amended by Form 10-K/A for the year ended
                       December 31, 1993 (Commission File No. 0-5550).

    10.28    Form of 1994 Non-Qualified Stock Option and Stock Appreciation
                 Rights Agreement.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K dated December 31, 1994, as amended
                       by Form 10-K/A (Commission File No. 0-20421).

                                                                     (continued)





                                      IV-7
<PAGE>   247
10 - Material contracts, continued:


    10.29    Qualified Employee Stock Purchase Plan of Tele-Communications,
                 Inc., as amended.*
                    Incorporated herein by reference to the
                       Tele-Communications, Inc. Registration Statement on Form
                       S-8 (Commission File No. 33-57635).

    10.30    Form of Restricted Stock Award Agreement for 1995 Award of Series
                 A TCI Group Restricted Stock pursuant to the
                 Tele-Communications, Inc. 1994 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.31    Form of Restricted Stock Award Agreement for 1995 Award of Series
                 A Liberty Media Group Restricted Stock pursuant to the
                 Tele-Communications, Inc. 1994 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.32    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A TCI Group common
                 stock pursuant to the Tele- Communications, Inc. 1994 Stock
                 Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.33    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A Liberty Media Group
                 common stock pursuant to the Tele-Communications, Inc. 1994
                 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.34    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A TCI Group common
                 stock pursuant to the Tele- Communications, Inc. 1995 Stock
                 Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.35    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A Liberty Media Group
                 common stock pursuant to the Tele-Communications, Inc. 1995
                 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

                                                                     (continued)





                                      IV-8
<PAGE>   248
10 - Material contracts, continued:


    10.36    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A TCI Group common
                 stock pursuant to the Tele- Communications, Inc. 1996 Stock
                 Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.37    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A Liberty Media Group
                 common stock pursuant to the Tele-Communications, Inc. 1996
                 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.38    The Tele-Communications International, Inc. 1995 Stock Incentive
                 Plan.  Incorporated herein by reference to Tele-Communications
                 International, Inc. Registration Statement on Form S-1 
                 (Commission File No. 33-91876).

    10.39    Form of Restricted Stock Award Agreement for 1995 Award of Series
                 A Tele-Communications International, Inc.  Restricted Stock
                 pursuant to the Tele-Communications International 1995 Stock
                 Incentive Plan.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.40    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A Tele-Communications
                 International, Inc. common stock pursuant to the
                 Tele-Communications International, Inc. 1995 Stock Incentive
                 Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.41    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A Tele-Communications
                 International, Inc. common stock.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).


    10.42    Restricted Stock Award Agreement, made as of July 1, 1996, among
                 Tele-Communications, Inc., Brendan Clouston and WestMarc
                 Communictions, Inc. *

    10.43    Option Agreement, dated as of December 4, 1996, by and between TCI
                 Satellite Entertainment, Inc. and Brendan R. Clouston.*
                    Incorporated herein by reference to the TCI Satellite
                       Entertainment, Inc. Annual Report on Form 10-K for the
                       year ended December 31, 1996 (Commission File No.
                       0-21317).
                                                                     (continued)





                                      IV-9
<PAGE>   249
10- Material contracts, continued:


    10.44    Form of Option to Purchase Common Stock Agreement made as of the
                 1st day of December 1996 by and among TCI Telephony Services,
                 Inc., Grantee and Tele-Communications, Inc.*

    10.45    Form of Option to Purchase Common Stock Agreement made as of the
                 1st day of December 1996 by and among TCI Wireline, Inc.,
                 Grantee and Tele-Communications, Inc.*

    10.46    Form of Option to Purchase Common Stock Agreement made as of the
                 1st day of December 1996 by and among TCI Internet Services,
                 Inc., Grantee and Tele-Communications, Inc. *

    10.47    Letter Agreement, dated December 26, 1996, by Tele-Communications,
                 Inc. to purchase WestMarc Series C Cumulative Compounding
                 Redeemable Preferred Stock from Larry E. Romrell.

    10.48    Employee Stock Purchase Plan for Bargaining Unit Employees of
                 United Cable Television of Baltimore Limited Partnership.*
                    Incorporated herein by reference to the
                       Tele-Communications, Inc. Registration Statement on Form
                       S-8 (Commission File No. 33-60839).

    10.49    Employee Stock Purchase Plan for Bargaining Unit Employees of
                 Heritage Cable Vision Associates, L.P. D/B/A TCI of Michiana.*
                    Incorporated herein by reference to the
                       Tele-Communications, Inc. Registration Statement on Form
                       S-8 (Commission File No. 33-60843).

    10.50    Employee Stock Purchase Plan for Bargaining Unit Employees of UACC
                 Midwest, Inc. d/b/a TCI of Central Indiana.*
                    Incorporated herein by reference to the
                       Tele-Communications, Inc. Registration Statement on Form
                       S-8 (Commission File No. 33-64827).

    10.51    The Settlement Plan and Rabbi Trust Agreement Entered into
                 Pursuant to Thomas Adams, Mark Adamski, et. al.  v. TCI of
                 Northern New Jersey, Inc. and the Tele-Communications, Inc.
                 Employee Stock Purchase Plan.*
                    Incorporated herein by reference to the
                       Tele-Communications, Inc. Registration Statement on Form
                       S-8 (Commission File No. 33-64829).

    10.52    Employee Stock Purchase Plan for Bargaining Unit Employees of TCI
                    of Northern New Jersey, Inc.* Incorporated herein by
                    reference to the Tele-Communications, Inc. Registration
                    Statement on Form S-8 (Commission File No. 33-64831).

                                                                     (continued)





                                     IV-10
<PAGE>   250
10- Material contracts, continued:


    10.53    Amended and Restated Agreement of Limited Partnership of MajorCo,
                 L.P., dated as of January 31, 1996, among Sprint Spectrum,
                 L.P., TCI Network Services, Comcast Telephony Services and Cox
                 Telephony Partnership.
             Second Amended and Restated Joint Venture Formation Agreement,
                 dated as of January 31, 1996, by and between Sprint
                 Corporation, Tele-Communications, Inc., Comcast Corporation
                 and Cox Communications, Inc.
             Parents Agreement, dated as of January 31, 1996, by
                    Tele-Communications, Inc. and Sprint Corporation.
                    Incorporated herein by reference to the Company's Current
                    Report on Form 8-K, dated February 9, 1996
                       (Commission File No. 0-20421).

    10.54    Amended and Restated Stock Purchase Agreement, dated as of April
                 25, 1995, by and among Eduardo Eurnekian, stockholders of
                 shares of the Common Stock of Cablevision S.A., Televisora
                 Belgrano S.A., Construred S.A., Univent's S.A., and TCI
                 International Holdings, Inc.
             Amended and Restated Stockholders Agreement, dated April 25, 1995,
                 between Eduardo Eurnekian and TCI International Holdings, Inc.
                    Incorporated herein by reference to the Company's Current
                       Report on Form 8-K, dated May 4, 1995, as amended by
                       Form 8-K/A (Commission File No. 0-20421).

    10.55    Parents Agreement, dated as of July 24, 1995, among Viacom, Inc.,
                 Tele-Communications, Inc. and TCI Communications, Inc.
             Subscription Agreement, dated as of July 24, 1995, among Viacom
                 International, Inc., Tele-Communications, Inc. and TCI
                 Communications, Inc.
             Implementation Agreement, dated as of July 24, 1995, between
                 Viacom International, Inc. and Viacom International Services,
                 Inc.
                    Incorporated herein by reference to the Company's Current
                       Report on Form 8-K, dated July 26, 1995 (Commission File
                       No. 0-20421).

    10.56    Agreement of Purchase and Sale of Partnership Interest, dated as
                 of January 31, 1996, among Halcyon Communications, Inc., ECP
                 Holdings, Inc. and Fisher Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.57    Consent and Amendment of Amended Agreement of Partnership for
                 Halcyon Communications Partners, dated as of January 31, 1996,
                 by and among Halcyon Communications, Inc., ECP Holdings, Inc.
                 and Fisher Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.58    Assignment and Assumption Agreement, made as of January 31, 1996,
                 between ECP Holdings, Inc. and Fisher Communications
                 Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

                                                                     (continued)





                                     IV-11
<PAGE>   251
10- Material contracts, continued:


    10.59    Option Agreement, dated as of January 31, 1996, between Fisher
                 Communications Associates, L.L.C. and ECP Holdings, Inc.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.60    Agreement of Purchase and Sale of Partnership Interests, dated as
                 of January 31, 1996, among Halcyon Communications, Inc.,
                 American Televenture of Minersville, Inc., TCI Cablevision of
                 Nevada, Inc., TCI Cablevision of Utah, Inc., TEMPO Cable, Inc.
                 and Fisher Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.61    Consent and First Amendment of Amended and Restated Agreement of
                 Limited Partnership for Halcyon Communications Limited
                 Partnership, dated as of January 31, 1996, by and among
                 Halcyon Communications, Inc., American Televenture of
                 Minersville, Inc., TCI Cablevision of Nevada, Inc., TCI
                 Cablevision of Utah, Inc., TEMPO Cable, Inc. and Fisher
                 Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.62    Assignment and Assumption Agreement, made as of January 31, 1996,
                 between TCI Cablevision of Utah, Inc. and Fisher
                 Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.63    Option Agreement, dated as of January 31, 1996, between Fisher
                 Communications Associates, L.L.C. and TCI Cablevision of Utah,
                 Inc.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.64    Assignment and Assumption Agreement, made as of January 31, 1996,
                 between TCI Cablevision of Nevada, Inc.  and Fisher
                 Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.65    Option Agreement, dated as of January 31, 1996, between Fisher
             Communications Associates, L.L.C. and TCI Cablevision of Nevada,
             Inc.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.66    Assignment and Assumption Agreement, made as of January 31, 1996,
                 between American Televenture of Minersville, Inc. and Fisher
                 Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).
                                                                     (continued)





                                     IV-12
<PAGE>   252
10- Material contracts, continued:


    10.67    Option Agreement, dated as of January 31, 1996, between Fisher
                 Communications Associates, L.L.C. and American Televenture of
                 Minersville, Inc.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.68    Assignment and Assumption Agreement, made as of January 31, 1996,
                 between TEMPO Cable, Inc. and Fisher Communications
                 Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.69    Option Agreement, dated as of January 31, 1996, between Fisher
                 Communications Associates, L.L.C. and TEMPO Cable, Inc.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.70    Employment Agreement, effective as of October 1, 1995, by and
                 between Tele-Communications, Inc. and Tony Coelho.*

    10.71    Agreement Regarding Shares, as of April 3, 1996, among ETC w/tci,
                 Inc., Tele-Communications, Inc., TCI ETC Holdings, Inc. and
                 Tony Coelho.(1)

    10.72    1996 Incentive Plan of ETC w/tci, Inc.*

    10.73    Coelho Option Agreement, as of April 3, 1996, betwen ETC w/tci,
                 Inc. and Tony Chelho.*

21- Subsidiaries of Tele-Communications, Inc.

23.1   Consent of KPMG Peat Marwick LLP.

23.2   Consent of KPMG Peat Marwick LLP.

23.3   Consent of KPMG Peat Marwick LLP.

23.4   Consent of KPMG Audit Plc.

23.5   Consent of Deloitte & Touche LLP.

23.6   Consent of Price Waterhouse LLP.

27- Financial data schedule

*Constitutes management contract or compensatory arrangement.

(1) Certain exhibits have been omitted. A copy of any exhibit
    or schedule will be furnished supplementally to the Commission
    upon request.



                                     IV-13
<PAGE>   253
(b)      Report on Form 8-K filed during the quarter ended December 31, 1996:

<TABLE>
<CAPTION>
                                    Item
         Date of Report           Reported         Financial Statements Filed
         -----------------        --------         --------------------------
         <S>                        <C>            <C>
         December 17, 1996          Item 5         None
</TABLE>





                                     IV-14
<PAGE>   254
                          INDEPENDENT AUDITORS' REPORT




The Board of Directors and Stockholders
Tele-Communications, Inc.:

Under date of March 24, 1997, we reported on the consolidated balance sheets of
Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1996, which are included in the December 31, 1996 annual report on Form
10-K.  In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules as listed in the accompanying index.  These financial
statement schedules are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.

In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.





                                                       KPMG Peat Marwick LLP



Denver, Colorado
March 24, 1997





                                     IV-15
<PAGE>   255
                                                                     Schedule I
                                                                    Page 1 of 3


                           TELE-COMMUNICATIONS, INC.
                                AND SUBSIDIARIES

                        Condensed Information as to the
                      Financial Position of the Registrant

                           December 31, 1996 and 1995


<TABLE>
<CAPTION>
Assets                                                       1996       1995 
                                                            -------    -------
                                                            amounts in millions
<S>                                                         <C>          <C>  
Investments in and advances to consolidated
   subsidiaries - eliminated upon consolidation             $ 6,305      6,364

Other assets, at cost, net of amortization                       16          4
                                                            -------    -------

                                                            $ 6,321      6,368
                                                            =======    =======

Liabilities and Stockholders' Equity

Accrued liabilities                                         $   149        109

Redeemable preferred stocks                                     658        478

Stockholders' equity:
   Series Preferred Stock, $.01 par value                      --         --
   Class B 6% Cumulative Redeemable Exchangeable Junior
     Preferred Stock, $.01 par value                           --         --
   Tele-Communications, Inc. Series A TCI Group common
     stock, $1 par value                                        696        672
   Tele-Communications, Inc. Series B TCI Group common
     stock, $1 par value                                         85         85
   Tele-Communications, Inc. Series A Liberty Media Group
     common stock, $1 par value                                 228        225
   Tele-Communications, Inc. Series B Liberty Media Group
     common stock, $1 par value                                  21         21
   Additional paid-in capital                                 4,933      5,217
   Cumulative foreign currency translation adjustment,
      net of taxes                                               26         (9)
   Unrealized holding gains for available-for-sale
     securities, net of taxes                                    15        338
   Accumulated deficit                                         (176)      (454)
   Treasury stock, at cost                                     (314)      (314)
                                                            -------    -------

                                                            $ 6,321      6,368
                                                            =======    =======
</TABLE>





                                     IV-16
<PAGE>   256
                                                                     Schedule I
                                                                    Page 2 of 3


                           TELE-COMMUNICATIONS, INC.
                                AND SUBSIDIARIES

                        Condensed Information as to the
                          Operations of the Registrant

                  Years ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>
                                                               1996     1995     1994 
                                                              -----    -----    -----
                                                                amounts in millions
<S>                                                           <C>        <C>      <C> 
Operating income (expenses):
   Selling, general and administrative                        $ (82)     (21)     (10)
   Compensation  (adjustment to compensation) relating
     to stock appreciation rights                                13      (21)       1
   Gain on sale of subsidiary stock                            --        123     --
                                                              -----    -----    -----

         Earnings (loss) before share
            of earnings (loss) of consolidated subsidiaries     (69)      81       (9)


Share of earnings (loss) of consolidated subsidiaries           347     (252)      71
                                                              -----    -----    -----

         Net earnings (loss)                                    278     (171)      62

Preferred stock dividend requirements                           (35)     (34)      (8)
                                                              -----    -----    -----

         Net earnings (loss) attributable
            to common stockholders                            $ 243     (205)      54
                                                              =====    =====    =====
</TABLE>





                                     IV-17
<PAGE>   257
                                                                     Schedule I
                                                                    Page 3 of 3


                           TELE-COMMUNICATIONS, INC.
                                AND SUBSIDIARIES

                          Condensed Information as to
                          Cash Flows of the Registrant

                  Years ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>
                                                        1996     1995     1994 
                                                        -----    -----    -----
                                                          amounts in millions
<S>                                                     <C>         <C>      <C>
Cash flows from operating activities:
   Earnings (loss) before share of earnings (loss) of
      consolidated subsidiaries                         $ (69)      81       (9)
   Adjustments to reconcile earnings (loss) to net
      cash provided (used) by operating activities:
         Compensation (adjustment to compensation)
            relating to stock appreciation rights         (13)      21       (1)
         Payments of stock appreciation rights             (3)    --       --
         Gain on sale of subsidiary stock                --       (123)    --
         Change in accrued liabilities                     56       53       24
                                                        -----    -----    -----

          Net cash provided (used) by operating
              activities                                  (29)      32       14
                                                        -----    -----    -----

Cash flows from investing activities:
   Reduction in or additional
      investments in and advances to
      consolidated subsidiaries, net                       75     (430)      (8)
   Other investing activities                             (11)      (9)      (3)
                                                        -----    -----    -----

          Net cash provided (used) by investing
              activities                                   64     (439)     (11)
                                                        -----    -----    -----

Cash flows from financing activities:
   Preferred stock dividends                              (35)     (24)      (4)
   Issuances of common stock                             --        431        1
                                                        -----    -----    -----

          Net cash provided (used) by financing
              activities                                  (35)     407       (3)
                                                        -----    -----    -----

                  Change in cash                         --       --       --

                  Cash at beginning of year              --       --       --
                                                        -----    -----    -----

                  Cash at end of year                   $--       --       --
                                                        =====    =====    =====
</TABLE>



See also note 3 to the consolidated financial statements.





                                     IV-18
<PAGE>   258
                                                                    Schedule II


                           TELE-COMMUNICATIONS, INC.
                                AND SUBSIDIARIES

                       Valuation and Qualifying Accounts

                  Years ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>
                                                              Additions         Deductions
                                                              ---------         ----------
                                             Balance at       Charged to        Write-offs        Balance
                                             beginning          profit            net of           at end
 Description                                  of year          and loss         recoveries        of year
 -----------                                  -------          --------         ----------        -------
                                                                  amounts in millions
 <S>                                             <C>              <C>               <C>              <C>
 Year ended
    December 31, 1996:
       Allowance for doubtful
          receivables - trade                  $  34              121               (119)            36
                                               =====            =====             ======          =====

 Year ended
    December 31, 1995:
       Allowance for doubtful
          receivables - trade                  $  23               86                (75)            34
                                               =====            =====             ======          =====

 Year ended
    December 31, 1994:
       Allowance for doubtful
          receivables - trade                  $  19               58                (54)            23
                                               =====            =====             ======          =====
</TABLE>





                                     IV-19
<PAGE>   259
INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TELEWEST COMMUNICATIONS PLC

We have audited the accompanying consolidated balance sheet of Telewest
Communications plc and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations and cash flows for each of the
years in the three year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the consolidated financial statements on pages 69 to 86 present
fairly, in all material respects, the financial position of Telewest
Communications plc and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31,1996 in conformity with generally accepted
accounting principles in the United States of America.






KPMG AUDIT PLC
Chartered Accountants
Registered Auditors
London, England

March 11, 1997





                                     IV-20
<PAGE>   260


CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                  Year ended December 31
                                                                       1996        1996          1995          1994
                                                                       $ '000    (pound) '000    (pound) '000  (pound) '000
                                                                      (note 2)
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>            <C>           <C>   
REVENUE
Cable television                                                      207,572      121,224        64,740        35,875
Telephony - residential                                               214,060      125,013        57,597        23,471
Telephony - business                                                   59,181       34,562        17,449         8,812
Other ((pound)1,600,(pound)1,451 and(pound)1,481 in 1996, 1995 and
  1994, respectively, from related parties)                            16,210        9,467         4,998         3,869
-----------------------------------------------------------------------------------------------------------------------
                                                                      497,023      290,266       144,784        72,027
-----------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Programming                                                          (119,700)     (69,906)      (32,194)      (15,500)
Telephony                                                             (90,019)     (52,572)      (29,526)      (14,714)
Selling, general and administrative (including
  (pound)2,560, (pound)3,257 and (pound)2,128 in 1996, 1995 and
  1994, respectively, to related parties)                            (286,507)    (167,323)     (105,388)      (60,414)
Depreciation                                                         (222,113)    (129,716)      (60,019)      (30,320)
Amortization of goodwill                                              (44,775)     (26,149)       (7,854)       (1,827)
-----------------------------------------------------------------------------------------------------------------------
                                                                     (763,114)    (445,666)     (234,981)     (122,775)
-----------------------------------------------------------------------------------------------------------------------
OPERATING LOSS                                                       (266,091)    (155,400)      (90,197)      (50,748)

OTHER INCOME/(EXPENSE)
Interest income (including (pound)1,723, (pound)1,583 and (pound)465
  in 1996, 1995 and 1994, respectively,
  from related parties)                                                28,512       16,651        15,645         2,291
Interest expense ((pound)1,083 in 1994 to related parties)           (180,086)    (105,172)      (26,649)      (10,069)
Loss on disposal of interest rate swaps                                     -            -        (8,609)            -
Unrealized gain on interest rate swaps                                      -            -             -         1,636
Foreign exchange losses, net                                           (4,860)      (2,838)      (14,575)          (21)
Share of net losses of affiliates                                     (27,351)     (15,973)      (12,777)       (8,466)
Gain/(loss) on disposal of assets                                         978          571          (419)           26
Minority interests in (profits)/losses of consolidated
  subsidiaries, net                                                      (308)        (180)          (16)           39
Other, net                                                                  -            -            82           (25)
-----------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES                                             (449,206)    (262,341)     (137,515)      (65,337)
Income tax expense (note 14)                                              (86)         (50)          (16)            -
-----------------------------------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY GAIN                                       (449,292)    (262,391)     (137,531)      (65,337)
Extraordinary gain (note 15)                                                -            -             -         7,287
-----------------------------------------------------------------------------------------------------------------------
NET LOSS                                                             (449,292)    (262,391)     (137,531)      (58,050)
=======================================================================================================================
</TABLE>


<TABLE>
<CAPTION>  
                                                                                  Year ended December 31
                                                                                                                Pro forma
                                                                         1996         1996          1995          1994
                                                                           $*        (pound)*      (pound)*      (pound)*
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>           <C>           <C>           <C>
LOSS PER ORDINARY SHARE
Weighted average number of ordinary shares
  outstanding                                                        925,425,473  925,425,473   861,424,848   630,756,392
Loss per ordinary share before extraordinary gain                          (0.49)       (0.28)        (0.16)        (0.10)
Extraordinary gain                                                          -            -             -             0.01
-------------------------------------------------------------------------------------------------------------------------
LOSS PER ORDINARY SHARE                                                    (0.49)       (0.28)        (0.16)        (0.09)
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to the consolidated financial statements.

* Except number of shares




                                     IV-21
<PAGE>   261

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                              December 31
                                                                                      1996       1996          1995
                                                                                     $ '000    (pound) '000   (pound) '000
                                                                                   (note 2)
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>            <C>          <C>    
ASSETS
Cash and cash equivalents                                                          135,470        79,116       464,818
Trade receivables (net of allowance for doubtful accounts
  of (pound)5,405 and(pound)4,695)                                                  50,179        29,305        23,123
Other receivables (note 7)                                                          55,468        32,394        25,657
Prepaid expenses                                                                     8,849         5,168         6,133
Investments in affiliates, accounted for under the equity method,
  and related receivables (note 8)                                                 118,868        69,420        80,703
Other investments, at cost                                                          43,948        25,666        20,666
Property and equipment (less accumulated depreciation
  of (pound)308,240 and(pound)182,142) (note 9)                                  2,478,030     1,447,194     1,063,808
Goodwill (less accumulated amortization of(pound)37,907 and(pound)11,758)          841,236       491,290       495,881
Other assets (less accumulated amortization of (pound)4,162 and (pound)742)
  (note 11)                                                                        106,825        62,387       108,931
----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                     3,838,873     2,241,940     2,289,720
======================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable                                                                    80,230        46,855        40,402
Other liabilities (note 12)                                                        325,679       190,200       103,824
Debt (note 13)                                                                   1,505,713       879,351       792,265
Capital lease obligations                                                           93,132        54,390        30,314
----------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES                                                                2,004,754     1,170,796       966,805
----------------------------------------------------------------------------------------------------------------------

MINORITY INTERESTS                                                                     594           347           167
----------------------------------------------------------------------------------------------------------------------

SHAREHOLDERS' EQUITY (note 16)
Convertible preference shares, 10p par value; 661,000,000
  shares authorized and 496,066,708 shares issued and outstanding                   84,942        49,607        49,607
Ordinary shares, 10p par value; 2,010,000,000 shares authorized;
  927,567,600 and 919,963,400 issued and outstanding in 1996
  and 1995, respectively                                                           158,828        92,757        91,996
Additional paid-in capital                                                       2,282,302     1,332,887     1,322,971
Accumulated deficit                                                               (688,530)     (402,108)     (139,717)
----------------------------------------------------------------------------------------------------------------------

                                                                                 1,837,542     1,073,143     1,324,857

Ordinary shares held in trust for The Telewest Restricted Share
  Scheme (note 17)                                                                  (4,017)       (2,346)       (2,109)
----------------------------------------------------------------------------------------------------------------------

TOTAL SHAREHOLDERS' EQUITY                                                       1,833,525     1,070,797     1,322,748
----------------------------------------------------------------------------------------------------------------------

Commitments and contingencies (note 18)

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                       3,838,873     2,241,940     2,289,720
======================================================================================================================
</TABLE>


See accompanying notes to the consolidated financial statements.





                                     IV-22
<PAGE>   262

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                Year ended December 31
                                                                     1996          1996          1995          1994
                                                                    $ '000      (pound) '000   (pound) '000   (pound) '000
                                                                   (note 2)
----------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>           <C>            <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss before extraordinary gain                                       (449,292)    (262,391)     (137,531)      (65,337)
Adjustments to reconcile loss before extraordinary gain
  to net cash provided by/(used in) operating activities:
  Depreciation                                                        222,113      129,716        60,019        30,320
  Amortization of goodwill                                             44,775       26,149         7,854         1,827
  Amortization of deferred financing costs and issue
    discount on senior discount debentures                            126,888       74,104        16,605             -
  Accrued interest on senior debentures                                     -            -         5,451             -
  Unrealized loss on foreign currency translation                       4,860        2,838        14,575             -
  Loss on disposal of interest rate swaps                                   -            -         8,609             -
  Unrealized gain on interest rate swaps                                    -            -             -        (1,636)
  Share of losses of affiliates                                        27,351       15,973        12,777         8,466
  (Gain)/loss on disposals of assets                                     (978)        (571)          419           (26)
  Minority interests in profit/(loss)                                     308          180            16           (39)
Changes in operating assets and liabilities, net of 
  effect of acquisition of subsidiaries:
  Change in receivables                                               (27,239)     (15,908)       (5,282)       (8,102)
  Change in prepaid expenses                                            1,632          953        (3,367)        1,004
  Change in accounts payable                                           (7,834)      (4,575)       (5,603)       15,293
  Change in other liabilities                                          88,471       51,668        19,206         9,067
Other                                                                       -            -          (356)            -
----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES                    31,055       18,136        (6,608)       (9,163)
----------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment                                 (795,136)    (464,367)     (254,453)     (202,683)
Cash paid for acquisition of subsidiaries                             (24,258)     (14,167)       (3,232)         (236)
Additional investments in and loans to affiliates                      (4,671)      (2,728)       (9,143)      (23,761)
Additions to other investments                                         (8,562)      (5,000)            -             -
Proceeds from disposals of assets                                       5,238        3,059           688           294
Other investing activities                                                  -            -           335        (5,505)
----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                (827,389)    (483,203)     (265,805)     (231,891)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for credit facility arrangement costs                       (31,506)     (18,400)            -             -
Proceeds from debenture issue                                               -            -       754,812             -
Cash paid for foreign currency option                                       -            -       (88,070)            -
Repayment of borrowings                                                (1,604)        (937)     (157,930)     (219,700)
Cash paid for debenture issue costs                                    (1,420)        (829)      (20,574)            -
Cash paid for share issue costs                                             -            -        (6,141)      (28,543)
Proceeds from share issues                                                  -            -             -       511,800
Proceeds from borrowings                                              171,915      100,400             -       174,200
Capital element of finance lease repayments                            (2,108)      (1,231)       (1,291)         (210)
Net contributions from Joint Venturers and minorities                       -            -             -        44,995
----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                             135,277       79,003       480,806       482,542
----------------------------------------------------------------------------------------------------------------------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS                 (661,057)    (386,064)      208,393       241,488
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
  CASH EQUIVALENTS                                                        620          362         8,423             -
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                        795,907      464,818       248,002         6,514
----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                              135,470       79,116       464,818       248,002
======================================================================================================================
</TABLE>

See accompanying notes to the consolidated financial statements.






                                     IV-23
<PAGE>   263

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                                           Net assets of
                                                                                                        the Joint Venture
                                                                                                           (pound) '000
                                                                                                           (See note 1)
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                                          <C>
JOINT VENTURE:
PERIOD FROM JANUARY 1 TO NOVEMBER 22, 1994
Balance at January 1, 1994                                                                                     311,695
Capital contribution                                                                                           121,873
Repayment of the Joint Venturers' capital accounts                                                             (75,700)
Net loss                                                                                                       (55,864)
----------------------------------------------------------------------------------------------------------------------

BALANCE AT NOVEMBER 22, 1994                                                                                   302,004
======================================================================================================================
</TABLE>

On November 22, 1994 the net assets of Joint Venture were contributed to the
Company, as described in Note 1 to the consolidated financial statements. The
contribution appears as an increase in additional paid-in capital in the
following table.

<TABLE>
<CAPTION>
                                        Convertible                              Additional
                                         preference     Ordinary     Shares held   paid-in    Accumulated
                                           shares        shares       in trust     capital      deficit        Total
                                        (pound) '000   (pound) '000    (pound) '000 (pound) '000  (pound) '000   (pound) '000
---------------------------------------------------------------------------------------------------------------------------

<S>                                        <C>           <C>           <C>         <C>            <C>          <C>    
COMPANY:
Shares issued during the year              15,300        84,824             -      384,272             -       484,396
Ordinary shares held in trust
  for the Telewest Restricted
  Share Scheme                                  -             -        (7,280)           -             -        (7,280)
Contribution of the Joint
  Venture to the Company
  on November 22, 1994                          -             -             -      302,004             -       302,004
Net loss                                        -             -             -            -        (2,186)       (2,186)
----------------------------------------------------------------------------------------------------------------------

BALANCE AT
DECEMBER 31, 1994                          15,300        84,824        (7,280)     686,276        (2,186)      776,934
Conversion of ordinary
  shares into convertible
  preference shares                        11,227       (11,227)            -            -             -             -
Shares issued in connection
  with the acquisition
  of TCMN (see note 5)                     23,080        18,399             -      636,695             -       678,174
Accrued employee
  compensation relating
  to the Telewest Restricted
  Share Scheme                                  -             -         5,171            -             -         5,171
Net loss                                        -             -             -            -      (137,531)     (137,531)
----------------------------------------------------------------------------------------------------------------------

BALANCE AT
  DECEMBER 31, 1995                        49,607        91,996        (2,109)   1,322,971      (139,717)    1,322,748
Ordinary shares issued                          _           761             -        9,916             -        10,677
Accrued employee compensation
  relating to the Telewest
  Restricted Share Scheme                       -             -          (237)           -             -          (237)
Net loss                                        -             -             -            -      (262,391)     (262,391)
----------------------------------------------------------------------------------------------------------------------

BALANCE AT
  DECEMBER 31, 1996                        49,607        92,757        (2,346)   1,332,887      (402,108)    1,070,797
======================================================================================================================
</TABLE>

See accompanying notes to the consolidated financial statements.




                                     IV-24
<PAGE>   264

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 1996 and 1995

1  ORGANIZATION AND HISTORY

Telewest Communications plc ("the Company") is a cable television and telephony
operator which offers these services to business and residential customers in
the United Kingdom ("UK"). The Company derives its cable television revenues
from installation fees, monthly basic and premium service fees and advertising
charges. The Company derives its telephony revenues from connection charges,
monthly line rentals, call charges, special residential service charges and
interconnection fees payable by other operators. The cable television and
telephony services account for approximately 42% and 55%, respectively, of the
Company's revenue. This revenue is predominantly derived from residential,
rather than business, customers.

The Company was incorporated on October 20, 1994 under the laws of England and
Wales in preparation for the October 2,1995 internal reorganization of Telewest
Communications Cable Limited ("TCCL"), then called TeleWest Communications plc,
and its subsidiaries whereby the entire issued share capital of TCCL was
transferred to the Company in exchange for fully paid up shares of the Company.
TCCL had traded since November 22, 1994 when affiliates of Tele-Communications,
Inc. (the "TCI Affiliates") and affiliates of US WEST, Inc. (the "US WEST
Affiliates") contributed their UK cable interests to TCCL (the "Contribution").
These interests were previously held by the TCI Affiliates and US WEST
Affiliates through TCI/US West Cable Communications Group, a general
partnership. TCI/US WEST Cable Communications Group and its subsidiaries
collectively are referred to herein as the "Joint Venture" and the TCI
Affiliates and US WEST Affiliates collectively are referred to herein as the
"Joint Venturers".

2  BASIS OF PREPARATION

The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The preparation of financial statements in conformity with US GAAP
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Company's historical
shareholders' equity for the periods prior to November 22, 1994, is the excess
of the Joint Venture's assets over the Joint Venture's liabilities and
represents the historical cost of the capital contributions made by the Joint
Venturers less the accumulated deficit arising from the Joint Venture's
operations.

The economic environment and currency in which the Company operates is the UK
and hence its reporting currency is Pounds Sterling ((pound)). Certain
financial information for the year ended December 31, 1996 has been translated
into US Dollars, with such US Dollar amounts being unaudited and presented
solely for the convenience of the reader, at the rate of $1.7123 = (pound)1.00,
the Noon Buying Rate of the Federal Reserve Bank of New York on December 31,
1996. The presentation of the US Dollar amounts should not be construed as a
representation that the Pounds Sterling amounts could be so converted into US
Dollars at the rate indicated or at any other rate.

3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
those of all majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated upon consolidation.

All acquisitions have been accounted for under the purchase method of
accounting. Under this method, the results of subsidiaries and affiliates
acquired in the year are included in the consolidated statement of operations
from the date of acquisition.

Goodwill arising on consolidation (representing the excess of the fair value of
the consideration given over the fair value of the identifiable net assets
acquired) is amortized over the acquisition's useful life or over a maximum
period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through projected undiscounted future operating
cash flows of the acquired operations. The assessment of the recoverability of
goodwill will be impacted if projected future operating cash flows are not
achieved. The amount of goodwill impairment, if any, is measured based on the
projected discounted future operating cash flows using a discount rate
reflecting the Company's cost of funds.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include highly-liquid investments with original
maturities of three months or less that are readily convertible into cash.

FINANCIAL INSTRUMENTS

The Company uses foreign currency option contracts which permit, but do not
require, the Company to exchange foreign currencies at a future date with
another party at a contracted exchange rate. The Company also enters into
combined foreign currency and interest rate swap contracts ("Foreign Currency
Swaps"). Such contracts are used to hedge against adverse changes in foreign
currency exchange rates associated with obligations denominated in foreign
currency.


                                     IV-25
<PAGE>   265

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 
(continued)

The foreign currency option and Foreign Currency Swaps are recorded on the
balance sheet in other assets or other liabilities at their fair value at the
reporting period with changes in their fair value during the reporting period
being reported as part of the foreign exchange gain or loss in the statement of
operations. Such gains and losses are offset against foreign exchange gains and
losses on the obligations denominated in foreign currencies which have been
hedged.

Interest rate swap agreements which are used to manage interest rate risk on
the Company's borrowings are accounted for using the accruals method. Net
income or expense resulting from the differential between exchanging floating
and fixed rate interest payments is recorded on an accruals basis. To the
extent that the interest rate swap agreements are delayed starting, net income
or expense is not recognized until the effective date of the agreement.

Other interest rate swaps which are held as trading assets are recorded on the
balance sheet at their fair value at the end of each reporting period with
changes in their fair value being recorded as gains and losses in the statement
of operations.

INVESTMENTS

Investments in partnerships, joint ventures and subsidiaries in which the
Company's voting interest is 20% to 50%, and others where the Company has
significant influence, are accounted for using the equity method. Investments
which do not have a readily determinable fair value, in which the Company's
voting interest is less than 20%, and in which the Company does not have
significant influence, are carried at cost and written down to the extent that
there has been an other-than-temporary diminution in value.

ADVERTISING COSTS

Advertising costs are expensed as incurred. The amount of advertising costs
expensed was (pound)24,846,000, (pound)10,246,000, and (pound)4,313,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost, including the historical carryover
basis cost from the Contribution. Except during the prematurity period as
described below, depreciation is provided to write off the cost, less estimated
residual value, of property and equipment by equal installments over their
estimated useful economic lives as follows:

<TABLE>
<S>                                             <C>     
Freehold and long leasehold buildings           50 years
Cable and ducting                               20 years
Electronic equipment
- System electronics                             8 years
- Switching equipment                            8 years
- Subscriber electronics                         5 years
- Headend, studio and playback facilities        5 years
Other equipment
- Office furniture and fittings                  5 years
- Motor vehicles                                 4 years
</TABLE>

During the prematurity period, depreciation of cable and ducting and system
electronics is charged monthly to write off the estimated cost at the end of
the prematurity phase over a useful life of 20 and 8 years, respectively. In
accordance with Statement of Financial Accounting Standard ("SFAS") No 51,
"Financial Reporting by Cable Television Companies", the monthly charge is
scaled down by a ratio of average customers in the current period to the
estimated customer base at the end of the prematurity period. The prematurity
period covers the period between connecting the first customer and substantial
completion of the network.

Preconstruction costs which are included within cable and ducting are amortized
over the life of the franchise from the date of the first customer.

The Company accounts for costs, expenses and revenues applicable to the
construction and operation of its cable systems under SFAS No 51.

The estimated useful lives of cable and ducting and systems electronics were
reassessed with effect from January 1, 1996, and were changed from 25-30 years
and 10 years to 20 years and 8 years, respectively. The net book value of these
assets are being written-off over their revised estimated remaining lives.

FRANCHISE COSTS

Expenditure incurred on successful applications for franchise licenses is
included in property and equipment and is amortized over the remaining life of
the original franchise term. Costs relating to unsuccessful applications are
charged to the statement of operations.

DEFERRED FINANCING COSTS

Costs incurred in raising debt are deferred and recorded on the balance sheet
in other assets. The costs are amortized to the consolidated statement of
operations at a constant rate to the carrying value of the debt over the life
of the obligation.

MINORITY INTERESTS

Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.

FOREIGN CURRENCIES

Transactions in foreign currencies are recorded using the rate of exchange in
effect at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange
ruling at the balance sheet date and the gains or losses on translation are
included in the statement of operations.

REVENUE RECOGNITION

Revenue is recognized as services are delivered. Other revenues include
connection fees which are recognized in the period of connection to the extent
that the fee is offset by direct selling costs. The remainder is recognized
over the estimated average period that customers are expected to remain
connected to the system.


                                     IV-26
<PAGE>   266

3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 
(continued)

PENSION COSTS

The Company does not have a defined-benefit pension plan but operates a
defined-contribution scheme or contributes up to specified limits to the
third-party scheme of the employee's choice. The amount included in losses in
1996, 1995 and 1994 of (pound)2,580,000, (pound)1,538,000, and (pound)839,000,
respectively, represents the contributions payable to the selected schemes in
respect of the relevant accounting periods.

INCOME TAXES

Prior to November 22, 1994 no provision had been made for income tax expense or
benefit in the accompanying financial statements as the earnings or losses of
the Joint Venture were reported in the respective income tax returns of the
individual Joint Venturers. Following the reorganization effective on November
22, 1994, the Company became subject to UK taxation and adopted SFAS No 109,
"Accounting for Income Taxes". The adoption of SFAS No 109 does not give rise
to any cumulative adjustment to be made in the 1994 consolidated statement of
operations. Under the asset and liability method of SFAS No 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered.

SHARE-BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does
not require, companies to record compensation cost for share-based employee
compensation plans at fair value. The Company has chosen to continue to account
for share-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation cost for
share options is measured as the excess, if any, of the quoted market price of
the Company's shares at the date of the grant over the amount an employee must
pay to acquire the shares.

Shares purchased by trustees in connection with the Telewest Restricted Share
Scheme, are valued at the market price on the date on which they are purchased
and are reflected as a reduction of shareholders' equity in the balance sheet.
This equity account is reduced when the shares are awarded to employees based
on the original cost of the shares to the trustees. The value of awards of
ordinary shares to be made to employees in future years is charged to the
statement of operations to the extent that the awards have been awarded to and
earned by employees in the current accounting period. The value of shares which
have been awarded to, but have not been earned by employees, is included as
deferred compensation expense within other assets.

LOSS PER ORDINARY SHARE

Loss per ordinary share is based on the weighted average number of ordinary
shares outstanding during the year. Ordinary share equivalents are not included
in the computation as their effect would be to decrease the loss per share. The
pro forma loss per ordinary share calculated for the year ended December 31,
1994 assumes that ordinary shares issued to the Joint Venturers in return for
the Contribution had been outstanding for the entire year.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". The statement establishes, among other things, new criteria
for determining whether a transfer of financial assets in exchange for cash or
other consideration should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. SFAS No. 125 also establishes new accounting
requirements and servicing of financial assets and extinguishment of
liabilities occurring after December 31,1996. In December 1996, SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125", was issued. SFAS No. 127 defers for one year the effective date of certain
requirements of SFAS No. 125. SFAS No. 125 is not expected to have a material
impact on the financial position or results of operations of the Company.

Statement of Position ("SOP") No. 96-1 "Environmental Remediation Liabilities",
was issued in October 1996. This statement provides authoritative guidance on
specific accounting issues that are present in the recognition, measurement,
display, and disclosure of environment remediation liabilities. The provisions
of this statement are effective for fiscal years beginning after December 15,
1996. SOP 96-1 is not expected to have a material impact on the financial
position or results of operations of the Company.


4  FINANCIAL INSTRUMENTS

FOREIGN CURRENCY OPTION CONTRACT

At December 31, 1996, the Company held a Pounds Sterling put option to purchase
US$1,537,000,000 to hedge its exposure to adverse fluctuations in exchange
rates on the principal amount at maturity of its US Dollar-denominated Senior
Discount Debentures due 2007 ("Senior Discount Debentures"). The expiration
date of this option contract is September 28, 2000. The put option has a strike
price at expiration of (pound)1.00 = US$1.4520. The foreign currency option has
been included in other assets at its fair value on December 31, 1996.


                                     IV-27
<PAGE>   267

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4  FINANCIAL INSTRUMENTS (continued)

FOREIGN CURRENCY SWAP

The Company has entered into a Foreign Currency Swap to hedge its exposure to
adverse fluctuations in exchange rates on the principal amount of its US
Dollar-denominated Senior Debentures due 2006 ("Senior Debentures"). The terms
of the contract provided for the Company to make an initial exchange of
principal of US$300,000,000 in exchange for (pound)196,078,000. On expiration
on October 1, 2000, the initial principal amounts will be re-exchanged. The
interest element of the Foreign Currency Swap requires the Company to make
Pounds Sterling fixed-rate interest payments and to receive US Dollar
fixed-rate interest payments on the initial exchange amounts on a semi-annual
basis. The Foreign Currency Swap contract has been included in other
liabilities at its fair value on December 31, 1996.

INTEREST RATE SWAPS

The Company has also entered into certain delayed-starting interest rate swap
agreements in order to manage interest rate risk on its senior secured credit
facility ("Senior Secured Facility"). The effective dates of the swap
agreements are January 2, 1997 and March 31, 1997, and the agreements mature on
December 31, 2001 and March 28, 2002.
The aggregate notional principal amount of the swaps
adjusts upwards on a semi-annual basis to a maximum of (pound)750 million. In
accordance with the swap agreements, the Company receives interest at the six
month LIBOR rate and pays a fixed interest rate in the range of 7.835 - 7.975%.

FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 119 "Disclosures about Derivative Financial Instruments and Fair Value
of Financial Instruments" requires disclosure of an estimate of the fair values
of certain financial instruments. SFAS No. 119 defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged
in a current transaction between willing parties other than in a forced sale.
Fair value estimates are made at a specific point in time, based upon relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore cannot be determined precisely. Changes in
assumptions could significantly affect the estimates.

At December 31, 1996, the Company's significant financial instruments include
cash and cash equivalents, trade receivables, a foreign currency option
contract, a Foreign Currency Swap, interest rate swap agreements, trade
payables and long-term borrowings. The following table summarizes the fair
value of the foreign currency option contract, the Foreign Currency Swap, the
interest rate swap agreements, the Senior Discount Debentures and the Senior
Debentures. The fair value of the other financial instruments held by the
Company approximates their recorded carrying amount due to the short maturity
of these instruments and these instruments are not presented in the following
table.

<TABLE>
<CAPTION>
                     AT DECEMBER 31, 1996      At December 31, 1995
                    CARRYING                   Carrying
                     AMOUNT       FAIR VALUE   amount     Fair value
                   (pound) '000  (pound) '000  (pound) '000  (pound) '000
-------------------------------------------------------------------------------
<S>                    <C>         <C>          <C>          <C>   
Assets:
Foreign currency
  option contract      25,828      25,828       85,742       85,742

Liabilities:
Interest rate swap
  agreements                -       4,776            -            -
Foreign Currency Swap  26,481      26,481        3,983        3,983
Senior Discount
  Debentures          600,799     621,367      595,266      601,222
Senior Debentures     175,203     179,582      193,113      196,975
===============================================================================
</TABLE>

The estimated fair value of the foreign currency option contract, the interest
rate swap agreements and the Foreign Currency Swap are based on quotations
received from independent, third party financial institutions and represent the
net amount receivable or payable to terminate the position, taking into
consideration market rates and counterparty credit risk. The estimated fair
value of the Senior Discount Debentures and the Senior Debentures are also
based on quotations from independent third party financial institutions and are
based on discounting the future cash flows to net present values using
appropriate market interest rates prevailing at the year end.

MARKET RISK AND CONCENTRATIONS OF CREDIT RISK

Market risk is the sensitivity of the value of the financial instruments to
changes in related currency and interest rates. Generally, the Company is not
exposed to such market risk because gains and losses on the financial
instruments are offset by gains and losses on the underlying assets and
liabilities.

The Company may be exposed to potential losses due to the credit risk of
non-performance by the counterparties to its foreign currency option, interest
rate swap agreements and Foreign Currency Swap contract, however such losses
are not anticipated as these counterparties are major international financial
institutions.

Temporary cash investments also potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105 "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risks". The Company places
its temporary cash investments with major international financial institutions
and limits the amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base.

At December 31, 1996, the Company had no significant concentration of credit
risk.



                                     IV-28
<PAGE>   268

5  BUSINESS COMBINATIONS

On January 10, 1996, the Company acquired the entire issued share capital of
Telewest Communications (Worcester) Limited, then called Bell Cablemedia
(Worcester) Limited and the owner of the Worcester cable franchise, for cash
consideration of (pound)9,849,000. Telewest Communications (Worcester) Limited
was otherwise a dormant company with net assets of (pound)2 representing its
called up share capital. This acquisition has been accounted for under the
purchase method of accounting. The goodwill arising on acquisition was
(pound)9,848,998 and is being amortized on a straight line basis over 20 years.

During the year, the Company made various other minor acquisitions, largely for
share consideration. The goodwill arising on these acquisitions was
(pound)11,708,000 and is being amortized on a straight-line basis over 20
years.

On October 3, 1995, the Company acquired the entire share capital of Telewest
Communications (Midlands & North West) Limited ("TCMN"), then called SBC
CableComms (UK), a company which holds cable television and telephony interests
in the UK, from an affiliate of Cox Communications, Inc. and affiliates of SBC
Communications, Inc., in exchange for an aggregate of 183,994,960 ordinary
shares of 10 pence each and 230,790,208 convertible preference shares of 10
pence each. The value attributable to the shares issued was (pound)1.635 per
share, being the market price of the shares on June 8, 1995, the day the terms
of the acquisition were agreed to and announced. The fair value of the share
consideration using this share price was (pound)678,174,000. The aggregate cost
of acquisition was (pound)689,878,000 including payment of expenses relating to
the acquisition. This acquisition has been accounted for under the purchase
method of accounting. The goodwill arising on acquisition is (pound)464,872,000
and is being amortized on a straight-line basis over 20 years.

The operating results of these acquisitions are included in
the Company's consolidated statement of operations from their respective dates
of acquisition. The following unaudited pro forma information presents the
consolidated results of operations of the Company as if the acquisitions had
occurred at the beginning of 1995, after giving effect to the amortization of
goodwill arising as a result of each of the acquisitions:

<TABLE>
<CAPTION>
                                      1996         1995
                                   (pound) '000  (pound) '000
-------------------------------------------------------------------------------

<S>                                  <C>           <C>    
Revenue                              290,266       191,195
Net loss                            (262,608)     (189,225)
===============================================================================
</TABLE>

The above unaudited pro forma financial information is presented for
information purposes only and is not necessarily indicative of the operating
results that would have occurred had the acquisition been consummated as of the
dates indicated above, nor is it indicative of future results.

6  SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash paid for interest was (pound)25,795,000, (pound)6,041,000 and
(pound)8,013,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.

Significant non-cash investing activities of the Company are described below.
The amounts stated for 1996 represent the purchase of former minority
shareholders' interests in certain UK cable interests held by the Company. The
amounts stated for 1995 represent the purchase of TCMN for largely share
consideration as described in Note 5 to the consolidated financial statements.
The amounts stated for 1994 represent the contribution of UK cable interests to
the Company by the Joint Venturers.

<TABLE>
<CAPTION>
                               1996          1995           1994
                            (pound) '000   (pound) '000   (pound) '000
-------------------------------------------------------------------------------

<S>                        <C>       <C>           <C>  
Purchase/contribution of
  cable interests:
  Assets                          -         428,080         3,967
  Liabilities assumed             -         (45,144)       (2,744)
  Debt assumed                    -        (157,930)            -
  Minority interest in
     subsidiaries                 -               -           (44)
-------------------------------------------------------------------------------

Net assets acquired/
  contributed                     -         225,006         1,179
Goodwill on acquisition       9,874         464,872             -
-------------------------------------------------------------------------------

                              9,874         689,878         1,179
===============================================================================

Share consideration/
  capital contribution        9,869         678,174         1,179
Costs of acquisition              5          11,704             -
-------------------------------------------------------------------------------
                              9,874         689,878         1,179
===============================================================================
</TABLE>

The Company entered into finance lease arrangements for switching equipment and
other equipment with a total capital value at the beginning of the lease of
(pound)25,307,000, (pound)16,920,000 and (pound)6,820,000 during the years
ended December 31, 1996, 1995 and 1994, respectively.

7  OTHER RECEIVABLES

<TABLE>
<CAPTION>
                                               At December 31
                                      1996          1995
                                   (pound) '000   (pound) '000
-------------------------------------------------------------------------------

<S>                                   <C>          <C>  
Value Added Tax refund                10,633       5,145
Interconnection receivables            3,865       3,019
Interest receivable                       63       3,341
Accrued income                         4,356       3,311
Recoverable expenses                   5,714       2,808
Other                                  7,763       8,033
-------------------------------------------------------------------------------

                                      32,394      25,657
===============================================================================
</TABLE>



                                     IV-29
<PAGE>   269

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


8  INVESTMENTS

The Company has investments in affiliates accounted for under the equity method
at December 31, 1996 and 1995 as follows:

<TABLE>
<CAPTION>
                                                 Percentage ownership
                                                    at December 31
                                        1996            1995
                                       (pound) '000   (pound) '000
-------------------------------------------------------------------------------
<S>                                       <C>          <C>   
Cable London plc                          50.00%       49.00%
Birmingham Cable Corporation
  Limited                                 27.47%       27.47%
London Interconnect Limited               16.67%       16.67%
Central Cable Sales Limited               50.00%       50.00%
===============================================================================
</TABLE>

The Company has accounted for its investment in London Interconnect Limited
under the equity method because it is in a position to exercise a significant
influence over London Interconnect Limited.

Summarized financial information for such affiliates which operate principally
in the cable television and telephony industries is as follows:

COMBINED FINANCIAL POSITION

<TABLE>
<CAPTION>
                                                At December 31
                                     1996           1995
                                  (pound) '000    (pound) '000
-------------------------------------------------------------------------------

<S>                                  <C>          <C>    
Property and equipment, net          391,183      311,265
Intangible assets, net                 3,845        4,644
Other assets, net                    105,475      149,786
-------------------------------------------------------------------------------

TOTAL ASSETS                         500,503      465,695
===============================================================================

Debt                                 281,500      247,653
Other liabilities                     91,947       50,268
Owners' equity                       127,056      167,774
-------------------------------------------------------------------------------

TOTAL LIABILITIES AND EQUITY         500,503      465,695
===============================================================================
</TABLE>



COMBINED OPERATIONS

<TABLE>
<CAPTION>
                                   Year ended December 31
                                      1996         1995
                                   (pound) '000  (pound) '000
-------------------------------------------------------------------------------

<S>                                 <C>          <C>   
Revenue                               98,329       70,016
Operating expenses                  (124,358)     (99,184)
-------------------------------------------------------------------------------

Operating loss                       (26,029)     (29,168)
Interest expense                     (15,945)      (4,615)
-------------------------------------------------------------------------------

NET LOSS                             (41,974)     (33,783)
===============================================================================
</TABLE>

The Company's investments in affiliates are comprised as follows:

<TABLE>
<CAPTION>
                                       AT DECEMBER 31
                                       1996         1995
                                   (pound) '000   (pound) '000
-------------------------------------------------------------------------------

<S>                                   <C>          <C>   
Loans                                 29,089       24,593
Share of net assets                   40,331       56,110
-------------------------------------------------------------------------------

                                      69,420       80,703
===============================================================================
</TABLE>

Any excess of the purchase cost over the value of the net assets acquired is
included in goodwill and amortized over 20 years on a straight-line basis.




                                     IV-30
<PAGE>   270

9  PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                    Cable and    Electronic      Other
                                           Land       Buildings      ducting     equipment      equipment      Total
                                        (pound) '000  (pound) '000   (pound) '000  (pound) '000    (pound) '000  (pound) '000
---------------------------------------------------------------------------------------------------------------------------

<S>                                         <C>          <C>          <C>          <C>            <C>        <C>      
ACQUISITION COSTS
Balance at January 1, 1996                  4,223        36,005       766,866      359,617        79,239     1,245,950
Additions                                       -         9,951       335,844      130,783        39,012       515,590
Disposals                                       -             -          (749)        (565)       (4,792)       (6,106)
---------------------------------------------------------------------------------------------------------------------------

Balance at December 31,1996                 4,223        45,956     1,101,961      489,835       113,459     1,755,434
---------------------------------------------------------------------------------------------------------------------------

ACCUMULATED DEPRECIATION
Balance at January 1, 1996                      -         4,920        74,532       70,810        31,880       182,142
Charge for year                                 -         2,458        47,374       60,220        19,664       129,716
Disposals                                       -             -          (725)        (547)       (2,346)       (3,618)
---------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1996                    -         7,378       121,181      130,483        49,198       308,240
---------------------------------------------------------------------------------------------------------------------------

1996 NET BOOK VALUE                         4,223        38,578       980,780      359,352        64,261     1,447,194
===========================================================================================================================

ACQUISITION COSTS
Balance at January 1, 1995                  4,055        16,643       321,208      149,652        30,575       522,133
On acquisition of TCMN                        168        14,551       284,670      131,682        25,681       456,752
Additions                                       -         4,811       161,439       78,729        24,097       269,076
Disposals                                       -             -          (451)        (446)       (1,114)       (2,011)
---------------------------------------------------------------------------------------------------------------------------

Balance at December 31,1995                 4,223        36,005       766,866      359,617        79,239     1,245,950
---------------------------------------------------------------------------------------------------------------------------

ACCUMULATED DEPRECIATION
Balance at January 1,1995                       -         2,106        25,926       28,040        11,218        67,290
On acquisition of TCMN                          -           833        26,201       17,080        11,660        55,774
Charge for year                                 -         1,981        22,507       25,791         9,740        60,019
Disposals                                       -             -          (102)        (101)         (738)         (941)
---------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1995                    -         4,920        74,532       70,810        31,880       182,142
---------------------------------------------------------------------------------------------------------------------------

1995 NET BOOK VALUE                         4,223        31,085       692,334      288,807        47,359     1,063,808
===========================================================================================================================
</TABLE>

Cable and ducting consists principally of civil engineering and fibre optic
costs. In addition, cable and ducting includes net book value of
preconstruction and franchise costs of (pound)13,220,000 and (pound)14,388,000
as of December 31, 1996 and 1995, respectively. Electronic equipment includes
the Company's switching, headend and converter equipment. Other equipment
consists principally of motor vehicles, office furniture and fixtures and
leasehold improvements.


10  VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                    Additions charged to
                                        Balance at   Acquisition    Costs and        Other                    Balance at
                                        January 1      of TCMN       expenses      accounts     Deductions   December 31
                                       (pound) '000   (pound) '000    (pound) '000   (pound) '000  (pound) '000   (pound) '000
--------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>         <C>           <C>             <C>       <C>            <C>  
1996
Allowance for doubtful accounts             4,695             -         9,020            -        (8,310)        5,405
==========================================================================================================================

1995
Allowance for doubtful accounts             1,736         1,063         5,920            -        (4,024)        4,695
==========================================================================================================================

1994
Allowance for doubtful accounts               577             -         3,392           26        (2,259)        1,736
==========================================================================================================================
</TABLE>




                                     IV-31
<PAGE>   271

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


11  OTHER ASSETS

The components of other assets, net of amortization, are as follows:

<TABLE>
<CAPTION>
                                                        At December 31
                                          1996              1995
                                       (pound) '000       (pound) '000
------------------------------------------------------------------------
<S>                                       <C>              <C>   
Deferred financing costs of debentures    17,510           20,716
Deferred financing costs of Senior
  Secured Facility                        18,186                -
Foreign currency option contract          25,828           85,742
Other                                        863            2,473
------------------------------------------------------------------------

                                         62,387           108,931
========================================================================
</TABLE>


12  OTHER LIABILITIES

Other liabilities are summarized as follows:

<TABLE>
<CAPTION>
                                                 At December 31
                                       1996          1995
                                    (pound) '000   (pound) '000
------------------------------------------------------------------

<S>                                    <C>         <C>  
Amounts due to affiliated or other
  related parties                      1,901         2,052
Accrued interest                       8,921         5,740
Accrued construction costs            36,397        14,859
Accrued expenses and deferred income  82,938        58,507
Foreign Currency Swap                 26,481         3,983
Other liabilities                     33,562        18,683
------------------------------------------------------------------
                                     190,200       103,824
==================================================================
</TABLE>


13  DEBT

Debt is summarized as follows at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                        Weighted average
                          interest rate       1996            1995
                         1996      1995    (pound) '000     (pound) '000
-------------------------------------------------------------------------------
<S>                     <C>       <C>         <C>            <C>    
Senior
  Debentures            9.625%    9.625%      175,203        193,113
Senior Discount
  Debentures           11.000%   11.000%      600,799        595,266
Senior Secured
  Facility              8.281%        -       100,000              -
Other debt              7.790%    8.450%        3,349          3,886
-------------------------------------------------------------------------------

                                              879,351        792,265
===============================================================================
</TABLE>

SENIOR DEBENTURES

In October 1995, the Company issued US$300,000,000 principal amount of Senior
Debentures with a yield to maturity of 9.625%. The cash consideration received
at the date of issue was (pound)188,703,000. The Senior Debentures mature on
October 1, 2006. Interest on the Senior Debentures accrues semi-annually and is
payable in arrears. The Senior Debentures are redeemable, in whole or in part,
at the option of the Company at any time on or after October 1, 2000 at the
redemption price of 104.813% of the principal amount during the year commencing
October 1, 2000, 102.406% of the principal amount during the year commencing
October 1, 2001, and thereafter at 100% of the principal amount plus accrued
and unpaid interest.

The Senior Debentures and the Senior Discount Debentures, which are described
below, were issued to finance general working capital, capital expenditure,
foreign currency swap and options to hedge against adverse fluctuations in
exchange rates, and additional investments in affiliated companies. A portion
of the net proceeds of the issue also was used to repay the (pound)157,930,000
indebtedness outstanding under the loan facility held by TCMN at the date that
it was acquired by the Company.

The indenture under which the Senior Debentures were issued contains various
covenants which, among other things, restrict the ability of the Company to
incur additional indebtedness, pay dividends, create certain liens, enter into
certain transactions with shareholders or affiliates, or sell certain assets.
The Company was in compliance with the convenants at December 31, 1996.

The Company has entered into a Foreign Currency Swap to hedge its exposure to
adverse fluctuations in exchange rates on the principal amount which will be
outstanding on October 1, 2000, the earliest redemption date, and the
associated interest payments of the Senior Debentures. The terms of the Foreign
Currency Swap are described in Note 4 to the consolidated financial statements.

The Senior Debentures are unsecured liabilities of the Company.

SENIOR DISCOUNT DEBENTURES

In October 1995, the Company issued US$1,536,413,000 principal amount at
maturity of Senior Discount Debentures with a yield to maturity of 11%. The
cash consideration received at the date of issue was (pound)566,109,000
(US$900,000,000). At December 31, 1996, the unamortized portion of the discount
on issue was (pound)296,482,000 (US$507,665,000). The Senior Discount
Debentures mature on October 1, 2007. Interest on the Senior Discount
Debentures accrues semi-annually. Cash interest will not accrue on the Senior
Discount Debentures prior to October 1, 2000 and is thereafter payable in
arrears on April 1 and October 1 of each year at a rate of 11% per annum. The
Senior Discount Debentures are redeemable, in whole or in part, at the option
of the Company at any time on or after October 1, 2000 at the redemption price
of 100% of the principal amount plus accrued and unpaid interest.

The indenture under which the Senior Discount Debentures were issued contains
various covenants as set out for the Senior Debentures above and the Company
was in compliance with such covenants at December 31, 1996.



                                     IV-32
<PAGE>   272

13  DEBT (continued)

The Company has purchased a five year Pounds Sterling put option to purchase
US$1,537,000,000 to hedge its exposure to adverse fluctuations in exchange
rates on the principal amount which will be outstanding on October 1, 2000, the
earliest redemption date, of the Senior Discount Debentures. The terms of the
foreign currency option contract are described in Note 4 to the consolidated
financial statements.

The Senior Discount Debentures are unsecured liabilities of the Company.

SENIOR SECURED FACILITY

During the year, a subsidiary of the Company entered into a senior secured
credit facility (the "Senior Secured Facility") with a syndicate of banks. The
facility is available to finance the capital expenditure, working capital
requirements and other permitted related activities involving the construction
and operation of all the Company's owned and operated franchises, to pay cash
interest on the Company's unsecured debentures, to fund the repayment of
existing secured borrowings in respect of the London South and South West
Regional Franchise Areas, to fund loans to or investments in affiliated
companies, to bid for or purchase, and subsequently construct, licenses or
franchises which may become available and to refinance advances and the payment
of interest, fees, and expenses in respect of the Senior Secured Facility.

The facility is divided into two tranches: the first portion (Tranche A) is
available on a revolving basis for up to (pound)300 million, reducing to
(pound)100 million by June 30, 1998 with full repayment by December 31, 1998;
the second portion (Tranche B) is available on a revolving basis concurrently
with Tranche A for an amount up to 6.5 times the trailing, rolling six month
annualized consolidated net operating cash flow, gradually reducing throughout
the period of the facility to 4 times by January 1, 2000. Thereafter, the
amount outstanding under the Tranche B facility converts to a term loan
amortizing over 5 years. The aggregate drawing at any time under both tranches
cannot exceed (pound)1.2 billion. At December 31, 1996, (pound)100,000,000 was
outstanding under Tranche A. During the year, the Company paid (pound)2,487,000
for commitment fees relating to the unused portion of the facility.

Borrowings under the facility are secured by the assets of the Company,
including the partnership interests and shares of subsidiaries, and bear
interest at 2.25% above LIBOR for Tranche A and between 0.5% and 1.875% above
LIBOR (depending on the ratio of borrowings to the trailing, rolling six month
annualized consolidated net operating cash flow) for Tranche B. In September
1996, the Company entered into certain delayed-starting interest rate swap
agreements in order to manage interest rate risk on the Senior Secured
Facility. The terms of the swap agreements are described in Note 4 to the
consolidated financial statements.

The Company's ability to borrow under the facility is subject to, among other
things, its compliance with the financial and other covenants and borrowing
conditions contained therein.

The Company was in compliance with the covenants at December 31, 1996.

OTHER DEBT

Other debt is represented by property loans which are secured on freehold land
and buildings held by the Company which mature in 1997. The property loans bear
interest at a rate of between 1.00% and 1.75% above LIBOR.

14  INCOME TAXES

As discussed in Note 3 to the consolidated financial statements, the Company
has adopted SFAS No 109 as of November 22, 1994. The adoption of this standard
has no cumulative effect to be reported in the 1994 consolidated statement of
operations.

Loss before income taxes is solely attributable to the UK.

The provisions for income taxes follow:

<TABLE>
<CAPTION>
                                      Year ended December 31
                                        1996           1995
                                     (pound) '000   (pound) '000
--------------------------------------------------------------------------------

<S>                                       <C>         <C>
Currently payable                         50          16
================================================================================
</TABLE>

A reconciliation of income taxes determined using the statutory UK rate of 33%
to the effective rate of income tax is as follows:

<TABLE>
<CAPTION>
                                      Year ended December 31
                                         1996        1995
                                           %           %
--------------------------------------------------------------------------------
<S>                                      <C>         <C> 
Corporate tax at UK statutory rates      (33)        (33)
Permanent differences                      1           3
Valuation allowance and other
  temporary differences                   30          26
Share of losses of affiliates              2           4
--------------------------------------------------------------------------------
                                           -           -
================================================================================
</TABLE>


Deferred income tax assets and liabilities at December 31, 1996 and 1995 are
summarized as follows:

<TABLE>
<CAPTION>
                                      1996             1995
                                   (pound) '000      (pound) '000
--------------------------------------------------------------------------------
<S>                                  <C>              <C>   
Deferred tax assets relating to:
Fixed assets                               -           2,200
Net operating loss carryforwards     310,300          97,000
Other                                  3,400           9,200
--------------------------------------------------------------------------------
Deferred tax asset                   313,700         108,400
Valuation allowance                 (175,200)        (96,300)
--------------------------------------------------------------------------------
                                     138,500          12,100
--------------------------------------------------------------------------------
Deferred tax liabilities relating to:
Fixed assets                        (110,600)              -
Other                                (27,900)        (12,100)
--------------------------------------------------------------------------------
Deferred tax liabilities            (138,500)        (12,100)
--------------------------------------------------------------------------------
DEFERRED TAX ASSET PER
  BALANCE SHEET                            -               -
================================================================================
</TABLE>



                                     IV-33
<PAGE>   273

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


14  INCOME TAXES (continued)

At December 31, 1996 and 1995 the Company estimates that it has, subject to
Inland Revenue agreement, net operating losses ("NOLs") of (pound)940,000,000
and (pound)294,000,000, available to relieve against future profits. NOLs at D
ember 31, 1995 exclude capital allowances on assets which were available to the
Company, but had not been claimed. At December 31, 1996, NOLs include a claim
for all available capital allowances.

The NOLs have an unlimited carry forward period under UK tax law, but are
limited to their use to the type of business which has generated the loss.

15  EXTRAORDINARY GAIN

The Company had entered into interest rate swap agreements in order to manage
the interest rate risk on its previous revolving credit facilities by swapping
the interest rate on part of its variable rate debt for a fixed interest rate.
Following the initial public offering of the Company in November 1994, the
Company used a portion of the proceeds from the offering to repay all amounts
outstanding under these credit facilities and the interest rate swap agreements
ceased to be a hedge of the interest rate liability. The interest rate swaps
were retained pending their use as hedges of interest rates on future drawdowns
of the credit facilities. They had been placed on the balance sheet at their
fair value at the date upon which the debt was repaid and an extraordinary gain
equal to the aggregate fair value of the interest rate swaps at this date was
recognized in the consolidated statement of operations. Any change in the
aggregate fair value of the swap agreements since this date had been recognized
in the consolidated statement of operations. On October 12, 1995, the Company
sold the interest rate swaps, recognizing a loss on disposal.

16  SHAREHOLDERS' EQUITY

MOVEMENTS IN SHARE CAPITAL

During the year the Company issued 7,604,200 ordinary shares of 10 pence each
for the following consideration: an additional 1% of the ordinary shares of
Cable London plc, the surrender by Trans-Global (UK) Limited of its option to
acquire 9.9% of equity in the South East Regional Franchise Area, and the
remaining 20% of the ordinary shares of Telewest Communications (Cotswolds)
Limited held by a minority interest.

On October 3, 1995, the Company acquired the entire share capital of TCMN from
its former shareholders in exchange for an aggregate of 183,994,960 ordinary
shares of 10 pence each and 230,790,208 convertible preference shares of 10
pence each. On October 2, 1995, pursuant to a court-approved scheme of
arrangement (the "Scheme of Arrangement"), the Company exchanged 735,468,440
ordinary shares of 10 pence each and 265,276,500 convertible preference shares
of 10 pence each in consideration for the transfer of shares of TCCL to the
Company. Dealings in ordinary shares and ADSs representing ordinary shares of
TCCL ceased on the London Stock Exchange and NASDAQ National Market immediately
prior to the execution of the Scheme of Arrangement and upon completion of the
Scheme of Arrangement, dealings in the ordinary shares and ADSs representing
ordinary shares of the Company commenced. Immediately prior to the execution of
the Scheme of Arrangement on October 2, 1995, TCCL restructured its share
capital by converting 112,276,500 ordinary shares of 10 pence each into
112,276,500 convertible preference shares of 10 pence each.

On November 22, 1994, immediately following the Contribution, TCCL issued
604,000,000 ordinary shares and 153,000,000 convertible preference shares to
the Joint Venturers and completed an initial public offering in which
239,744,940 ordinary shares of 10 pence each were issued to the public market.

CONVERTIBLE PREFERENCE SHARES

The convertible preference shares are convertible into fully paid up ordinary
shares at any time on the basis of one ordinary share for every convertible
preference share provided that, immediately following the conversion, the
percentage of the issued ordinary share capital of the Company held by members
of the public, as defined by the listing rules of the London Stock Exchange,
does not fall below 25%. The ordinary shares arising on conversion will rank
pari passu in all respects with the ordinary shares then in issue.

The holders of the convertible preference shares are entitled to receive a
dividend of such amount as is declared and paid in relation to each ordinary
share, subject to the dividend to be paid not exceeding 20 pence per share net
of any associated tax credit.

In the event of a winding-up of the Company or other return of capital, the
assets of the Company available for distribution will be paid first to the
holders of the convertible preference shares up to the sum of capital paid-up
or credited as paid-up unless the right of election upon a winding-up of the
Company has been exercised in respect of the convertible preference shares
("the Elected Shares"). If the election has been exercised, the holders of the
ordinary shares and the Elected Shares will receive any surplus in accordance
with the amount paid-up or credited as paid-up on the shares held.

The holders of the convertible preference shares are not entitled to vote at
any general meeting of the Company unless the meeting includes the
consideration of a resolution for winding up the Company or a resolution
modifying the rights or privileges attaching to the convertible preference
shares.


                                     IV-34
<PAGE>   274

17  SHARE-BASED COMPENSATION PLANS

At December 31, 1996, the Company operated three types of share-based
compensation plans: the Telewest Executive Share Option Schemes, the Telewest
Sharesave Schemes, and the Telewest Restricted Share Scheme.

The Company applies APB Opinion Bulletin No. 25 and related interpretations in
accounting for its share-based compensation plans. Accordingly, no compensation
cost has been charged to the statement of operations in respect of
performance-based option grants since the options do not have exercise prices
less than the market value of the Company's ordinary shares. Compensation cost
has been recognized for fixed option grants since the options have exercise
prices less than the market value of the Company's ordinary shares at the date
of grant. Compensation cost has also been recognized for awards over ordinary
shares made under the Telewest Restricted Share Scheme since the awards have no
exercise price. Compensation cost recognized for fixed option grants and awards
under the Telewest Restricted Share Scheme was (pound)1,380,000,
(pound)1,334,000 and (pound)nil for 1996, 1995, and 1994, respectively.

If compensation cost for share option grants and for awards under the Telewest
Restricted Share Scheme had been determined based on their fair value at the
date of grant for 1996 and 1995 consistent with the method prescribed by SFAS
123, the Company's net loss and loss per share would have been adjusted to the
pro forma amounts set out below:

<TABLE>
<CAPTION>
                                         1996          1995
                                      (pound) '000   (pound) '000
-----------------------------------------------------------------
<S>                                     <C>         <C>    
Net loss - As reported                  262,391     137,531
       - Pro forma                      264,579     138,468

                                         (pound)    (pound)
-----------------------------------------------------------------

Loss per share - As reported               0.28        0.16
           - Pro forma                     0.29        0.16
-----------------------------------------------------------------
</TABLE>

PERFORMANCE-BASED SHARE OPTION COMPENSATION PLANS

The Company has two performance-based share option plans: the Telewest 1995
(No. 1) Executive Share Option Scheme and the Telewest 1995 (No. 2) Executive
Share Option Scheme. Under both plans, certain officers and key employees are
granted options to purchase ordinary shares of the Company. The exercise price
of each option generally equals the market price of the Company's ordinary
shares on the date of grant. The options are exercisable between three and ten
years after the date of the grant with exercise conditional on the Company's
shares out-performing by price the FT-SE100 Index over any three year period
preceding exercise. The Company may grant options for up to 92,000,000 ordinary
shares.

The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model using a weighted-average risk-free
interest rate of 8.1 per cent and 8.3 per cent for grants in 1996 and 1995,
respectively, and an expected volatility of 30 per cent used for grants in both
1996 and 1995. The Company does not expect to pay a dividend on its ordinary
shares at any time during the expected life of the option.



                                     IV-35
<PAGE>   275

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


17  SHARE-BASED COMPENSATION PLANS (continued)

A summary of the status of the Company's performance-based share option plans
as at December 31, 1996 and 1995, the first year in which the options were
granted, and changes during the years ended on those dates is presented below:

<TABLE>
<CAPTION>
                                                                                      1996                      1995
                                                                                     WEIGHTED                  Weighted
                                                                      NUMBER          AVERAGE       Number      average
                                                                    OF SHARES     EXERCISE PRICE  of shares   exercise price
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                <C>        <C>             <C>   
Outstanding at beginning of year                                    8,645,229          160.4p             -          -
Granted                                                             4,121,474          140.9p     8,871,398       160.3p
Forfeited                                                          (1,527,851)         162.6p      (226,169)      158.0p
---------------------------------------------------------------------------------------------------------------------------

Outstanding at end of year                                         11,238,852          153.0p     8,645,229       160.4p
===========================================================================================================================

Options exercisable at year end                                     1,023,042          154.3p             -           -
Weighted average fair value of options granted
  during the year                                                        75.6p                         86.0p
</TABLE>


The following table summarizes information about the Company's
performance-based share option plans outstanding at December 31, 1996.

<TABLE>
<CAPTION>
                                                   Options outstanding                                 Options exercisable
                                     ------------------------------------------------------     ---------------------------------

                                         Number          Weighted                                     Number
                                     outstanding at       average            Weighted             exercisable at    Weighted
                                      December 31,       remaining            average              December 31,      average
Range of exercise prices                  1996        contractual life     exercise price             1996        exercise price
---------------------------------------------------------------------------------------------------------------------------------
<C>                                     <C>               <C>                  <C>                    <C>             <C>   
138.0 - 141.0p                          3,945,812         7.0 years            140.1p                 343,954         140.6p
154.5 - 155.5p                          5,275,536         5.8 years            154.6p                 414,019         154.6p
171.5 - 173.5p                          2,017,504         6.9 years            172.4p                 265,069         171.8p
---------------------------------------------------------------------------------------------------------------------------------

138.0 - 173.5p                          11,238,852         6.4 years            152.7p              1,023,042         154.3p
=================================================================================================================================
</TABLE>

FIXED SHARE OPTION COMPENSATION PLANS

The Company also operates the Telewest Sharesave Scheme, a fixed share option
compensation scheme. Under this plan, the Company grants options to employees
to purchase ordinary shares at a 20% discount to market price. These options
can be exercised only with funds saved by employees over time in a qualified
savings account. The options are exercisable between
37 and 66 months after the date of grant.

The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model using a weighted-average risk-free
interest rate of 7.4 per cent, 7.2 per cent, and 8.7 per cent for grants in
1996, 1995 and 1994, respectively, and an expected volatility of 30 per cent
for all years. The Company does not expect to pay a dividend on its ordinary
shares at any time during the expected life of the option.

A summary of the status of the Company's fixed share option plans as of
December 31, 1996, 1995, and 1994 and the changes during the years ended on
those dates is presented below:

<TABLE>
<CAPTION>
                                                  1996                           1995                           1994
                                                        WEIGHTED                         Weighted                     Weighted
                                           NUMBER        AVERAGE          Number         average          Number       average
                                        OF SHARES     EXERCISE PRICE    of shares     exercise price    of shares  exercise price
---------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                 <C>          <C>              <C>                                   
Outstanding at beginning of year        3,345,941           139.6p       1,666,534        150.0p                 -             -
Granted                                 2,165,009           102.5p       2,168,157        134.0p         1,666,534           150.0p
Forfeited                              (1,434,315)          139.8p        (488,750)       150.0p                 -             -
---------------------------------------------------------------------------------------------------------------------------------

Outstanding at end of year              4,076,635           119.8p       3,345,941        139.6p         1,666,534           150.0p
==================================================================================================================================

Options exercisable at year end            75,977                          32,200                                -
Weighted average fair value of
  options granted during the year            49.7p                           79.3p                            97.4p
</TABLE>



                                     IV-36
<PAGE>   276

17  SHARE-BASED COMPENSATION PLANS (continued)

The following table summarizes information about the Company's fixed share
options outstanding at December 31, 1996.

<TABLE>
<CAPTION>
                      Options outstanding
-------------------------------------------------------------------------------
                           Number            Weighted average
                         outstanding at         remaining
  Exercise price       December 31, 1996     contractual life
-------------------------------------------------------------------------------
<S>        <C>            <C>                    <C>      
           102.5p         2,165,009              3.6 years
           134.0p         1,258,104              4.6 years
           150.0p           653,522              3.6 years
-------------------------------------------------------------------------------

   102.5 - 150.0p         4,076,635              3.9 years
===============================================================================
</TABLE>

TELEWEST RESTRICTED SHARE SCHEME

The Company operates the Telewest Restricted Share Scheme in conjunction with
an employment trust, the Telewest Employees Share Ownership Plan Trust (the
"Telewest ESOP"), which has been designed to provide incentives to executives
of the Company based on the performance of the Company. Under the Telewest
Restricted Share Scheme, executives may be granted awards over ordinary shares
of the Company based on a percentage of salary. The awards are made for no
consideration. The awards generally vest three years after the date of the
award and are exercisable for up to seven years after the date when they vest.
Awards granted under the Telewest Restricted Share Scheme may be made over a
maximum of 4,000,000 ordinary shares of the Company.

The fair value of each award is the share price of the ordinary shares on the
date the award was made.

A summary of the status of the Company's Restricted Share Scheme at December
31, 1996 and 1995, the first year in which the awards were made, and changes
during the years ended on those dates is presented below:

<TABLE>
<CAPTION>
                                     1996        1995
                                   NUMBER OF   Number of
                                    SHARES      shares
-------------------------------------------------------------
<S>                               <C>          <C> 
Outstanding at beginning of year   2,616,857           -
Granted                              328,297   2,857,191
Exercised                            (62,920)          _
Forfeited                           (233,801)   (240,334)
-------------------------------------------------------------

Outstanding at end of year         2,648,433   2,616,857
=============================================================

Awards exercisable at year end       646,341      49,867
=============================================================

WEIGHTED AVERAGE FAIR
  VALUE OF AWARDS GRANTED
  DURING THE YEAR                (pound)1.47 (pound)1.72
</TABLE>

At December 31, 1996, the 2,648,433 awards outstanding and the 646,341 awards
exercisable have weighted average remaining contractual lives of 8.2 years and
8.0 years, respectively.

18  COMMITMENTS AND CONTINGENCIES

CAPITAL AND OPERATING LEASES

The Company leases a number of assets under arrangements accounted for as
capital leases, as follows:

<TABLE>
<CAPTION>
                        Acquisition  Accumulated      Net book
                          costs      depreciation      value
                       (pound) '000   (pound) '000    (pound) '000
---------------------------------------------------------------------

<S>                       <C>         <C>             <C>   
At December 31, 1996
Electronic equipment      46,634       (8,376)        38,258
Other equipment            8,780       (1,900)         6,880

At December 31, 1995
Electronic equipment      27,148       (3,352)        23,796
Other equipment            1,512         (432)         1,080
---------------------------------------------------------------------
</TABLE>

Depreciation charged on these assets was (pound)7,106,000 and (pound)3,194,000
for the years ended December 31, 1996 and 1995, respectively.

The Company leases business offices and uses certain equipment under lease
arrangements accounted for as operating leases. Minimum rental expense under
such arrangements amounted to (pound)3,065,000, (pound)2,276,000 and
(pound)1,535,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.

Future minimum lease payments under capital and operating leases are summarized
as follows as at December 31,1996:

<TABLE>
<CAPTION>

                                     Capital    Operating
                                     leases       leases
                                   (pound) '000  (pound) '000
--------------------------------------------------------------

<C>                                    <C>         <C>  
1997                                   6,033       2,796
1998                                   7,036       2,234
1999                                   8,025       1,717
2000                                   9,320       1,687
2001                                   8,517       1,630
2002 and thereafter                   32,411      10,116
------------------------------------------------

                                      71,342

Imputed interest                     (16,952)
------------------------------------------------

TOTAL                                 54,930
================================================
</TABLE>

It is expected that, in the normal course of business, expiring leases will be
renewed or replaced.

MINORITY INTERESTS

In October 1993, the Company acquired all of the outstanding minority interests
in the London South Regional Franchise Area from various shareholders other
than the interest of one shareholder holding an approximately 0.03% interest in
the London South Regional Franchise Area.



                                     IV-37
<PAGE>   277

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


18  COMMITMENTS AND CONTINGENCIES (continued)

In consideration for such minority interests, the Company made an initial
payment to the sellers of approximately (pound)790,000 and may be required to
make an additional payment to one of the sellers upon the occurrence of certain
events (including the completion of certain share issuances by the Company).
The amount of this payment is based upon the valuation of the London South
Regional Franchise Area and the percentage of the franchise formerly owned by
the minority shareholders. The Company does not expect any payments to the
shareholders to have a material effect on the liquidity or capital resources of
the Company.

CONTINGENT LIABILITIES

The Company is a party to various legal proceedings in the ordinary course of
business which it does not believe will result, in aggregate, in a material
adverse effect on its financial condition.

19  RELATED PARTY TRANSACTIONS

The Company, in the normal course of providing cable television services,
purchases certain of its programming from UK affiliates of TCI. Such
programming is purchased on commercially-available terms. Total purchases in
the year amounted to (pound)6,951,000.

The Company has management agreements with TCI and US WEST under which amounts
are paid by the Company relating to TCI and US WEST employees who have been
seconded to the Company. For the years ended December 31, 1996, 1995 and 1994,
fees charged to the Company under the agreements were (pound)2,185,000,
(pound)3,042,000 and (pound)2,128,000, respectively. The Company has similar
managment agreements with Cox Communications, Inc. and SBC Communications, Inc.
For the years ended December 31,1996 and 1995, fees charged to the Company
under these agreements were (pound)374,000 and (pound)233,000, respectively.

The Company has entered into consulting agreements with its affiliates pursuant
to which the Company provides consulting services related to telephony
operations. Under the agreements, the Company receives an annual fee from each
affiliate based upon the affiliate's revenues. Fees received for the years
ended December 31,1996, 1995 and 1994 were (pound)642,000, (pound)566,000 and
(pound)557,000, respectively. The Company also receives a fee for providing
switching support services, comprising of a fixed element based on a number of
switches and a variable element based on a number of lines. Fees received for
the years ended December 31, 1996, 1995 and 1994, were (pound)741,000,
(pound)827,000 and (pound)822,000, respectively.

20  QUARTERLY FINANCIAL INFORMATION (unaudited)

<TABLE>
<CAPTION>
                                                                                      1996
                                                        Total      Fourth quarter  Third quarter   Second quarter   First quarter
                                                     (pound) '000     (pound) '000    (pound) '000      (pound) '000    (pound) '000
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>             <C>              <C>   
Revenue                                                 290,266        83,663         73,123             68,320        65,160
Operating loss                                         (155,400)      (46,095)       (34,512)           (38,536)      (36,257)
Finance expenses, net                                   (90,788)       28,222        (30,710)           (54,503)      (33,797)
Net loss                                               (262,391)      (22,361)       (69,303)           (97,080)      (73,647)
Loss per ordinary share                                28 pence       2 pence        7 pence           10 pence       8 pence
===================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                      1995
                                                        Total      Fourth quarter  Third quarter   Second quarter   First quarter
                                                     (pound) '000     (pound) '000    (pound) '000      (pound) '000   (pound) '000
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>             <C>              <C>   
Revenue                                                 144,784        57,144          32,240           28,969           26,431
Operating loss                                          (90,197)      (33,464)        (20,135)         (19,209)         (17,389)
Finance expenses, net                                   (34,607)      (29,344)         (3,662)          (1,064)            (537)
Net loss                                               (137,531)      (66,346)        (27,325)         (23,547)         (20,313)
Loss per ordinary share                                16 pence       7 pence         3 pence          3 pence          2 pence
===================================================================================================================================
</TABLE>

The Company regularly reviews the estimated useful lives of its property and
equipment and the estimates used in calculating the capitalizable overheads
which relate to the construction of the cable network. With effect from January
1, 1996, the Company has revised the estimated useful lives of certain assets
as set out in Note 3 to the consolidated financial statements and certain of
the estimates used in calculating capitalizable overheads. The impact of these
revisions is to increase the depreciation charge for the year from
(pound)110,233,000 to (pound)129,716,000 and to increase the loss per ordinary
share for the year by 2 pence, and to increase the capitalization of overheads
in the year from (pound)38,812,000 to (pound)54,019,000, and to reduce loss per
ordinary share for the year by 2 pence. This impact principally has been
accounted for in the fourth quarter of 1996.

Finance expenses includes foreign exchange gains and losses on the
re-translation or valuation of non-Sterling denominated financial instruments
using period end exchange rates and market valuations.


                                     IV-38
<PAGE>   278





                       [DELOITTE & TOUCHE LLP LETTERHEAD]



INDEPENDENT AUDITORS' REPORT

Partners of Sprint Spectrum Holding Company, L.P.
Kansas City, Missouri

We have audited the accompanying consolidated balance sheets of Sprint Spectrum
Holding Company, L.P. and subsidiaries (the "Partnership"),  development stage
enterprises, as of December 31, 1996 and 1995, and the related consolidated
statements of operations, changes in partners' capital and cash flows for each
of the two years in the period ended December 31, 1996, for the period from
October 24, 1994 (date of inception) to December 31, 1994 and for the
cumulative period from October 24, 1994 (date of inception) to December 31,
1996.  These consolidated financial statements are the responsibility of the
Partnership's management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
1996 financial statements of American PCS, L.P. ("APC") an investment of the
Partnership which is accounted for by use of the equity method.  The
Partnership's share of  APC's net loss for the year ended December 31, 1996 was
$96,850,000 and is included in the accompanying consolidated financial
statements.  The financial statements of APC were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to the amounts included for APC, is based solely on the reports of such other
auditors.

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

In our opinion, based on our audits and the reports of other auditors, such
consolidated financial statements present fairly, in all material respects, the
consolidated financial position of Sprint Spectrum Holding Company, L.P. and
subsidiaries at December 31, 1996 and 1995 and the results of their operations
and their cash flows for the years then ended and for the period from October
24, 1994 (date of inception) to December 31, 1994 and for the cumulative period
from October 24, 1994 (date of inception) to December 31, 1996, in conformity
with generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, Sprint
Spectrum Holding Company, L.P. and its subsidiaries are in the development
stage as of December 31, 1996.


/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 14, 1997


                                     IV-39
<PAGE>   279

REPORT OF INDEPENDENT ACCOUNTANTS


In our opinion, the balance sheet and the related statements of loss, of
changes in partners capital and cash flows (not presented separately herein)
present fairly, in all material respects, the financial position of American
PCS, L.P. at December 31, 1996, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.  These financial statements are the responsibility of the
Partnerships management; our responsibility is to express an opinion on these
financial statements based on our audit.  We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  We believe that our audit provide a
reasonable basis for the opinion expressed above.




PRICE WATERHOUSE LLP

Washington, DC
March 7, 1997



                                    IV-40
<PAGE>   280
             SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                          DECEMBER 31,    DECEMBER 31,
                                                              1996            1995
                                                          ------------    ------------
<S>                                                       <C>             <C>         
                                    ASSETS

CURRENT ASSETS:
   Cash and cash equivalents ..........................   $     69,988    $      1,123
   Accounts receivable, net ...........................          3,310            --
   Receivable from affiliates .........................         12,901             340
   Inventory ..........................................         72,414            --
   Prepaid expenses and other assets, net .............         14,260             188
   Note receivable--unconsolidated partnership ........        226,670             655
                                                          ------------    ------------
     Total current assets .............................        399,543           2,306

INVESTMENT IN PCS LICENSES, net .......................      2,122,908       2,124,594

INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS ............        179,085          85,546

PROPERTY, PLANT AND EQUIPMENT, net ....................      1,408,680          31,897

MICROWAVE RELOCATION COSTS, net .......................        135,802            --

OTHER ASSETS, net .....................................         77,383            --
                                                          ------------    ------------
TOTAL ASSETS ..........................................   $  4,323,401    $  2,244,343
                                                          ============    ============

                       LIABILITIES AND PARTNERS' CAPITAL

CURRENT LIABILITIES:
   Advances from partners .............................   $    167,818    $       --
   Accounts payable ...................................        196,146          41,950
   Payable to affiliate ...............................          5,626           7,598
   Accrued expenses ...................................         81,230           1,700
   Current maturities of long-term debt ...............             49            --
                                                          ------------    ------------
     Total current liabilities ........................        450,869          51,248

LONG-TERM COMPENSATION OBLIGATION .....................         11,356           1,856

CONSTRUCTION OBLIGATIONS ..............................        714,934            --

LONG-TERM DEBT ........................................        686,192            --

COMMITMENTS AND CONTINGENCIES

LIMITED PARTNER INTEREST IN CONSOLIDATED
   SUBSIDIARY .........................................         13,397          13,170

PARTNERS' CAPITAL AND ACCUMULATED DEFICIT:
   Partners' capital ..................................      3,003,484       2,291,806
   Deficit accumulated during the development stage ...       (556,831)       (113,737)
                                                          ------------    ------------
     Total partners' capital ..........................      2,446,653       2,178,069
                                                          ------------    ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL ...............   $  4,323,401    $  2,244,343
                                                          ============    ============
</TABLE>

See notes to consolidated financial statements


                                     IV-41
<PAGE>   281
             SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                    CUMULATIVE    
                                                                                PERIOD FROM         PERIOD FROM   
                                                                              OCTOBER 24, 1994    OCTOBER 24, 1994
                                                                                 (DATE OF            (DATE OF     
                                              YEAR ENDED      YEAR ENDED       INCEPTION) TO       INCEPTION) TO  
                                              DECEMBER 31,    DECEMBER 31,      DECEMBER 31,        DECEMBER 31,  
                                                  1996            1995             1994                1996
                                              ------------    ------------    ----------------    ----------------
<S>                                           <C>             <C>             <C>                 <C>             
OPERATING REVENUES:
   Service ................................   $         33    $       --      $           --      $             33
   Equipment ..............................          4,142            --                  --                 4,142
                                              ------------    ------------    ----------------    ----------------

     Total operating revenues .............          4,175            --                  --                 4,175

OPERATING EXPENSES:
   Cost of service ........................         21,928            --                  --                21,928
   Cost of equipment ......................         14,148            --                  --                14,148
   Selling ................................         38,345             145                --                38,490
   General and administrative .............        274,352          66,195               3,294             343,841
   Depreciation and amortization ..........         11,275             211                  38              11,524
                                              ------------    ------------    ----------------    ----------------

     Total operating expenses .............        360,048          66,551               3,332             429,931
                                              ------------    ------------    ----------------    ----------------

LOSS FROM OPERATIONS ......................       (355,873)        (66,551)             (3,332)           (425,756)

OTHER INCOME (EXPENSE):
   Interest income ........................          8,593             460                  24               9,077
   Interest expense, net ..................           (323)           --                  --                  (323)
   Other income ...........................          1,586              38                --                 1,624
   Equity in loss of unconsolidated .......        (96,850)        (46,206)               --              (143,056)
   partnership
   Limited partner interest in net loss
     of consolidated subsidiary ...........           (227)          1,830                --                 1,603
                                              ------------    ------------    ----------------    ----------------

     Total other income (expense) .........        (87,221)        (43,878)                 24            (131,075)
                                              ------------    ------------    ----------------    ----------------

NET LOSS ..................................   $   (443,094)   $   (110,429)   $         (3,308)   $       (556,831)
                                              ============    ============    ================    ================
</TABLE>


See notes to consolidated financial statements



                                     IV-42
<PAGE>   282
             SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
            CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                        PARTNERS'                   ACCUMULATED
                                         CAPITAL       DEFICIT         TOTAL
                                       -----------   -----------    -----------
<S>                                    <C>           <C>            <C>      
BALANCE, October 24, 1994 ..........   $      --     $      --      $      --

Contributions of capital ...........       123,438          --          123,438

Net loss ...........................          --          (3,308)        (3,308)
                                       -----------   -----------    -----------

BALANCE, December 31, 1994 .........       123,438        (3,308)       120,130

Contributions of capital ...........     2,168,368          --        2,168,368

Net loss ...........................          --        (110,429)      (110,429)
                                       -----------   -----------    -----------

BALANCE, December 31, 1995 .........     2,291,806      (113,737)     2,178,069

Contributions of capital ...........       711,678          --          711,678

Net loss ...........................          --        (443,094)      (443,094)
                                       -----------   -----------    -----------


BALANCE, December 31, 1996 .........   $ 3,003,484   $  (556,831)   $ 2,446,653
                                       ===========   ===========    ===========
</TABLE>

See notes to consolidated financial statements




                                     IV-43
<PAGE>   283
             SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                              CUMULATIVE    
                                                                                          PERIOD FROM         PERIOD FROM   
                                                                                        OCTOBER 24, 1994    OCTOBER 24, 1994
                                                                                           (DATE OF            (DATE OF     
                                                           YEAR ENDED DECEMBER 31,       INCEPTION) TO       INCEPTION) TO  
                                                        ----------------------------      DECEMBER 31,        DECEMBER 31,  
                                                            1996            1995             1994                1996
                                                        ------------    ------------    ----------------    ----------------
<S>                                                     <C>             <C>             <C>                 <C>              
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss ..........................................   $   (443,094)   $   (110,429)   $         (3,308)   $       (556,831)
  Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
     Equity in loss of unconsolidated partnership ...         96,850          46,206                --               143,056
     Limited partner interest in net loss of 
       consolidated subsidiary ......................            227          (1,830)               --                (1,603)
     Depreciation and amortization ..................         11,275             211                  38              11,524
     Amortization of  debt discount and 
       issuance costs ...............................         14,008            --                  --                14,008
     Loss on disposal of non-network equipment ......           --                31                --                    31
     Changes in assets and liabilities:
        Receivables .................................        (15,871)           (340)               --               (16,211)
        Inventory ...................................        (72,414)           --                  --               (72,414)
        Prepaid expenses and other assets ...........        (21,608)           (178)                (10)            (21,796)
        Accounts payable and accrued expenses .......        231,754          47,503               3,745             283,002
        Long-term compensation obligation ...........          9,500           1,856                --                11,356
                                                        ------------    ------------    ----------------    ----------------
          Net cash provided by (used in) 
            operating activities ....................       (189,373)        (16,970)                465            (205,878)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures ..............................       (683,886)        (31,763)               (451)           (716,100)
  Proceeds on sale of equipment .....................           --                37                --                    37
  Microwave relocation costs ........................       (123,354)           --                  --              (123,354)
  Purchase of PCS licenses ..........................           --        (2,006,156)           (118,438)         (2,124,594)
  Investment in unconsolidated partnerships .........       (190,390)       (131,752)               --              (322,142)
  Loan to unconsolidated partnership ................       (231,964)           (655)               --              (232,619)
  Payment received on loan to unconsolidated
    partnership .....................................          5,950            --                  --                 5,950
                                                        ------------    ------------    ----------------    ----------------
          Net cash used in investing activities .....     (1,223,644)     (2,170,289)           (118,889)         (3,512,822)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Advances from partners ............................        167,818            --                  --               167,818
  Proceeds from issuance of long-term debt ..........        674,201            --                  --               674,201
  Payments on long-term debt ........................            (24)           --                  --                   (24)
  Debt issuance costs ...............................        (71,791)           --                  --               (71,791)
  Partner capital contributions .....................        711,678       2,183,368             123,438           3,018,484
                                                        ------------    ------------    ----------------    ----------------
          Net cash provided by financing
            activities ..............................      1,481,882       2,183,368             123,438           3,788,688
                                                        ------------    ------------    ----------------    ----------------
INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS ..................................         68,865          (3,891)              5,014              69,988

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......          1,123           5,014                --                  --
                                                        ------------    ------------    ----------------    ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............   $     69,988    $      1,123    $          5,014    $         69,988
                                                        ============    ============    ================    ================


SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
     - Interest paid, net of amount capitalized .....   $        323    $       --      $           --      $            323

  NON-CASH INVESTING ACTIVITIES:
     - Capital expenditures and microwave
       relocation costs of $807,241 for the 
       year ended December 31, 1996 are net
       of construction obligations of $714,934.
</TABLE>

See notes to consolidated financial statements




                                     IV-44
<PAGE>   284
             SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. ORGANIZATION

Sprint Spectrum Holding Company, L.P. (the "Company" and "Holdings") is a
limited partnership formed in Delaware on March 28, 1995, by Sprint
Enterprises, L.P., TCI Spectrum Holdings, Inc. (formerly known as TCI Telephony
Services, Inc. as successor to TCI Network Services), Cox Telephony Partnership
and Comcast Telephony Services (together the "Partners"). Holdings was formed
pursuant to a reorganization of the operations of an existing partnership,
WirelessCo, L.P. ("WirelessCo") which transferred certain operating functions
to Holdings. The Partners are subsidiaries of Sprint Corporation ("Sprint"),
Tele-Communications, Inc. ("TCI"), Comcast Corporation ("Comcast") and Cox
Communications, Inc. ("Cox", and together with Sprint, TCI and Comcast, the
"Parents"), respectively. The Company and certain other affiliated partnerships
offer services as Sprint PCS.

The Partners of the Company have the following ownership interests as of
December 31, 1996 and 1995:

<TABLE>
                  <S>                                <C>
                  Sprint Enterprises, L.P.           40%
                  TCI Spectrum Holdings, Inc.        30%
                  Cox Telephony Partnership          15%
                  Comcast Telephony Services         15%
</TABLE>

Each Partner's ownership interest consists of a 99% general partner interest
and a 1% limited partnership interest.

The Company is consolidated with certain subsidiaries, including NewTelco, L.P.
and Sprint Spectrum L.P. which, in turn, has several subsidiaries. Sprint
Spectrum L.P.'s subsidiaries are Sprint Spectrum Equipment Company, L.P.
("EquipmentCo"), Sprint Spectrum Realty Company, L.P. ("RealtyCo"), Sprint
Spectrum Finance Corporation ("FinCo"), and WirelessCo. MinorCo, L.P.
("MinorCo") held the remaining ownership interests in NewTelco, L.P., Sprint
Spectrum L.P., EquipmentCo, RealtyCo and WirelessCo at December 31, 1996.
RealtyCo and EquipmentCo were organized on May 15, 1996 for the purpose of
holding PCS network-related real estate interests and assets. FinCo was formed
on May 20, 1996 to be a co-obligor of the debt obligations discussed in Note 5.


VENTURE FORMATION AND AFFILIATED PARTNERSHIPS - A Joint Venture Formation
Agreement (the "Formation Agreement"), dated as of October 24, 1994, and
subsequently amended as of March 28, 1995, and January 31, 1996, was entered
into by the Parents, pursuant to which the Parents agreed to form certain
entities to (i) provide national wireless telecommunications services,
including acquisition and development of personal communications service
("PCS") licenses, (ii) develop a PCS wireless system in the Los Angeles-San
Diego Major Trading Area ("MTA") and (iii) take certain other actions.

On October 24, 1994, WirelessCo was formed and on March 28, 1995, additional
partnerships were formed consisting of Holdings, MinorCo, NewTelco, L.P., and
Sprint Spectrum L.P. The Partners'


                                     IV-45
<PAGE>   285


ownership interests in WirelessCo were initially held directly by the Partners
as of October 24, 1994, the formation date of WirelessCo, but were subsequently
contributed to Holdings and then to Sprint Spectrum L.P. on March 28, 1995.

Prior to July 1, 1996, substantially all wireless operations of Sprint Spectrum
L.P. and subsidiaries were conducted at Holdings and substantially all
operating assets and liabilities, with the exception of the interest in an
unconsolidated subsidiary and the ownership interest in PCS licenses, were held
at Holdings. As of July 1, 1996, Holdings transferred these net assets, and
assigned agreements related to the wireless operations to which it was a party
to Sprint Spectrum L.P., EquipmentCo and RealtyCo.

SPRINT SPECTRUM HOLDING COMPANY, L.P. (FORMERLY KNOWN AS MAJORCO, L.P.)
PARTNERSHIP AGREEMENT - The Amended and Restated Agreement of Limited
Partnership of MajorCo, L.P. (the "MajorCo Agreement"), dated as of January 31,
1996, among Sprint Enterprises, L.P., TCI Spectrum Holdings, Inc., Comcast
Telephony Services and Cox Telephony Partnership provides that the purpose of
the Company is to engage in wireless communications services. The MajorCo
Agreement provides for the governance and administration of partnership
business, allocation of profits and losses (including provisions for special
and curative allocations), tax allocations, transactions with partners,
disposition of partnership interests and other matters.

The MajorCo Agreement generally provides for the allocation of profits and
losses according to each Partner's proportionate percentage interest, after
giving effect to special allocations. After special allocations, profits are
allocated to partners to the extent of and in proportion to cumulative net
losses previously allocated. Losses are allocated, after considering special
allocations, according to each Partner's allocation of net profits previously
allocated.

The MajorCo Agreement provides for a planned capital amount to be contributed by
the Partners ("Total Mandatory Contributions"), which represents the sum of $4.2
billion, which includes agreed upon values attributable to the contributions of
certain additional PCS licenses by a Partner. The Total Mandatory Contributions
amount is required to be contributed in accordance with capital contribution
schedules to be set forth in approved annual budgets. The partnership board of
Holdings may request capital contributions to be made in the absence of an
approved budget or more quickly than provided for in an approved budget, but
always subject to the Total Mandatory Contributions limit. The proposed budget
for fiscal 1997 has not yet been approved by the partnership board. An
additional Amended and Restated Capital Contribution Agreement (the "Amended
Agreement") was executed effective October 2, 1996. The Amended Agreement
recognizes that through December 31, 1995, approximately $2.2 billion of the
Total Mandatory Contributions had been contributed to Sprint Spectrum L.P., and
designates that $1.0 billion of the balance of the Total Mandatory Contributions
amount shall be contributed to Sprint Spectrum L.P.

At December 31, 1996, approximately $3.0 billion of the Total Mandatory
Contributions had been contributed by the Partners to Holdings and its
affiliated partnerships, of which $2.6 billion had been contributed to Sprint
Spectrum L.P.

PARENT UNDERTAKING - Each Parent has entered into an agreement which provides
for certain undertakings by each Parent in favor of other Partners and which
addresses certain obligations of the Parent pertaining to items including
provision of services, confidentiality, foreign ownership, purchasing,
restrictions on disposition and certain other matters.



                                     IV-46
<PAGE>   286


DEVELOPMENT STAGE ENTERPRISES - The Company and its subsidiaries are
development stage enterprises. The success of the Company's development is
dependent on a number of business factors, including securing financing to
complete network construction and fund initial operations, successfully
deploying the PCS network and attaining profitable levels of market demand for
Company products and services.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - The consolidated financial statements have been
prepared from the date of inception, October 24, 1994, for WirelessCo, and from
the dates of inception, for other consolidated subsidiaries, through December
31, 1996. The assets, liabilities, results of operations and cash flows of
entities in which the Company has a controlling interest have been
consolidated. All significant intercompany accounts and transactions have been
eliminated.

MinorCo, the limited partner, has been allocated approximately $227,000 in
income and $1,830,000 of losses incurred by NewTelco, L.P. for the years ended
December 31, 1996 and 1995, respectively, as losses in excess of the general
partner's capital account (which consisted of $1,000) are to be allocated to
the limited partner to the extent of its capital account.

TRADEMARK AGREEMENT - Sprint(R) is a registered trademark of Sprint
Communications Company, L.P. and is licensed to the Company on a royalty-free
basis pursuant to a trademark license agreement between the Company and Sprint.

REVENUE RECOGNITION - Operating revenues for PCS services are recognized as
service is rendered. Operating revenues for equipment sales are recognized at
the time the equipment is sold to a customer or an unaffiliated agent.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents. Under
the Company's cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes and are
included in Accounts payable in the consolidated balance sheets.

ACCOUNTS RECEIVABLE - Accounts receivable are net of an allowance for doubtful
accounts of approximately $202,000 at December 31, 1996. No allowance was
recorded for the year ended December 31, 1995.

INVENTORY - Inventory consists of wireless communication equipment (primarily
handsets). Inventory is stated at lower of cost or replacement cost. Gains and
losses on the sales of handsets are recognized at the time of sale.

PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Construction work in progress represents costs incurred to design and
construct the PCS network. Repair and maintenance costs are charged to expense
as incurred. When network equipment is retired, or otherwise disposed of, its
book value, net of salvage, is charged to accumulated depreciation. When
non-network equipment is sold, retired or abandoned, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is recognized.
Property, plant and equipment are


                                     IV-47
<PAGE>   287


depreciated using the straight-line method based on estimated useful lives of
the assets. Depreciable lives range from 3 to 20 years.

INVESTMENT IN PCS LICENSES AND OTHER INTANGIBLES - During 1994 and 1995, the
Federal Communications Commission ("FCC") auctioned PCS licenses in specific
geographic service areas. The FCC grants licenses for terms of up to ten years,
and generally grants renewals if the licensee has complied with its license
obligations. The Company believes it has and will continue to meet all
requirements necessary to secure renewal of its PCS licenses. The Company has
also incurred costs associated with microwave relocation in the construction of
the PCS network. Amortization of PCS licenses and microwave relocation costs
will commence as each service area becomes operational, over estimated useful
lives of 40 years. Amortization expense of $1,711,000 is included in
Depreciation and amortization expense in the consolidated statement of
operations for the year ended December 31, 1996. No amortization expense was
recorded in 1995 or 1994. Interest expense capitalized pertaining to the
acquisition of the PCS licenses has been included in Property, plant and
equipment.

The ongoing value and remaining useful life of intangible assets are subject to
periodic evaluation. The Company currently expects the carrying amounts to be
fully recoverable. Impairments of intangibles and long-lived assets are
assessed based on an undiscounted cash flow methodology.

CAPITALIZED INTEREST - Interest costs associated with the construction of
capital assets incurred during the period of construction are capitalized. The
total capitalized in 1996 was approximately $30,461,000. There were no amounts
capitalized in 1995 or 1994.

DEBT ISSUANCE COSTS - Included in Other assets are costs associated with
obtaining financing. Such costs are capitalized and amortized to interest
expense over the term of the related debt instruments using the effective
interest method. Amortization expense for the year ended December 31, 1996 was
approximately $1,944,000.

MAJOR CUSTOMER - The Company markets its products through multiple distribution
channels, including Company-owned retail stores and third-party retail outlets.
Sales to one third-party retail customer exceeded 10% of Equipment revenue in
the consolidated statement of operations for the year ended December 31, 1996.

INCOME TAXES - The Company has not provided for federal or state income taxes
since such taxes are the responsibility of the individual Partners.

FINANCIAL INSTRUMENTS - The carrying value of the Company's short-term
financial instruments, including cash and cash equivalents, receivables from
customers and affiliates and accounts payable approximates fair value. The fair
value of the Company's long-term debt is based on quoted market prices for the
same issues or current rates offered to the Company for similar debt. A summary
of the fair value of the Company's long-term debt at December 31, 1996 is
included in Note 5.

USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.



                                     IV-48
<PAGE>   288


RECLASSIFICATIONS - Certain reclassifications have been made to the 1995 and
1994 financial statements to conform to the 1996 financial statement
presentation.


3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following at December 31, 1996
and 1995 (in thousands):

<TABLE>
<CAPTION>
                                                                  1996          1995
                                                               ----------    ----------
<S>                                                            <C>           <C>     
Land .......................................................   $      905    $     --
Buildings and leasehold improvements .......................       86,467          --
Office furniture and fixtures ..............................       68,210         2,902
Network equipment ..........................................      255,691          --
Telecommunications plant - construction work in progress ...    1,006,990        29,200
                                                               ----------    ----------
                                                                1,418,263        32,102
Less accumulated depreciation ..............................       (9,583)         (205)
                                                               ----------    ----------

                                                               $1,408,680    $   31,897
                                                               ==========    ==========
</TABLE>

4. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS

AMERICAN PCS, L.P. - On January 9, 1995, WirelessCo acquired a 49% limited
partnership interest in American PCS, L.P. ("APC"). American Personal
Communications II, L.P. ("APC II") holds a 51% partnership interest in APC and
is the general managing partner. The investment in APC is accounted for under
the equity method. Concurrently with the execution of the partnership
agreement, the Company entered into an affiliation agreement with APC which
provides for the reimbursement of certain allocable costs and payment of
affiliate fees. Effective August 31, 1996, WirelessCo's interest in APC, the
existing loans to APC, and obligations to provide additional funding to APC
were transferred to Holdings pursuant to an amendment to the partnership
agreement. Summarized financial information is as follows (in thousands):

<TABLE>
<CAPTION>
                                                     December 31,   December 31,
                                                         1996           1995
                                                     ------------   ------------
<S>                                                  <C>            <C>         
Total assets .....................................   $    331,556   $    237,326
Total liabilities ................................        450,690        171,180
Total revenues ...................................         71,838          5,153
Net loss .........................................        202,626         51,551
</TABLE>

The partnership agreement between the Company and APC II specifies that losses
are allocated based on percentage ownership interests and certain other
factors. In January 1997, the Company and APC II amended the APC partnership
agreement with respect to the allocation of profits and losses. For financial
reporting purposes, profits and losses are to be allocated in proportion to
Holdings' and APC


                                     IV-49
<PAGE>   289


II's respective partnership interests, except for costs related to stock
appreciation rights and interest expense attributable to the FCC interest
payments which shall be allocated entirely to APC II.

Holding's investment in APC was approximately $75,546,000 at December 31, 1995.
Holdings share of the losses of APC for the year ended December 31, 1996,
totaling approximately $96,850,000, has exceeded its investment balance by
approximately $20,554,000.

The unamortized excess of the Company's investment over its equity in the
underlying net assets of APC at the date of acquisition was approximately
$10,139,000. This excess investment has been eliminated as a result of the
recognition of Holding's equity in APC's losses. Amortization included in
equity in loss of unconsolidated partnership prior to such elimination totaled
approximately $128,000 and $240,000 for the years ended December 31, 1996 and
1995, respectively.

The call option in APC acquired on January 9, 1995, provides the Company with
the right to purchase an additional interest in APC from APC II in annual
increments beginning five years after the initial PCS network build-out is
completed. The first increment, an additional 20% of the APC II ownership
interest, can be acquired in each of the fifth through seventh years with the
remaining interest available for purchase in the eighth through tenth year. APC
II also has the right to put a portion of its ownership interest to the Company
on an annual basis beginning after the completion of the initial PCS network
build-out, through the fifth anniversary date the greater of (i) one-fifth of
APC II's initial percentage interest of 51% in APC or (ii) the portion of APC
II's interest equal to APC II's obligation for annual FCC payments to be made
by APC. The exercise price of the call and put options are based on the Fair
Value, as defined, of APC at the date of exercise. The amount recorded at
December 31, 1996 and 1995 for such option, net of accumulated amortization,
was $9,250,000 and $10,000,000, respectively. As of December 31, 1996, APC II
has not exercised any put options. The Company is committed to arrange or
provide certain funding for procurement of APC's CDMA network. APC is under a
contractual obligation to repay any amounts provided by the Company, plus
interest.

During the initial five year build-out period, which began in December 1994,
APC II and the Company are obligated as follows: (a) APC II is obligated to
make capital contributions in an amount equal to the aggregate principal and
interest payments to the FCC, provided APC II has sufficient cash flows or can
obtain financing from a third party; (b) if APC II is unable to meet such
obligation, the Company is required to contribute the shortfall, upon ten days
prior notice. Under certain circumstances, APC II has the right and is
obligated to exercise its put right to the extent necessary to fund additional
capital contributions; (c) the Company is required to contribute to APC cash
necessary for operations up to an amount of approximately $98 million; and (d)
the Company is obligated to fund the cash requirements of APC in excess of that
described in (a), (b), and (c) above, in the form of either loans or additional
capital up to $275 million. As of December 31, 1996, $98 million of equity had
been contributed and approximately $232 million of partner advances had been
extended, fulfilling the Company's obligations under (c) and (d) above. In
January 1997, additional advances of $20 million were extended. All advances
were repaid in full in February 1997 and no further obligation for (c) and (d)
above exists.

COX COMMUNICATIONS PCS, L.P. - On December 31, 1996, the Company acquired a 49%
limited partner interest in Cox Communications PCS, L.P. ("Cox PCS"). Cox
Pioneer Partnership ("CPP") holds a 50.5% general and a 0.5% limited partner
interest and is the general and managing partner. The investment in Cox PCS is
accounted for under the equity method. As of December 31, 1996, approximately
$168 million in equity, including $2.45 million to PCS Leasing Co, L.P.


                                     IV-50
<PAGE>   290


("LeasingCo"), a wholly owned subsidiary of Cox PCS, had been contributed to
Cox PCS by the Company. The excess of the Company's investment over its equity
in the underlying net assets on December 31, 1996 was approximately $32.7
million. A portion of the initial contribution totaling approximately $23
million was payable at December 31, 1996.

Under the terms of the partnership agreement, CPP and the Company are obligated
as follows: (a) if the FCC consents to the assumption and recognition of the
license payment obligations by Cox PCS, CPP is obligated to make capital
contributions in an amount equal to such liability and related interest; (b) if
the FCC does not consent, Cox PCS is obligated to reimburse Cox Communications,
Inc. for interest payments exceeding the amount that would have been payable by
Cox Communications, Inc. to the FCC had the interest rate been 5.875% through
the date that Cox Communications, Inc. completes refinancing of the FCC
liability; (c) the Company is obligated to make capital contributions of
approximately $369,908,000 to Cox PCS; (d) the Company is not obligated to make
any cash capital contributions upon the assumption by Cox PCS of the FCC
payment obligations until CPP has contributed cash in an amount equal to the
aggregate principal and interest of such obligations; and, (e) CPP and the
Company are obligated to make additional capital contributions in an amount
equal to such partner's percentage interest times the amount of additional
capital contributions being requested. Additionally, the Company acquired a 49%
limited partner interest in LeasingCo. LeasingCo is a limited partnership
formed to acquire, construct or otherwise develop equipment and other personal
property to be leased to Cox PCS. The Company is not obligated to make
additional capital contributions beyond the initial funding of approximately
$2,450,000.

Concurrently with the execution of the partnership agreement, the Company
entered into an affiliation agreement with Cox PCS which provides for the
reimbursement of certain allocable costs and payment of affiliate fees. For the
year ended December 31, 1996, allocable costs of approximately $7,339,000 are
netted against the related operating expense captions in the accompanying
consolidated statement of operations and in receivables from affiliates in the
consolidated balance sheet. In addition, the Company purchases certain
equipment, such as handsets, on behalf of Cox PCS. Receivables from affiliates
for handsets and related equipment were approximately $6 million at December
31, 1996.


5. LONG-TERM DEBT AND BORROWING ARRANGEMENTS

Long-term debt consists of the following at of December 31, 1996 (in
thousands):

<TABLE>
<S>                                                                     <C>     
11% Senior Notes due in 2006 ........................................   $250,000
12 1/2% Senior Discount Notes due in 2006, net
   of unamortized discount of $214,501 ..............................    285,499
Credit facility - term loan .........................................    150,000
Other ...............................................................        742
                                                                        --------

Total debt ..........................................................    686,241
Less current maturities .............................................         49
                                                                        --------

Long-term debt ......................................................   $686,192
                                                                        ========
</TABLE>




                                     IV-51
<PAGE>   291


SENIOR NOTES AND SENIOR DISCOUNT NOTES - In August 1996, Sprint Spectrum L.P.
and Sprint Spectrum Finance Corporation (together, the "Issuers") issued $250
million aggregate principal amount of 11% Senior Notes due 2006 ("the Senior
Notes"), and $500 million aggregate principal amount at maturity of 12 1/2%
Senior Discount Notes due 2006 (the "Senior Discount Notes" and, together with
the Senior Notes, the "Notes"). The Senior Discount Notes were issued at a
discount to their aggregate principal amount at maturity and generated proceeds
of approximately $273 million. Cash interest on the Senior Notes will accrue at
a rate of 11% per annum and is payable semi-annually in arrears on each
February 15 and August 15, commencing February 15, 1997. Cash interest will not
accrue or be payable on the Senior Discount Notes prior to August 15, 2001.
Thereafter, cash interest on the Senior Discount Notes will accrue at a rate of
12 1/2% per annum and will be payable semi-annually in arrears on each February
15 and August 15, commencing February 15, 2002.

On August 15, 2001, the Issuers will be required to redeem an amount equal to
$384.772 per $1,000 principal amount at maturity of each Senior Discount Note
then outstanding ($192 million in aggregate principal amount at maturity,
assuming all of the Senior Discount Notes remain outstanding at such date).

The Notes are redeemable at the option of the Issuers, in whole or in part, at
any time on or after August 15, 2001 at the redemption prices set forth below,
respectively, plus accrued and unpaid interest, if any, to the redemption date,
if redeemed during the 12 month period beginning on August 15 of the years
indicated below:

<TABLE>
<CAPTION>
                                                                SENIOR DISCOUNT
                                                  SENIOR NOTES       NOTES
                                                   REDEMPTION     REDEMPTION
             YEAR                                     PRICE          PRICE
             ----                                 ------------  ---------------
<S>                                                 <C>             <C>     
  2001 .......................................      105.500%        110.000%
  2002 .......................................      103.667%        106.500%
  2003 .......................................      101.833%        103.250%
  2004 and thereafter ........................      100.000%        100.000%
</TABLE>

In addition, prior to August 15, 1999, the Issuers may redeem up to 35% of the
originally issued principal amount of the Notes. The redemption price of the
Senior Notes is equal to 111.0% of the principal amount of the Senior Notes so
redeemed, plus accrued and unpaid interest, if any, to the redemption date with
the net proceeds of one or more public equity offerings, provided that at least
65% of the originally issued principal amount of Senior Notes would remain
outstanding immediately after giving effect to such redemption. The redemption
price of the Senior Discount Notes is equal to 112.5% of the accreted value at
the redemption date of the Senior Discount Notes so redeemed, with the net
proceeds of one or more public equity offerings, provided that at least 65% of
the originally issued principal amount at maturity of the Senior Discount Notes
would remain outstanding immediately after giving effect to such redemption.

The Notes contain certain restrictive covenants, including (among other
requirements) limitations on additional indebtedness, limitations on restricted
payments, limitations on liens, and limitations on dividends and other payment
restrictions affecting certain restricted subsidiaries.



                                     IV-52
<PAGE>   292


BANK CREDIT FACILITY - Sprint Spectrum L.P. (the "Borrower") entered into an
agreement with The Chase Manhattan Bank ("Chase") as administrative agent for a
group of lenders for a $2 billion bank credit facility dated October 2, 1996.
The proceeds of this facility are to be used to finance working capital needs,
subscriber acquisition costs, capital expenditures and other general Borrower
purposes.

The facility consists of a revolving credit commitment of $1.7 billion and a
$300 million term loan commitment, $150 million of which was drawn down
subsequent to closing and $150 million of which was to be drawn within 90 days
after closing. The amount available under the revolving credit facility was
$450 million on December 31, 1996. There were no borrowings under the revolving
credit facility as of December 31, 1996. The availability will be increased
upon the achievement of certain financial and operating conditions as defined
in the agreement. Commitment fees for the revolving portion of the agreement
are payable quarterly based on average unused revolving commitments.

The revolving credit commitment expires July 13, 2005. Availability will be
reduced in quarterly installments ranging from $75 million to $175 million
commencing January 2002. Further reductions may be required after January 1,
2000, to the extent that the Borrower meets certain financial conditions.
Subsequent to December 31, 1996, the Borrower drew down $200 million under the
revolving credit facility.

The term loans are due in sixteen consecutive quarterly installments beginning
January 2002 in aggregate principal amounts of $125,000 for each of the first
fifteen payments with the remaining aggregate outstanding principal amount of
the term loans due as the last installment.

Interest on the term loans and/or the revolving credit loans is at the
applicable LIBOR rate plus 2.5% ("Eurodollar Loans"), or the greater of the
prime rate or 0.5% plus the Federal Funds effective rate, plus 1.5% ("ABR
Loans"), at the Company's option. The interest rate may be adjusted downward
for improvements in the bond rating and/or leverage ratios. Interest on ABR
Loans and Eurodollar Loans with interest period terms in excess of 3 months is
payable quarterly. Interest on Eurodollar Loans with interest period terms of
less than 3 months is payable on the last day of the interest period. As of
December 31, 1996, the interest rate on the first $150 million term loan was
8.19%.

Borrowings under the Bank Credit Facility are secured by the Company's
interests in WirelessCo, RealtyCo and EquipmentCo and certain other personal
and real property (the "Shared Lien"). The Shared Lien equally and ratably
secures the Bank Credit Facility, the Vendor Financing (Note 6) and certain
other indebtedness of the Company. The credit facility is jointly and severally
guaranteed by WirelessCo, RealtyCo and EquipmentCo and is non-recourse to the
Parents and the Partners.

The Bank Credit Facility agreement and Vendor Financing agreements (Note 6)
contain certain restrictive financial and operating covenants, including (among
other requirements) maximum debt ratios (including debt to total
capitalization), limitations on capital expenditures, limitations on additional
indebtedness and limitations on dividends and other payment restrictions
affecting certain restricted subsidiaries. The loss of the right to use the
Sprint trademark, the termination or non-renewal of any FCC license that
reduces population coverage below specified limits, or changes in controlling
interest in the Company, as defined, among other provisions, constitute events
of default.



                                     IV-53
<PAGE>   293


The estimated fair value of the Company's long-term debt at December 31, 1996
is as follows (in thousands):

<TABLE>
<CAPTION>
                                                     Carrying         Estimated
                                                      Amount         Fair Value
                                                     --------        ----------
<S>                                                  <C>              <C>     
11% Senior Notes                                     $250,000         $270,625
12 1/2% Senior Discount Notes                         285,499          337,950
Credit facility - term loan                           150,000          151,343
</TABLE>


At December 31, 1996, scheduled maturities of long-term debt during each of the
next five years are as follows (in thousands):

<TABLE>
                       <S>                    <C>     
                       1997                   $     49
                       1998                         54
                       1999                         60
                       2000                         66
                       2001                    192,459
</TABLE>


6. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES - Minimum rental commitments as of December 31, 1996, for all
noncancelable operating leases, consisting principally of leases for cell and
switch sites and office space, are as follows (in thousands):

<TABLE>
                       <S>                    <C>     
                       1997                   $ 68,616
                       1998                     61,186
                       1999                     57,407
                       2000                     38,356
                       2001                     13,468
</TABLE>

Gross rental expense for cell and switch sites aggregated approximately
$13,097,000 for the year ended December 31, 1996. Gross rental expense for
office space approximated $11,432,000, $687,000 and $105,000 for the years
ended December 31, 1996 and 1995, and the period from October 24, 1994 (date of
inception) through December 31, 1994, respectively. Certain leases contain
renewal options that may be exercised from time to time and are excluded from
the above amounts.

PROCUREMENT CONTRACTS - On January 31, 1996, the Company entered into
procurement and services contracts with AT&T Corp. (subsequently assigned to
Lucent Technologies, Inc., "Lucent") and Northern Telecom, Inc. ("Nortel" and
together with Lucent, the "Vendors") for the engineering and construction of a
PCS network. Each contract provides for an initial term of ten years with
renewals for additional one-year periods. The Vendors must achieve substantial
completion of the PCS network within an established time frame and in
accordance with criteria specified in the procurement contracts. Pricing for
the initial equipment, software and engineering services has been established
in the procurement contracts. The procurement contracts provide for payment
terms based on delivery dates, substantial completion dates, and final
acceptance dates. In the event of delay in the completion


                                     IV-54
<PAGE>   294


of the PCS network, the procurement contracts provide for certain amounts to be
paid to the Company by the Vendors. The minimum commitments for the initial
term are $0.8 billion and $1.0 billion from Lucent and Nortel, respectively,
which include, but are not limited to, all equipment required for the
establishment and installation of the PCS network.

HANDSET PURCHASE AGREEMENTS - In June, 1996, the Company entered into a
three-year purchase and supply agreement with a vendor for the purchase of
handsets and other equipment totaling approximately $500 million. During 1996,
the Company purchased $85 million under the agreement. The total purchase
commitment must be satisfied by April 30, 1998.

In September, 1996, the Company entered into a second three-year purchase and
supply agreement for the purchase of handsets and other equipment totaling more
than $600 million. Purchases under the second agreement will commence on or
after April 1, 1997, and the total purchase commitment must be satisfied during
the three-year period after the initial handset purchase.

VENDOR FINANCING - As of October 2, 1996, the Company entered into financing
agreements with Nortel and Lucent for multiple drawdown term loan facilities
totaling $1.3 billion and $1.8 billion, respectively. The proceeds of such
facilities are to be used to finance the purchase of goods and services
provided by the Vendors.

Nortel has committed to provide financing in two phases. During the first
phase, Nortel will finance up to $800 million. Once the full $800 million has
been utilized and the Company obtains additional equity commitments and/or
subordinated unsecured loans of at least $400 million and achieves certain
operating conditions, Nortel will finance up to an additional $500 million. The
amount available under the Nortel facility was $1.3 billion on December 31,
1996. In addition, the Company will be obligated to pay origination fees on the
date of the initial draw down loan under the first and second phases. The
Nortel agreement terminates on the earliest of (a) the date the availability
under the commitments is reduced to zero, (b) December 31, 2000, or (c) March
31, 1997 if no borrowings under the agreements have been drawn.

Lucent has committed to financing up to $1.5 billion through December 31, 1997,
and up to an aggregate of $1.8 billion thereafter. The Company pays a facility
fee on the daily amount of loans outstanding under the agreement, payable
quarterly. The Lucent agreement terminates June 30, 2001. Subsequent to
December 31, 1996, the Company borrowed approximately $274 million under the
Lucent facility.

Certain amounts included under Construction Obligations on the consolidated
balance sheet may be financed under the Vendor Financing agreements.

The principal amounts of the loans drawn under both the Nortel and Lucent
agreements are due in twenty consecutive quarterly installments, commencing on
the date which is thirty-nine months after the last day of such "Borrowing
Year" (defined in the agreements as any one of the five consecutive 12-month
periods following the date of the initial drawdown of the loan). The aggregate
amount due each year is equal to percentages ranging from 10% to 30% multiplied
by the total principal amount of loans during each Borrowing Year.

The agreements provide two borrowing rate options. During the first phase of
the Nortel agreement and throughout the term of the Lucent agreement "ABR
Loans" bear interest at the greater of the


                                     IV-55
<PAGE>   295


prime rate or 0.5% plus the Federal Funds effective rate, plus 2%. "Eurodollar
Loans" bear interest at the London interbank (LIBOR) rate (any one of the 30-,
60- or 90-day rates, at the discretion of the Company), plus 3%. During the
second phase of the Nortel agreement, ABR Loans bear interest at the greater of
the prime rate or 0.5% plus the Federal Funds effective rate, plus 1.5%; and
Eurodollar loans bear interest at the LIBOR rate plus 2.5%. Interest from the
date of each loan through one year after the last day of the Borrowing Year is
added to the principal amount of each loan. Thereafter, interest is payable
quarterly.

Borrowings under the Vendor Financing are secured by the Shared Lien (Note 5).
The Vendor Financing is jointly and severally guaranteed by WirelessCo,
RealtyCo and EquipmentCo and is non-recourse to the Parents and the Partners.

SERVICE AGREEMENT - The Company has entered into an agreement with a vendor to
provide PCS call record and retention services. Monthly rates per subscriber
are variable based on overall subscriber volume. If subscriber fees are less
than specified annual minimum charges, the Company will be obligated to pay the
difference between the amounts paid for processing fees and the annual minimum.
Annual minimums range from $20 million to $60 million through 2001.

The agreement extends through December 31, 2001, with two automatic, two-year
renewal periods, unless terminated by the Company. The company may terminate
the agreement prior to the expiration date, but would be subject to specified
termination penalties.

8. EMPLOYEE BENEFITS

Employees performing services for the Company were employed by Sprint
Corporation through December 31, 1995. Amounts paid to Sprint Corporation
relating to pension expense and employer contributions to the Sprint
Corporation 401(k) plan for these employees approximated $323,000 in 1995. No
expense was incurred through December 31, 1994.

The Company maintains short-term and long-term incentive plans. All salaried
employees are eligible for the short-term incentive plan commencing at date of
hire. Short-term incentive compensation is based on incentive targets
established for each position based on the Company's overall compensation
strategy. Targets contain both an objective Company component and a personal
objective component. Charges to operations for the short-term plan approximated
$12,332,000 and $3,491,000 for the years ended December 31, 1996 and 1995,
respectively. No expense was incurred through December 31, 1994.

LONG-TERM COMPENSATION OBLIGATION - Effective July 1, 1996, a long-term
compensation plan was adopted. Employees meeting certain eligibility
requirements are considered to be participants in the plan. Participants will
receive 100% of the pre-established targets for the period from July 1, 1995 to
June 30, 1996 (the "Introductory Term"). Participants may elect a payout of the
amount due or convert 50% or 100% of the award to appreciation units. Unless
converted to appreciation units, payment for the Introductory Term will be made
in the third quarter of 1998. Appreciation units vest 25% per year commencing
on the second anniversary of the date of grant. Participants have until March
15, 1997 to make payout or conversion elections. For the years ended December
31, 1996 and 1995, $9.5 million and $1.9 million, respectively, has been
expensed. The ultimate liability will be based on actual payout vs. conversion
elections and the final results of an independent valuation of the


                                     IV-56
<PAGE>   296


Company as of June 30, 1997. The Company has applied APB Opinion No. 25,
"Accounting for Stock Issued to Employees" for 1996. No significant difference
would have resulted if SFAS No. 123, "Accounting for Stock-Based Compensation"
had been applied.

SAVINGS PLAN - Effective January, 1996, the Company established a savings and
retirement program (the "Savings Plan") for certain employees, which is
intended to qualify under Section 401(k) of the Internal Revenue Code. Most
permanent full-time, and certain part-time, employees are eligible to become
participants in the plan after one year of service or upon reaching age 35,
whichever occurs first. Participants make contributions to a basic before tax
account and supplemental before tax account. The maximum contribution for any
participant for any year is 16% of such participant's compensation. For each
eligible employee who elects to participate in the Savings Plan and makes a
contribution to the basic before tax account, the Company makes a matching
contribution. The matching contributions equal 50% of the amount of the basic
before tax contribution of each participant up to the first 6% that the
employee elects to contribute. Contributions to the Savings Plan are invested,
at the participants discretion, in several designated investment funds.
Distributions from the Savings Plan generally will be made only upon retirement
or other termination of employment, unless deferred by the participant. Expense
under the Savings Plan approximated $1,125,000 in 1996.

PROFIT SHARING (RETIREMENT) PLAN - Effective January, 1996, the Company
established a profit sharing plan for its employees. Employees are eligible to
participate in the plan after completing one year of service. Profit sharing
contributions are based on the compensation, age, and years of service of the
employee. Profit sharing contributions are deposited into individual accounts
of the Company's 401(k) plan. Vesting occurs once a participant completes five
years of service. For the year ended December 31, 1996, expense under the
profit sharing plan approximated $726,000.

9. RELATED PARTY TRANSACTIONS

BUSINESS SERVICES - The Company reimburses Sprint Corporation for certain
accounting and data processing services, for participation in certain
advertising contracts, for certain cash payments made by Sprint Corporation on
behalf of the Company and other management services. The Company is allocated
the costs of such services based on direct usage. Allocated expenses of
approximately $11,900,000 and $2,646,000 are included in Selling and General
and administrative expense in the consolidated statement of operations for 1996
and 1995, respectively. No reimbursement was made through December 31, 1994.

PAGING SERVICES - In 1996, the Company commenced paging services pursuant to
agreements with Paging Network Equipment Company ("PageNet") and Sprint
Communications Company, L.P. ("Sprint Communications"). For the year ended
December 31, 1996, Sprint Communications received agency fees of approximately
$4.9 million.

ADVANCES FROM PARTNERS - In December 1996, the Partners advanced approximately
$168 million to the Company, which was contributed to Cox PCS (Note 4). The
advances bear interest at the prime rate (8.25% at December 31, 1996) and were
repaid in February 1997.




                                     IV-57
<PAGE>   297


10. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for 1996 and 1995 is as follows (in
thousands):

<TABLE>
<CAPTION>
               1996                     First      Second     Third      Fourth
               ----                     -----      ------     -----      ------
<S>                                    <C>        <C>        <C>        <C>     
Operating revenues .................   $  --      $  --      $   --     $  4,175
Operating expenses .................    30,978     46,897      87,135    195,038
Net loss ...........................    67,425     90,770     101,497    183,402
                                                   
               1995                                
               ----                                
Operating revenues .................   $  --      $  --      $   --     $   --
Operating expenses .................     3,655      4,589      11,844     46,463
Net loss ...........................     6,789      9,718      19,488     74,434
</TABLE>



                                     IV-58
<PAGE>   298
                                   SIGNATURES

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


                                             TELE-COMMUNICATIONS, INC.


Dated:  March 28, 1997                       By   /s/  John C. Malone      
                                                --------------------------------
                                                   John C. Malone
                                                      Chief Executive Officer


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

<TABLE>
<CAPTION>
                Signature                      Title                        Date
                ---------                      -----                        ----
<S>   <C>                           <C>                                   <C>
/s/   John C. Malone                Chairman of the Board,                March 28, 1997
------------------------------          Chief Executive                                 
      John C. Malone                    Officer and Director             
                                                                         
                                                                         
                                                                         
                                                                         
 /s/  Jerome H. Kern                Director                              March 28, 1997
------------------------------                                                          
      Jerome H. Kern                                                     
                                                                         
                                                                         
                                                                         
 /s/  John W. Gallivan              Director                              March 28, 1997
------------------------------                                                          
      John W. Gallivan                                                   
                                                                         
                                                                         
                                                                         
 /s/  Donne F. Fisher               Director                              March 28, 1997
------------------------------                                                          
      Donne F. Fisher                                                    
                                                                         
                                                                         
                                                                         
 /s/  J.C. Sparkman                 Director                              March 28, 1997
------------------------------                                                          
      J.C. Sparkman                                                      
                                                                         
                                                                         
                                                                         
 /s/  Paul A. Gould                 Director                              March 28, 1997
------------------------------                                                          
      Paul A. Gould                                                      
                                                                         
                                                                         
                                                                         
 /s/  Leo J. Hindery, Jr.           President and Chief Operating         March 28, 1997
------------------------------          Officer                                         
      Leo J. Hindery, Jr.                                                
                                                                         
                                                                         
                                                                         
 /s/  Stephen M. Brett              Executive Vice President              March 28, 1997
------------------------------          and Secretary                                   
      Stephen M. Brett                                                   
                                                                         
                                                                         
                                                                         
 /s/  Brendan R. Clouston           Executive Vice President and          March 28, 1997
------------------------------          Chief Financial Officer                         
      Brendan R. Clouston               (Principal Financial Officer)    
                                                                         
                                                                         
                                                                         
                                                                         
 /s/  Gary K. Bracken               Senior Vice President of              March 28, 1997
------------------------------          TCI Communications, Inc.                        
      Gary K. Bracken                   (Principal Accounting Officer)   
                                                                      
</TABLE>




                                    IV-59
<PAGE>   299
                                EXHIBIT INDEX


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

3 - Articles of Incorporation and Bylaws:

      3.1    The Restated Certificate of Incorporation, dated August 4, 1994,
                 as amended on August 4, 1994, August 16, 1994, October 11,
                 1994, October 21, 1994, January 26, 1995, August 3, 1995,
                 August 3, 1995, January 25, 1996 and January 25, 1996.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December  31,
                       1995 (Commission File No. 0-20421).

      3.2    The Bylaws as adopted June 16, 1994.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1994, as amended by Form 10-K/A (Commission File No.
                       0-20421).

10 - Material Contracts:

    10.1     Tele-Communications, Inc. 1994 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Form S-4
                       Registration Statement (Commission File No. 33-54263).

    10.2     Tele-Communications, Inc. 1995 Employee Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.3     Tele-Communications, Inc. 1996 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.4     Restated and Amended Employment Agreement, dated as of November 1,
                 1992, between the Company and Bob Magness.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1992, as amended by Form 10-K/A for the year ended
                       December 31, 1992 (Commission File No. 0-5550).

    10.5     Assignment and Assumption Agreement, dated as of August 4, 1994,
                 among TCI/Liberty Holding Company, Tele- Communications, Inc.
                 and Bob Magness.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1994, as amended by Form 10-K/A (Commission File No.
                       0-20421).

    10.6     Restated and Amended Employment Agreement, dated as of November 1,
                 1992, between the Company and John C.  Malone.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1992, as amended by Form 10-K/A for the year ended
                       December 31, 1992 (Commission File No. 0-5550).

                                                                     (continued)





<PAGE>   300
10 - Material contracts, continued:

    10.7     Assignment and Assumption Agreement, dated as of August 4, 1994,
                 among TCI/Liberty Holding Company, Tele- Communications, Inc.
                 and John C. Malone.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1994, as amended by Form 10-K/A (Commission File No.
                       0-20421).

    10.8     Restricted Stock Award Agreement, made as of December 10, 1992,
                 among Tele-Communications, Inc., Donne F.  Fisher and WestMarc
                 Communications, Inc.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1992, as amended by Form 10-K/A for the year ended
                       December 31, 1992 (Commission File No. 0-5550).

    10.9     Consulting Agreement, dated as of January 1, 1996, between
                 Tele-Communications, Inc. and Donne F. Fisher.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.10    Consulting Agreement, dated as March 11, 1995, between
                 Tele-Communications, Inc. and J.C. Sparkman.*

    10.11    Deferred Compensation Plan for Non-Employee Directors, effective
                 on November 1, 1992.* Incorporated herein by reference to
                 the Company's Annual Report on Form 10-K for the year ended
                       December 31, 1992, as amended by Form 10-K/A for the
                       year ended December 31, 1992 (Commission File No.
                       0-5550).

    10.12    Amended and Restated Employment Agreement, dated as of July 18,
                 1995, among Tele-Communications, Inc., Tele-Communications
                 International, Inc. and Fred A. Vierra.*
                    Incorporated herein by reference to Tele-Communications
                       International, Inc.'s Registration Statement on Form S-1
                       (Commission File No. 33-80491).

    10.13    Employment Agreement, dated as of January 1, 1993, between
                 Tele-Communications, Inc. and Larry E. Romrell.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K dated December 31, 1994, as amended
                       by Form 10-K/A (Commission File No. 0-20421).

    10.14    Assignment and Assumption Agreement, dated as of August 4, 1994,
                 among TCI/Liberty Holding Company, Tele- Communications, Inc.
                 and Larry E. Romrell.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K dated December 31, 1994, as amended
                       by Form 10-K/A (Commission File No. 0-20421).

    10.15    Form of 1992 Non-Qualified Stock Option and Stock Appreciation
                 Rights Agreement.* 
                    Incorporated herein by reference to the Company's Annual 
                    Report on Form 10-K for the year ended December 31, 1993, 
                    as amended by Form 10-K/A for the year ended December 31, 
                    1993 (Commission File No. 0-5550).

                                                                     (continued)





<PAGE>   301
10 - Material contracts, continued:


    10.16    Form of 1993 Non-Qualified Stock Option and Stock Appreciation
                 Rights Agreement.* 
                    Incorporated herein by reference to the Company's Annual 
                      Report on Form 10-K for the year ended December 31, 1993,
                      as amended by Form 10-K/A for the year ended December 31,
                      1993 (Commission File No. 0-5550).

    10.17    Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement, dated as of November 12, 1993, by and between
                 Tele-Communications, Inc. and Jerome   H. Kern.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1993, as amended by Form 10-K/A for the year ended
                       December 31, 1993 (Commission File No. 0-5550).

    10.18    Form of Assumption and Amended and Restated Stock Option Agreement
                 between the Company, Liberty Media Corporation and grantee
                 relating to stock appreciation rights granted pursuant to
                 letter dated September 17, 1991.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.19    Form of Assumption and Amended and Restated Stock Option Agreement
                 between the Company, Liberty Media Corporation and grantee
                 relating to the assumption of options and related stock
                 appreciation rights granted under the Liberty Media
                 Corporation 1991 Stock Incentive Plan pursuant to letter dated
                 July 26, 1993.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.20    Assumption and Amended and Restated Stock Option Agreement between
                 the Company, TCI/Liberty Holding Company and a director of
                 Tele-Communications, Inc. relating to assumption of options
                 and related stock appreciation rights granted outside of an
                 employee benefit plan pursuant to Tele-Communications, Inc.'s
                 1993 Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.21    Form of Assumption and Amended and Restated Stock Option Agreement
                 between the Company, TCI/Liberty Holding Company and grantee
                 relating to assumption of options and related stock
                 appreciation rights granted under Tele-Communications, Inc.'s
                 1992 Stock Incentive Plan pursuant to Tele-Communications,
                 Inc.'s 1993 Non-Qualified Stock Option and Stock Appreciation
                 Rights Agreement.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

                                                                     (continued)





<PAGE>   302
10 - Material contracts, continued:


    10.22    Form of Assumption and Amended and Restated Stock Option Agreement
                 between the Company, TCI/Liberty Holding Company and grantee
                 relating to assumption of grants pursuant to the Agreement and
                 Plan of Merger dated June 6, 1991 between United Artists
                 Entertainment Company and Tele-Communications, Inc.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.23    Form of letter dated September 17, 1991 from Liberty Media
                 Corporation to grantee relating to grant of stock appreciation
                 rights.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.24    Form of letter dated July 26, 1993 from Liberty Media Corporation
                 to grantee relating to grant of options and stock appreciation
                 rights.*
                    Incorporated by reference to Tele-Communications, Inc.'s
                       Post Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.25    Form of Assumption and Amended and Restated Stock Option Agreement
                 between the Company, TCI/Liberty Holding Company and grantee
                 relating to assumption of options and related stock
                 appreciation rights under Tele-Communications, Inc.'s 1992
                 Stock Incentive Plan pursuant to Tele-Communications, Inc.'s
                 1992 Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement.*
                    Incorporated herein by reference to the Company's Post
                       Effective Amendment No. 1 to Form S-4 Registration
                       Statement on Form S-8 Registration Statement (Commission
                       File No. 33-54263).

    10.26    Forms of Assumption and Amended and Restated Stock Option
                 Agreements relating to options granted under the United
                 Artists Entertainment Company 1988 Incentive and Non-Qualified
                 Stock Option Plan and executed by employees who did not have
                 employment agreements with United Artists Entertainment
                 Company.*
                    Incorporated herein by reference to Tele-Communications,
                       Inc.'s Post-Effective Amendment No. 1 to Form S-4
                       Registration Statement on Form S-8 Registration
                       Statement (Commission File No. 33-43009).

    10.27    Form of Indemnification Agreement.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31,
                       1993, as amended by Form 10-K/A for the year ended
                       December 31, 1993 (Commission File No. 0-5550).

    10.28    Form of 1994 Non-Qualified Stock Option and Stock Appreciation
                 Rights Agreement.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K dated December 31, 1994, as amended
                       by Form 10-K/A (Commission File No. 0-20421).

                                                                     (continued)





<PAGE>   303
10 - Material contracts, continued:


    10.29    Qualified Employee Stock Purchase Plan of Tele-Communications,
                 Inc., as amended.*
                    Incorporated herein by reference to the
                       Tele-Communications, Inc. Registration Statement on Form
                       S-8 (Commission File No. 33-57635).

    10.30    Form of Restricted Stock Award Agreement for 1995 Award of Series
                 A TCI Group Restricted Stock pursuant to the
                 Tele-Communications, Inc. 1994 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.31    Form of Restricted Stock Award Agreement for 1995 Award of Series
                 A Liberty Media Group Restricted Stock pursuant to the
                 Tele-Communications, Inc. 1994 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.32    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A TCI Group common
                 stock pursuant to the Tele-Communications, Inc. 1994 Stock
                 Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.33    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A Liberty Media Group
                 common stock pursuant to the Tele-Communications, Inc. 1994
                 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.34    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A TCI Group common
                 stock pursuant to the Tele-Communications, Inc. 1995 Stock
                 Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.35    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A Liberty Media Group
                 common stock pursuant to the Tele-Communications, Inc. 1995
                 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

                                                                     (continued)





<PAGE>   304
10 - Material contracts, continued:
 

    10.36    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A TCI Group common
                 stock pursuant to the Tele-Communications, Inc. 1996 Stock
                 Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.37    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A Liberty Media Group
                 common stock pursuant to the Tele-Communications, Inc. 1996
                 Stock Incentive Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.38    The Tele-Communications International, Inc. 1995 Stock Incentive
                 Plan.  Incorporated herein by reference to Tele-Communications
                 International, Inc. Registration Statement on Form S-1 
                 (Commission File No. 33-91876).

    10.39    Form of Restricted Stock Award Agreement for 1995 Award of Series
                 A Tele-Communications International, Inc.  Restricted Stock
                 pursuant to the Tele-Communications International 1995 Stock
                 Incentive Plan.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.40    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A Tele-Communications
                 International, Inc. common stock pursuant to the
                 Tele-Communications International, Inc. 1995 Stock Incentive
                 Plan.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.41    Form of Non-Qualified Stock Option and Stock Appreciation Rights
                 Agreement for 1995 Grant of Options with tandem stock
                 appreciation rights to purchase Series A Tele-Communications
                 International, Inc. common stock.*
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).


    10.42    Restricted Stock Award Agreement, made as of July 1, 1996, among
                 Tele-Communications, Inc., Brendan Clouston and WestMarc
                 Communictions, Inc. *

    10.43    Option Agreement, dated as of December 4, 1996, by and between TCI
                 Satellite Entertainment, Inc. and Brendan R. Clouston.*
                    Incorporated herein by reference to the TCI Satellite
                       Entertainment, Inc. Annual Report on Form 10-K for the
                       year ended December 31, 1996 (Commission File No.
                       0-21317).
                                                                     (continued)





<PAGE>   305
10 - Material contracts, continued:


    10.44    Form of Option to Purchase Common Stock Agreement made as of the
                 1st day of December 1996 by and among TCI Telephony Services,
                 Inc., Grantee and Tele-Communications, Inc.*

    10.45    Form of Option to Purchase Common Stock Agreement made as of the
                 1st day of December 1996 by and among TCI Wireline, Inc.,
                 Grantee and Tele-Communications, Inc.*

    10.46    Form of Option to Purchase Common Stock Agreement made as of the
                 1st day of December 1996 by and among TCI Internet Services,
                 Inc., Grantee and Tele-Communications, Inc. *

    10.47    Letter Agreement, dated December 26, 1996, by Tele-Communications,
                 Inc. to purchase WestMarc Series C Cumulative Compounding
                 Redeemable Preferred Stock from Larry E. Romrell.

    10.48    Employee Stock Purchase Plan for Bargaining Unit Employees of
                 United Cable Television of Baltimore Limited Partnership.*
                    Incorporated herein by reference to the
                       Tele-Communications, Inc. Registration Statement on Form
                       S-8 (Commission File No. 33-60839).

    10.49    Employee Stock Purchase Plan for Bargaining Unit Employees of
                 Heritage Cable Vision Associates, L.P. D/B/A TCI of Michiana.*
                    Incorporated herein by reference to the
                       Tele-Communications, Inc. Registration Statement on Form
                       S-8 (Commission File No. 33-60843).

    10.50    Employee Stock Purchase Plan for Bargaining Unit Employees of UACC
                 Midwest, Inc. d/b/a TCI of Central Indiana.*
                    Incorporated herein by reference to the
                       Tele-Communications, Inc. Registration Statement on Form
                       S-8 (Commission File No. 33-64827).

    10.51    The Settlement Plan and Rabbi Trust Agreement Entered into
                 Pursuant to Thomas Adams, Mark Adamski, et. al.  v. TCI of
                 Northern New Jersey, Inc. and the Tele-Communications, Inc.
                 Employee Stock Purchase Plan.*
                    Incorporated herein by reference to the
                       Tele-Communications, Inc. Registration Statement on Form
                       S-8 (Commission File No. 33-64829).

    10.52    Employee Stock Purchase Plan for Bargaining Unit Employees of TCI
                    of Northern New Jersey, Inc.* Incorporated herein by
                    reference to the Tele-Communications, Inc. Registration
                    Statement on Form S-8 (Commission File No. 33-64831).

                                                                     (continued)





<PAGE>   306
10 - Material contracts, continued:


    10.53    Amended and Restated Agreement of Limited Partnership of MajorCo,
                 L.P., dated as of January 31, 1996, among Sprint Spectrum,
                 L.P., TCI Network Services, Comcast Telephony Services and Cox
                 Telephony Partnership.
             Second Amended and Restated Joint Venture Formation Agreement,
                 dated as of January 31, 1996, by and between Sprint
                 Corporation, Tele-Communications, Inc., Comcast Corporation
                 and Cox Communications, Inc.
             Parents Agreement, dated as of January 31, 1996, by
                    Tele-Communications, Inc. and Sprint Corporation.
                    Incorporated herein by reference to the Company's Current
                    Report on Form 8-K, dated February 9, 1996
                       (Commission File No. 0-20421).

    10.54    Amended and Restated Stock Purchase Agreement, dated as of April
                 25, 1995, by and among Eduardo Eurnekian, stockholders of
                 shares of the Common Stock of Cablevision S.A., Televisora
                 Belgrano S.A., Construred S.A., Univent's S.A., and TCI
                 International Holdings, Inc.
             Amended and Restated Stockholders Agreement, dated April 25, 1995,
                 between Eduardo Eurnekian and TCI International Holdings, Inc.
                    Incorporated herein by reference to the Company's Current
                       Report on Form 8-K, dated May 4, 1995, as amended by
                       Form 8-K/A (Commission File No. 0-20421).

    10.55    Parents Agreement, dated as of July 24, 1995, among Viacom, Inc.,
                 Tele-Communications, Inc. and TCI Communications, Inc.
             Subscription Agreement, dated as of July 24, 1995, among Viacom
                 International, Inc., Tele-Communications, Inc. and TCI
                 Communications, Inc.
             Implementation Agreement, dated as of July 24, 1995, between
                 Viacom International, Inc. and Viacom International Services,
                 Inc.
                    Incorporated herein by reference to the Company's Current
                       Report on Form 8-K, dated July 26, 1995 (Commission File
                       No. 0-20421).

    10.56    Agreement of Purchase and Sale of Partnership Interest, dated as
                 of January 31, 1996, among Halcyon Communications, Inc., ECP
                 Holdings, Inc. and Fisher Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.57    Consent and Amendment of Amended Agreement of Partnership for
                 Halcyon Communications Partners, dated as of January 31, 1996,
                 by and among Halcyon Communications, Inc., ECP Holdings, Inc.
                 and Fisher Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.58    Assignment and Assumption Agreement, made as of January 31, 1996,
                 between ECP Holdings, Inc. and Fisher Communications
                 Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

                                                                     (continued)





<PAGE>   307
10 - Material contracts, continued:


    10.59    Option Agreement, dated as of January 31, 1996, between Fisher
                 Communications Associates, L.L.C. and ECP Holdings, Inc.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.60    Agreement of Purchase and Sale of Partnership Interests, dated as
                 of January 31, 1996, among Halcyon Communications, Inc.,
                 American Televenture of Minersville, Inc., TCI Cablevision of
                 Nevada, Inc., TCI Cablevision of Utah, Inc., TEMPO Cable, Inc.
                 and Fisher Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.61    Consent and First Amendment of Amended and Restated Agreement of
                 Limited Partnership for Halcyon Communications Limited
                 Partnership, dated as of January 31, 1996, by and among
                 Halcyon Communications, Inc., American Televenture of
                 Minersville, Inc., TCI Cablevision of Nevada, Inc., TCI
                 Cablevision of Utah, Inc., TEMPO Cable, Inc. and Fisher
                 Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.62    Assignment and Assumption Agreement, made as of January 31, 1996,
                 between TCI Cablevision of Utah, Inc. and Fisher
                 Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.63    Option Agreement, dated as of January 31, 1996, between Fisher
                 Communications Associates, L.L.C. and TCI Cablevision of Utah,
                 Inc.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.64    Assignment and Assumption Agreement, made as of January 31, 1996,
                 between TCI Cablevision of Nevada, Inc.  and Fisher
                 Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.65    Option Agreement, dated as of January 31, 1996, between Fisher
             Communications Associates, L.L.C. and TCI Cablevision of Nevada,
             Inc.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.66    Assignment and Assumption Agreement, made as of January 31, 1996,
                 between American Televenture of Minersville, Inc. and Fisher
                 Communications Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).
                                                                     (continued)





<PAGE>   308
10 - Material contracts, continued:


    10.67    Option Agreement, dated as of January 31, 1996, between Fisher
                 Communications Associates, L.L.C. and American Televenture of
                 Minersville, Inc.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.68    Assignment and Assumption Agreement, made as of January 31, 1996,
                 between TEMPO Cable, Inc. and Fisher Communications
                 Associates, L.L.C.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.69    Option Agreement, dated as of January 31, 1996, between Fisher
                 Communications Associates, L.L.C. and TEMPO Cable, Inc.
                    Incorporated herein by reference to the Company's Annual
                       Report on Form 10-K for the year ended December 31, 1995
                       (Commission File No. 0-20421).

    10.70    Employment Agreement, effective as of October 1, 1995, by and
                 between Tele-Communications, Inc. and Tony Coelho.*

    10.71    Agreement Regarding Shares, as of April 3, 1996, among ETC w/tci,
                 Inc., Tele-Communications, Inc., TCI ETC Holdings, Inc. and
                 Tony Coelho.(1)

    10.72    1996 Incentive Plan of ETC w/tci, Inc.*

    10.73    Coelho Option Agreement, as of April 3, 1996, betwen ETC w/tci,
                 Inc. and Tony Chelho.*

21 - Subsidiaries of Tele-Communications, Inc.

23.1   Consent of KPMG Peat Marwick LLP.

23.2   Consent of KPMG Peat Marwick LLP.

23.3   Consent of KPMG Peat Marwick LLP.

23.4   Consent of KPMG Audit Plc.

23.5   Consent of Deloitte & Touche LLP.

23.6   Consent of Price Waterhouse LLP.

27 - Financial data schedule

*Constitutes management contract or compensatory arrangement.

(1) Certain exhibits have been omitted. A copy of any omitted
    exhibit or schedule will be furnished supplementally to
    the Commission upon request.