##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2002                                             
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 00-21315

On Command Corporation

(Exact Name of Registrant as specified in its
charter)


|                                                                                                |  |                                      
|----------------------------------------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                                                        |  | 77-0435194                           
|(State of Incorporation)                                                                        |  | (IRS Employer
    Identification No.)
|                                                                                               
|4610 South Ulster Street, 6th Floor, Denver,
    CO(Address of Principal Executive
    Offices) |  | 80237(Zip code)                      

Registrants telephone number, including
area code:

(720) 873-3200


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

None


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

Common Stock


Series A Common Stock Purchase
Warrants


Series B Common Stock Purchase
Warrants


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

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

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

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

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



---






---

TABLE OF CONTENTS



|                                              |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                       
|                                              | Item 1. Business                                                                             
|                                              | Item 2. Properties                                                                           
|                                              | Item 3. Legal Proceedings                                                                    
|                                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                      
|                                              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                              | Item 6. Selected Financial Data                                                              
|                                              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                              | Item 8. Financial Statements and Supplementary Data                                          
|                                              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                     
|                                              | Item 10. Directors and Executive Officers of the Registrant                                  
|                                              | Item 11. Executive Compensation                                                              
|                                              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                              | Item 13. Certain Relationships and Related Transactions                                      
|                                              | Item 14. Controls and Procedures                                                             
|PART IV                                      
|                                              | Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K                   
|SIGNATURES                                   
|CERTIFICATION                                
|EXHIBIT INDEX                                
|EX-21 Subsidiaries                           
|EX-23.1 Independent Auditors' Consent        
|EX-99.1 Certification Pursuant to Section 906



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##### Table of Contents



ON COMMAND CORPORATION

2002 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

|         |  |                                                                                              |  |      |        | 
|-------- |  | -------------------------------------------------------------------------------------------- |  | ---- | ------ | 
|         |  |                                                                                              |  | Page
|         |  |                                                                                              |  |     
|PART I  
|Item 1.  |  | Business                                                                                     |  |      | I-1    | 
|Item 2.  |  | Properties                                                                                   |  |      | I-17   | 
|Item 3.  |  | Legal Proceedings                                                                            |  |      | I-17   | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                      |  |      | I-17   | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                    |  |      | II-1   | 
|Item 6.  |  | Selected Financial Data                                                                      |  |      | II-2   | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations    |  |      | II-3   | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                               |  |      | II-13  | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                  |  |      | II-13  | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure     |  |      | II-13  | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                           |  |      | III-1  | 
|Item 11. |  | Executive Compensation                                                                       |  |      | III-4  | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                           |  |      | III-8  | 
|Item 13. |  | Certain Relationships and Related Transactions                                               |  |      | III-13 | 
|Item 14. |  | Controls and Procedures                                                                      |  |      | III-14 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statements and Financial
    Statement Schedules and Reports on Form 8-K |  |      | IV-1   | 



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PART I






|        |         
|------- | --------
|Item 1. | Business

General Development of Business

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

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

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

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



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

I-1



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

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

Narrative Description of Business



| |                    
| | -------------------
| | Industry Background

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

I-2



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become a standard amenity offered by many hotels
to their guests. Historically, providers of programming to
hotels delivered their content on a fixed time schedule that did
not provide the hotel guest flexibility in choosing when to
watch a movie. Typically, a guest would be offered a choice of
four to eight movies, each of which would be shown once every
two to four hours. The development of video switches enabled
providers of pay-per-view services to offer scheduling
flexibility to the viewer. Depending on the type of system
installed and the size of the hotel, guests could choose from
among 12 to 85 pay-per-view programming titles as of
December 31, 2002. Based on the current storage capacities
of the Companys most technologically advanced systems, and
improvements in the storage capacities of those systems that are
expected to occur in 2003 and future periods, the Company
expects that the average number of programming titles available
to guests will increase over time. Changes in technology have
also led to the ability to provide a number of on-demand
interactive services such as Internet services, games, digital
music, guest folio review, automatic checkout, survey completion
and guest messaging. The market for in-room entertainment and
information is characterized as a highly competitive environment
among several industry-dedicated companies and a number of new
entrants including cable companies, satellite distribution
companies, telecommunications companies, laptop connectivity
companies and others. See additional discussion in
Competition below.




| |                              
| | -----------------------------
| | Operating and Growth Strategy

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



| |              
| | -------------
| | Video Systems



| |                  
| | -----------------
| | OCX® Video System

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

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

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system whenever a new video system is required to
be installed in new and existing hotels with 150 or more rooms.
The standard RoommateTM system is configured to
provide on-demand pay-per-view services and digital music, with
television-based Internet access and video game services also
available.


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

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

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

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

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

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

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

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electronic delivery of digital content through
the Companys satellite distribution system. For additional
information concerning the Companys satellite distribution
system, see Content Distribution below.


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

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



| |                  
| | -----------------
| | OCV® Video System

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

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

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

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

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##### Table of Contents



during 2003. The Companys experience has
been that the installation of this upgrade typically results in
increases in room revenue.




| |                    
| | -------------------
| | Other Video Systems

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



| |                     
| | --------------------
| | Content Distribution

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



| |              
| | -------------
| | Capital Costs

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

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| |         
| | --------
| | Services



| |                            
| | ---------------------------
| | Pay-Per-View Movie Services

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

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

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



| |               
| | --------------
| | Short Subjects

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

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| |                  
| | -----------------
| | Internet Services

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



| |      
| | -----
| | Music

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



| |              
| | -------------
| | Game Services

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

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##### Table of Contents



average 8 to 12 game titles available in
most rooms in which video games are offered. Guests typically
pay $6.99 per hour to play the games. The Company does not
expect significant growth during 2003 in the number of hotel
rooms equipped with the Companys video game service as new
installations will be limited to only those hotels (primarily
resort hotels) where historical experience would suggest that
the Company will earn an adequate return on its invested
capital. On Command pays its video game suppliers a flat
software fee. In addition, suppliers receive a percentage of net
revenue generated from the service.




| |                                   
| | ----------------------------------
| | Free-To-Guest Programming Services

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

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



| |                               
| | ------------------------------
| | Other Hotel and Guest Services

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



| |                    
| | -------------------
| | Sales and Marketing

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

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


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

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



| |                
| | ---------------
| | Hotel Contracts

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

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

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forms of capital assistance and, to a lesser
extent, provide television maintenance services to hotels during
the respective terms of the applicable contracts. However, the
Company generally seeks to avoid entering into new contracts or
renewals that require the Company to provide capital assistance
or television maintenance services unless other terms of the
contract make it economical for the Company to do so.


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

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



| |                      
| | ---------------------
| | Markets And Customers

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

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

|                                           |               |              |             |         |  |   |             |         | 
|------------------------------------------ | ------------- | ------------ | ----------- | ------- |  | - | ----------- | ------- | 
|                                           |               |             
|                                           |               | December 31,
|                                           |               |             
|                                           |               | 2002         |             | 2001   
|                                           |               |              |             |        
|Hotels served:                             |               |              |             |         |  |   |             |        
|                                           | U.S.          |              |             | 2,989   |  |   |             | 3,038   | 
|                                           | International |              |             | 383     |  |   |             | 402     | 
|                                           |               |              |             |         |  |   |             |        
|                                           |               |              | 3,372       |         |  |   | 3,440       |        
|                                           |               |              |             |         |  |   |             |        
|Rooms served:                              |               |              |             |         |  |   |             |        
|                                           | U.S.          |              |             | 792,000 |  |   |             | 819,000 | 
|                                           | International |              |             | 99,000  |  |   |             | 107,000 | 
|                                           |               |              |             |         |  |   |             |        
|                                           |               |              | 891,000     |         |  |   | 926,000     |        
|                                           |               |              |             |         |  |   |             |        
|                                          
|Average net room revenue per equipped room |               | $            | 20.76/month |         |  | $ | 20.21/month |        



| |                      
| | ---------------------
| | Significant Customers

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

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

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

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the Company expects that, regardless of the
expiration dates of master contracts or individual contracts
with hotels, the Company will continue to be the provider of
in-room entertainment services for individual hotels that are
not under contract until such time as a competitors
equipment can be installed. For this and other reasons, the
Company does not anticipate that it will cease earning revenue
from all of its Hyatt rooms on December 31, 2004 in the
event that a new master contract has not been executed by that
date.


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



| |                                        
| | ---------------------------------------
| | Installation And Service
    Operations

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

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



| |                                          
| | -----------------------------------------
| | Technology  Research and
    Development

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

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

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

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



| |          
| | ---------
| | Suppliers

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

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

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



| |            
| | -----------
| | Competition

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

I-14



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##### Table of Contents



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

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

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



| |           
| | ----------
| | Regulation

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

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

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

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

I-15



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##### Table of Contents



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




| |                                       
| | --------------------------------------
| | Patents, Trademarks And
    Copyrights

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

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

The Company has trademark applications pending in
the United States Patent and Trademark Office for the
RoommateTM,
MiniMateTM and
TeleMateTM trademarks.



| |                      
| | ---------------------
| | International Markets

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

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



| |                                     
| | ------------------------------------
| | Licensees And Other System
    Sales

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



| |            
| | -----------
| | Seasonality

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

I-16



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##### Table of Contents





| |          
| | ---------
| | Employees

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






|        |           
|------- | ----------
|Item 2. | Properties

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






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

The Companys legal proceedings are set
forth below:



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






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

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



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

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##### Table of Contents






PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

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

|             |                |             |   |        |  |  |   |        | 
|------------ | -------------- | ----------- | - | ------ |  |  | - | ------ | 
|             |                |            
|             |                | Price Range
|             |                |            
|Common Stock |                | High        |   | Low   
|             |                |             |   |       
|2002:        |                |             |   |        |  |  |   |       
|             | First quarter  |             | $ | 7.6800 |  |  | $ | 3.0260 | 
|             | Second quarter |             | $ | 5.5000 |  |  | $ | 1.5000 | 
|             | Third quarter  |             | $ | 1.5100 |  |  | $ | 0.4900 | 
|             | Fourth quarter |             | $ | 0.9600 |  |  | $ | 0.4500 | 
|2001:        |                |             |   |        |  |  |   |       
|             | First quarter  |             | $ | 8.1250 |  |  | $ | 5.2500 | 
|             | Second quarter |             | $ | 7.7900 |  |  | $ | 4.5000 | 
|             | Third quarter  |             | $ | 5.7000 |  |  | $ | 2.1900 | 
|             | Fourth quarter |             | $ | 3.7800 |  |  | $ | 1.1500 | 

|                  |                |             |   |        |  |  |   |        | 
|----------------- | -------------- | ----------- | - | ------ |  |  | - | ------ | 
|                  |                |            
|                  |                | Price Range
|                  |                |            
|Series A Warrants |                | High        |   | Low   
|                  |                |             |   |       
|2002:             |                |             |   |        |  |  |   |       
|                  | First quarter  |             | $ | 0.5300 |  |  | $ | 0.2500 | 
|                  | Second quarter |             | $ | 0.4000 |  |  | $ | 0.0900 | 
|                  | Third quarter  |             | $ | 0.5000 |  |  | $ | 0.0500 | 
|                  | Fourth quarter |             | $ | 0.1900 |  |  | $ | 0.0200 | 
|2001:             |                |             |   |        |  |  |   |       
|                  | First quarter  |             | $ | 1.6250 |  |  | $ | 1.3750 | 
|                  | Second quarter |             | $ | 1.1000 |  |  | $ | 0.9900 | 
|                  | Third quarter  |             | $ | 0.8900 |  |  | $ | 0.3000 | 
|                  | Fourth quarter |             | $ | 0.2500 |  |  | $ | 0.0900 | 

|                  |                |             |   |        |  |  |   |        | 
|----------------- | -------------- | ----------- | - | ------ |  |  | - | ------ | 
|                  |                |            
|                  |                | Price Range
|                  |                |            
|Series B Warrants |                | High        |   | Low   
|                  |                |             |   |       
|2002:             |                |             |   |        |  |  |   |       
|                  | First quarter  |             | $ | 0.3100 |  |  | $ | 0.1400 | 
|                  | Second quarter |             | $ | 0.2900 |  |  | $ | 0.0500 | 
|                  | Third quarter  |             | $ | 0.0500 |  |  | $ | 0.0100 | 
|                  | Fourth quarter |             | $ | 0.1200 |  |  | $ | 0.0100 | 
|2001:             |                |             |   |        |  |  |   |       
|                  | First quarter  |             | $ | 1.6250 |  |  | $ | 0.6250 | 
|                  | Second quarter |             | $ | 1.0000 |  |  | $ | 0.7100 | 
|                  | Third quarter  |             | $ | 0.8000 |  |  | $ | 0.6400 | 
|                  | Fourth quarter |             | $ | 0.4000 |  |  | $ | 0.1400 | 

II-1



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##### Table of Contents



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






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

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

|                                           |                                                                            |                                               |   |         |         |      |   |         |         |      |   |         |         |  |   |         |         |  |   |         |         | 
|------------------------------------------ | -------------------------------------------------------------------------- | --------------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                           |                                                                            |                                              
|                                           |                                                                            | Year Ended December 31,                      
|                                           |                                                                            |                                              
|                                           |                                                                            | 2002                                          |   | 2001    |         | 2000 |   | 1999    |         | 1998
|                                           |                                                                            |                                               |   |         |         |      |   |         |         |     
|                                           |                                                                            |                                              
|                                           |                                                                            | (Dollars in thousands, except per share data)
|Consolidated Statement of Operations Data: |                                                                            |                                               |   |         |         |      |   |         |         |      |   |         |         |  |   |         |         |  |   |        
|                                           | Total revenue                                                              |                                               | $ | 238,397 |         |      | $ | 239,409 |         |      | $ | 265,380 |         |  | $ | 252,948 |         |  | $ | 238,820 |        
|                                           | Net loss(1)                                                                |                                               | $ | (42,607 | )       |      | $ | (85,716 | )       |      | $ | (39,043 | )       |  | $ | (29,394 | )       |  | $ | (25,966 | )      
|                                           | Basic and diluted net loss per share                                       |                                               | $ | (1.64   | )       |      | $ | (2.92   | )       |      | $ | (1.28   | )       |  | $ | (0.97   | )       |  | $ | (0.86   | )      
|                                           | Basic and diluted weighted average number of
    common shares outstanding |                                               |   | 30,917  |         |      |   | 30,797  |         |      |   | 30,483  |         |  |   | 30,222  |         |  |   | 30,150  |        
|Other Data:                                |                                                                            |                                               |   |         |         |      |   |         |         |      |   |         |         |  |   |         |         |  |   |        
|                                           | Cash dividends per share                                                   |                                               | $ |        |         |      | $ |        |         |      | $ |        |         |  | $ |        |         |  | $ |        |        
|                                           | Rooms served at end of period(2)                                           |                                               |   | 891,000 |         |      |   | 926,000 |         |      |   | 977,000 |         |  |   | 956,000 |         |  |   | 929,000 |        
|                                           |                                                                            | On demand rooms                               |   |         | 874,000 |      |   |         | 893,000 |      |   |         | 929,000 |  |   |         | 884,000 |  |   |         | 829,000 | 
|                                           |                                                                            | Scheduled rooms                               |   |         | 17,000  |      |   |         | 33,000  |      |   |         | 48,000  |  |   |         | 72,000  |  |   |         | 100,000 | 
|                                           | Hotels served at end of period                                             |                                               |   | 3,372   |         |      |   | 3,440   |         |      |   | 3,519   |         |  |   | 3,366   |         |  |   | 3,220   |        
|                                           | Capital expenditures                                                       |                                               | $ | 54,391  |         |      | $ | 85,428  |         |      | $ | 110,822 |         |  | $ | 85,444  |         |  | $ | 83,208  |        
|Consolidated Balance Sheet Data:           |                                                                            |                                               |   |         |         |      |   |         |         |      |   |         |         |  |   |         |         |  |   |        
|                                           | Total assets                                                               |                                               | $ | 396,482 |         |      | $ | 433,038 |         |      | $ | 439,294 |         |  | $ | 402,917 |         |  | $ | 402,968 |        
|                                           | Long-term debt                                                             |                                               | $ | 261,946 |         |      | $ | 264,761 |         |      | $ | 248,465 |         |  | $ | 181,758 |         |  | $ | 163,013 |        
|                                           | Redeemable securities                                                      |                                               | $ | 100,181 |         |      | $ | 93,310  |         |      | $ |        |         |  | $ |        |         |  | $ |        |        
|                                           | Total stockholders equity (deficit)                                       |                                               | $ | (16,883 | )       |      | $ | 33,234  |         |      | $ | 125,057 |         |  | $ | 164,147 |         |  | $ | 190,005 |        



---



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

II-2



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##### Table of Contents



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



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






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Critical Accounting Policies

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

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

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

Material Changes in Results of
Operations



| |              
| | -------------
| | 2002 vs. 2001



| |        
| | -------
| | Revenue

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

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hotels. The Companys total net revenue
during 2002 and 2001 was $238,397,000 and $239,409,000,
respectively.


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

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

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

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

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

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



| |             
| | ------------
| | Direct Costs

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

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

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

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



| |                   
| | ------------------
| | Operations Support

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

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decreased $5,149,000 or 16.8% during 2002, as
compared to 2001. Such decrease is primarily attributable to
lower labor, overhead and other operating costs as a result of
certain changes to the Companys operational structure and
other cost savings measures, including the outsourcing of
certain call center and warehouse management functions.




| |                         
| | ------------------------
| | Research and Development

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



| |                                    
| | -----------------------------------
| | Selling, General and Administrative

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



| |                              
| | -----------------------------
| | Depreciation and Amortization

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



| |                                   
| | ----------------------------------
| | Asset Impairment and Other Charges

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



| |                             
| | ----------------------------
| | Relocation and Restructuring

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

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| |                 
| | ----------------
| | Interest Expense

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



| |                               
| | ------------------------------
| | Impairment of Cost Investments

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



| |                                 
| | --------------------------------
| | Loss on Settlement of Litigation

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



| |             
| | ------------
| | Income Taxes

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



| |         
| | --------
| | Net Loss

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

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expenses or capital expenditures. To the extent
that changes in hotel occupancy rates impact the Companys
revenue base, the Company will not experience proportionate
changes in its expenses since many of the Companys
expenses do not vary with hotel occupancy rates.




| |              
| | -------------
| | 2001 vs. 2000



| |        
| | -------
| | Revenue

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

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

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

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



| |             
| | ------------
| | Direct Costs

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

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| |                   
| | ------------------
| | Operations Support

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



| |                         
| | ------------------------
| | Research and Development

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



| |                                    
| | -----------------------------------
| | Selling, General and Administrative

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



| |                              
| | -----------------------------
| | Depreciation and Amortization

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



| |                                   
| | ----------------------------------
| | Asset Impairment and Other Charges

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



| |                             
| | ----------------------------
| | Relocation and Restructuring

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



| |                 
| | ----------------
| | Interest Expense

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



| |                               
| | ------------------------------
| | Impairment of Cost Investments

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

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Companys investment in STS Hotel Net, Inc.
The writedowns were recorded to reflect other than temporary
declines in the estimated fair values of such investments. In
the case of the STSN writedown, the estimated fair value was
based on the price of securities sold by STSN during the first
quarter of 2002.




| |                                 
| | --------------------------------
| | Loss on Settlement of Litigation

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



| |                           
| | --------------------------
| | Provision for income taxes

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



| |         
| | --------
| | Net Loss

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



| |                                    
| | -----------------------------------
| | Liquidity and Capital
    Resources



| |                                            
| | -------------------------------------------
| | Material Changes in Financial
    Condition

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

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

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

II-10



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##### Table of Contents



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


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

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

II-11



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##### Table of Contents



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

|                                              |  |       |         |                        |  |       |       |       |  |         |         |  |  |   |     |  |  |   |        | 
|--------------------------------------------- |  | ----- | ------- | ---------------------- |  | ----- | ----- | ----- |  | ------- | ------- |  |  | - | --- |  |  | - | ------ | 
|                                              |  |       |         |                       
|                                              |  |       |         | Payments Due by Period
|                                              |  |       |         |                       
|                                              |  |       |         | Less Than              |  | 1-3   |       | 4-5   |  | After  
|                                              |  | Total |         | One Year               |  | Years |       | Years |  | 5 Years
|                                              |  |       |         |                        |  |       |       |       |  |        
|Revolving Credit Facility                     |  | $     | 261,633 |                        |  | $     |      |       |  | $       | 261,633 |  |  | $ |    |  |  | $ |       | 
|Mandatorily redeemable preferred stock(1)     |  |       | 97,848  |                        |  |       |      |       |  |         | 30,899  |  |  |   |    |  |  |   | 66,949 | 
|Operating leases                              |  |       | 6,637   |                        |  |       | 3,229 |       |  |         | 3,005   |  |  |   | 400 |  |  |   | 3      | 
|Obligation to repurchase Company Common Stock |  |       | 2,333   |                        |  |       |      |       |  |         | 2,333   |  |  |   |    |  |  |   |       | 
|Capital lease obligations                     |  |       | 1,146   |                        |  |       | 833   |       |  |         | 310     |  |  |   | 3   |  |  |   |       | 
|                                              |  |       |         |                        |  |       |       |       |  |         |         |  |  |   |     |  |  |   |        | 
|                                              |  | $     | 369,597 |                        |  | $     | 4,062 |       |  | $       | 298,180 |  |  | $ | 403 |  |  | $ | 66,952 | 
|                                              |  |       |         |                        |  |       |       |       |  |         |         |  |  |   |     |  |  |   |        | 



---



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

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

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

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

II-12



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##### Table of Contents



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


Recent Accounting Pronouncements

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






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

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

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






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

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






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

None.

II-13



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders

On Command Corporation:


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

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

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

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

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



| |         
| | --------
| | KPMG LLP

Denver, Colorado

February 12, 2003, except as


| |                              
| | -----------------------------
| | to Note 6 to the consolidated

financial statements, which is


as of March 28, 2003


II-14



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##### Table of Contents



ON COMMAND CORPORATION

(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


CONSOLIDATED BALANCE SHEETS

|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |          |         |         | 
|-------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------ | -------------------------------------------------------- | -------- | ------- | ------- | -------- | -------- | ------- | ------- | 
|                                                                                                                                 |                                                                                                               |                         
|                                                                                                                                 |                                                                                                               | December 31,            
|                                                                                                                                 |                                                                                                               |                         
|                                                                                                                                 |                                                                                                               | 2002                     |                                                          | 2001    
|                                                                                                                                 |                                                                                                               |                          |                                                          |         
|                                                                                                                                 |                                                                                                               |                         
|                                                                                                                                 |                                                                                                               | (amounts in thousands)  
|ASSETS                                                                                                                          
|Current assets:                                                                                                                  |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 | Cash and cash equivalents                                                                                     |                          | $                                                        | 4,501    |         |         | $        | 2,869    |        
|                                                                                                                                 | Accounts receivable (net of allowance for
    doubtful accounts of $1,087,000 in 2002 and $1,640,000 in 2001) |                          |                                                          | 33,525   |         |         |          | 33,460   |        
|                                                                                                                                 | Other current assets                                                                                          |                          |                                                          | 3,461    |         |         |          | 2,964    |        
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | Total current assets                                     |          |         | 41,487  |          |          |         | 39,293  | 
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|Property and equipment:                                                                                                          |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 | Video systems                                                                                                 |                          |                                                          |          |         |         |          |          |        
|                                                                                                                                 |                                                                                                               | In service               |                                                          |          | 668,697 |         |          |          | 670,318 |        
|                                                                                                                                 |                                                                                                               | Construction in progress |                                                          |          | 37,511  |         |          |          | 53,754  |        
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | 706,208                                                  |          |         |         | 724,072  |         
|                                                                                                                                 | Support equipment, vehicles and leasehold
    improvements                                                    |                          |                                                          | 26,245   |         |         |          | 27,148   |        
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | 732,453                                                  |          |         |         | 751,220  |         
|                                                                                                                                 | Accumulated depreciation                                                                                      |                          |                                                          | (457,482 | )       |         |          | (442,757 | )      
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | 274,971                                                  |          |         |         | 308,463  |         
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|Goodwill (note 2)                                                                                                                |                                                                                                               |                          | 65,580                                                   |          |         |         | 65,580   |         
|Cost investments (note 5)                                                                                                        |                                                                                                               |                          | 3,298                                                    |          |         |         | 6,759    |         
|Other assets, net                                                                                                                |                                                                                                               |                          | 11,146                                                   |          |         |         | 12,943   |         
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | Total assets                                             |          | $       | 396,482 |          |          | $       | 433,038 | 
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)                                                                              
|Current liabilities:                                                                                                             |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 | Accounts payable                                                                                              |                          | $                                                        | 28,689   |         |         | $        | 21,021   |        
|                                                                                                                                 | Accounts payable to parent (note 10)                                                                          |                          |                                                          | 1,906    |         |         |          | 711      |        
|                                                                                                                                 | Accrued compensation                                                                                          |                          |                                                          | 6,433    |         |         |          | 5,511    |        
|                                                                                                                                 | Sales, use and property tax liabilities                                                                       |                          |                                                          | 4,585    |         |         |          | 5,144    |        
|                                                                                                                                 | Other accrued liabilities (note 15)                                                                           |                          |                                                          | 7,987    |         |         |          | 6,678    |        
|                                                                                                                                 | Current portion of debt (note 6)                                                                              |                          |                                                          | 833      |         |         |          | 909      |        
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | Total current liabilities                                |          |         | 50,433  |          |          |         | 39,974  | 
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|Long-term debt (note 6)                                                                                                          |                                                                                                               |                          | 261,946                                                  |          |         |         | 264,761  |         
|Other long-term liabilities (note 14)                                                                                            |                                                                                                               |                          | 496                                                      |          |         |         | 1,642    |         
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | Total liabilities                                        |          |         | 312,875 |          |          |         | 306,377 | 
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|Minority interest in consolidated subsidiary                                                                                     |                                                                                                               |                          | 259                                                      |          |         |         | 117      |         
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|Redeemable securities (note 7):                                                                                                  |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 | Mandatorily redeemable preferred stock                                                                        |                          |                                                          | 97,848   |         |         |          | 89,185   |        
|                                                                                                                                 | Common stock subject to repurchase obligation                                                                 |                          |                                                          | 2,333    |         |         |          | 4,125    |        
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | Total redeemable securities                              |          |         | 100,181 |          |          |         | 93,310  | 
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|Stockholders equity (deficit) (note 8):                                                                                         |                                                                                                               |                          |                                                          |          |         |         |          |         
|Preferred stock, $.01 par value; shares
    authorized  10,000,000; shares issued and
    outstanding  98,500 in 2002 and 2001 |                                                                                                               |                          |                                                         |          |         |         |         |         
|Common stock, $.01 par value; shares
    authorized  150,000,000; shares issued 
    30,973,989 in 2002 and 30,884,459 in 2001 |                                                                                                               |                          | 310                                                      |          |         |         | 309      |         
|Additional paid-in-capital                                                                                                       |                                                                                                               |                          | 299,398                                                  |          |         |         | 304,429  |         
|Accumulated other comprehensive loss                                                                                             |                                                                                                               |                          | (4,533                                                   | )        |         |         | (5,115   | )       
|Accumulated deficit                                                                                                              |                                                                                                               |                          | (285,777                                                 | )        |         |         | (243,170 | )       
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | 9,398                                                    |          |         |         | 56,453   |         
|Common stock held in treasury, at cost (119,500
    in 2002 and zero in 2001)                                                    |                                                                                                               |                          | (1,344                                                   | )        |         |         |         |         
|Note receivable from stockholder (note 11)                                                                                       |                                                                                                               |                          | (24,887                                                  | )        |         |         | (23,219  | )       
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | Total stockholders equity (deficit)                     |          |         | (16,833 | )        |          |         | 33,234  | 
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         
|Commitments and contingencies (notes 4, 6,
    12 and 16)                                                                        |                                                                                                               |                          |                                                          |          |         |         |          |         
|                                                                                                                                 |                                                                                                               |                          | Total liabilities and stockholders equity
    (deficit) |          | $       | 396,482 |          |          | $       | 433,038 | 
|                                                                                                                                 |                                                                                                               |                          |                                                          |          |         |         |          |         

See accompanying notes to consolidated financial
statements.

II-15



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##### Table of Contents



ON COMMAND CORPORATION

(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |         |         |  
|--------------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------------------------------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                                  |                                                          |                                                                                 
|                                                                                  |                                                          | Years Ended December 31,                                                        
|                                                                                  |                                                          |                                                                                 
|                                                                                  |                                                          | 2002                                                                             |         | 2001    |         | 2000
|                                                                                  |                                                          |                                                                                  |         |         |         |     
|                                                                                  |                                                          |                                                                                 
|                                                                                  |                                                          | (amounts in thousands,                                                          
|                                                                                  |                                                          | except per share amounts)                                                       
|Net revenue:                                                                      |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  | Net room revenue                                         |                                                                                  | $       | 226,621 |         |      | $       | 228,237 |         |   | $       | 248,918 |        
|                                                                                  | Video system and equipment sales and other               |                                                                                  |         | 11,776  |         |      |         | 11,172  |         |   |         | 16,462  |        
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  |                                                          | Total net revenue                                                                |         |         | 238,397 |      |         |         | 239,409 |   |         |         | 265,380 |  
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|Direct costs of net revenue:                                                      |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  | Content fees, commissions and other in-room
    services |                                                                                  |         | 115,021 |         |      |         | 112,605 |         |   |         | 116,418 |        
|                                                                                  | Video system, equipment and other costs                  |                                                                                  |         | 6,533   |         |      |         | 7,343   |         |   |         | 7,762   |        
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  |                                                          | Total costs of net revenue                                                       |         |         | 121,554 |      |         |         | 119,948 |   |         |         | 124,180 |  
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  |                                                          | Direct margin (exclusive of other operating
    expenses shown separately below) |         |         | 116,843 |      |         |         | 119,461 |   |         |         | 141,200 |  
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|Other operating expenses:                                                         |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  | Operations support                                       |                                                                                  |         | 25,589  |         |      |         | 30,738  |         |   |         | 31,245  |        
|                                                                                  | Research and development                                 |                                                                                  |         | 4,064   |         |      |         | 5,600   |         |   |         | 8,734   |        
|                                                                                  | Selling, general and administrative (note 10)            |                                                                                  |         | 21,296  |         |      |         | 24,651  |         |   |         | 25,358  |        
|                                                                                  | Depreciation and amortization (note 2)                   |                                                                                  |         | 79,057  |         |      |         | 83,824  |         |   |         | 84,497  |        
|                                                                                  | Asset impairments and other charges (notes 4
    and 5)  |                                                                                  |         | 8,850   |         |      |         | 709     |         |   |         | 1,123   |        
|                                                                                  | Relocation and restructuring (note 15)                   |                                                                                  |         |        |         |      |         | 17,041  |         |   |         | 6,108   |        
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  |                                                          | Total other operating expenses                                                   |         |         | 138,856 |      |         |         | 162,563 |   |         |         | 157,065 |  
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  |                                                          | Loss from operations                                                             |         |         | (22,013 | )    |         |         | (43,102 | ) |         |         | (15,865 | )
|Interest expense                                                                  |                                                          |                                                                                  | (14,113 | )       |         |      | (19,374 | )       |         |   | (17,138 | )      
|Impairment of cost investments (note 5)                                           |                                                          |                                                                                  | (6,060  | )       |         |      | (19,639 | )       |         |   | (900    | )      
|Loss on settlement of litigation (note 5)                                         |                                                          |                                                                                  |        |         |         |      | (3,700  | )       |         |   | (4,764  | )      
|Other income, net                                                                 |                                                          |                                                                                  | 23      |         |         |      | 467     |         |         |   | 47      |        
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  |                                                          | Loss before income taxes                                                         |         |         | (42,163 | )    |         |         | (85,348 | ) |         |         | (38,620 | )
|Income tax expense                                                                |                                                          |                                                                                  | (444    | )       |         |      | (368    | )       |         |   | (423    | )      
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  |                                                          | Net loss                                                                         |         |         | (42,607 | )    |         |         | (85,716 | ) |         |         | (39,043 | )
|Dividends on mandatorily redeemable preferred
    stock and other (notes 5 and 7) |                                                          |                                                                                  | (8,215  | )       |         |      | (4,259  | )       |         |   |        |        
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|                                                                                  |                                                          | Net loss attributable to common stockholders                                     |         | $       | (50,822 | )    |         | $       | (89,975 | ) |         | $       | (39,043 | )
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|Basic and diluted net loss per common share
    (note 2)                          |                                                          | $                                                                                | (1.64   | )       |         | $    | (2.92   | )       |         | $ | (1.28   | )      
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        
|Basic and diluted weighted average number of
    common shares outstanding        |                                                          |                                                                                  | 30,917  |         |         |      | 30,797  |         |         |   | 30,483  |        
|                                                                                  |                                                          |                                                                                  |         |         |         |      |         |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

II-16



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##### Table of Contents



ON COMMAND CORPORATION

(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS

|                                                                                     |                                   |                          |         |      |  |      |         |        |   |   |         |        |  
|------------------------------------------------------------------------------------ | --------------------------------- | ------------------------ | ------- | ---- |  | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                                     |                                   |                         
|                                                                                     |                                   | Years Ended December 31,
|                                                                                     |                                   |                         
|                                                                                     |                                   | 2002                     |         | 2001 |  | 2000
|                                                                                     |                                   |                          |         |      |  |     
|                                                                                     |                                   |                         
|                                                                                     |                                   | (amounts in thousands)  
|Net loss                                                                             |                                   | $                        | (42,607 | )    |  | $    | (85,716 | )      |   | $ | (39,043 | )     
|Foreign currency translation adjustments, net of
    tax                             |                                   |                          | (348    | )    |  |      | (2,055  | )      |   |   | (2,188  | )     
|Reclassification adjustment for translation
    losses included in net loss (note 4) |                                   |                          | 930     |      |  |      |        |        |   |   |        |       
|                                                                                     |                                   |                          |         |      |  |      |         |        |   |   |         |       
|                                                                                     | Other comprehensive income (loss) |                          |         | 582  |  |      |         | (2,055 | ) |   |         | (2,188 | )
|                                                                                     |                                   |                          |         |      |  |      |         |        |   |   |         |       
|Comprehensive loss                                                                   |                                   | $                        | (42,025 | )    |  | $    | (87,771 | )      |   | $ | (41,231 | )     
|                                                                                     |                                   |                          |         |      |  |      |         |        |   |   |         |       

See accompanying notes to consolidated financial
statements.

II-17



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##### Table of Contents



ON COMMAND CORPORATION

(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY (DEFICIT)

Years Ended December 31, 2002, 2001 and
2000


|                                                                                                                                        |  |                        |   |        |  |            |     |               |  |             |         |          |  |                 |        |                  |  |   |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | - | ------ |  | ---------- | --- | ------------- |  | ----------- | ------- | -------- |  | --------------- | ------ | ---------------- |  | - | -------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                        |  |                        |   |        |  |            |     | Accumulated   |  |             |         |          |  |                 |        |                 
|                                                                                                                                        |  |                        |   |        |  | Additional |     | other         |  |             |         |          |  | Notes           |        | Total           
|                                                                                                                                        |  | Preferred              |   | Common |  | paid-in    |     | comprehensive |  | Accumulated |         | Treasury |  | receivable from |        | stockholders   
|                                                                                                                                        |  | stock                  |   | stock  |  | capital    |     | income (loss) |  | deficit     |         | stock    |  | stockholder     |        | equity (deficit)
|                                                                                                                                        |  |                        |   |        |  |            |     |               |  |             |         |          |  |                 |        |                 
|                                                                                                                                        |  |                       
|                                                                                                                                        |  | (Amounts in thousands)
|Balance at January 1, 2000                                                                                                              |  | $                      |  |        |  | $          | 303 |               |  | $           | 283,127 |          |  | $               | (872   | )                |  | $ | (118,411 | ) |  | $ |       |   |  | $ |        |   |  | $ | 164,147 |  
|Net loss                                                                                                                                |  |                        |  |        |  |            |    |               |  |             |        |          |  |                 |       |                  |  |   | (39,043  | ) |  |   |       |   |  |   |        |   |  |   | (39,043 | )
|Other comprehensive loss                                                                                                                |  |                        |  |        |  |            |    |               |  |             |        |          |  |                 | (2,188 | )                |  |   |         |   |  |   |       |   |  |   |        |   |  |   | (2,188  | )
|Exercise of stock options                                                                                                               |  |                        |  |        |  |            | 3   |               |  |             | 1,825   |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | 1,828   |  
|Issuance of common stock                                                                                                                |  |                        |  |        |  |            |    |               |  |             | 222     |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | 222     |  
|Conversion of warrants                                                                                                                  |  |                        |  |        |  |            |    |               |  |             | 77      |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | 77      |  
|Issuance of preferred stock (note 8)                                                                                                    |  |                        |  |        |  |            |    |               |  |             | 21,094  |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | 21,094  |  
|Note receivable from stockholder (note 11)                                                                                              |  |                        |  |        |  |            |    |               |  |             |        |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   | (21,080 | ) |  |   | (21,080 | )
|Interest on stockholder note (note 11)                                                                                                  |  |                        |  |        |  |            |    |               |  |             | 594     |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   | (594    | ) |  |   |        |  
|                                                                                                                                        |  |                        |   |        |  |            |     |               |  |             |         |          |  |                 |        |                  |  |   |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                                                                                                            |  | $                      |  |        |  | $          | 306 |               |  | $           | 306,939 |          |  | $               | (3,060 | )                |  | $ | (157,454 | ) |  | $ |       |   |  | $ | (21,674 | ) |  | $ | 125,057 |  
|Net loss                                                                                                                                |  |                        |  |        |  |            |    |               |  |             |        |          |  |                 |       |                  |  |   | (85,716  | ) |  |   |       |   |  |   |        |   |  |   | (85,716 | )
|Other comprehensive loss                                                                                                                |  |                        |  |        |  |            |    |               |  |             |        |          |  |                 | (2,055 | )                |  |   |         |   |  |   |       |   |  |   |        |   |  |   | (2,055  | )
|Exercise of stock options                                                                                                               |  |                        |  |        |  |            |    |               |  |             | 18      |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | 18      |  
|Issuance of common stock                                                                                                                |  |                        |  |        |  |            | 1   |               |  |             | 188     |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | 189     |  
|Interest on stockholder note (note 11)                                                                                                  |  |                        |  |        |  |            |    |               |  |             | 1,545   |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   | (1,545  | ) |  |   |        |  
|Dividends on mandatorily redeemable preferred
    stock                                                                                 |  |                        |  |        |  |            |    |               |  |             | (4,259  | )        |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | (4,259  | )
|Issuance of common stock in legal settlement
    (note 5)                                                                               |  |                        |  |        |  |            | 2   |               |  |             | 4,123   |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | 4,125   |  
|Reclassification of redemption amount of common
    stock subject to repurchase obligation to redeemable securities
    (notes 5 and 7) |  |                        |  |        |  |            |    |               |  |             | (4,125  | )        |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | (4,125  | )
|                                                                                                                                        |  |                        |   |        |  |            |     |               |  |             |         |          |  |                 |        |                  |  |   |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                                                                                            |  | $                      |  |        |  | $          | 309 |               |  | $           | 304,429 |          |  | $               | (5,115 | )                |  | $ | (243,170 | ) |  | $ |       |   |  | $ | (23,219 | ) |  | $ | 33,234  |  
|Net loss                                                                                                                                |  |                        |  |        |  |            |    |               |  |             |        |          |  |                 |       |                  |  |   | (42,607  | ) |  |   |       |   |  |   |        |   |  |   | (42,607 | )
|Other comprehensive income                                                                                                              |  |                        |  |        |  |            |    |               |  |             |        |          |  |                 | 582    |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | 582     |  
|Issuance of common stock                                                                                                                |  |                        |  |        |  |            | 1   |               |  |             | 172     |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | 173     |  
|Interest on stockholder note (note 11)                                                                                                  |  |                        |  |        |  |            |    |               |  |             | 1,668   |          |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   | (1,668  | ) |  |   |        |  
|Reduction of repurchase obligation to repurchase
    Company Common Stock (note 5)                                                      |  |                        |  |        |  |            |    |               |  |             | 1,792   |          |  |                 |       |                  |  |   |         |   |  |   | (1,344 | ) |  |   |        |   |  |   | 448     |  
|Dividends on mandatorily redeemable preferred
    stock                                                                                 |  |                        |  |        |  |            |    |               |  |             | (8,663  | )        |  |                 |       |                  |  |   |         |   |  |   |       |   |  |   |        |   |  |   | (8,663  | )
|                                                                                                                                        |  |                        |   |        |  |            |     |               |  |             |         |          |  |                 |        |                  |  |   |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                                                                                            |  | $                      |  |        |  | $          | 310 |               |  | $           | 299,398 |          |  | $               | (4,533 | )                |  | $ | (285,777 | ) |  | $ | (1,344 | ) |  | $ | (24,887 | ) |  | $ | (16,833 | )
|                                                                                                                                        |  |                        |   |        |  |            |     |               |  |             |         |          |  |                 |        |                  |  |   |          |   |  |   |        |   |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

II-18



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##### Table of Contents



ON COMMAND CORPORATION

(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |         |          |          |  
|-------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------- | ------- | ----- | ------- | ------- | -------- | ------ | ------- | -------- | -------- | -
|                                                         |                                                                                                     |                                                                 
|                                                         |                                                                                                     | Years Ended December 31,                                        
|                                                         |                                                                                                     |                                                                 
|                                                         |                                                                                                     | 2002                                                             |                                                         | 2001    |         | 2000   
|                                                         |                                                                                                     |                                                                  |                                                         |         |         |        
|                                                         |                                                                                                     |                                                                 
|                                                         |                                                                                                     | (amounts in thousands)                                          
|                                                         |                                                                                                     | (note 3)                                                        
|Cash flows from operating activities:                    |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|                                                         | Net loss                                                                                            |                                                                  | $                                                       | (42,607 | )       |         | $     | (85,716 | )       |          | $      | (39,043 | )       
|                                                         | Adjustments to reconcile net loss to net cash
    provided by operating activities:                 |                                                                  |                                                         |         |         |         |       |         |         |          |        |         |         
|                                                         |                                                                                                     | Depreciation and amortization                                    |                                                         |         | 79,057  |         |       |         | 83,824  |          |        |         | 84,497   |         
|                                                         |                                                                                                     | Restructuring charges                                            |                                                         |         |        |         |       |         | 4,909   |          |        |         |         |         
|                                                         |                                                                                                     | Payments of restructuring costs                                  |                                                         |         | (1,241  | )       |       |         | (1,819  | )        |        |         |         |         
|                                                         |                                                                                                     | Asset impairments and other changes                              |                                                         |         | 8,850   |         |       |         | 709     |          |        |         | 1,123    |         
|                                                         |                                                                                                     | Amortization of debt issuance costs                              |                                                         |         | 1,164   |         |       |         | 680     |          |        |         | 175      |         
|                                                         |                                                                                                     | Impairment of cost investments                                   |                                                         |         | 6,060   |         |       |         | 19,639  |          |        |         | 900      |         
|                                                         |                                                                                                     | Loss on settlement of litigation                                 |                                                         |         |        |         |       |         | 3,700   |          |        |         | 4,764    |         
|                                                         |                                                                                                     | Other non-cash items                                             |                                                         |         | 409     |         |       |         | (131    | )        |        |         |         |         
|                                                         | Changes in assets and liabilities, net of the
    non-cash effect of acquisitions and dispositions: |                                                                  |                                                         |         |         |         |       |         |         |          |        |         |         
|                                                         |                                                                                                     | Accounts receivable                                              |                                                         |         | (460    | )       |       |         | 1,291   |          |        |         | (4,076   | )       
|                                                         |                                                                                                     | Other assets                                                     |                                                         |         | (565    | )       |       |         | (4,745  | )        |        |         | (11,134  | )       
|                                                         |                                                                                                     | Accounts payable                                                 |                                                         |         | 7,261   |         |       |         | (20,872 | )        |        |         | 15,628   |         
|                                                         |                                                                                                     | Accounts payable to parent                                       |                                                         |         | 867     |         |       |         | 566     |          |        |         | (909     | )       
|                                                         |                                                                                                     | Accrued compensation                                             |                                                         |         | 1,170   |         |       |         | (2,234  | )        |        |         | (112     | )       
|                                                         |                                                                                                     | Sales, use and property tax liabilities                          |                                                         |         | (572    | )       |       |         | (207    | )        |        |         | (1,199   | )       
|                                                         |                                                                                                     | Other accrued liabilities                                        |                                                         |         | 2,347   |         |       |         | (862    | )        |        |         | (2,575   | )       
|                                                         |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|                                                         |                                                                                                     |                                                                  | Net cash provided by (used in) operating
    activities |         |         | 61,740  |       |         |         | (1,268   | )      |         |          | 48,039   |  
|                                                         |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|Cash flows from investing activities:                    |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|                                                         |                                                                                                     | Capital expenditures                                             |                                                         |         | (54,391 | )       |       |         | (85,428 | )        |        |         | (110,822 | )       
|                                                         |                                                                                                     | Cost investments and note receivable                             |                                                         |         | (2,599  | )       |       |         | (16,000 | )        |        |         | (8,575   | )       
|                                                         |                                                                                                     | Cash proceeds from dispositions, net of cash
    transferred     |                                                         |         | 1,135   |         |       |         |        |          |        |         |         |         
|                                                         |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|                                                         |                                                                                                     |                                                                  | Net cash used in investing activities                   |         |         | (55,855 | )     |         |         | (101,428 | )      |         |          | (119,397 | )
|                                                         |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|Cash flows from financing activities:                    |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|                                                         |                                                                                                     | Borrowings of debt                                               |                                                         |         | 10,000  |         |       |         | 59,594  |          |        |         | 277,134  |         
|                                                         |                                                                                                     | Repayments of debt                                               |                                                         |         | (12,862 | )       |       |         | (42,779 | )        |        |         | (212,224 | )       
|                                                         |                                                                                                     | Repurchase of common stock pursuant to repurchase
    obligation |                                                         |         | (1,344  | )       |       |         |        |          |        |         |         |         
|                                                         |                                                                                                     | Proceeds from issuance of common and preferred
    stock         |                                                         |         | 173     |         |       |         | 85,133  |          |        |         | 2,127    |         
|                                                         |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|                                                         |                                                                                                     |                                                                  | Net cash provided by (used in) financing
    activities |         |         | (4,033  | )     |         |         | 101,948  |        |         |          | 67,037   |  
|                                                         |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|Effect of exchange rate changes on cash                  |                                                                                                     |                                                                  | (220                                                    | )       |         |         | 48    |         |         |          | (1,082 | )      
|                                                         |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                                     |                                                                  | 1,632                                                   |         |         |         | (700  | )       |         |          | (5,403 | )      
|Cash and cash equivalents, beginning of year             |                                                                                                     |                                                                  | 2,869                                                   |         |         |         | 3,569 |         |         |          | 8,972  |        
|                                                         |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        
|Cash and cash equivalents, end of year                   |                                                                                                     | $                                                                | 4,501                                                   |         |         | $       | 2,869 |         |         | $        | 3,569  |        
|                                                         |                                                                                                     |                                                                  |                                                         |         |         |         |       |         |         |          |        |        

See accompanying notes to consolidated financial
statements.

II-19



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##### Table of Contents



ON COMMAND CORPORATION

(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Years Ended December 31, 2002, 2001 and
2000




|    |                      
|--- | ---------------------
|(1) | Basis of Presentation

On Command Corporation is a Delaware
corporation formed in July 1996 by Ascent Entertainment Group,
Inc. (Ascent). Ascent is the controlling stockholder
of On Command Corporation (together with its consolidated
subsidiaries, On Command or the
Company). On March 28, 2000, Liberty Media
Corporation (Liberty) closed a cash tender offer for
the common stock of Ascent and thereby obtained control of the
Company. On June 8, 2000, Liberty completed a merger with
Ascent pursuant to which Ascent became an indirect, wholly-owned
subsidiary of Liberty. The portion of Libertys cost to
acquire Ascent that is attributable to the Company has not been
reflected in the accompanying consolidated financial statements
of the Company due to the fact that a significant percentage of
the Companys common stock (Company Common
Stock) is owned by shareholders other than Liberty. In
April 2002, Liberty Satellite & Technology, Inc.
(LSAT), a majority-owned subsidiary of Liberty,
acquired 100% of the common equity of Ascent. At
December 31, 2002, LSAT, through its ownership interest in
Ascent, owned approximately 70% of the outstanding Company
Common Stock and 100% of certain series of the Companys
preferred stock, which ownership interests collectively
represented approximately 76% of the voting power associated
with On Commands common and preferred securities.
Subsequent to December 31, 2002, LSATs ownership
interest in the outstanding Company Common Stock increased to
approximately 74%, and LSATs overall voting power in the
Company increased to approximately 80%.

The Company develops, assembles and operates
proprietary video systems. The Companys primary
distribution system allows hotel guests to select, on an
on-demand basis, motion pictures on computer-controlled
television sets located in their hotel rooms. The Company also
provides in-room viewing of select cable channels and other
interactive services under long-term contracts to hotels. These
interactive services include video games, Internet offerings,
digital music and various hotel and guest services. At
December 31, 2002, the Companys primary operating
subsidiaries or branches were located in the United States,
Canada and Mexico.



|    |                                               
|--- | ----------------------------------------------
|(2) | Summary of Significant Accounting
    Policies



| |                            
| | ---------------------------
| | Principles of Consolidation

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



| |                          
| | -------------------------
| | Cash and Cash Equivalents

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



| |            
| | -----------
| | Receivables

Accounts receivable are shown net of an allowance
based on historical collection trends and managements
judgment of the collectibility of these accounts. These
collection trends, as well as prevailing and anticipated
economic conditions, are routinely monitored by management, and
any adjustments required are reflected in current operations.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment is stated at cost less
accumulated depreciation. Video systems in service consist of
equipment, related costs of assembling and costs of installation
at hotel locations. Construction in progress

II-20



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

consists of materials, labor and related overhead
costs associated with partially constructed video systems.
Depreciation is calculated on a straight-line basis using the
remaining terms of the applicable hotel contracts for video
systems, and the shorter of capital lease terms or estimated
useful lives for all remaining depreciable assets. The original
terms of the Companys hotel contracts generally range from
five to seven years. Support equipment, vehicles and leasehold
improvements generally are depreciated using estimated lives of
five years. Repairs and maintenance costs that do not
significantly extend the life of the asset are charged to
operations. Gains or losses are recognized upon the retirement,
impairment or disposal of assets.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets, the Company
periodically reviews the carrying amounts of property and
equipment to determine whether current events and circumstances
indicate that such carrying amounts may not be recoverable. If
the carrying amount of the asset is greater than the expected
undiscounted cash flows to be generated by such asset, an
impairment adjustment is to be recognized. Such adjustment is
measured by the amount that the carrying value of such asset
exceeds its estimated fair value. The Company generally measures
estimated fair value by considering quoted market prices, sales
prices for similar assets, or by discounting estimated future
cash flows. Considerable management judgment is necessary to
estimate the undiscounted cash flows and fair values of assets.
Accordingly, actual results could vary significantly from such
estimates.



| |         
| | --------
| | Goodwill

In accordance with Statement of Financial
Accounting Standards No. 142, Accounting for Goodwill
and Other Intangible Assets (Statement
No. 142), the Company evaluates, on at least an
annual basis, the carrying amount of goodwill to determine
whether current events and circumstances indicate that such
carrying amount may not be recoverable. To accomplish this, the
Company compares the fair value of its reporting units to their
carrying amounts. If the carrying value of a reporting unit were
to exceed its fair value, the Company would perform the second
step of the impairment test. In the second step, the Company
would compare the implied fair value of the reporting
units goodwill to its carrying amount and any excess would
be charged to operations. Considerable management judgment is
necessary to estimate the fair values of assets. Accordingly,
actual results could vary significantly from such estimates.

Under Statement No. 142, which the Company
adopted January 1, 2002, the Company no longer amortizes
goodwill. Prior to the adoption of Statement 142, goodwill was
amortized over the expected periods to be benefited, generally
20 years. Adjusted net loss and pro forma loss per common
share for the years ended December 31, 2001 and 2000,
exclusive of amortization expense related to goodwill are as
follows (amounts in thousands, except per share amounts):

|                                                                   |  |              |         |      |  |   |         |  
|------------------------------------------------------------------ |  | ------------ | ------- | ---- |  | - | ------- | -
|                                                                   |  |             
|                                                                   |  | December 31,
|                                                                   |  |             
|                                                                   |  | 2001         |         | 2000
|                                                                   |  |              |         |     
|Net loss                                                           |  | $            | (85,716 | )    |  | $ | (39,043 | )
|Adjustment for goodwill amortization                               |  |              | 4,608   |      |  |   | 4,376   |  
|                                                                   |  |              |         |      |  |   |         |  
|Net loss                                                           |  | $            | (81,108 | )    |  | $ | (34,667 | )
|                                                                   |  |              |         |      |  |   |         |  
|Basic and diluted loss per common share, as
    reported           |  | $            | (2.92   | )    |  | $ | (1.28   | )
|Adjustment for goodwill amortization                               |  |              | 0.15    |      |  |   | 0.14    |  
|                                                                   |  |              |         |      |  |   |         |  
|Pro forma basic and diluted loss per common
    share, as adjusted |  | $            | (2.77   | )    |  | $ | (1.14   | )
|                                                                   |  |              |         |      |  |   |         |  

II-21



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                 
| | ----------------
| | Cost Investments

The Companys less-than-20%-owned
investments that are not considered marketable securities are
accounted for using the cost method. The Company continually
reviews its investments to determine whether a decline in fair
value below the cost basis is other-than-temporary. The Company
considers a number of factors in its determination including
(i) the financial condition, operating performance and near
term prospects of the investees; (ii) the reason for the
decline in fair value, be it general market conditions, industry
specific or investee specific; (iii) the length of time
that the fair value of the investment is below the
Companys carrying value; (iv) changes in valuation
subsequent to the balance sheet date; and (v) the
Companys intent and ability to hold the investment for a
period of time sufficient to allow for a recovery in fair value.
If the decline in fair value is deemed to be other than
temporary, a cost basis of the security is established at the
then estimated fair value. In situations where the fair value of
an asset is not evident due to a lack of a public market price
or other factors, management uses its best estimates and
assumptions to arrive at the estimated fair value of such an
asset. The Companys assessment of the foregoing factors
involves a high degree of judgment and accordingly, actual
results may differ from the Companys estimates and
judgments. Writedowns of cost investments are included in the
consolidated statements of operations as impairment of cost
investments.



| |                              
| | -----------------------------
| | Internally Developed Software

The Company capitalizes certain internal
development software costs in accordance with AICPA Statement of
Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.Internally
developed software that is integral to the Companys video
systems is classified within video systems in the accompanying
consolidated balance sheets. All other internally developed
software is included in other assets in the accompanying
consolidated balance sheets. Amortization or depreciation
commences when the software is ready for its intended use.
Software is generally amortized or depreciated over five years.
Capitalized costs primarily include internal salaries and wages
of individuals dedicated to the development of internal use
software. The Company capitalized software development costs of
$4,865,000, $4,218,000 and $4,088,000 during the years ended
December 31, 2002, 2001 and 2000, respectively.



| |                    
| | -------------------
| | Debt Issuance Costs

Costs associated with the issuance of the
Companys current credit facilities are capitalized and
amortized over the term of the related borrowing or facility.
Amortization of debt issuance costs is charged to operations and
is included in interest expense.



| |                             
| | ----------------------------
| | Foreign Currency Translation

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

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

II-22



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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



| |                    
| | -------------------
| | Revenue Recognition

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



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees, (APB Opinion No. 25) and related
interpretations, to account for its fixed plan stock options.
Under this method, compensation expense for stock options or
awards that are fixed is required to be recognized over the
vesting period only if the current market price of the
underlying stock exceeds the exercise price on the date of
grant. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, (Statement
No. 123) established accounting and disclosure
requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by Statement
No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting prescribed by APB
Opinion No. 25, and has adopted the disclosure requirement
of Statement No. 123, as amended by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
An Amendment of FASB Statement No. 123 (Statement
No. 148). The following table illustrates the effects
on net loss and loss per share if the Company had applied the
fair value recognition provisions of Statement No. 123 to
stock-based employee compensation.

|                      |                                                                                        |                                                          |         |        |         |      |         |        |         |   |         |        |         |  
|--------------------- | -------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                      |                                                                                        |                                                         
|                      |                                                                                        | Years Ended December 31,                                
|                      |                                                                                        |                                                         
|                      |                                                                                        | 2002                                                     |         | 2001   |         | 2000
|                      |                                                                                        |                                                          |         |        |         |     
|Net loss, as reported |                                                                                        | $                                                        | (42,607 | )      |         | $    | (85,716 | )      |         | $ | (39,043 | )     
|                      | Deduct stock compensation expense determined
    under fair value method, net of taxes |                                                          |         | (4,608 | )       |      |         | (2,110 | )       |   |         | (6,130 | )      
|                      |                                                                                        |                                                          |         |        |         |      |         |        |         |   |         |       
|                      |                                                                                        | Pro forma net loss                                       |         | $      | (47,215 | )    |         | $      | (87,826 | ) |         | $      | (45,173 | )
|                      |                                                                                        |                                                          |         |        |         |      |         |        |         |   |         |       
|                      |                                                                                        | Pro forma net loss applicable to common
    shareholders |         | $      | (55,430 | )    |         | $      | (92,085 | ) |         | $      | (45,173 | )
|                      |                                                                                        |                                                          |         |        |         |      |         |        |         |   |         |       
|Loss per share:       |                                                                                        |                                                          |         |        |         |      |         |        |         |   |         |       
|                      | Basic and diluted  as reported                                                        |                                                          | $       | (1.64  | )       |      | $       | (2.92  | )       |   | $       | (1.28  | )      
|                      |                                                                                        |                                                          |         |        |         |      |         |        |         |   |         |       
|                      | Basic and diluted  pro forma                                                          |                                                          | $       | (1.79  | )       |      | $       | (2.99  | )       |   | $       | (1.48  | )      
|                      |                                                                                        |                                                          |         |        |         |      |         |        |         |   |         |       

The grant-date fair values underlying the
foregoing calculations are based on the Black-Scholes
option-pricing model. The key assumptions used in the model
include the following: (a) a discount rate equal to the
one-year Treasury Bill rate at the date of grant;
(b) volatility rates of 86.3% for 2002 grants, 71.8% for
2001 grants, 47.7% for 2000 grants, 45.9% for 1999 grants and
25% for all grants in all prior periods; (c) expected
option lives of 5 or 5.5 years; (d) the closing price
of the Company Common Stock on the date of grant; and
(e) an expected dividend rate of zero. See note 8.

II-23



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |             
| | ------------
| | Income Taxes

The Company uses the asset and liability approach
for accounting and reporting on income taxes. Deferred tax
assets and liabilities are recognized for the future
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. 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 or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.



| |                                     
| | ------------------------------------
| | Earnings (Loss) Per Common
    Share

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

The loss per common share for the years ended
December 31, 2002, 2001 and 2000 is based on 30,917,000,
30,797,000 and 30,483,000 weighted average shares outstanding
during the respective periods. Potential common shares were not
included in the computation of diluted earnings per share
because their inclusion would be anti-dilutive. At
December 31, 2002 and 2001, the number of potential common
shares was approximately 20,110,000 and 20,328,000,
respectively. Such potential common shares consist of stock
options to acquire shares of Company Common Stock, warrants and
convertible securities. The foregoing potential common share
amount does not take into account the shares that might be
issued to the HDN Stockholder, as described in note 4, or
the assumed number of shares that would be repurchased by the
Company upon the exercise of stock options.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In June 2002, the Financial Accounting Standards
Board (the FASB) issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (Statement
No. 146). In October 2002, the FASB issued Statement
of Financial Accounting Standards No. 147, Acquisitions
of Certain Financial Institutions, An Amendment of FASB
Statement Nos. 72 and 144 and FASB Interpretation No. 9
(Statement No. 147). In December 2002, the FASB
issued Statement No. 148. In January 2003, the FASB issued
FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements
(FIN 46). The adoption of Statement
Nos. 146, 147 and 148 and FIN 46 is not expected to
have, a material impact on the Companys financial
condition, results of operations or cash flows.



| |                 
| | ----------------
| | Use of Estimates

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

II-24



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                  
| | -----------------
| | Reclassifications

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



|    |                                                                      
|--- | ---------------------------------------------------------------------
|(3) | Supplemental Disclosures to Consolidated
    Statements of Cash Flows

Cash paid for interest was $12,574,000,
$19,134,000 and $13,762,000 during 2002, 2001 and 2000,
respectively. Cash paid for income taxes was not significant for
these periods. For a description of certain non-cash
transactions, see notes 4, 5 and 11.



|    |                              
|--- | -----------------------------
|(4) | Acquisitions and Dispositions

On July 18, 2002, the Company consummated
the sale (the OCE Sale) of its 70.0% majority
shareholdings in On Command Europe Limited
(OCE) to Techlive Limited (Techlive),
the owner of the remaining 30.0% interest in OCE. Proceeds
from the sale, net of cash transferred, aggregated $1,135,000.
In connection with the consummation of the OCE Sale, On Command
recorded a $5,103,000 impairment loss during the second quarter
of 2002 to reduce the carrying value of OCEs long-lived
assets to the fair value indicated by the OCE Sale. During the
third quarter of 2002, OCEs remaining net assets,
including a $930,000 cumulative foreign currency translation
loss, were written off against the net proceeds received,
resulting in no material impact to the Companys net loss
for the period.

Concurrent with the consummation of the OCE Sale,
On Command and Techlive entered into a License Agreement
(the License Agreement), and On Command
received a $200,000 payment for (i) the use of the
On Command Europe corporate name through
January 17, 2003; and (ii) the fee due for the first
year of the License Agreement. The License Agreement provides
OCE with the ability to continue to operate as an authorized
On Command distributor, subject to performance criteria to
be determined by On Command, for a period of ten years. As
part of the agreement, On Command will license software and
provide technical support to OCE at escalating per room rates
over the next ten years.

On February 28, 2001, the Company acquired a
controlling interest in the common stock of Hotel Digital
Network, Inc. (HDN) (d/b/a Instant Media
Network) in exchange for (i) the conversion of the amounts
due under a note receivable from HDN ($1,445,000), (ii) a
commitment to provide approximately $2,400,000 of funding to
HDN; and (iii) $226,000 of cash. Through December 31,
2002, the Company had satisfied $1,765,000 of its funding
commitment to HDN. HDN provides in-room music content to hotels
through the Company and other in-room entertainment providers.
The Company accounted for the acquisition of HDN using the
purchase method of accounting. Accordingly, the excess of the
purchase price over the fair value of the identifiable net
assets of HDN has been allocated to goodwill. If the HDN
acquisition had occurred on January 1, 2000, the
Companys results of operations and comprehensive loss
would not have been materially different from the Companys
historical results of operations and comprehensive loss for the
years ended December 31, 2001 and 2000.

In connection with the HDN acquisition, the
Company entered into a stockholders agreement (the
HDN Stockholders Agreement) with the then
controlling stockholder of Hotel Digital Network (the HDN
Stockholder). The HDN Stockholders Agreement
provides the HDN Stockholder with the right during each of the
30-day periods beginning on March 1, 2003 and 2004 to
require the Company to exchange shares of Company Common Stock
for all, but not less than all, of the Hotel Digital Network
common shares held by the HDN Stockholder. On March 20,
2003, the HDN Stockholder exercised such right. The HDN
Stockholders Agreement also provides the Company with the
right during the 30-day period beginning on March 1, 2006
to require the HDN Stockholder to exchange all, but not less
than all, of his HDN common shares for shares of Company Common
Stock. The number of shares of Company Common Stock to be issued
in any such exchanges will be determined based on the then
market value of Company Common Stock,

II-25



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and the then fair value of HDN common stock, each
as determined in accordance with the HDN Stockholders
Agreement. At December 31, 2002, the Company held 85.9%,
and the HDN Stockholder held 13.3% of the outstanding HDN common
stock. Based on the Companys current assessment of values,
the Company does not expect that the settlement of this
obligation will have a material impact on its capitalization,
financial condition or results of operations



|    |                 
|--- | ----------------
|(5) | Cost Investments

The Companys cost investments are
summarized as follows (amounts in thousands):

|                                                                             |  |              |       |      |  |   |       | 
|---------------------------------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                                                             |  |             
|                                                                             |  | December 31,
|                                                                             |  |             
|                                                                             |  | 2002         |       | 2001
|                                                                             |  |              |       |     
|e-ROOM CORPORATION (e-ROOM) (formerly
    known as MagiNet Corporation)(a) |  | $            | 3,298 |      |  | $ | 3,298 | 
|STSN, Inc. (STSN)(b)                                                       |  |              |      |      |  |   | 3,461 | 
|                                                                             |  |              |       |      |  |   |       | 
|                                                                             |  | $            | 3,298 |      |  | $ | 6,759 | 
|                                                                             |  |              |       |      |  |   |       | 



---



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



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



|    |  |                                                                                                                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | On March 30, 2001, the Company acquired
    certain preferred stock of STSN in exchange for cash of
    $15,000,000 and the conversion of a $5,000,000 convertible
    promissory note. During the fourth quarter of

II-26



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

2001, the Company recorded a $16,539,000
impairment charge to reflect an other than temporary decline in
the estimated fair value of its investment. Such estimated fair
value was based on the price of securities sold by STSN to the
Company and other investors during the first quarter of 2002. In
this regard, the Company purchased $2,599,000 of preferred stock
from STSN during the first six months of 2002.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the first quarter of 2002, the Company
    transferred certain equipment and related contracts to STSN. In
    connection with this transfer, STSN agreed to make quarterly
    royalty payments to the Company through February 2009 equal to
    20% of the net operating margin derived by STSN from such
    equipment and contracts. For purposes of these royalty payments,
    net operating margin is defined as gross revenue less all direct
    costs. Due to the uncertainty involved in estimating these
    royalty payments, the Company recorded an impairment loss on
    this transaction equal to the $1,411,000 carrying value of the
    contributed equipment. The royalty payments from STSN are
    recognized as other income when received by the Company. During
    2002, royalty payments received from STSN were not significant.
|
| |  | During the fourth quarter of 2002, STSN informed
    the Company that additional financing would be required during
    the first quarter of 2003 due to revisions to STSNs
    business plan. Based on the Companys assessment of the
    business plan and financing requirements of STSN, the Company
    determined that it would not participate in the 2003 financing,
    and that an other-than-temporary decline in the fair value of
    its investment in STSN had occurred. As a result, the Company
    wrote-off the remaining $6,060,000 carrying value of its
    investment in STSN during the fourth quarter of 2002.                                                                                                                                                                                                                             
|
| |  | During the second quarter of 2001, the Company
    recorded a $1,100,000 charge to write-off the remaining carrying
    value of its cost investment in STS HotelNet, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

(6)     Debt

Debt is summarized as follows (amounts in
thousands):

|                             |  |              |         |      |  |   |         |  
|---------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                             |  |             
|                             |  | December 31,
|                             |  |             
|                             |  | 2002         |         | 2001
|                             |  |              |         |     
|Revolving Credit Facility(a) |  | $            | 261,633 |      |  | $ | 263,633 |  
|Capital lease obligations    |  |              | 1,146   |      |  |   | 2,037   |  
|                             |  |              |         |      |  |   |         |  
|                             |  |              | 262,779 |      |  |   | 265,670 |  
|Less current portion         |  |              | (833    | )    |  |   | (909    | )
|                             |  |              |         |      |  |   |         |  
|                             |  | $            | 261,946 |      |  | $ | 264,761 |  
|                             |  |              |         |      |  |   |         |  



---



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Revolving loans extended under the Revolving
    Credit Facility bear interest at the London Interbank Offering
    Rate (LIBOR) plus a spread that may range from 1.10%
    to 2.75% depending on certain operating ratios of the Company
    (3.94% effective borrowing rate at December 31, 2002). In
    addition, a facility fee ranging from 0.15% to 0.50% per
    annum is charged on the Revolving Credit Facility, depending on
    certain operating ratios of the Company. The Revolving Credit
    Facility contains customary covenants and limitations, most
    notably the inclusion of restrictions on the Companys
    ability to pay dividends or make other distributions, and
    restrictions on the Companys ability to make capital
    expenditures. In addition, the Company is required to maintain
    leverage and interest coverage ratios. The

II-27



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Company was in compliance with such covenants at
    December 31, 2002. Substantially all of the Companys
    assets are pledged as collateral for borrowings under the
    Revolving Credit Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | At December 31, 2002, the maximum leverage
    ratio permitted under the Revolving Credit Facility was 4.25,
    and the Companys actual leverage ratio was 3.99. The
    maximum leverage ratio permitted under the Revolving Credit
    Facility at March 31, 2003 is 3.50. Although the Company is
    in compliance with the leverage ratio covenant at
    December 31, 2002, the Company believes that it would not
    have been in compliance with such covenant at March 31,
    2003. In March 2003, the Company reached agreement with its bank
    lenders to postpone until June 29, 2003 the step-down of
    the leverage ratio covenant from 4.25 to 3.50. The Company is
    also seeking to restructure the Revolving Credit Facility to,
    among other matters, extend the maturity date to
    December 31, 2007. It is anticipated that any closing of
    the restructuring of the Revolving Credit Facility will be
    contingent upon the contribution of $40,000,000 by Liberty or
    one of its affiliates to the Company to be used to repay
    principle due, and permanently reduce lender commitments,
    pursuant to the restructured Revolving Credit Facility. The
    terms of the proposed Liberty contribution (including the
    securities or other consideration to be received by Liberty or
    its affiliate in exchange for such contribution) have not yet
    been agreed upon, and no assurance can be given that Liberty or
    its affiliate will contribute $40,000,000 to the Company, as
    contemplated by the terms of the proposed restructuring. In the
    event that the Company determines that it unlikely the proposed
    restructuring of the Revolving Credit Facility will close on or
    before June 29, 2003, the Company anticipates that it would
    seek a further postponement of the step-down of the leverage
    ratio covenant, and would continue to seek to refinance or
    restructure the Revolving Credit Facility. In the event that a
    restructuring or refinancing is not completed by the date that
    the leverage ratio is reduced to 3.50, the Company anticipates
    that a default would occur under the terms of the Revolving
    Credit Facility. Upon the occurrence of a default, if left
    uncured, the bank lenders would have various remedies, including
    terminating their revolving loan commitment, declaring all
    outstanding loan amounts including interest immediately due and
    payable, and exercising their rights against their collateral
    which consists of substantially all of the Companys
    assets. No assurance can be given that the Company will be able
    to successfully restructure or refinance the Revolving Credit
    Facility on terms acceptable to the Company, or that the Company
    will be able to avoid a default under the Revolving Credit
    Facility. In light of the foregoing circumstances, the
    Companys independent auditors have included an explanatory
    paragraph in their audit report that addresses the ability of
    the Company to continue as a going concern.

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

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

|     |  |   |         | 
|---- |  | - | ------- | 
|2003 |  | $ | 833     | 
|2004 |  |   | 261,905 | 
|2005 |  |   | 38      | 
|2006 |  |   | 3       | 
|2007 |  |   |        | 
|     |  |   |         | 
|     |  | $ | 262,779 | 
|     |  |   |         | 

II-28



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                      
|--- | ---------------------
|(7) | Redeemable Securities



| |                                           
| | ------------------------------------------
| | Mandatorily Redeemable Preferred
    Stock

General.The
Companys Series B Cumulative Redeemable Preferred
Stock, par value $.01 per share (the Series B
Preferred Stock), Series C Cumulative Redeemable
Preferred Stock, par value $.01 per share (the
Series C Preferred Stock) and Series D
Cumulative Convertible Redeemable Preferred Stock, par value
$.01 per share (Series D Preferred Stock)
are classified as mandatorily redeemable preferred stock in the
accompanying consolidated balance sheets due to the fact that
the terms of such preferred stock instruments provide for
redemption provisions that are outside of the Companys
control. Dividends on the Companys Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred
Stock aggregated $8,663,000 and $4,259,000 during 2002 and 2001,
respectively. Accumulated dividends have been added to the
liquidation preference of the applicable preferred stock
issuance since the Company did not pay any cash dividends during
2002 or 2001.

Holders of Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock
are not entitled to vote on any matters submitted to a vote of
the shareholders of the Company, except as described below and
as required by law, and except that without the consent of at
least 66 2/3% of the number of shares of each such series
then outstanding, the Company may not take any action, including
by merger, to amend any of the provisions of the respective
certificates of designations or amend any of the provisions of
the Restated Certificate of Incorporation of the Company so as
to adversely affect any preferences or rights of such series of
preferred stock. In addition to the rights set forth above,
following December 31, 2002, in connection with any matter
as to which the holders of Company Common Stock are entitled to
vote, each outstanding share of Series D Preferred Stock
shall have (and the holder thereof shall be entitled to cast)
the number of votes equal to the number of votes such holder
would have been entitled to cast had the shares of Series D
Preferred Stock held by such holder been converted into shares
of Company Common Stock immediately prior to the record date for
the determination of the stockholders entitled to vote upon such
matter.

Series B and C Preferred Stock.Pursuant to Preferred Stock Agreements
dated March 5, 2001 and April 23, 2001 between the
Company and Ascent, the Company sold 15,000 newly issued shares
of its Series B Preferred Stock, and 10,000 shares of
its Series C Preferred Stock, (collectively, the
Series B and C Preferred Stock), to Ascent for
cash consideration of $15,000,000 and $10,000,000, respectively.

The liquidation preference (the Liquidation
Preference) of each share of the Series B and C
Preferred Stock as of any date of determination is equal to the
sum of (a) the stated value per share of $1,000, plus
(b) an amount equal to all dividends accrued on such shares
that have been added to and remain a part of the Liquidation
Preference as of such date, plus (c) for purposes of the
liquidation and redemption provisions of the Series B and C
Preferred Stock, an amount equal to all unpaid dividends accrued
on the sum of the amounts specified in clauses (a) and (b)
above during the period from and including the immediately
preceding dividend payment date to but excluding the date in
question. At December 31, 2002, the aggregate liquidation
preference of the Series B and Series C Preferred
Stock was $30,899,000.

The holders of Series B and C Preferred
Stock are entitled to receive cumulative dividends, when and as
declared by the Company, in preference to dividends on junior
securities, including Company Common Stock and the Series A
Preferred Stock (as described in note 8), and ratably on
dividends to parity securities. Currently, dividends accrue on
the Series B Preferred Stock and Series C Preferred
Stock at the rate of 12% per annum of the Liquidation
Preference of the applicable Preferred Stock. Accrued dividends
on the Series B Preferred Stock are payable monthly, in
cash. Accrued dividends on the Series C Preferred Stock are
payable quarterly, in cash. Dividends not paid on any dividend
payment date are added to the Liquidation Preference on such
date and remain a part of the Liquidation Preference until such
dividends are paid.

II-29



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Upon any liquidation, dissolution or winding up
of the Company, the holders of shares of Series B and C
Preferred Stock are entitled to receive, from the assets of the
Company available for distribution to stockholders, an amount in
cash per share equal to the Liquidation Preference of a share of
Series B and C Preferred Stock, after payment is made on
any senior securities and before any distribution or payment is
made on any junior securities, which payment will be made
ratably among the holders of the Series B and C Preferred
Stock and the holders of any parity securities.

Shares of Series B and C Preferred Stock are
redeemable at the option of the Company at any time after the
issuance date at a redemption price per share payable in cash
equal to the Liquidation Preference of such share on the
redemption date. Any redemptions by the Company are required to
be made pro rata if less than all shares of Series B and C
Preferred Stock are to be redeemed.

Subject to certain restrictions, including any
such restrictions contained in the Companys Revolving
Credit Facility, shares of Series B and C Preferred Stock
are redeemable at the option of the holder at a price equal to
the Liquidation Preference.

Series D Preferred Stock.On June 29, 2001, pursuant to a
Preferred Stock Purchase Agreement between the Company and
Ascent (the Series D Purchase Agreement), the
Company authorized for issuance 60,000 shares of its
Series D Preferred Stock, to Ascent in consideration of
$60,000,000 in cash. The Series D Purchase Agreement states
that the shares are issuable in three sub-series,
Series D-1, Series D-2 and Series D-3, each with
an aggregate authorized amount of $20,000,000 in stated value.
The Series D-1 shares were issued on June 29,
2001, the Series D-2 shares were issued on
August 2, 2001 and the Series D-3 shares were
issued on October 18, 2001. On or after December 31,
2002, each share of Series D Preferred Stock is convertible
at the option of the holder into a number of shares of Company
Common Stock determined by dividing the liquidation preference
of each share of Series D Preferred Stock of (the
Series D Liquidation Preference) by $7.55,
subject to anti-dilution adjustments.

The Series D Liquidation Preference of each
share of Series D Preferred Stock as of any date of
determination is equal to the sum of (a) the stated value
per share of $1,000, plus (b) an amount equal to all
dividends accrued on such shares that have been added to and
remain a part of the Series D Liquidation Preference as of
such date, plus (c) for purposes of the liquidation and
redemption provisions of the Series D Preferred Stock, an
amount equal to all unpaid dividends accrued on the sum of the
amounts specified in clauses (a) and (b) above during
the period from and including the immediately preceding dividend
payment date to but excluding the date in question. At
December 31, 2002, the aggregate Series D Liquidation
Preference was $66,949,000.

The holders of the Series D Preferred Stock
are entitled to receive cumulative dividends, when and as
declared by the Company, in preference to dividends on junior
securities, including the Company Common Stock and the
Series A Preferred Stock (as described in
note 8) and ratably with dividends on parity
securities. Dividends accrue on each sub-series of the
Series D Preferred Stock at the rate of 8% per annum
of the Series D Liquidation Preference. Accrued dividends
are payable in cash quarterly. Dividends not paid on any
dividend payment date are added to the Series D Liquidation
Preference until such dividends are paid.

Upon any liquidation, dissolution or winding up
of the Company, the holders of shares of Series D Preferred
Stock are entitled to receive, from the assets of the Company
available for distribution to stockholders, an amount in cash
per share equal to the Series D Liquidation Preference of a
share of Series D Preferred Stock, after payment is made on
any senior securities and before any distribution or payment is
made on any junior securities, which payment will be made
ratably among the holders of Series D Preferred Stock and
the holders of any parity securities.

The Series D Preferred Stock is not
redeemable, at the option of the Company, during the period from
December 31, 2002 to June 30, 2005. Thereafter, the
shares are redeemable, at the option of the Company, at

II-30



---



##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the Series D Liquidation Preference plus the
percentage set forth opposite the applicable redemption date as
follows:

|                              |  |            |    | 
|----------------------------- |  | ---------- | -- | 
|Redemption Date               |  | Percentage
|                              |  |           
|June 30, 2005 - June 29, 2006 |  |            | 4% | 
|June 30, 2006 - June 29, 2007 |  |            | 3% | 
|June 30, 2007 - June 29, 2008 |  |            | 2% | 
|June 30, 2008 - June 29, 2009 |  |            | 1% | 
|June 30, 2009 - thereafter    |  |            | 0% | 

In the event of certain events of bankruptcy
described in the Certificate of Designations of the
Series D Preferred Stock, and subject to certain
restrictions, including any such restrictions contained in the
Companys Revolving Credit Facility, shares of
Series D Preferred Stock are redeemable at the option of
the holder at a price equal to the Series D Liquidation
Preference if such redemption occurs prior to June 30,
2005. If the redemption occurs after June 30, 2005, the
shares are redeemable at the Series D Liquidation
Preference plus the percentage set forth in the foregoing table.



| |                                                          
| | ---------------------------------------------------------
| | Company Common Stock Subject to Repurchase
    Obligation

During the first quarter of 2001, the Company
issued 275,000 shares of Company Common Stock that were
subject to a repurchase obligation. During the fourth quarter of
2002, the Company repurchased 119,500 of such shares. For
additional information concerning the remaining repurchase
obligations, see note 5.



|    |                               
|--- | ------------------------------
|(8) | Stockholders Equity (Deficit)



| |                  
| | -----------------
| | Stock Option Plan

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

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



| |                                           
| | ------------------------------------------
| | 1997 Non-Employee Directors Stock
    Plan

In May 1997, the Company adopted the
Companys 1997 Non-Employee Directors Stock Plan (the
Directors Plan). The Directors Plan authorized the
granting of an annual award of 400 shares of the Company
Common Stock and, pursuant to an amendment adopted in 1999, a
one-time non-qualified option to
purchase 50,000 shares of the Company Common Stock (an
Independent Director Option) to each independent
director. On June 13, 2000, the Board of Directors adopted
and approved an amendment to increase the number of authorized
shares under the Directors Plan available for issuance and
subject to option and share grants to independent directors by
400,000 shares. The aggregate number of shares of Company
Common Stock which may be issued upon exercise of Independent
Directors Options granted under the Directors Plan plus the
number of shares which may be awarded pursuant to the Directors
Plan will not exceed 696,800, subject to adjustment to reflect
events such as stock dividends, stock splits, recapitalizations,

II-31



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

mergers or reorganizations of or by the Company.
Effective December 2002, the Board of Directors adopted a new
compensation plan for independent directors that eliminates the
equity component set forth in the Directors Plan. Subject
to the terms and conditions of the plan, the stock options were
granted at no less than fair market value on the date of grant.
The options generally expire in ten years, vest over a
three-year period and are exercisable in installments of 25%
after the first and second years, and the remaining 50% after
the third year. During 2002, no options were granted pursuant to
the Directors Plan. In 2001 and 2000, options granted pursuant
to the Directors Plan aggregated 50,000 and 200,000,
respectively.

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

|                                                                                              |  |               |            |                     |  |          |            |   |  |   |       | 
|--------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ------------------- |  | -------- | ---------- | - |  | - | ----- | 
|                                                                                              |  |               |            |                    
|                                                                                              |  |               |            | Options Outstanding
|                                                                                              |  |               |            |                    
|                                                                                              |  |               |            |                     |  | Weighted
|                                                                                              |  | Options       |            |                     |  | average 
|                                                                                              |  | available for |            | Number of           |  | exercise
|                                                                                              |  | grant         |            | shares              |  | price   
|                                                                                              |  |               |            |                     |  |         
|Balances, January 1, 2000 (690,847
    exercisable at a weighted-average price of $12.77)     |  |               | 436,224    |                     |  |          | 2,489,079  |   |  | $ | 14.11 | 
|Granted (weighted-average fair value of $7.06)                                                |  |               | (2,460,500 | )                   |  |          | 2,460,500  |   |  | $ | 14.12 | 
|Increase in options authorized                                                                |  |               | 2,650,000  |                     |  |          |           |   |  |   |       | 
|Exercised                                                                                     |  |               |           |                     |  |          | (191,762   | ) |  | $ | 10.40 | 
|Cancelled                                                                                     |  |               | 862,342    |                     |  |          | (862,342   | ) |  | $ | 15.25 | 
|                                                                                              |  |               |            |                     |  |          |            |   |  |   |       | 
|Balances, December 31, 2000 (1,124,938
    exercisable at a weighted-average price of $14.07) |  |               | 1,488,066  |                     |  |          | 3,895,475  |   |  | $ | 13.79 | 
|Granted (weighted-average fair value of $3.68)                                                |  |               | (1,317,000 | )                   |  |          | 1,317,000  |   |  | $ | 6.62  | 
|Exercised                                                                                     |  |               |           |                     |  |          | (2,520     | ) |  | $ | 7.19  | 
|Cancelled                                                                                     |  |               | 1,938,009  |                     |  |          | (1,938,009 | ) |  | $ | 13.24 | 
|                                                                                              |  |               |            |                     |  |          |            |   |  |   |       | 
|Balances, December 31, 2001 (1,404,793
    exercisable at a weighted-average price of $13.94) |  |               | 2,109,075  |                     |  |          | 3,271,946  |   |  | $ | 11.38 | 
|Granted (weighted-average fair value of $3.32)                                                |  |               | (1,282,000 | )                   |  |          | 1,282,000  |   |  | $ | 4.74  | 
|Cancelled                                                                                     |  |               | 1,213,850  |                     |  |          | (1,213,850 | ) |  | $ | 10.75 | 
|                                                                                              |  |               |            |                     |  |          |            |   |  |   |       | 
|Balances, December 31, 2002 (1,187,907
    exercisable at a weighted-average price of $12.87) |  |               | 2,040,925  |                     |  |          | 3,340,096  |   |  | $ | 9.06  | 
|                                                                                              |  |               |            |                     |  |          |            |   |  |   |       | 

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

|         |               |             |  |                     |           |                     |  |             |     |          |  |   |       |  |  |  |           |  |  |   |       | 
|-------- | ------------- | ----------- |  | ------------------- | --------- | ------------------- |  | ----------- | --- | -------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|         |               |             |  |                     |           |                     |  |            
|         |               |             |  | Options Outstanding |           |                    
|         |               |             |  |                     |           | Options Exercisable
|         |               |             |  | Weighted            |           |                     |  |            
|         |               |             |  | average             |           | Weighted            |  |             |     | Weighted
|Range of |               | Number      |  | remaining           |           | average             |  | Number      |     | average 
|exercise |               | outstanding |  | contractual         |           | exercise            |  | exercisable |     | exercise
|prices   |               | at 12/31/02 |  | life (Years)        |           | price               |  | at 12/31/02 |     | price   
|         |               |             |  |                     |           |                     |  |             |     |         
|$        | 1.10 -  4.53  |             |  |                     | 400,000   |                     |  |             | 9.2 |          |  | $ | 2.20  |  |  |  | 38,000    |  |  | $ | 3.41  | 
|$        | 5.45 -  5.80  |             |  |                     | 1,289,000 |                     |  |             | 9.0 |          |  | $ | 5.54  |  |  |  | 89,000    |  |  | $ | 5.80  | 
|$        | 7.34 -  9.34  |             |  |                     | 314,500   |                     |  |             | 7.8 |          |  | $ | 7.65  |  |  |  | 153,500   |  |  | $ | 7.90  | 
|$        | 11.13 - 14.87 |             |  |                     | 374,096   |                     |  |             | 5.7 |          |  | $ | 12.74 |  |  |  | 262,957   |  |  | $ | 12.72 | 
|$        | 15.19 - 15.91 |             |  |                     | 666,500   |                     |  |             | 7.0 |          |  | $ | 15.27 |  |  |  | 351,400   |  |  | $ | 15.33 | 
|$        | 16.00 - 18.09 |             |  |                     | 296,000   |                     |  |             | 6.6 |          |  | $ | 16.03 |  |  |  | 293,050   |  |  | $ | 16.02 | 
|         |               |             |  |                     |           |                     |  |             |     |          |  |   |       |  |  |  |           |  |  |   |       | 
|         |               |             |  |                     | 3,340,096 |                     |  |             | 7.5 |          |  | $ | 9.06  |  |  |  | 1,187,907 |  |  | $ | 12.87 | 
|         |               |             |  |                     |           |                     |  |             |     |          |  |   |       |  |  |  |           |  |  |   |       | 

II-32



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Stock compensation expense was not significant
during 2002, 2001, and 2000. For information concerning the pro
forma impact of using the fair value recognition provisions of
Statement 123, see note 2.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

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



| |         
| | --------
| | Warrants

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



| |                         
| | ------------------------
| | Series A Preferred Stock

On August 8, 2000, the Company issued
13,500 shares of the Companys Series A,
$.01 Par Value Convertible Participating Preferred Stock
(Series A Preferred Stock), to the then
Chairman and Chief Executive Officer of the Company in exchange
for a $21,080,000 promissory note and a $13,500 cash payment.
The Series A Preferred Stock is initially convertible into
an aggregate of 1,350,000 shares of Company Common Stock.
The price of the Series A Preferred Stock was
$1,562.50 per share. The Series A Preferred Stock
participates in any dividends paid to the holders of Company
Common Stock but otherwise is not entitled to receive any
dividends. The Series A Preferred Stock has a liquidation
preference of $.01 per share, and will also participate
with the Company Common Stock in any liquidating distributions
on an as-converted basis. The holder of the Series A
Preferred Stock votes with the holders of the Company Common
Stock as a single class and is entitled to one vote per share.
The promissory note is secured by the Series A Preferred
Stock or proceeds thereon and the former Chairman and Chief
Executive Officers personal obligations under such
promissory note are limited to 25% of the principal amount of
the note plus accrued interest thereon. The note may not be
prepaid and interest on the note accrues at a rate of
7% per annum, compounded quarterly. The promissory note,
which is reflected as a reduction of stockholders equity,
matures on July 31, 2005, at which time all principal and
interest becomes due. The right to transfer the Series A
Preferred Stock is restricted. See note 11.



| |                             
| | ----------------------------
| | Shares Reserved for Issuance

At December 31, 2002, a total of
20,109,593 shares of Company Common Stock were reserved for
issuance pursuant to the 1996 Plan, the Directors Plan, the ESP
Plan, the Warrants, Series A Preferred Stock and
Series D Preferred Stock.

II-33



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |             
|--- | ------------
|(9) | Income Taxes

The Company files a separate tax return and is
not included in Libertys consolidated tax return. The
provision for income taxes consists of the following (amounts in
thousands):

|          |         |                          |      |      |   |      |      |      |   |   |      |      |  
|--------- | ------- | ------------------------ | ---- | ---- | - | ---- | ---- | ---- | - | - | ---- | ---- | -
|          |         |                         
|          |         | Years Ended December 31,
|          |         |                         
|          |         | 2002                     |      | 2001 |   | 2000
|          |         |                          |      |      |   |     
|Current:  |         |                          |      |      |   |      |      |      |   |   |      |     
|          | Federal |                          | $    |     |   |      | $    |     |   |   | $    |     |  
|          | State   |                          |      | (1   | ) |      |      | (238 | ) |   |      | (238 | )
|          | Foreign |                          |      | (443 | ) |      |      | (130 | ) |   |      | (185 | )
|          |         |                          |      |      |   |      |      |      |   |   |      |     
|          |         |                          | (444 | )    |   |      | (368 | )    |   |   | (423 | )   
|Deferred: |         |                          |      |      |   |      |      |      |   |   |      |     
|          | Federal |                          |      |     |   |      |      |     |   |   |      |     |  
|          | State   |                          |      |     |   |      |      |     |   |   |      |     |  
|          | Foreign |                          |      |     |   |      |      |     |   |   |      |     |  
|          |         |                          |      |      |   |      |      |      |   |   |      |     
|Total     |         | $                        | (444 | )    |   | $    | (368 | )    |   | $ | (423 | )   
|          |         |                          |      |      |   |      |      |      |   |   |      |     

Loss before income taxes consists of the
following (amounts in thousands):

|         |  |                          |         |      |  |      |         |   |  |   |         |  
|-------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|         |  |                         
|         |  | Years Ended December 31,
|         |  |                         
|         |  | 2002                     |         | 2001 |  | 2000
|         |  |                          |         |      |  |     
|Domestic |  | $                        | (45,011 | )    |  | $    | (80,332 | ) |  | $ | (37,006 | )
|Foreign  |  |                          | 2,848   |      |  |      | (5,016  | ) |  |   | (1,614  | )
|         |  |                          |         |      |  |      |         |   |  |   |         |  
|Total    |  | $                        | (42,163 | )    |  | $    | (85,348 | ) |  | $ | (38,620 | )
|         |  |                          |         |      |  |      |         |   |  |   |         |  

The provision for income taxes differs from the
amount obtained by applying the federal statutory rate (35%) to
loss before income taxes as follows (amounts in thousands):

|                                                        |  |                          |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                        |  |                         
|                                                        |  | Years Ended December 31,
|                                                        |  |                         
|                                                        |  | 2002                     |         | 2001 |  | 2000
|                                                        |  |                          |         |      |  |     
|Tax benefit computed at federal statutory rate          |  | $                        | 14,757  |      |  | $    | 29,872  |   |  | $ | 13,517  |  
|State tax benefit, net of federal benefit               |  |                          | (1      | )    |  |      | (155    | ) |  |   | (155    | )
|Amortization not deductible for income tax
    purposes |  |                          |        |      |  |      | (1,822  | ) |  |   | (1,731  | )
|Other                                                   |  |                          | 2,648   |      |  |      | (3,666  | ) |  |   | 1,282   |  
|Taxes on unutilized losses of foreign operations        |  |                          | (3,705  | )    |  |      | (130    | ) |  |   | (185    | )
|Change in valuation allowance                           |  |                          | (14,143 | )    |  |      | (24,467 | ) |  |   | (13,151 | )
|                                                        |  |                          |         |      |  |      |         |   |  |   |         |  
|Provision for income taxes                              |  | $                        | (444    | )    |  | $    | (368    | ) |  | $ | (423    | )
|                                                        |  |                          |         |      |  |      |         |   |  |   |         |  

II-34



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Deferred income taxes, which result from the net
tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, consist
of the following (amounts in thousands):

|                               |                                                 |              |         |          |   |   |         |         |  
|------------------------------ | ----------------------------------------------- | ------------ | ------- | -------- | - | - | ------- | ------- | -
|                               |                                                 |             
|                               |                                                 | December 31,
|                               |                                                 |             
|                               |                                                 | 2002         |         | 2001    
|                               |                                                 |              |         |         
|Deferred tax assets:           |                                                 |              |         |          |   |   |         |        
|                               | Tax net operating loss and credit carryforwards |              | $       | 110,039  |   |   | $       | 91,664  |  
|                               | Accruals not recognized for tax purposes        |              |         | 2,953    |   |   |         | 4,644   |  
|                               | Other                                           |              |         | 8,401    |   |   |         | 8,086   |  
|                               | Valuation allowance                             |              |         | (100,667 | ) |   |         | (86,524 | )
|                               |                                                 |              |         |          |   |   |         |        
|Total deferred tax assets      |                                                 |              | 20,726  |          |   |   | 17,870  |        
|Deferred tax liabilities:      |                                                 |              |         |          |   |   |         |        
|                               | Depreciation and amortization                   |              |         | (20,726  | ) |   |         | (17,870 | )
|                               | Other                                           |              |         |         |   |   |         |        |  
|                               |                                                 |              |         |          |   |   |         |        
|Total deferred tax liabilities |                                                 |              | (20,726 | )        |   |   | (17,870 | )      
|                               |                                                 |              |         |          |   |   |         |        
|Net deferred tax liability     |                                                 | $            |        |          |   | $ |        |        
|                               |                                                 |              |         |          |   |   |         |        

At December 31, 2002, the Company had net
operating loss carryforwards for federal income tax purposes
aggregating approximately $309,747,000. If not utilized to
reduce taxable income in future periods, the federal net
operating loss carryforwards will begin to expire in 2009. At
December 31, 2002, federal alternative minimum tax credit
carryforwards of $1,595,000, were available to offset future
regular federal tax liabilities. At December 31, 2002,
federal research and development tax credit carryforwards of
approximately $32,000 were available to offset future federal
tax liabilities.

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



|     |                           
|---- | --------------------------
|(10) | Related Party Transactions

Subsequent to Libertys acquisition of
Ascent in March of 2000, Liberty and Ascent have allocated
certain general and administrative expenses to the Company.
Although there are no written agreements with Liberty and Ascent
for these allocations, the Company believes the amounts to be
reasonable. Allocations from Liberty and Ascent aggregated
$145,000 and $100,000 during the year ended December 31,
2002 and 2001, respectively, and such amounts are included in
selling, general and administrative expense in the accompanying
consolidated statements of operations. In addition, the Company
reimburses Liberty for certain expenses paid by Liberty on
behalf of the Company. Amounts owed to Liberty and Ascent
pursuant to these arrangements ($1,906,000 at December 31,
2002) are non-interest bearing. Subsequent to December 31,
2002, the Company repaid $895,000 of the amounts due to Liberty
and Ascent.

Effective October 1, 2002, the Company
entered into a short-term agreement with Ascent Media Group,
Inc. (Ascent Media Group), a controlled subsidiary
of Liberty, pursuant to which Ascent Media Group supplied the
Company with uplink and satellite transport services at a cost
of $120,000 through December 31, 2002. The Company has been
utilizing the services to test the satellite delivery of content
updates to the Companys downlink sites at various hotels.
The Company has completed its testing of satellite delivery and
the parties have executed a Content Preparation and Distribution
Services Agreement, dated March 24, 2003,

II-35



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

to be effective April 1, 2003, which will
provide for uplink and satellite transport services for a
monthly fee of approximately $36,000, subject to adjustment, for
a period of five years. The long-term agreement also provides
for Ascent Media Group to supply the Company with content
preparation services at a negotiated rate for a period of five
years at the Companys request. The Company is also
negotiating an agreement with a wholly-owned subsidiary of
Ascent Media Group for the installation by such subsidiary of
satellite equipment at the Companys downlink sites at
hotels for a set fee per installation completed.



|     |                                             
|---- | --------------------------------------------
|(11) | Transactions with Officers and
    Directors

On August 8, 2000, the Company issued
13,500 shares of the Companys Series A,
$.01 Par Value Convertible Participating Preferred Stock
(Series A Preferred Stock), to the then
Chairman and Chief Executive Officer of the Company in exchange
for a $21,080,000 promissory note and a $13,500 cash payment.
The promissory note is secured by the Series A Preferred
Stock or proceeds thereon and the former Chairman and Chief
Executive Officers personal obligations under such
promissory note are limited to 25% of the principal amount of
the note plus accrued interest thereon. The note, which may not
be prepaid, is due and payable on August 1, 2005, and
interest on the note accrues at a rate of 7% per annum,
compounded quarterly.

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

The Company had made arrangements for the use of
an airplane owned by a limited liability company of which the
Companys former Chairman of the Board and Chief Executive
Officer is the sole member. When that airplane was used for
purposes related to the conduct of the Companys business,
the Company reimbursed the limited liability company for such
use at market rates. The aggregate amount paid for this service
during the year ended December 31, 2001 was approximately
$190,000. This arrangement was terminated in June 2001.



|     |                      
|---- | ---------------------
|(12) | Concentration of Risk

The Company generates the majority of its revenue
from the guest usage of proprietary video systems in various
hotels located primarily throughout the United States, Canada
and Mexico. The Company performs periodic credit evaluations of
its installed hotel locations and generally requires no
collateral while maintaining allowances for potential credit
losses. The Company invests its cash in high-credit quality
institutions. These instruments are short-term in nature and,
therefore, bear minimal risk.

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

As further discussed below, the Hilton master
contract has expired, and Hilton has signed a new master
contract with a competitor of the Company. In addition, the
Company does not have master contracts with

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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

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

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

II-37



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|     |                                 
|---- | --------------------------------
|(13) | Geographic Operating Information

The following represents total revenue for the
years ended December 31, 2002, 2001 and 2000 and long-lived
assets as of December 31, 2002, 2001 and 2000 by geographic
territory (amounts in thousands):

|                  |  |          |         |        |  |          |         |        |  |          |         |        |  |   |         |  |  |   |         |  |  |   |         | 
|----------------- |  | -------- | ------- | ------ |  | -------- | ------- | ------ |  | -------- | ------- | ------ |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                  |  |          |         |        |  |         
|                  |  | 2002     |         | 2001   |  | 2000    
|                  |  |          |         |        |  |         
|                  |  |          |         | Long-  |  |          |         | Long-  |  |          |         | Long- 
|                  |  | Total    |         | Lived  |  | Total    |         | Lived  |  | Total    |         | Lived 
|                  |  | Revenue* |         | Assets |  | Revenue* |         | Assets |  | Revenue* |         | Assets
|                  |  |          |         |        |  |          |         |        |  |          |         |       
|United States     |  | $        | 219,823 |        |  | $        | 316,362 |        |  | $        | 218,863 |        |  | $ | 340,952 |  |  | $ | 237,975 |  |  | $ | 339,775 | 
|Canada            |  |          | 13,469  |        |  |          | 19,296  |        |  |          | 13,243  |        |  |   | 21,270  |  |  |   | 13,441  |  |  |   | 21,028  | 
|All other foreign |  |          | 5,105   |        |  |          | 4,893   |        |  |          | 7,303   |        |  |   | 11,821  |  |  |   | 13,964  |  |  |   | 16,994  | 
|                  |  |          |         |        |  |          |         |        |  |          |         |        |  |   |         |  |  |   |         |  |  |   |         | 
|Total             |  | $        | 238,397 |        |  | $        | 340,551 |        |  | $        | 239,409 |        |  | $ | 374,043 |  |  | $ | 265,380 |  |  | $ | 377,797 | 
|                  |  |          |         |        |  |          |         |        |  |          |         |        |  |   |         |  |  |   |         |  |  |   |         | 



---



|  |                                                                                      
|- | -------------------------------------------------------------------------------------
|* | Total revenue is attributed to countries based on
    invoicing location of customer.



|     |                      
|---- | ---------------------
|(14) | Employee Benefit Plan

On Command is the sponsor of the
On Command 401(k) Saving Plan ( the On Command 401(k)
Plan), which provides employees an opportunity to create a
retirement fund by contributing up to 15% of their eligible
earnings in several different mutual funds. The Company, by
resolution of the Board of Directors, generally contributes up
to 50% of the amount contributed by employees up to a maximum
matching contribution of 4% of the participating employees
wages. Matching contributions made by the Company were
approximately $798,000, $971,000 and $1,068,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.



|     |                                   
|---- | ----------------------------------
|(15) | Restructuring and Relocation Costs

During 2001, the Company completed the process of
relocating its headquarter operations from San Jose,
California to Denver, Colorado. During the years ended
December 31, 2001 and 2000, $12,132,000 and $6,108,000,
respectively of relocation expenses were recognized and recorded
in connection with such relocation. The relocation expenses
included severance, stay bonuses, hiring costs, moving and
travel costs, contract labor, and redundant labor and overhead
costs.

On May 21, 2001, the compensation committee
of the Companys board of directors approved a
restructuring plan, which affected approximately 50 employees.
Severance costs associated with the May 2001 restructuring plan
aggregated $2,212,000 and were recognized during the year ended
December 31, 2001.

During the fourth quarter of 2001, the Company
recorded a $2,697,000 restructuring charge to record the future
lease obligations (net of estimated sublease income) associated
with the Companys exit from certain leased premises in
San Jose, California.

At December 31, 2002, the remaining
liability related to the May 2001 restructuring plan was
$259,000, and the liability with respect to the vacated premises
in San Jose, California was $1,590,000. The liability
related to the vacated premises in San Jose, California is
payable through June 2004.

II-38



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|     |                              
|---- | -----------------------------
|(16) | Commitments and Contingencies



| |                 
| | ----------------
| | Operating Leases

The Company leases office space and certain
equipment pursuant to non-cancelable operating leases. Rental
expense under such agreements amounted to $3,586,000, $4,546,000
and $3,289,000 for the years ended December 31, 2002, 2001
and 2000, respectively.

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

|                          |                     |  |   |       | 
|------------------------- | ------------------- |  | - | ----- | 
|Years Ending December 31: |                     |  |   |      
|                          | 2003                |  |   | 3,229 | 
|                          | 2004                |  |   | 2,124 | 
|                          | 2005                |  |   | 881   | 
|                          | 2006                |  |   | 308   | 
|                          | 2007 and thereafter |  |   | 95    | 
|                          |                     |  |   |      
|                          | Total               |  | $ | 6,637 | 
|                          |                     |  |   |      

The foregoing future minimum payment amounts
include future payments provided for in the Companys 2001
restructuring reserve with respect to its San Jose,
California premises. See note 15.



| |           
| | ----------
| | Litigation

The Company has received a series of letters from
Acacia Media Technologies Corporation regarding a portfolio of
patents owned by Acacia. Acacia has alleged that its patents
cover certain activities performed by the Company and has
proposed that the Company take a license under those patents.
The Company is reviewing Acacias patents and believes
there are substantial arguments that Acacias claims lack
merit.

The Company is a defendant, and may be a
potential defendant, in other lawsuits and claims arising in the
ordinary course of its business. While the outcomes of such
claims, lawsuits, or other proceedings cannot be predicted with
certainty, management expects that such liability, to the extent
not provided for by insurance or otherwise, will not have a
material adverse effect on the financial condition of the
Company.



| |      
| | -----
| | Other

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

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

II-39



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##### Table of Contents



ON COMMAND CORPORATION


(An Indirect Consolidated Subsidiary of
Liberty Media Corporation)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|     |                                                
|---- | -----------------------------------------------
|(17) | Quarterly Results of Operations
    (Unaudited)

The following is a summary of unaudited quarterly
results of operations for the years ended December 31, 2002
and 2001:

|                                 |  |                                               |         |          |  |         |         |          |  |   |         |   |  |   |         |  
|-------------------------------- |  | --------------------------------------------- | ------- | -------- |  | ------- | ------- | -------- |  | - | ------- | - |  | - | ------- | -
|                                 |  | Dec. 31                                       |         | Sept. 30 |  | June 30 |         | March 31
|                                 |  |                                               |         |          |  |         |         |         
|                                 |  |                                              
|                                 |  | (Amounts in thousands, except per share data)
|2002                             |  |                                               |         |          |  |         |         |          |  |   |         |   |  |   |         |  
|Revenue                          |  | $                                             | 59,225  |          |  | $       | 60,790  |          |  | $ | 60,999  |   |  | $ | 57,383  |  
|Direct margin                    |  |                                               | 27,894  |          |  |         | 30,462  |          |  |   | 30,483  |   |  |   | 28,004  |  
|Net loss                         |  |                                               | (14,273 | )        |  |         | (6,124  | )        |  |   | (12,197 | ) |  |   | (10,013 | )
|Basic and diluted loss per share |  | $                                             | (0.46   | )        |  | $       | (0.27   | )        |  | $ | (0.46   | ) |  | $ | (0.39   | )
|2001                             |  |                                               |         |          |  |         |         |          |  |   |         |   |  |   |         |  
|Revenue                          |  | $                                             | 55,535  |          |  | $       | 58,322  |          |  | $ | 63,338  |   |  | $ | 62,214  |  
|Direct margin                    |  |                                               | 27,488  |          |  |         | 28,360  |          |  |   | 31,286  |   |  |   | 32,327  |  
|Net loss                         |  |                                               | (34,111 | )        |  |         | (12,481 | )        |  |   | (19,959 | ) |  |   | (19,165 | )
|Basic and diluted loss per share |  | $                                             | (1.11   | )        |  | $       | (0.44   | )        |  | $ | (0.68   | ) |  | $ | (0.63   | )

II-40



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##### Table of Contents






PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The following lists the directors and executive
officers of the Company, their birth dates, a description of
their business experience and positions held with the Company as
of February 1, 2003.

|                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                                        |  | Position                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Kenneth G. Carroll
    Born April 21, 1955  |  | Has served as a Director of On Command since
    May 2002. Mr. Carroll has served as Senior Vice President
    and Chief Financial Officer of the Companys parent,
    Liberty Satellite & Technology, Inc.
    (LSAT), since February 1995 and as its Treasurer
    since August 1999. Mr. Carroll is also currently
    LSATs acting President. He has also served as Senior Vice
    President and Chief Financial Officer of Phoenixstar, Inc.
    (formerly PRIMESTAR, Inc.), since April 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                           
|Bernard G. Dvorak
    Born April 19, 1960   |  | Has been Senior Vice President, Chief Financial
    Officer and Treasurer of On Command since July 2002. Mr.
    Dvorak was Chief Executive Officer and a member of the board of
    directors of Formus Communications, Inc., a provider of fixed
    wireless services in Europe, from September 2000 until June
    2002, and from April 1999 until September 2000, he served as
    Chief Financial Officer of Formus Communications, Inc. On
    March 28, 2001, an involuntary petition under
    Chapter 7 of the United States Bankruptcy Code was filed
    against Formus Communications, Inc. in the United States
    Bankruptcy Court for the District of Colorado. From February
    1998 until April 1999, Mr. Dvorak was President, Chief
    Executive Officer and a member of the board of directors of
    Cordillera Communications Corp., a specialized mobile radio
    operator in Latin America, and from February 1997 until February
    1998, he served as Chief Financial Officer of Cordillera
    Communications Corp.                                                                                                                                                                                                 
|                                           
|William R. Fitzgerald
    Born May 20, 1957 |  | Has served as a Director of On Command since
    October 2001. Mr. Fitzgerald has served as Senior Vice
    President of the Companys indirect parent, Liberty Media
    Corporation (Liberty), and as Chairman of the Board
    of the Companys affiliate, Ascent Media Group, Inc.
    (Ascent Media Group), formerly known as Liberty
    Livewire Corporation, since August 2000, and acting Chief
    Executive Officer of Ascent Media Group since May 2002.
    Mr. Fitzgerald served as Chief Operating Officer,
    Operations Administration, of AT&T Broadband LLC (which was
    formerly known as Tele-Communications, Inc. (TCI),
    and is now a part of Comcast Corporation) from August 1999 to
    May 2000, and Executive Vice President and Chief Operating
    Officer of TCI from March 1999 to August 1999.
    Mr. Fitzgerald served as Executive Vice President and Chief
    Operating Officer of TCI Communications, Inc. (TCI
    Communications), the domestic cable subsidiary of TCI,
    from November 1998 to March 1999, and served as an Executive
    Vice President of TCI Communications from December 1997 to March
    1999. Mr. Fitzgerald is also a Director of LSAT and Ascent
    Media Group.
|                                           
|Paul A. Gould
    Born September 27, 1945   |  | Has served as a Director of On Command since
    April 2000. Mr. Gould has served for over five years as a
    Managing Director and Executive                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

III-1



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##### Table of Contents



|                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                                        |  | Position                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                            |  | Vice President of Allen & Company
    Incorporated, an investment banking services company.
    Mr. Gould is a Director of Liberty and Ampco-Pittsburgh
    Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                           
|Mark K. Hammond
    Born September 2, 1960  |  | Has served as a Director of On Command since
    November 2002. Mr. Hammond has been Executive Vice
    President and Chief Financial Officer of Amerus Annuity Group,
    an insurance company focused exclusively in the individual
    annuity market, since January 2001. Mr. Hammond was Chief
    Financial Officer and Chief Operating Officer of Integrated
    Communications Systems Corporation, Inc., a start-up sales,
    distribution and marketing services company, from March 2000
    through November 2000, and was Vice President of OrionAuto,
    Inc., an insurance company, from January 1999 through December
    1999. Mr. Hammond worked in various positions at
    Deloitte & Touche LLP from 1983 to 1998 with the most
    recent position being Audit Partner from June 1996 through
    December 1998.                                                                                                                    
|                                           
|Gary S. Howard
    Born February 22, 1951   |  | Has served as Chairman of the Board of
    On Command since October 2001 and as a Director of On
    Command since April 2000. Mr. Howard has served as
    Executive Vice President, Chief Operating Officer, and Director
    of Liberty since July 1998. Mr. Howard has also served as
    Chairman of the Board of LSAT since August 2000, as Chief
    Executive Officer of LSAT from December 1996 to April 2000.
    Mr. Howard served as Executive Vice President of
    Tele-Communications, Inc., or TCI (now a part of Comcast
    Corporation), from December 1997 to March 1999; as Chief
    Executive Officer, Chairman of the Board and a Director of TV
    Guide, Inc. from June 1997 to March 1999; and as President and
    Chief Executive Officer of TCI Ventures Group, LLC from December
    1997 to March 1999. Mr. Howard is a Director of Liberty,
    LSAT, Ascent Media Group, SpectraSite, Inc., and
    UnitedGlobalCom, Inc.
|                                           
|David A. Simpson
    Born February 19, 1958 |  | Has been Senior Vice President of
    Research & Development and Engineering of
    On Command since July 2001, and Senior Vice President of
    Research & Development, Operations and Engineering from
    October 2000 until July 2001. Mr. Simpson was Vice
    President, Operations of On Command, from July 1998 until
    October 2000. From January 1997 until June 1998,
    Mr. Simpson founded HomeIntranet, Inc., a start-up venture
    formed to design and market an integrated residential gateway
    device to simplify television, voice, data and home automation.                                                                                                                                                                                                                                                                                                                                                                     
|                                           
|Laurence M. Smith
    Born April 16, 1959   |  | Has been Senior Vice President of Sales and
    Distribution for On Command since November 2001. From August
    2001 to November 2001, Mr. Smith served as a consultant for
    On Command. Mr. Smith was Executive Vice President of Sales
    and Marketing for IntelliReady, Inc., a provider of wiring and
    technology for entertainment, communication and data networks,
    from October 2000 until June 2001, and President of Sun Valley
    Resources, Inc., a start-up applications service provider
    serving professional employment organizations, from February
    2000 until October 2000. From November 1996 until January 2000,
    Mr. Smith was co-founder and Executive Vice President of
    Internet Gift Registries, Inc., an e-commerce start-up venture.                                                                                                                                                                   

III-2



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##### Table of Contents



|                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                                           |  | Position                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Christopher Sophinos
    Born January 26, 1952 |  | Has served as Director of On Command since
    December 2002. Has been President of On Command since April
    2001 and Chief Executive Officer since October 2001.
    Mr. Sophinos has also served as Senior Vice President of
    LSAT since April 2000. Mr. Sophinos served as President of
    LSAT from September 1997 to April 2000 and as Senior Vice
    President of LSAT from February 1996 until September 1997.
    Mr. Sophinos served as Senior Vice President of PRIMESTAR,
    Inc. (now known as Phoenixstar, Inc.) from April 1998 until
    August 1999. Mr. Sophinos served as the President of Boats
    Unlimited, a retail boat dealership, from November 1993 to
    September 1998.
|                                              
|Pamela J. Strauss
    Born September 5, 1960   |  | Has been Senior Vice President, General Counsel
    and Secretary of the Company since January 2002, and Vice
    President, General Counsel and Secretary since June 2001.
    Ms. Strauss has also served as General Counsel of LSAT
    since February 2000, and Secretary of LSAT since April 2000.
    Ms. Strauss served as Corporate Counsel for LSAT from April
    1994 to April 1998, and Assistant Secretary from December 1996.
    Ms. Strauss has also served as Associate General Counsel for
    Phoenixstar, Inc. since April 1998, Secretary since July 1999
    and Assistant Secretary from August 1997 to June 1999.                                                                    
|                                              
|J. David Wargo
    Born October 1, 1953        |  | Has served as a Director of On Command since
    November 1998. Mr. Wargo has served as President of
    Wargo & Company, Inc., a private investment company
    specializing in the communications industry, since 1993.
    Mr. Wargo is also a Director of Strayer Education, Inc. and
    OpenTV, Inc.                                                                                                                                                                                                                                                                                                                                                                                                   

During the third quarter of 2002,
Messrs. Richard D. Goldstein, Carl E. Vogel and Gary L.
Wilson resigned their positions as directors of the Company. In
June 2002, Mr. William D. Myers resigned his position as
Executive Vice President, Chief Financial Officer and Treasurer.

There are no family relations by blood, marriage
or adoption of first cousin or closer, among the above-named
directors and executive officers.

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

Compliance With Securities Laws

Section 16(a) of the Securities Exchange Act
of 1934, as amended, requires the Companys executive
officers and directors and persons who own more than ten percent
of a registered class of the Companys equity securities,
to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission
(SEC). Such persons are required by SEC regulations
to furnish the Company with copies of all Section 16(a)
forms they file.

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

III-3



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##### Table of Contents








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Summary Compensation Table

The following table is a summary of all forms of
compensation paid by the Company to the officers named therein
(the Named Executive Officers) for services rendered
in all capacities to the Company for the fiscal years ended
December 31, 2002, 2001 and 2000 (total of six persons).

|                                  |  |      |      |        |  |       |         |              |  |            |        |              |  |              |   |  |  |  |   |  |  |  |         |  |  |  |        | 
|--------------------------------- |  | ---- | ---- | ------ |  | ----- | ------- | ------------ |  | ---------- | ------ | ------------ |  | ------------ | - |  |  |  | - |  |  |  | ------- |  |  |  | ------ | 
|                                  |  |      |      |        |  |       |         |              |  | Restricted |        | Securities   |  |             
|                                  |  |      |      |        |  |       |         | Other annual |  | stock      |        | underlying   |  | All other   
|                                  |  |      |      | Salary |  | Bonus |         | compensation |  | award(s)   |        | options/SARs |  | compensation
|Name and Position                 |  | Year |      | ($)    |  | ($)   |         | ($)          |  | ($)        |        | (#)          |  | ($)(6)      
|                                  |  |      |      |        |  |       |         |              |  |            |        |              |  |             
|Christopher Sophinos(1)           |  |      | 2002 |        |  |       | 324,989 |              |  |            | 50,000 |              |  |              |  |  |  |  |  |  |  |  | 150,000 |  |  |  | 5,500  | 
|President and Chief Executive     |  |      | 2001 |        |  |       | 201,262 |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  | 200,000 |  |  |  |       | 
|Officer                           |  |      | 2000 |        |  |       |        |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  |        |  |  |  |       | 
|Bernard G. Dvorak(2)              |  |      | 2002 |        |  |       | 114,333 |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  | 100,000 |  |  |  | 3,033  | 
|Senior Vice President and Chief   |  |      | 2001 |        |  |       |        |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  |        |  |  |  |       | 
|Financial Officer and Treasurer   |  |      | 2000 |        |  |       |        |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  |        |  |  |  |       | 
|David A. Simpson                  |  |      | 2002 |        |  |       | 299,063 |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  | 100,000 |  |  |  | 5,500  | 
|Senior Vice President, Research & |  |      | 2001 |        |  |       | 290,000 |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  |        |  |  |  | 12,114 | 
|Development and Engineering       |  |      | 2000 |        |  |       | 212,855 |              |  |            | 19,812 |              |  |              |  |  |  |  |  |  |  |  | 100,000 |  |  |  | 6,281  | 
|Laurence M. Smith(3)              |  |      | 2002 |        |  |       | 240,631 |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  | 50,000  |  |  |  | 5,500  | 
|Senior Vice President, Sales and  |  |      | 2001 |        |  |       | 69,846  |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  | 100,000 |  |  |  | 40     | 
|Distribution                      |  |      | 2000 |        |  |       |        |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  |        |  |  |  |       | 
|Pamela J. Strauss(4)              |  |      | 2002 |        |  |       | 167,842 |              |  |            | 35,000 |              |  |              |  |  |  |  |  |  |  |  | 50,000  |  |  |  | 5,500  | 
|Senior Vice President and General |  |      | 2001 |        |  |       | 113,811 |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  |        |  |  |  |       | 
|Counsel                           |  |      | 2000 |        |  |       |        |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  |        |  |  |  |       | 
|William D. Myers(5)               |  |      | 2002 |        |  |       | 136,237 |              |  |            | 30,000 |              |  |              |  |  |  |  |  |  |  |  | 100,000 |  |  |  | 4,817  | 
|Former Executive Vice President,  |  |      | 2001 |        |  |       | 132,708 |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  | 150,000 |  |  |  | 11,561 | 
|Chief Financial Officer and       |  |      | 2000 |        |  |       |        |              |  |            |       |              |  |              |  |  |  |  |  |  |  |  |        |  |  |  |       | 
|Treasurer                         |  |      |      |        |  |       |         |              |  |            |        |              |  |              |   |  |  |  |   |  |  |  |         |  |  |  |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Sophinos became President of the Company
    on April 27, 2001. Although Mr. Sophinos has continued
    to perform duties as an officer of LSAT, Mr. Sophinos has
    devoted substantially all of his time to the Company since
    April 27, 2001. As such, the Company has been responsible
    for Mr. Sophinos compensation since May 1, 2001,
    and the 2001 compensation in the table represents the amount
    paid to reimburse LSAT for Mr. Sophinos compensation
    for the eight months ended December 31, 2001. The Company
    commenced paying Mr. Sophinos salary directly in
    January 2002.                  
|   
|(2) | Mr. Dvorak became Senior Vice President,
    Chief Financial Officer and Treasurer in July 2002. Accordingly,
    the 2002 compensation information included in the table
    represents five and one-half months of employment.                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(3) | Mr. Smith became Senior Vice President of
    Sales and Distribution for On Command in November 2001.
    From August 2001 to November 2001, Mr. Smith served as a
    consultant to On Command. Accordingly, the 2001
    compensation information included in the table represents two
    months of employment and three months of consulting services.                                                                                                                                                                                                                                                                                 
|   
|(4) | Ms. Strauss became Vice President, General
    Counsel and Secretary of On Command in June 2001. Although
    Ms. Strauss has continued to perform duties as an officer
    of LSAT, Ms. Strauss has devoted substantially all of her
    time to the Company since June 2001. As such, the Company has
    been responsible for Ms. Strauss compensation since
    June 2001, and the 2001 compensation in the table represents the
    amount paid to reimburse LSAT for Ms. Strauss
    compensation for the seven months ended December 31, 2001.
    The Company commenced paying Ms. Strausss salary
    directly in January 2002.
|   
|(5) | Mr. Myers became Executive Vice President,
    Chief Financial Officer and Treasurer in June 2001. Accordingly,
    the 2001 compensation information included in the table
    represents seven months of                                                                                                                                                                                                                                                                                                                                                                                                                                 

III-4



---



##### Table of Contents



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | employment. Due to Mr. Myers June 2002
    resignation, the 2002 compensation information included in the
    table represents five months of employment.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Other compensation includes: contributions by the
    Company on behalf of the executives to the On Command
    401(k) Plan. The On Command 401(k) Plan provides employees
    with an opportunity to save for retirement by contributing up to
    15% of their eligible earnings in several different mutual
    funds. The Company, by resolution of the Board of Directors,
    generally contributes up to 50% of the amount contributed by the
    employee up to maximum matching contribution of 4%. Participant
    contributions to the On Command 401(k) Plan are fully
    vested upon contribution.

Option Grants in Last Fiscal Year

|                     |  |                   |         |                 |  |               |       |            |  |            |      |  |  |  |         |  |  |  |         | 
|-------------------- |  | ----------------- | ------- | --------------- |  | ------------- | ----- | ---------- |  | ---------- | ---- |  |  |  | ------- |  |  |  | ------- | 
|                     |  |                   |         |                 |  |               |       |           
|                     |  | Individual Grants |         |                 |  |               |       |           
|                     |  |                   |         |                 |  |               |       |           
|                     |  | Number of         |         |                 |  |               |       |            |  |           
|                     |  | securities        |         | Percent of      |  |               |       |            |  |           
|                     |  | underlying        |         | total options   |  |               |       |            |  | Grant date
|                     |  | options           |         | granted to      |  | Exercise or   |       |            |  | present   
|                     |  | granted           |         | employees in    |  | base price    |       | Expiration |  | value     
|                     |  | (1)               |         | fiscal year (2) |  | ($/Share) (3) |       | date       |  | ($)(4)    
|                     |  |                   |         |                 |  |               |       |            |  |           
|Christopher Sophinos |  |                   | 150,000 |                 |  |               | 11.7% |            |  |            | 5.45 |  |  |  | 1/22/12 |  |  |  | 573,000 | 
|Bernard G. Dvorak    |  |                   | 100,000 |                 |  |               | 7.8%  |            |  |            | 1.10 |  |  |  | 7/8/12  |  |  |  | 77,000  | 
|David A. Simpson     |  |                   | 100,000 |                 |  |               | 7.8%  |            |  |            | 5.45 |  |  |  | 1/22/12 |  |  |  | 382,000 | 
|Laurence M. Smith    |  |                   | 50,000  |                 |  |               | 3.9%  |            |  |            | 5.45 |  |  |  | 1/22/12 |  |  |  | 191,000 | 
|Pamela J. Strauss    |  |                   | 50,000  |                 |  |               | 3.9%  |            |  |            | 5.45 |  |  |  | 1/22/12 |  |  |  | 191,000 | 
|William D. Myers     |  |                   | 100,000 |                 |  |               | 7.8%  |            |  |            | 5.45 |  |  |  | 1/22/12 |  |  |  | 382,000 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The options expire ten years from grant date and
    vest 20% annually over five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | The total number of options granted to
    On Command employees in 2002 was 1,282,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(3) | Represents the closing market price per share of
    the Company Common Stock on the date of the grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(4) | On Command used the Black-Scholes option
    pricing model to determine grant date present values using the
    following assumptions for the year 2002: stock price volatility
    of 86.3%; a five year option term; a discount rate equal to the
    one-year Treasury Bill rate at the date of grant; the closing
    price of the Company Common Stock on the date of grant; and an
    expected dividend rate of zero. Forfeitures are reflected as
    they occur. The use of this model is in accordance with SEC
    rules; however the actual value of an option will be measured by
    the difference between the stock price and the exercise price on
    the date the option is exercised. Accordingly, the realized
    value, if any, will not necessarily be the value determined by
    the model.

III-5



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##### Table of Contents



Option Exercises And Fiscal Year-End
Values

The following table provides, for the Named
Executive Officers, information on (i) the exercise during
the year ended December 31, 2002 of options with respect to
shares of Company Common Stock, (ii) the number of shares
of Company Common Stock represented by unexercised option owned
by them at December 31, 2002 and (iii) the value of
those options as of the same date.



| |                                                                    
| | -------------------------------------------------------------------
| | Aggregated Option Exercises in 2002, and
    Year-End Option Values

|                     |  |            |   |          |  |                        |   |                       |  |             |        |               |  |  |         |  |  |  |   |  |  |  |   | 
|-------------------- |  | ---------- | - | -------- |  | ---------------------- | - | --------------------- |  | ----------- | ------ | ------------- |  |  | ------- |  |  |  | - |  |  |  | - | 
|                     |  |            |   |          |  |                        |   |                       |  |            
|                     |  |            |   |          |  | Number of securities   |   |                      
|                     |  |            |   |          |  | underlying unexercised |   | Value of in-the-money
|                     |  | Shares     |   |          |  | options at 12/31/02    |   | options at 12/31/02  
|                     |  | underlying |   |          |  |                        |   |                      
|                     |  | options    |   | Value    |  | Exercisable            |   | Unexercisable         |  | Exercisable |        | Unexercisable
|                     |  | exercised  |   | realized |  | (#)                    |   | (#)                   |  | ($)         |        | ($)          
|                     |  |            |   |          |  |                        |   |                       |  |             |        |              
|Christopher Sophinos |  |            |  |          |  |                        |  |                       |  |             | 40,000 |               |  |  | 310,000 |  |  |  |  |  |  |  |  | 
|Bernard G. Dvorak    |  |            |  |          |  |                        |  |                       |  |             |       |               |  |  | 100,000 |  |  |  |  |  |  |  |  | 
|David A. Simpson     |  |            |  |          |  |                        |  |                       |  |             | 99,000 |               |  |  | 166,000 |  |  |  |  |  |  |  |  | 
|Laurence M. Smith    |  |            |  |          |  |                        |  |                       |  |             | 20,000 |               |  |  | 130,000 |  |  |  |  |  |  |  |  | 
|Pamela J. Strauss    |  |            |  |          |  |                        |  |                       |  |             | 10,000 |               |  |  | 90,000  |  |  |  |  |  |  |  |  | 
|William D. Myers(1)  |  |            |  |          |  |                        |  |                       |  |             | 30,000 |               |  |  |        |  |  |  |  |  |  |  |  | 



---



|    |                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Myers unvested options on
    220,000 shares expired in June 2002, in connection with his
    resignation from the Company.

Employment and Severance
Arrangements

For a description of a consulting arrangement
with a former executive officer of the Company, see
Certain Relationships and Related Party
Transactions, below.

The Executive Severance Plan.On May 1, 2002, the Company
adopted the 2002 Executive Severance Pay Plan. Employees
eligible to participate under the Executive Severance Pay Plan
include the Companys Senior Vice Presidents, Executive
Vice Presidents, President and Chief Executive Officer. Under
the Executive Severance Pay Plan, an eligible employee may
receive certain payments and benefits in the event such
employees employment (i) is terminated by the Company
as a result of a layoff, reduction in force, or as part of a
corporate transaction involving the Company where the employee
is not offered comparable employment with the entity involved in
the corporate transaction with the Company, or (ii) is
terminated by the employee for good reason. A termination of
employment by the employee will be considered good
reason if the employee terminates his or her employment
because the employee is relocated by the Company or a
successor-in-interest to the Company to a primary job location
more than 50 miles from the employees prior job
location with the Company or because the employees base
wage rate is reduced by any amount. The plan administrator has
the sole discretion to determine whether these conditions are
met.

Under the Executive Severance Pay Plan, if an
executed waiver and release agreement is delivered by the
eligible employee to the Company within the period specified by
the Company, eligible employees are entitled to payment as
follows:

|                                     |  |                        |           | 
|------------------------------------ |  | ---------------------- | --------- | 
|Title of Eligible Employee           |  | Amount of Compensation
|                                     |  |                       
|Senior Vice President                |  |                        | 12 months | 
|Executive Vice President             |  |                        | 18 months | 
|President or Chief Executive Officer |  |                        | 24 months | 

Under the Severance Plan, if an executed waiver
and release agreement is delivered by the eligible employee to
the Company within the period specified by the Company, eligible
employees are entitled to salary continuation of from one month
to twelve months depending upon the employees title.

III-6



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##### Table of Contents



Compensation of Directors

In May 1997, the Company adopted a compensation
plan for independent directors, providing for both a cash
component and an equity component. As cash compensation for
their service to the Company, each independent director receives
an annual retainer of $6,000 in cash, payable quarterly, $500
for each board meeting attended, and $500 for each meeting of a
committee of the board attended. Each independent director who
is also a chairman of a committee of the board receives an
additional annual fee of $2,000 payable quarterly.

The equity component of such compensation plan
was set forth in the 1997 Non-Employee Directors Stock Plan
adopted by the board of directors and the stockholders of the
Company (the Directors Stock Plan). Under the
Directors Stock Plan, each independent director was originally
granted an award of 400 shares of Company Common Stock and
a non-qualified option to purchase 4,000 shares of
Company Common Stock, priced at the fair market value on the
date of grant, each on an annual basis effective immediately
following the Companys annual stockholder meeting. Such
options are exercisable as follows: 25% on the first anniversary
of the date of grant, 50% on the second anniversary of the date
of grant and 100% on the third anniversary of the date of grant.

In April 1999, the board ratified and adopted an
amendment to the Directors Stock Plan, which amendment was
approved by the stockholders at the Companys 1999 annual
stockholders meeting. Pursuant to the amendment, the independent
directors would continue to receive 400 shares annually,
however, the annual grant to independent directors of an option
to purchase 4,000 shares of Company Common Stock was
replaced with a one-time grant of an option to
purchase 50,000 shares of Company Common Stock. Under
the terms of the amendment, any independent director who
received such an option would not be eligible to receive an
additional option under the Directors Stock Plan until the fifth
annual meeting after the original grant. Such options provided
for vesting of 25% on the first anniversary of grant, and 25%
and 50%, respectively, on the second and third anniversaries, or
100% upon a change in control of the Company. In November 1999,
the board acted to provide that the acquisition of Ascent
Entertainment Group, Inc. (Ascent) by Liberty would
constitute a change in control of the Company for purposes of
the Directors Stock Plan.

In June 2000, the board adopted a further
amendment to the Directors Stock Plan, which amendment was
approved by the Companys stockholders in October 2000, to
increase the authorized number of shares under the Plan subject
to the grant of options from 296,800 to 696,800 shares.

Since May 1997, the definition of independent
director has changed, both for purposes of the Directors Stock
Plan and for purposes of the cash compensation paid to
independent directors. Initially, independent
director meant a director who was not an employee of the
Company or any direct or indirect parent or subsidiary of the
Company. In June 2000, the board of directors changed the
definition of independent director to mean a director who was
not an officer or employee of the Company. The Companys
stockholders subsequently approved this change as an amendment
to the Directors Stock Plan in October 2000. Then, on
May 9, 2002, the definition of the term independent
director under the Directors Stock Plan and with respect
to the cash compensation paid by the Company to its independent
directors, was changed again to mean a director who is not an
employee of the Company or Liberty, or of any of their
respective subsidiaries or affiliates.

Effective December 19, 2002, the Board
adopted a new compensation plan for independent directors which
eliminates the equity component set forth in the Directors Stock
Plan. The new plan defines an independent director
as a director who is not an officer or employee of the Company
or an officer or employee of Liberty or any of its direct or
indirect subsidiaries. Under the new plan, independent directors
receive an annual retainer of $20,000 in cash, which is to be
paid out quarterly. In addition, the chairman of the Audit
Committee receives an annual retainer of $7,500 and the chairman
of other committees receive an annual retainer of
$5,000 per committee. Independent directors receive $1,000
for each board meeting attended in person, $500 for each board
meeting attended telephonically, $750 for each audit committee
meeting attended in person or telephonically and $500 for all
other committee meetings attended in person or

III-7



---



##### Table of Contents



telephonically. Independent directors are also
reimbursed for reasonable out of pocket expenses for attendance
at board and committee meetings.


In addition to the compensation provided
generally to independent directors, as described above, during
the first quarter of 2002, Messrs. Wargo and Goldstein each
received $60,000 for their service during 2001 and the first
quarter of 2002 on a special committee formed by the board of
directors.

Additional Information with Respect to
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions

The current members of the Compensation Committee
of the board of directors are Messrs. J. David Wargo
(Chairman) and Mark K. Hammond. Messrs. Goldstein and
Wilson served as members of the Compensation Committee during
2001 and thereafter until their resignations as members of the
board of directors in September 2002. No member of the
Companys Compensation Committee during 2001 nor any member
of the current Compensation Committee is or was an officer in
the Company or any of its affiliates.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Security Ownership of Certain Beneficial
Owners

As of December 31, 2002, the voting
securities of the Company consisted of 30,854,489 outstanding
shares of Company Common Stock and 13,500 issued and outstanding
shares outstanding of Series A, $.01 par value
Convertible Participating Preferred Stock (Series A
Preferred Stock). As of such date, the 15,000 shares
of Series B Cumulative Redeemable Preferred Stock, par
value $.01 per share (the Series B Preferred
Stock), 10,000 shares of Series C Cumulative
Redeemable Preferred Stock, par value $.01 per share (the
Series C Preferred Stock), and
60,000 shares of Series D Cumulative Convertible
Redeemable Preferred Stock, par value $.01 per share
(Series D Preferred Stock), that were then
issued and outstanding were not entitled to vote in the election
of directors or any other matter presented for the vote of
stockholders of the Company generally. The following table lists
stockholders (excluding any directors or officers of the
Company) believed by the Company to be the beneficial owners of
more than five percent of the outstanding voting securities as
of December 31, 2002 based upon filings pursuant to
Section 13(d) or (g) under the Securities Exchange Act of
1934, as amended. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power
with respect to securities. Shares of common stock issuable upon
exercise or conversion of options, warrants and convertible
securities that were exercisable or convertible on or within
60 days after December 31, 2002, are deemed to be
outstanding and to be beneficially owned by the person holding
the options, warrants or convertible securities for the purposes
of computing the percentage ownership of the person, but are not
treated as outstanding for the purpose of computing the
percentage ownership of any other person. Voting power in the
table is computed with respect to a general election of
directors. So far as is known to the Company, the persons
indicated below have sole voting and investment power with
respect to the shares indicated as believed to be owned by them
except as otherwise stated in the notes to the table.

|                                        |  |                          |  |                    |            |            |  |  |      |  
|--------------------------------------- |  | ------------------------ |  | ------------------ | ---------- | ---------- |  |  | ---- | -
|                                        |  |                          |  | Number of shares   |            | Percent of
|Name and address of beneficial owner    |  | Title of class           |  | beneficially owned |            | class(1)  
|                                        |  |                          |  |                    |            |           
|Liberty Media Corporation(2)            |  | Series A Preferred Stock |  |                    |           |            |  |  |     |  
|12300 Liberty Boulevard                 |  | Company Common Stock     |  |                    | 30,519,659 |            |  |  | 76.4 | %
|Englewood, CO 80112                     |  |                          |  |                    |            |            |  |  |      |  
|                                       
|Liberty Satellite & Technology, Inc.(2) |  | Series A Preferred Stock |  |                    |           |            |  |  |     |  
|12300 Liberty Boulevard                 |  | Company Common Stock     |  |                    | 30,519,494 |            |  |  | 76.4 | %
|Englewood, CO 80112                     |  |                          |  |                    |            |            |  |  |      |  
|                                       
|Credit Suisse First Boston(3)           |  | Series A Preferred Stock |  |                    |           |            |  |  |     |  
|11 Madison Avenue                       |  | Company Common Stock     |  |                    | 2,255,035  |            |  |  | 7.3  | %
|New York, NY 10010                      |  |                          |  |                    |            |            |  |  |      |  

III-8



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##### Table of Contents



|                                     |  |                          |  |                    |           |            |  |  |       |  
|------------------------------------ |  | ------------------------ |  | ------------------ | --------- | ---------- |  |  | ----- | -
|                                     |  |                          |  | Number of shares   |           | Percent of
|Name and address of beneficial owner |  | Title of class           |  | beneficially owned |           | class(1)  
|                                     |  |                          |  |                    |           |           
|Par Capital Management, Inc.(4)      |  | Series A Preferred Stock |  |                    |          |            |  |  |      |  
|One Financial Center, Suite 1600     |  | Company Common Stock     |  |                    | 2,044,865 |            |  |  | 6.6   | %
|Boston, MA 02111                     |  |                          |  |                    |           |            |  |  |       |  
|                                    
|Merrill Lynch & Co., Inc.(5)         |  | Series A Preferred Stock |  |                    |          |            |  |  |      |  
|800 Scudders Mill Road               |  | Company Common Stock     |  |                    | 1,832,035 |            |  |  | 5.9   | %
|Plainsboro, NJ 08536                 |  |                          |  |                    |           |            |  |  |       |  
|                                    
|Gary Wilson(6)                       |  | Series A Preferred Stock |  |                    |          |            |  |  |      |  
|300 Delfern Drive                    |  | Company Common Stock     |  |                    | 1,812,000 |            |  |  | 5.6   | %
|Los Angeles, CA 90077                |  |                          |  |                    |           |            |  |  |       |  
|                                    
|Jerome H. Kern(7)                    |  | Series A Preferred Stock |  |                    | 13,500    |            |  |  | 100.0 | %
|4600 S. Syracuse, Suite 1000         |  | Company Common Stock     |  |                    | 1,350,000 |            |  |  | 4.2   | %
|Denver, CO 80237                     |  |                          |  |                    |           |            |  |  |       |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on 13,500 shares of the Series A
    Preferred Stock and 30,854,489 shares of the Company Common
    Stock outstanding as of December 31, 2002. The
    Companys Series B Preferred Stock, Series C
    Preferred Stock and Series D Preferred Stock were not
    voting securities as of December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(2) | Based upon information contained in a
    Schedule 13D/A jointly filed on January 24, 2003 by
    Liberty and LSAT. Of the shares shown as beneficially owned by
    Liberty and LSAT, 30,519,494 shares are beneficially owned
    by LSATs subsidiary, Ascent, which number includes
    (i) 1,123,792 shares of Company Common Stock issuable
    upon the exercise of currently exercisable Series A
    Warrants and (ii) 7,947,018 shares of Company Common
    Stock issuable upon the conversion of shares of Series D
    Preferred Stock. Liberty also beneficially owns, and has sole
    voting and dispositive power with respect to 165 shares of
    Company Common Stock, which represents less than 1% of the
    issued and outstanding shares of Company Common Stock. Of such
    165 shares beneficially owned by Liberty, 40 of such shares
    consist of shares of Company Common Stock issuable upon the
    exercise of currently exercisable Series B Warrants. Each
    Series B Warrant represents the right to acquire one share
    of Company Common Stock. Liberty and LSAT share the voting and
    dispositive power with respect to 30,519,494 shares of
    Company Common Stock. Subsequent to December 31, 2002, LSAT
    acquired 1,329,368 additional shares of Company Common Stock. If
    such share acquisitions had been included in Liberty and
    LSATs share ownership at December 31, 2002, the
    shares of Company Common Stock beneficially owned by Liberty and
    LSAT would have increased to 31,849,027 and 31,848,862,
    respectively, and the percentage of the outstanding Company
    Common Stock owned by Liberty and LSAT would each have increased
    to approximately 80%. LSAT owns a controlling interest in the
    Company, and Liberty owns a controlling interest in LSAT.
|   
|(3) | Based upon information contained in a
    Schedule 13G filed with the SEC on February 14, 2002
    by Credit Suisse First Boston (the Bank). The Bank
    shares voting and dispositive power over 2,255,035 shares
    of Company Common Stock with its consolidated subsidiaries to
    the extent that they constitute a part of the investment banking
    business (the Reporting Person) of Credit Suisse
    First Boston business unit (the CSFB business unit).
    The ultimate parent company of the Bank is Credit Suisse Group
    (CSG), a corporation formed under the laws of
    Switzerland. CSG is a global financial services company with two
    distinct business units, one of which is the CSFB business unit.
    CSG, for purposes of the federal securities laws, may be deemed
    ultimately to control the Bank and the Reporting Person. CSG
    disclaims beneficial ownership of the 2,255,035 shares of
    the Company Common Stock beneficially owned by the Reporting
    Person.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(4) | Based upon information contained in a
    Schedule 13G filed with the SEC on February 14, 2003
    by Par Investment Partners, L.P., Par Group, L.P. and Par
    Capital Management, Inc. The foregoing persons are hereinafter
    referred to collectively as the Par Reporting Persons. The Par
    Reporting Persons have sole voting and dispositive power over
    2,044,865 shares of Company Common Stock. Par Group, L.P.
    and Par Capital Management, Inc. are general partners of Par
    Investment Partners, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

III-9



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Based upon information contained in a
    Schedule 13G filed with the SEC on January 9, 2003 by
    Merrill Lynch & Co., Inc. (Merrill Lynch),
    on behalf of Merrill Lynch Investment Managers. Merrill Lynch is
    the beneficial owner of, and shares voting and dispositive power
    over, 1,832,035 shares of Company Common Stock. Merrill
    Lynch is a parent holding company and Merrill Lynch Investment
    Managers (formerly known as Merrill Lynch Asset Management
    Group) is an operating division of Merrill Lynchs
    indirectly owned asset management subsidiaries. Fund Asset
    Management, L.P. and Merrill Lynch Investment Managers, L.P. are
    the two asset management subsidiaries which hold the
    1,832,035 shares of Company Common Stock.
|   
|(6) | Includes 1,810,000 Series C Warrants to
    purchase the same number of shares of Company Common Stock at a
    per share price of $15.27. The Series C Warrants are
    exercisable on or within 60 days after December 31,
    2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(7) | Mr. Kern holds 13,500 shares of
    Series A Preferred Stock, which are convertible, at
    Mr. Kerns option, into 1,350,000 shares of
    Company Common Stock. Mr. Kerns ability to convert
    such shares into Company Common Stock is contingent upon his
    repayment of $24,887,000 owed to the Company as of
    December 31, 2002, pursuant to a promissory note.                                                                                                                                                                                                                                                                                                                                                                                                             

Common Stock Ownership Of Management

The following table sets forth information with
respect to the beneficial ownership by each director and each of
the Named Executive Officers of the Company and by all directors
and executive officers as a group of shares of the Company
Common Stock, Liberty Media Corporation Series A Common
Stock (Series A Liberty Common Stock), Liberty
Media Corporation Series B Common Stock
(Series B Liberty Common Stock), Liberty
Satellite & Technology, Inc. Series A Common Stock
(Series A LSAT Common Stock) and Liberty
Satellite & Technology, Inc., Series B Common
Stock (Series B LSAT Common Stock). LSAT owns a
controlling interest in the Company and Liberty owns a
controlling interest in LSAT.

The following information is given as of
December 31, 2002 and, in the case of percentage ownership
information, is based on (i) 30,854,489 shares of
Company Common Stock; (ii) 2,476,953,566 shares of
Series A Liberty Common Stock;
(iii) 212,044,128 shares of Series B Liberty
Common Stock; (iv) 34,765,055 shares of Series A
LSAT Common Stock; and (v) 11,078,834 shares of
Series B LSAT Common Stock in each case outstanding on that
date. Shares of Company Common Stock issuable upon exercise or
conversion of options, warrants and convertible securities that
were exercisable or convertible on or within 60 days of
December 31, 2002, and upon vesting of restricted stock,
are deemed to be outstanding and to be beneficially owned by the
person holding the options, warrants or convertible securities
for the purpose of computing the percentage ownership of that
person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. So far
as is known to the Company, the persons indicated below have the
sole voting power with respect to the shares indicated as owned
by them except as otherwise stated in the notes to the table.

|                         |  |                               |  |                    |         |            |  |        |   |  |  |  |   | 
|------------------------ |  | ----------------------------- |  | ------------------ | ------- | ---------- |  | ------ | - |  |  |  | - | 
|                         |  |                               |  | Number of shares   |         | Percent of |  | Voting
|Name of beneficial owner |  | Title of class                |  | beneficially owned |         | class      |  | power 
|                         |  |                               |  |                    |         |            |  |       
|Directors:               |  |                               |  |                    |         |            |  |        |   |  |  |  |   | 
|Kenneth G. Carroll       |  | Company Common Stock          |  |                    |        |            |  |        |  |  |  |  |  | 
|                         |  | Series A Liberty Common Stock |  |                    | 17,427  | (1)        |  |        | * |  |  |  | * | 
|                         |  | Series B Liberty Common Stock |  |                    |        |            |  |        |  |  |  |  |   | 
|                         |  | Series A LSAT Common Stock    |  |                    | 44,323  | (2)        |  |        | * |  |  |  | * | 
|                         |  | Series B LSAT Common Stock    |  |                    |        |            |  |        |  |  |  |  |   | 
|William R. Fitzgerald    |  | Company Common Stock          |  |                    | 400     |            |  |        | * |  |  |  | * | 
|                         |  | Series A Liberty Common Stock |  |                    | 653,642 | (3)(4)     |  |        | * |  |  |  | * | 
|                         |  | Series B Liberty Common Stock |  |                    |        |            |  |        |  |  |  |  |   | 
|                         |  | Series A LSAT Common Stock    |  |                    | 52      |            |  |        | * |  |  |  | * | 
|                         |  | Series B LSAT Common Stock    |  |                    |        |            |  |        |  |  |  |  |   | 

III-10



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##### Table of Contents



|                                                       |  |                               |  |                    |           |            |  |        |      |  |  |  |   | 
|------------------------------------------------------ |  | ----------------------------- |  | ------------------ | --------- | ---------- |  | ------ | ---- |  |  |  | - | 
|                                                       |  |                               |  | Number of shares   |           | Percent of |  | Voting
|Name of beneficial owner                               |  | Title of class                |  | beneficially owned |           | class      |  | power 
|                                                       |  |                               |  |                    |           |            |  |       
|Paul A. Gould                                          |  | Company Common Stock          |  |                    | 25,800    | (5)        |  |        | *    |  |  |  | * | 
|                                                       |  | Series A Liberty Common Stock |  |                    | 1,669,595 |            |  |        | *    |  |  |  | * | 
|                                                       |  | Series B Liberty Common Stock |  |                    | 600,344   |            |  |        | *    |  |  |  |   | 
|                                                       |  | Series A LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series B LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 
|Mark K. Hammond                                        |  | Company Common Stock          |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series A Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series B Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |   | 
|                                                       |  | Series A LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series B LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 
|Gary S. Howard                                         |  | Company Common Stock          |  |                    | 800       |            |  |        | *    |  |  |  | * | 
|                                                       |  | Series A Liberty Common Stock |  |                    | 5,650,822 | (6)(7)     |  |        | *    |  |  |  | * | 
|                                                       |  |                               |  |                    |           | (8)(9)(10) |  |        |      |  |  |  |   | 
|                                                       |  | Series B Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |   | 
|                                                       |  | Series A LSAT Common Stock    |  |                    | 58,022    | (11)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series B LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 
|Christopher Sophinos                                   |  | Company Common Stock          |  |                    | 40,000    | (12)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series A Liberty Common Stock |  |                    | 5,140     |            |  |        | *    |  |  |  | * | 
|                                                       |  | Series B Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |   | 
|                                                       |  | Series A LSAT Common Stock    |  |                    | 33,495    | (13)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series B LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 
|J. David Wargo                                         |  | Company Common Stock          |  |                    | 51,200    | (14)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series A Liberty Common Stock |  |                    | 119,502   | (15)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series B Liberty Common Stock |  |                    | 4,304     |            |  |        | *    |  |  |  |   | 
|                                                       |  | Series A LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series B LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 
|Named executive officers:                              |  |                               |  |                    |           |            |  |        |      |  |  |  |   | 
|Bernard G. Dvorak                                      |  | Company Common Stock          |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series A Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series B Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |   | 
|                                                       |  | Series A LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series B LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 
|William D. Myers                                       |  | Company Common Stock          |  |                    | 30,000    | (16)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series A Liberty Common Stock |  |                    | 64,780    | (17)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series B Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |   | 
|                                                       |  | Series A LSAT Common Stock    |  |                    | 5,722     |            |  |        | *    |  |  |  | * | 
|                                                       |  | Series B LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 
|David A. Simpson                                       |  | Company Common Stock          |  |                    | 99,000    | (18)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series A Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series B Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |   | 
|                                                       |  | Series A LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series B LSAT Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 
|Laurence M. Smith                                      |  | Company Common Stock          |  |                    | 20,000    | (19)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series A Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | Series B Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |   | 
|                                                       |  | LSAT Series A Common Stock    |  |                    |          |            |  |        |     |  |  |  |  | 
|                                                       |  | LSAT Series B Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 
|Pamela J. Strauss                                      |  | Company Common Stock          |  |                    | 10,000    | (20)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series A Liberty Common Stock |  |                    | 4,620     | (21)       |  |        | *    |  |  |  | * | 
|                                                       |  | Series B Liberty Common Stock |  |                    |          |            |  |        |     |  |  |  |   | 
|                                                       |  | LSAT Series A Common Stock    |  |                    | 336       |            |  |        | *    |  |  |  | * | 
|                                                       |  | LSAT Series B Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 
|All directors and officers as a group
    (12 persons) |  | Company Common Stock          |  |                    | 277,200   |            |  |        | *    |  |  |  | * | 
|                                                       |  | Series A Liberty Common Stock |  |                    | 8,185,528 |            |  |        | *    |  |  |  | * | 
|                                                       |  | Series B Liberty Common Stock |  |                    | 604,648   |            |  |        | *    |  |  |  |   | 
|                                                       |  | LSAT Series A Common Stock    |  |                    | 141,950   |            |  |        | 1.3% |  |  |  | * | 
|                                                       |  | LSAT Series B Common Stock    |  |                    |          |            |  |        |     |  |  |  |   | 

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---



| |   |              
| | - | -------------
| | * | Less than 1%.



| |     |                                                                                                                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Includes 4,721 shares held by the Liberty
    401(k) Saving Plan for the benefit of Mr. Carroll.                                                                                                                                                                                                                     
|
| | (2) | Assumes the exercise in full of LSAT
    Series A Common Stock options to
    purchase 31,465 shares, all of which are exercisable
    on or within 60 days after December 31, 2002. Also
    includes 7,500 restricted shares issued in February 2001, 25% of
    which vest within 60 days after December 31, 2002.
|
| | (3) | Assumes the exercise in full of Liberty Media
    Series A Common Stock options to
    purchase 611,274 shares, all of which are exercisable
    on or within 60 days after December 31, 2002.                                                                                                                       
|
| | (4) | Includes 6,168 shares held by the Liberty
    401(k) Savings Plan for the benefit of Mr. Fitzgerald.                                                                                                                                                                                                                 
|
| | (5) | Assumes the exercise in full of Company Common
    Stock options to purchase 25,000 shares, all of which
    are exercisable on or within 60 days after
    December 31, 2002.                                                                                                                                       
|
| | (6) | Includes 291,089 restricted shares of Liberty
    Series A Common Stock held by a Grantor Retained Annuity
    Trust, none of which was vested at December 31, 2002.                                                                                                                                                 
|
| | (7) | Assumes the exercise in full of Liberty
    Series A Common Stock options to
    purchase 4,173,183 shares, all of which are
    exercisable on or within 60 days after December 31,
    2002.                                                                                                                       
|
| | (8) | Includes 40,623 shares of Liberty
    Series A Common Stock held by the Liberty 401(k) Savings
    Plan for the benefit of Mr. Howard.                                                                                                                                                                               
|
| | (9) | Includes 314,376 shares of Liberty
    Series A Common Stock held by a Grantor Retained Annuity
    Trust.                                                                                                                                                                                                           



|     |                                                                                                                                                                                                                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 12,284 shares of Liberty Media
    Series A Common Stock owned directly by
    Mr. Howards wife, Mrs. Leslie D. Howard, and
    185,120 shares of Liberty Series A common stock owned
    by Mrs. Leslie D. Howard that are held by a Grantor
    Retained Annuity Trust, as to which Mr. Howard has
    disclaimed beneficial ownership.
|    
|(11) | Assumes the exercise in full of LSAT
    Series A Common Stock to purchase 49,965 shares,
    all of which are exercisable on or within 60 days after
    December 31, 2002. Also includes 2,549 shares held by
    trusts of which Mr. Howard is beneficial owner as trustee
    for his children.                                                
|    
|(12) | Assumes the exercise in full of Company Common
    Stock options to purchase 40,000 shares, all of which
    are exercisable on or within 60 days after
    December 31, 2002.                                                                                                                                                                     
|    
|(13) | Assumes the exercise in full of LSAT
    Series A Common Stock options to
    purchase 20,625 shares, all of which are exercisable
    on or within 60 days after December 31, 2002. Also
    includes 7,500 restricted shares issued in February 2001, 25% of
    which vested within 60 days of December 31, 2002.                               
|    
|(14) | Assumes the exercise in full of Company Common
    Stock options to purchase 50,000 shares, all of which
    are exercisable on or within 60 days after
    December 31, 2002.                                                                                                                                                                     
|    
|(15) | Includes 112,823 shares of Liberty
    Series A Common Stock held in investment accounts managed
    by Mr. Wargo as to which he shares voting and investment
    power.                                                                                                                                                                           
|    
|(16) | Assumes the exercise in full of Company Common
    Stock options to purchase 30,000 shares, all of which
    are exercisable on or within 60 days after
    December 31, 2002.                                                                                                                                                                     
|    
|(17) | Assumes the exercise in full of Liberty
    Series A Common Stock options to
    purchase 23,712 shares, all of which are exercisable
    within 60 days after December 31, 2002.                                                                                                                                                                  
|    
|(18) | Assumes the exercise in full of Company Common
    Stock options to purchase 99,000 shares, all of which
    are exercisable on or within 60 days after
    December 31, 2002.                                                                                                                                                                     
|    
|(19) | Assumes the exercise in full of Company Common
    Stock options to purchase 20,000 shares, all of which
    are exercisable on or within 60 days after
    December 31, 2002.                                                                                                                                                                     
|    
|(20) | Assumes the exercise in full of Company Common
    Stock options to purchase 10,000 shares, all of which
    are exercisable on or within 60 days after
    December 31, 2002.                                                                                                                                                                     
|    
|(21) | Includes 1,388 shares held by the Liberty
    401(k) Savings Plan for the benefit of Ms. Strauss.                                                                                                                                                                                                                                                  

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##### Table of Contents



Securities Authorized for Issuance Under
Equity Compensation Plans

The following table provides information as of
December 31, 2002, with respect to compensation plans under
which equity securities of the registrant are authorized for
issuance:

|                                         |       |                         |           |                      |  |                      |       |      |  |  |           |           | 
|---------------------------------------- | ----- | ----------------------- | --------- | -------------------- |  | -------------------- | ----- | ---- |  |  | --------- | --------- | 
|                                         |       |                         |           |                      |  | Number of Securities
|                                         |       | Number of Securities to |           | Weighted-Average     |  | Remaining Available 
|                                         |       | Be Issued upon Exercise |           | Exercise Price of    |  | for Future Issuance 
|                                         |       | of Outstanding Options, |           | Outstanding Options, |  | Under Equity        
|Plan Category  Approved by Stockholders |       | Warrants and Rights     |           | Warrants and Rights  |  | Compensation Plans  
|                                         |       |                         |           |                      |  |                     
|1997 Non-Employee Directors Stock Plan   |       |                         | 125,000   |                      |  | $                    | 13.00 |      |  |  | 571,800   |          
|1996 Key Employee Stock Option Plan      |       |                         | 3,215,096 |                      |  | $                    | 8.88  |      |  |  | 1,469,125 |          
|                                         |       |                         |           |                      |  |                      |       |      |  |  |           |          
|                                         | Total |                         |           | 3,340,096            |  |                      | $     | 9.06 |  |  |           | 2,040,925 | 
|                                         |       |                         |           |                      |  |                      |       |      |  |  |           |          






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Transactions with Liberty

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

Expense Allocations from
Liberty.Subsequent to Libertys
acquisition of Ascent in March of 2000, Liberty and Ascent have
allocated certain general and administrative expenses to the
Company. Although there are no written agreements with Liberty
and Ascent for these allocations, the Company believes the
amounts to be reasonable. Allocations from Liberty and Ascent
aggregated $145,000 during 2002 and such amounts are included in
selling, general and administrative expense in the accompanying
consolidated statements of operations. In addition, the Company
reimburses Liberty for certain expenses paid by Liberty on
behalf of the Company. Amounts owed to Liberty and Ascent
pursuant to this arrangement ($1,906,000 at December 31,
2002) are non-interest bearing.

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

Preferred Stock Held by
Ascent.The Companys
Series B Preferred Stock, Series C Preferred Stock,
and Cumulative Convertible Redeemable Series D Preferred
Stock, were issued to Ascent during 2001, and are classified as
mandatorily redeemable preferred stock within the accompanying
consolidated balance sheet due to the fact that the terms of
such preferred stock instruments provide for redemption
provisions that are

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##### Table of Contents



outside of the Companys control. Dividends
on the Companys Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock
aggregated $8,663,000 during 2002. Accumulated dividends have
been added to the liquidation preference of the applicable
preferred stock issuance since the Company has not paid any of
such dividends in cash.


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

Consulting Arrangement.William D. Myers was the
Companys Executive Vice President, Chief Financial Officer
and Treasurer until June 7, 2002 when he resigned as an
officer of the Company. On June 5, 2001, Mr. Myers
received a option grant of 150,000 shares of Company Common
Stock. The terms of the Option Agreement pursuant to which such
option was granted provided, among other things, (i) for a
five-year vesting period for the options with the first 20%
vesting on the first anniversary date of the grant and
(ii) for the termination of the option three months after
the termination of Mr. Myers employment with the
Company. On June 5, 2002, the option vested with respect to
30,000 shares of Company Common Stock and based upon
Mr. Myers resignation on June 7, 2002, these
vested options were to terminate on September 5, 2002.
Mr. Myers unvested options under the June 5,
2001 option grant terminated on June 7, 2002. Rather than
having Mr. Myers vested options terminate on
September 5, 2002, effective August 15, 2002, the
Company entered into an arrangement with Mr. Myers, whereby
Mr. Myers has agreed to provide up to 80 hours of
consulting services to the Company during the period commencing
June 8, 2002 and ending September 8, 2004. In exchange
therefore, the Company amended the Option Agreement to provide
an extension of the termination date with respect to the 30,000
vested options to September 7, 2004.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

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

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PART IV






|         |                                                                      
|-------- | ---------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statements, Schedules
    and Reports on Form 8-K

(a)(1) Financial Statements

The following consolidated financial statements
of On Command Corporation are included in Item 8:

|                                                                                                                       |  |      |       | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | 
|                                                                                                                       |  | Page
|                                                                                                                       |  | no. 
|                                                                                                                       |  |     
|Independent Auditors Reports                                                                                          |  |      | II-14 | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                                          |  |      | II-15 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2002, 2001 and 2000                         |  |      | II-16 | 
|Consolidated Statements of Comprehensive Loss for
    the years ended December 31, 2002, 2001 and 2000                 |  |      | II-17 | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for the years ended December 31, 2002,
    2001 and 2000 |  |      | II-18 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000                         |  |      | II-19 | 
|Notes to the Consolidated Financial Statements                                                                         |  |      | II-20 | 

(a)(2) Financial Statement Schedules

The following consolidated financial statement
schedule of On Command Corporation is included:



| |                                         
| | ----------------------------------------
| | Independent Auditors Report on Schedule
|
| | Schedule II  Valuation Accounts        

(a)(3) Exhibits

(a) Exhibits

|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | ---- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|number  |      | Description
|        |      |            
|        | 3.1  |             |  | Restated Certificate of Incorporation, dated
    August 13, 1996, as amended by Certificate of Amendment,
    dated October 6, 2000, Certificate of Designations of
    Convertible Participating Preferred Stock, Series A, dated
    August 10, 2000, Certificate of Designations of Cumulative
    Redeemable Preferred Stock, Series B, dated March 5,
    2001, Certificate of Designations of Cumulative Redeemable
    Preferred Stock, Series C, dated April 23, 2001, and
    Certificate of Designations of Cumulative Convertible Redeemable
    Preferred Stock, Series D, dated June 29, 2001.
    (Incorporated by reference to Exhibit 3.1 to the Annual
    Report on Form 10-K for the year ended December 31,
    2001 of On Command Corporation).
|        | 3.2  |             |  | Bylaws of On Command Corporation, as amended
    on November 23, 1998, August 5, 1999, March 13,
    2001 and May 9, 2002. (Incorporated by reference to
    Exhibit 3.2 to the Quarterly Report on Form 10-Q for
    the quarter ended June 30, 2002 of On Command
    Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 4.1  |             |  | Registration Rights Agreement by and among
    On Command Corporation and the other parties named therein
    (Incorporated by reference to Exhibit 4.1 to the
    Registration Statement on Form S-4 (File
    No. 333-10407) of On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 4.2  |             |  | Warrant Agreement by and among On Command
    Corporation and the other parties named therein, which is
    incorporated by reference to Exhibit 4.2 to the
    Registration Statement on Form S-4 (File
    No. 333-10407) of On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10.1 |             |  | Master Services Agreement, dated as of
    August 3, 1993, by and between Marriott International,
    Inc., Marriott Hotel Services, Inc. and On Command Video
    Corporation (confidential treatment granted) (Incorporated by
    reference to Exhibit 10.6 to the Registration Statement on
    Form S-1 (File No. 33-98502) of Ascent Entertainment
    Group, Inc.).                                                                                                                                                                                                                                                                                                                                                                                          

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|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | ------ | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|number  |        | Description
|        |        |            
|        | 10.2   |             |  | Service Agreement, dated March 21, 2001,
    between On Command Corporation and Marriott International,
    Inc. (composite version) (confidential treatment requested)
    (Incorporated by reference to Exhibit 10.1 to the Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2001 of On Command Corporation).                                                                                                                
|        | 10.3   |             |  | Hilton Hotels Corporation-On Command Video
    Agreement, dated April 27, 1993, by and between Hilton
    Hotels Corporation and On Command Video Corporation
    (confidential treatment granted) (Incorporated by reference to
    Exhibit 10.4 to the Registration Statement on Form S-4
    (File No. 333-10407) of On Command Corporation).                                                                                                   
|        | 10.4   |             |  | Standard Lease, dated June, 1996, between
    Berg & Berg Developers, and On Command Video
    Corporation (Incorporated by reference to Exhibit 10.10 to
    the Annual Report on Form 10-K for the year ended
    December 31, 1996 of On Command Corporation).                                                                                                                                                                                  
|        | 10.5*  |             |  | Amended and Restated On Command Corporation
    1996 Key Employee Stock Plan. (Incorporated by reference to
    Exhibit 10.8 of the Annual Report on Form 10-K/A for
    the year ended December 31, 2000 of On Command
    Corporation).                                                                                                                                                                                                          
|        | 10.6*  |             |  | 1997 Employee Stock Purchase Plan (Incorporated
    by reference to Exhibit 4(c) of the Registration Statement
    on Form S-8 of On Command Corporation (File
    No. 333-33149), filed on August 8, 1997).                                                                                                                                                                                                                                       
|        | 10.7*  |             |  | Amended and Restated 1997 Non-Employee Directors
    Stock Plan (Incorporated by reference to Exhibit 10.10 to
    the Annual Report on Form 10-K for the year ended
    December 31, 2000 and Exhibit 10.2 of the Quarterly
    Report filed on Form 10-Q for the quarter ended
    June 30, 2002 of On Command Corporation).                                                                                                                     
|        | 10.8*  |             |  | On Command Corporation 2002 Executive
    Severance Pay Plan, effective May 1, 2002 (Incorporated by
    reference to Exhibit 10.1 of the Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2002 of
    On Command Corporation).                                                                                                                                                                                                    
|        | 10.9*  |             |  | Separation and Release Agreement dated as of
    April 25, 2001 between Jerome H. Kern and On Command
    Corporation. (Incorporated by reference to Exhibit 10.9 of
    the Annual Report on Form 10-K for the year ended
    December 31, 2001, of On Command Corporation).                                                                                                                                                                      
|        | 10.10* |             |  | Form of Waiver and Release Agreement.
    (Incorporated by reference to Exhibit 10.10 of the Annual
    Report on Form 10-K for the year ended December 31,
    2001 of On Command Corporation).                                                                                                                                                                                                                                                   
|        | 10.11  |             |  | Stock Purchase and Loan Agreement, dated as of
    August 4, 2000, by and between Jerome H. Kern and
    On Command Corporation (Incorporated by reference to
    Exhibit 1 to the Report on Schedule 13D/A filed by
    Jerome H. Kern on August 18, 2000 with respect to
    securities of On Command Corporation).                                                                                                                              
|        | 10.12  |             |  | Secured Note, due August 1, 2005, made by
    Jerome H. Kern to the order of On Command Corporation
    (Incorporated by reference to Exhibit 3 to the Report on
    Schedule 13D/A filed by Jerome H. Kern on August 18,
    2000 with respect to securities of On Command Corporation).                                                                                                                                                          
|        | 10.13  |             |  | Pledge and Security Agreement, dated as of
    August 10, 2000, by and between Jerome H. Kern and
    On Command Corporation (Incorporated by reference to
    Exhibit 4 to the Report on Schedule 13D/A filed by
    Jerome H. Kern on August 18, 2000 with respect to
    securities of On Command Corporation).                                                                                                                                 
|        | 10.14  |             |  | Credit Agreement, dated as of July 18, 2000,
    by and among On Command Corporation, the lenders party
    thereto, Toronto Dominion (Texas), Inc., Fleet National Bank,
    Bank of America, N.A., and the Bank of New York. (Incorporated
    by reference to Exhibit 10.16 of the Annual Report on
    Form 10-K/A for the year ended December 31, 2000 of
    On Command Corporation).                                                        
|        | 10.15  |             |  | Amendment No. 1, dated as of March 27,
    2001, to the Credit Agreement, dated as of July 18, 2000,
    by and among On Command Corporation, the lenders party
    thereto, Toronto Dominion (Texas), Inc., Fleet National Bank,
    Bank of America, N.A., and the Bank of New York. (Incorporated
    by reference to Exhibit 10.17 of the Annual Report on
    Form 10-K/A for the year ended December 31, 2000 of
    On Command Corporation).

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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|number  |       | Description
|        |       |            
|        | 10.16 |             |  | Amendment No. 2 dated as of
    November 14, 2001, to the Credit Agreement, by and among
    On Command Corporation, Toronto Dominion (Texas), Inc.
    Fleet National Bank, Bank of America, the Bank of New York
    Company and the Bank of New York. (Incorporated by reference to
    Exhibit 10.16 of the Annual Report of Form 10-K for
    the year ended December 31, 2001 of On Command
    Corporation).
|        | 10.17 |             |  | Preferred Stock Purchase Agreement, dated
    March 5, 2001, between On Command Corporation and
    Ascent Entertainment Group, Inc. (Incorporated by reference to
    Exhibit 10.17 of the Annual Report on Form 10-K for
    the year ended December 31, 2001 of On Command
    Corporation).                                                                                                                    
|        | 10.18 |             |  | Preferred Stock Purchase Agreement, dated
    April 23, 2001, between On Command Corporation and
    Ascent Entertainment Group, Inc. (Incorporated by reference to
    Exhibit 10.1 to the Current Report on Form 8-K filed
    by On Command Corporation on July 17, 2001).                                                                                                                                      
|        | 10.19 |             |  | Preferred Stock Purchase Agreement, dated
    June 29, 2001, between On Command Corporation and
    Ascent Entertainment Group, Inc. (Incorporated by reference to
    Exhibit 10.2 to the Current Report on Form 8-K filed
    by On Command Corporation on July 17, 2001).                                                                                                                                       
|        | 21    |             |  | Subsidiaries of On Command Corporation filed
    herewith.                                                                                                                                                                                                                                                                                                                                                         
|        | 23.1  |             |  | Independent Auditors Consent filed herewith.                                                                                                                                                                                                                                                                                                                                                                      
|        | 99.1  |             |  | Certification pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 filed herewith.                                                                                                                                                                                                                                                                                                                        



---



|  |                                            
|- | -------------------------------------------
|* | Indicates compensatory plan or arrangement.



| |                                                                             
| | ----------------------------------------------------------------------------
| | (b) Reports on Form 8-K filed during
    the quarter ended December 31, 2002

|                  |  |               |        |                            |  |  |      | 
|----------------- |  | ------------- | ------ | -------------------------- |  |  | ---- | 
|Date of report    |  | Item reported |        | Financial statements filed
|                  |  |               |        |                           
|November 14, 2002 |  |               | Item 9 |                            |  |  | None | 
|November 15, 2002 |  |               | Item 5 |                            |  |  | None | 

IV-3



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT ON
SCHEDULE

The Board of Directors and Stockholders

On Command Corporation:


Under date of February 12, 2003, except as
to Note 6 to the consolidated financial statements which is as
of March 28, 2003, we reported on the consolidated balance
sheets of On Command Corporation and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated
statements of operations, comprehensive loss, stockholders
equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 2002, which are
included in the Companys annual report on Form 10-K
for the year ended December 31, 2002. In connection with
our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial
statement Schedule II. This financial statement schedule is
the responsibility of the Companys management. Our
responsibility is to express an opinion on this financial
statement schedule based on our audits.

In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.

Our reports dated February 12, 2003, except
as to note 6 to the consolidated financial statements, which is
as of March 28, 2003, contain an explanatory paragraph that
the maximum leverage ratio permitted under the Companys
debt facility was 4.25, and the Companys actual leverage
ratio was 3.99. Because the maximum leverage ratio permitted at
March 31, 2003 steps down to 3.50, the Company believes
that it would not have been in compliance with such covenant at
March 31, 2003 had it not reached agreement with its bank
lenders to postpone, until June 29, 2003, the step down of
the leverage ratio from 4.25 to 3.50. The Company is seeking to
restructure the debt facility and such restructuring is
contingent on certain events, which raises substantial doubt
about the Companys ability to continue as a going concern.
The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty. Our reports refer to a change in the method of
accounting for goodwill in 2002.



| |         
| | --------
| | KPMG LLP

Denver, Colorado

February 12, 2003, except as


| |                              
| | -----------------------------
| | to note 6 to the consolidated

financial statements, which is


as of March 28, 2003


IV-4



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##### Table of Contents



ON COMMAND CORPORATION

SCHEDULE II  VALUATION
ACCOUNTS

|                                              |                                        |                        |   |            |  |            |   |           |   |  |   |       |  |  |   |         | 
|--------------------------------------------- | -------------------------------------- | ---------------------- | - | ---------- |  | ---------- | - | --------- | - |  | - | ----- |  |  | - | ------- | 
|                                              |                                        | Balance at             |   | Charged to |  |            |   | Balance  
|                                              |                                        | beginning              |   | costs or   |  |            |   | at end   
|Description                                   |                                        | of period              |   | expenses   |  | Deductions |   | of period
|                                              |                                        |                        |   |            |  |            |   |          
|                                              |                                        |                       
|                                              |                                        | (Amounts in thousands)
|From January 1, 2002 to December 31,
    2002 |                                        |                        |   |            |  |            |   |           |   |  |   |       |  |  |   |        
|                                              | Deferred tax asset valuation allowance |                        | $ | 86,524     |  |            | $ | 14,143    |   |  | $ |      |  |  | $ | 100,667 | 
|                                              | Bad debt allowance                     |                        |   | 1,640      |  |            |   | (9        | ) |  |   | 544   |  |  |   | 1,087   | 
|From January 1, 2001 to December 31,
    2001 |                                        |                        |   |            |  |            |   |           |   |  |   |       |  |  |   |        
|                                              | Deferred tax asset valuation allowance |                        | $ | 71,528     |  |            | $ | 14,996    |   |  | $ |      |  |  | $ | 86,524  | 
|                                              | Bad debt allowance                     |                        |   | 1,366      |  |            |   | 360       |   |  |   | 86    |  |  |   | 1,640   | 
|From January 1, 2000 to December 31,
    2000 |                                        |                        |   |            |  |            |   |           |   |  |   |       |  |  |   |        
|                                              | Deferred tax asset valuation allowance |                        | $ | 56,650     |  |            | $ | 14,776    |   |  | $ |      |  |  | $ | 71,528  | 
|                                              | Bad debt allowance                     |                        |   | 2,287      |  |            |   | 451       |   |  |   | 1,372 |  |  |   | 1,366   | 

IV-5



---



##### Table of Contents






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, in the city of Denver,
State of Colorado on March 31, 2003.



| |                       
| | ----------------------
| | ON COMMAND CORPORATION



| |     |                         
| | --- | ------------------------
| | By: | /s/ CHRISTOPHER SOPHINOS

| |                                        
| | ---------------------------------------
| |                                        
| | Christopher Sophinos                   
| | President & 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 dates indicated:

|                                               |  |                                                                                                               |  |                |  | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                               |  |                                                                                                               |  |               
|Signature                                      |  | Title                                                                                                         |  | Date          
|                                               |  |                                                                                                               |  |               
|                                              
|/s/ GARY S. HOWARDGary S. Howard               |  | Chairman of the Board and Director                                                                            |  | March 31, 2003
|                                              
|/s/ KENNETH G. CARROLLKenneth G. Carroll       |  | Director                                                                                                      |  | March 31, 2003
|                                              
|/s/ WILLIAM R. FITZGERALDWilliam R. Fitzgerald |  | Director                                                                                                      |  | March 31, 2003
|                                              
|/s/ PAUL A. GOULDPaul A. Gould                 |  | Director                                                                                                      |  | March 31, 2003
|                                              
|/s/ MARK K. HAMMONDMark K. Hammond             |  | Director                                                                                                      |  | March 31, 2003
|                                              
|/s/ J. DAVID WARGOJ. David Wargo               |  | Director                                                                                                      |  | March 31, 2003
|                                              
|/s/ CHRISTOPHER SOPHINOSChristopher Sophinos   |  | Director, President and
    Chief Executive Officer
    (Principal Executive Officer)                         |  | March 31, 2003
|                                              
|/s/ BERNARD G. DVORAKBernard G. Dvorak         |  | Senior Vice President, Chief Financial Officer
    and Treasurer (Principal Accounting and Financial Officer) |  | March 31, 2003

IV-6



---



##### Table of Contents






CERTIFICATION

I, Christopher Sophinos, certify that:

1. I have reviewed this annual report on
Form 10-K of On Command Corporation;

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

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

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

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



| |                                          
| | -----------------------------------------
| | /s/ CHRISTOPHER SOPHINOS                 
| |                                          
| | Christopher Sophinos                     
| | President and Chief Executive
    Officer

Date: March 31, 2003

IV-7



---



##### Table of Contents



CERTIFICATION

I, Bernard G. Dvorak, certify that:

1. I have reviewed this annual report on
Form 10-K of On Command Corporation;

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

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

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

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



| |                                                   
| | --------------------------------------------------
| | /s/ BERNARD G. DVORAK                             
| |                                                   
| | Bernard G. Dvorak                                 
| | Senior Vice President, Chief Financial
    Officer
| | and Treasurer                                     

Date: March 31, 2003

IV-8



---



##### Table of Contents






EXHIBIT INDEX

|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|number  |        | Description
|        |        |            
|        | 3.1    |             |  | Restated Certificate of Incorporation, dated
    August 13, 1996, as amended by Certificate of Amendment,
    dated October 6, 2000, Certificate of Designations of
    Convertible Participating Preferred Stock, Series A, dated
    August 10, 2000, Certificate of Designations of Cumulative
    Redeemable Preferred Stock, Series B, dated March 5,
    2001, Certificate of Designations of Cumulative Redeemable
    Preferred Stock, Series C, dated April 23, 2001, and
    Certificate of Designations of Cumulative Convertible Redeemable
    Preferred Stock, Series D, dated June 29, 2001.
    (Incorporated by reference to Exhibit 3.1 to the Annual
    Report on Form 10-K for the year ended December 31,
    2001 of On Command Corporation).
|        | 3.2    |             |  | Bylaws of On Command Corporation, as amended
    on November 23, 1998, August 5, 1999, March 13,
    2001 and May 9, 2002. (Incorporated by reference to
    Exhibit 3.2 to the Quarterly Report on Form 10-Q for
    the quarter ended June 30, 2002 of On Command
    Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 4.1    |             |  | Registration Rights Agreement by and among
    On Command Corporation and the other parties named therein
    (Incorporated by reference to Exhibit 4.1 to the
    Registration Statement on Form S-4 (File
    No. 333-10407) of On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 4.2    |             |  | Warrant Agreement by and among On Command
    Corporation and the other parties named therein, which is
    incorporated by reference to Exhibit 4.2 to the
    Registration Statement on Form S-4 (File
    No. 333-10407) of On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10.1   |             |  | Master Services Agreement, dated as of
    August 3, 1993, by and between Marriott International,
    Inc., Marriott Hotel Services, Inc. and On Command Video
    Corporation (confidential treatment granted) (Incorporated by
    reference to Exhibit 10.6 to the Registration Statement on
    Form S-1 (File No. 33-98502) of Ascent Entertainment
    Group, Inc.).                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.2   |             |  | Service Agreement, dated March 21, 2001,
    between On Command Corporation and Marriott International,
    Inc. (composite version) (confidential treatment requested)
    (Incorporated by reference to Exhibit 10.1 to the Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2001 of On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.3   |             |  | Hilton Hotels Corporation-On Command Video
    Agreement, dated April 27, 1993, by and between Hilton
    Hotels Corporation and On Command Video Corporation
    (confidential treatment granted) (Incorporated by reference to
    Exhibit 10.4 to the Registration Statement on Form S-4
    (File No. 333-10407) of On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.4   |             |  | Standard Lease, dated June, 1996, between
    Berg & Berg Developers, and On Command Video
    Corporation (Incorporated by reference to Exhibit 10.10 to
    the Annual Report on Form 10-K for the year ended
    December 31, 1996 of On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10.5*  |             |  | Amended and Restated On Command Corporation
    1996 Key Employee Stock Plan. (Incorporated by reference to
    Exhibit 10.8 of the Annual Report on Form 10-K/A for
    the year ended December 31, 2000 of On Command
    Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.6*  |             |  | 1997 Employee Stock Purchase Plan (Incorporated
    by reference to Exhibit 4(c) of the Registration Statement
    on Form S-8 of On Command Corporation (File
    No. 333-33149), filed on August 8, 1997).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.7*  |             |  | Amended and Restated 1997 Non-Employee Directors
    Stock Plan (Incorporated by reference to Exhibit 10.10 to
    the Annual Report on Form 10-K for the year ended
    December 31, 2000 and Exhibit 10.2 of the Quarterly
    Report filed on Form 10-Q for the quarter ended
    June 30, 2002 of On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10.8*  |             |  | On Command Corporation 2002 Executive
    Severance Pay Plan, effective May 1, 2002 (Incorporated by
    reference to Exhibit 10.1 of the Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2002 of
    On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.9*  |             |  | Separation and Release Agreement dated as of
    April 25, 2001 between Jerome H. Kern and On Command
    Corporation. (Incorporated by reference to Exhibit 10.9 of
    the Annual Report on Form 10-K for the year ended
    December 31, 2001, of On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10.10* |             |  | Form of Waiver and Release Agreement.
    (Incorporated by reference to Exhibit 10.10 of the Annual
    Report on Form 10-K for the year ended December 31,
    2001 of On Command Corporation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



---



##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|number  |       | Description
|        |       |            
|        | 10.11 |             |  | Stock Purchase and Loan Agreement, dated as of
    August 4, 2000, by and between Jerome H. Kern and
    On Command Corporation (Incorporated by reference to
    Exhibit 1 to the Report on Schedule 13D/A filed by
    Jerome H. Kern on August 18, 2000 with respect to
    securities of On Command Corporation).                                                                                                                              
|        | 10.12 |             |  | Secured Note, due August 1, 2005, made by
    Jerome H. Kern to the order of On Command Corporation
    (Incorporated by reference to Exhibit 3 to the Report on
    Schedule 13D/A filed by Jerome H. Kern on August 18,
    2000 with respect to securities of On Command Corporation).                                                                                                                                                          
|        | 10.13 |             |  | Pledge and Security Agreement, dated as of
    August 10, 2000, by and between Jerome H. Kern and
    On Command Corporation (Incorporated by reference to
    Exhibit 4 to the Report on Schedule 13D/A filed by
    Jerome H. Kern on August 18, 2000 with respect to
    securities of On Command Corporation).                                                                                                                                 
|        | 10.14 |             |  | Credit Agreement, dated as of July 18, 2000,
    by and among On Command Corporation, the lenders party
    thereto, Toronto Dominion (Texas), Inc., Fleet National Bank,
    Bank of America, N.A., and the Bank of New York. (Incorporated
    by reference to Exhibit 10.16 of the Annual Report on
    Form 10-K/A for the year ended December 31, 2000 of
    On Command Corporation).                                                        
|        | 10.15 |             |  | Amendment No. 1, dated as of March 27,
    2001, to the Credit Agreement, dated as of July 18, 2000,
    by and among On Command Corporation, the lenders party
    thereto, Toronto Dominion (Texas), Inc., Fleet National Bank,
    Bank of America, N.A., and the Bank of New York. (Incorporated
    by reference to Exhibit 10.17 of the Annual Report on
    Form 10-K/A for the year ended December 31, 2000 of
    On Command Corporation).
|        | 10.16 |             |  | Amendment No. 2 dated as of
    November 14, 2001, to the Credit Agreement, by and among
    On Command Corporation, Toronto Dominion (Texas), Inc.
    Fleet National Bank, Bank of America, the Bank of New York
    Company and the Bank of New York. (Incorporated by reference to
    Exhibit 10.16 of the Annual Report of Form 10-K for
    the year ended December 31, 2001 of On Command
    Corporation).                                
|        | 10.17 |             |  | Preferred Stock Purchase Agreement, dated
    March 5, 2001, between On Command Corporation and
    Ascent Entertainment Group, Inc. (Incorporated by reference to
    Exhibit 10.17 of the Annual Report on Form 10-K for
    the year ended December 31, 2001 of On Command
    Corporation).                                                                                                                                                    
|        | 10.18 |             |  | Preferred Stock Purchase Agreement, dated
    April 23, 2001, between On Command Corporation and
    Ascent Entertainment Group, Inc. (Incorporated by reference to
    Exhibit 10.1 to the Current Report on Form 8-K filed
    by On Command Corporation on July 17, 2001).                                                                                                                                                                      
|        | 10.19 |             |  | Preferred Stock Purchase Agreement, dated
    June 29, 2001, between On Command Corporation and
    Ascent Entertainment Group, Inc. (Incorporated by reference to
    Exhibit 10.2 to the Current Report on Form 8-K filed
    by On Command Corporation on July 17, 2001).                                                                                                                                                                       
|        | 21    |             |  | Subsidiaries of On Command Corporation filed
    herewith.                                                                                                                                                                                                                                                                                                                                                                                         
|        | 23.1  |             |  | Independent Auditors Consent filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 99.1  |             |  | Certification pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 filed herewith.                                                                                                                                                                                                                                                                                                                                                        



---



|  |                                            
|- | -------------------------------------------
|* | Indicates compensatory plan or arrangement.