TELE COMMUNICATIONS INC /CO/
8-K, 1999-01-07
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>   1
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                                    FORM 8-K


                                 CURRENT REPORT


                     Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934


          Date of Report and Earliest Event Reported: January 7, 1999



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


                                State of Delaware
                 ----------------------------------------------
                 (State or other jurisdiction of incorporation)


           0-20421                                     84-1260157
    ------------------------              ------------------------------------
    (Commission File Number)              (I.R.S. Employer Identification No.)


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


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


<PAGE>   2


Item 5.       Other Events

         As reported on the Company's Current Report on Form 8-K, dated July 1,
1998, the Company intends, subject to stockholder approval, to merge with a
subsidiary of AT&T Corp. (the "Merger") and, independent of whether the Merger
is consummated, to combine Liberty Media Group and TCI Ventures Group (the
"Combination"). Exhibit 99.1 sets forth the following financial statements,
including notes thereto, of the Company and the combined Liberty/Ventures Group:
(a) the consolidated balance sheets of the Company as of September 30, 1998 and
December 31, 1997 and 1996, (b) the consolidated statements of operations,
stockholders' equity and cash flows of the Company for each of the fiscal years
in the three-year period ended December 31, 1997 and for the nine-month periods
ended September 30, 1998 and 1997, (c) the combined balance sheets of the
Liberty/Ventures Group as of September 30, 1998 and December 31, 1997 and 1996,
and (d) the combined statements of operations, equity and cash flows of the
Liberty/Ventures Group for each of the fiscal years in the three-year period
ended December 31, 1997 and for the nine-month periods ended September 30, 1998
and 1997. In addition, Exhibit 99.1 sets forth management's discussion and
analysis of results of operations of the Company for the years ended December
31, 1997, 1996 and 1995 and for the nine months ended September 30, 1998 and
1997.

         The Company is filing this Current Report on Form 8-K in order to cause
the information set forth in Exhibit 99.1 to be incorporated by reference into
the joint proxy statement/prospectus of the Company and AT&T, dated January 7, 
1999, relating to the Merger and the Combination.

Item 7.       Financial Statements and Exhibits

(c)     Exhibits

        (99.1) Financial Statements

        Tele-Communications, Inc.:
          Management's Discussion and Analysis of Financial Condition and 
            Results of Operations, Years ended December 31, 1997, 1996 and 1995
          Independent Auditors' Report
          Consolidated Balance Sheets,
            December 31, 1997 and 1996
          Consolidated Statements of Operations,
            Years ended December 31, 1997, 1996 and 1995
          Consolidated Statements of Stockholders' Equity,
            Years ended December 31, 1997, 1996 and 1995
          Consolidated Statements of Cash Flows,
            Years ended December 31, 1997, 1996 and 1995
          Notes to Consolidated Financial Statements,
            December 31, 1997, 1996 and 1995

        Liberty/Ventures Group:
          Independent Auditors' Report
          Combined Balance sheets,
            December 31, 1997 and 1996
          Combined Statements of Operations,
            Years ended December 31, 1997, 1996 and 1995
          Combined Statements of Equity,
            Years ended December 31, 1997, 1996 and 1995
          Combined Statements of Cash Flows,
            Years ended December 31, 1997, 1996 and 1995
          Notes to Combined Financial Statements,
            December 31, 1997, 1996 and 1995

        Tele-Communications, Inc.:
          Management's Discussion and Analysis of Financial Condition and 
            Results of Operations, Nine Months ended September 30, 1998 and 1997
          Consolidated Balance Sheets,
            September 30, 1998 and December 31, 1997 (unaudited)
          Consolidated Statements of Operations,
            Nine months ended September 30, 1998 and 1997 (unaudited)
          Consolidated Statement of Stockholders' Equity,
            Nine months ended September 30, 1998 (unaudited)
          Consolidated Statements of Cash Flows,
            Nine months ended September 30, 1998 and 1997 (unaudited)
          Notes to Consolidated Financial Statements,
            September 30, 1998 (unaudited)

        Liberty/Ventures Group:
          Combined Balance Sheets,
            September 30, 1998 and December 31, 1997 (unaudited)
          Combined Statements of Operations,
            Nine months ended September 30, 1998 and 1997 (unaudited)
          Combined Statement of Equity,
            Nine months ended September 30, 1998 (unaudited)
          Combined Statements of Cash Flows,
            Nine months ended September 30, 1998 and 1997 (unaudited)
          Notes to Combined Financial Statements,
            September 30, 1998 (unaudited)
<PAGE>   3



                                   SIGNATURES


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



Date:    January 7, 1999



                                              TELE-COMMUNICATIONS, INC.
                                              (Registrant)



                                              By: /s/ Stephen M. Brett
                                                  -------------------------
                                                      Stephen M. Brett
                                                  Executive Vice President,
                                                    General Counsel and
                                                         Secretary

<PAGE>   4
                              EXHIBIT INDEX


<TABLE>
<CAPTION>

EXHIBIT NO.             DESCRIPTION
- -----------             -----------
<S>                     <C>

99.1                    Financial Statements

</TABLE>


<PAGE>   1



                            TELE-COMMUNICATIONS, INC.

                              FINANCIAL INFORMATION



<PAGE>   2

                            TELE-COMMUNICATIONS, INC.

                              FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                                         Page
                                                                                                       Numbers
                                                                                                       -------
<S>                                                                                                      <C>
         TELE-COMMUNICATIONS, INC.:

         Management's Discussion and Analysis of Financial Condition and Results
              of Operations, Years ended December 31, 1997, 1996 and 1995                                 3
         Independent Auditors' Report                                                                    50
         Consolidated Balance Sheets,
              December 31, 1997 and 1996                                                                 51
         Consolidated Statements of Operations,
              Years ended December 31, 1997, 1996 and 1995                                               53
         Consolidated Statements of Stockholders' Equity,
              Years ended December 31, 1997, 1996 and 1995                                               55
         Consolidated Statements of Cash Flows,
              Years ended December 31, 1997, 1996 and 1995                                               58
         Notes to Consolidated Financial Statements,
              December 31, 1997, 1996 and 1995                                                           59

         LIBERTY/VENTURES GROUP:

         Independent Auditors' Report                                                                    132
         Combined Balance Sheets,
              December 31, 1997 and 1996                                                                 133
         Combined Statements of Operations,
              Years ended December 31, 1997, 1996 and 1995                                               135
         Combined Statements of Equity,
              Years ended December 31, 1997, 1996 and 1995                                               136
         Combined Statements of Cash Flows,
              Years ended December 31, 1997, 1996 and 1995                                               137
         Notes to Combined Financial Statements,
              December 31, 1997, 1996 and 1995                                                           139

         TELE-COMMUNICATIONS, INC.:

         Management's Discussion and Analysis of Financial Condition and Results
              of Operations, Nine months ended September 30, 1998 and 1997                               182
         Consolidated Balance Sheets,
              September 30, 1998 and December 31, 1997 (unaudited)                                       224
         Consolidated Statements of Operations,
              Nine months ended September 30, 1998 and 1997 (unaudited)                                  226
         Consolidated Statement of Stockholders' Equity,
              Nine months ended September 30, 1998 (unaudited)                                           227
         Consolidated Statements of Cash Flows,
              Nine months ended September 30, 1998 and 1997 (unaudited)                                  228
         Notes to Consolidated Financial Statements,
              September 30, 1998 (unaudited)                                                             229
</TABLE>



                                       1
<PAGE>   3


                            TELE-COMMUNICATIONS, INC.

                              FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                                         Page
                                                                                                       Numbers
                                                                                                       -------
<S>                                                                                                      <C>
         LIBERTY/VENTURES GROUP:

         Combined Balance Sheets,
              September 30, 1998 and December 31, 1997 (unaudited)                                       269
         Combined Statements of Operations,
              Nine months ended September 30, 1998 and 1997 (unaudited)                                  271
         Combined Statement of Equity,
              Nine months ended September 30, 1998 (unaudited)                                           272
         Combined Statements of Cash Flows,
              Nine months ended September 30, 1998 and 1997 (unaudited)                                  273
         Notes to Combined Financial Statements,
              September 30, 1998 (unaudited)                                                             275
</TABLE>



                                       2
<PAGE>   4



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

                  Years ended December 31, 1997, 1996 and 1995

         Tele-Communications, Inc. ("TCI" or the "Company") is currently traded
through six separate series of common stock which represent three targeted
groups of assets. "TCI Group", which is traded through Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share ("TCI Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock, par value
$1.00 per share ("TCI Group Series B Stock", and together with the TCI Group
Series A Stock, the "TCI Group Stock"), is intended to reflect the separate
performance of TCI's domestic cable and communications business. "Liberty Media
Group", which is traded trough Tele-Communications, Inc. Series A Liberty Media
Group Common Stock, par value $1.00 per share ("Liberty Group Series A Stock")
and Tele-Communications, Inc. Series B Liberty Media Group Common Stock, par
value $1.00 per share ("Liberty Group Series B Stock", and together with the
Liberty Group Series A Stock, the "Liberty Group Stock"), is intended to reflect
the separate performance of TCI's assets which produce and distribute
programming services. "TCI Ventures Group", which is traded through
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock, par value
$1.00 per share ("TCI Ventures Group Series A Stock") and Tele-Communications,
Inc. Series B TCI Ventures Group Common Stock, par value $1.00 per share ("TCI
Ventures Group Series B Stock", and together with the TCI Ventures Group Series
A Stock, the "TCI Ventures Group Stock"), is intended to reflect the separate
performance of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming assets.

         On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue the Liberty Group Series A Stock and
Liberty Group Series B Stock. Additionally, the stockholders of TCI approved the
redesignation of the previously authorized Class A and Class B common stock into
TCI Group Series A Stock and TCI Group Series B Stock. On August 10, 1995, TCI
distributed in the form of a dividend (the "Liberty Distribution"), 2.25 shares
of Liberty Group Stock (as adjusted for stock dividends - see below) for each
four shares of TCI Group Stock owned.

         On August 28, 1997, the stockholders of TCI authorized the Board to
issue the TCI Ventures Group Stock. Prior to stockholder approval to issue the
TCI Ventures Group Stock, TCI commenced the offers (the "Exchange Offers") to
exchange shares of TCI Ventures Group Stock for shares of TCI Group Stock in the
ratio of two shares of the applicable series of TCI Ventures Group Stock in
exchange for each share of the corresponding series of TCI Group Stock properly
tendered. On September 10, 1997, 188,661,300 shares of TCI Group Series A Stock
and 16,266,400 shares of TCI Group Series B Stock were exchanged for 377,322,600
shares of TCI Ventures Group Series A Stock and 32,532,800 shares of TCI
Ventures Group Series B Stock, respectively (the "TCI Ventures Exchange").

         Effective February 6, 1998, the Company issued stock dividends to
holders of Liberty Group Stock (the "1998 Liberty Stock Dividend") and TCI
Ventures Group Stock (the "Ventures Stock Dividend"). The 1998 Liberty Stock
Dividend consisted of one share of Liberty Group Stock for every two shares of
Liberty Group Stock owned. The Ventures Stock Dividend consisted of one share of
TCI Ventures Group Stock for every one share of TCI Ventures Group Stock owned.
The 1998 Liberty Stock Dividend and the Ventures Stock Dividend have been
treated as stock splits, and accordingly, all share and per share amounts
presented have been restated to reflect the 1998 Liberty Stock Dividend and the
Ventures Stock Dividend.





                                       3
<PAGE>   5



         On June 24, 1998, the Board announced its intention, subject to
shareholder approval, to combine Liberty Media Group and TCI Ventures Group
(collectively, "Liberty/Ventures Group"). Under the terms of the proposed
combination (the "Liberty/Ventures Combination"), each outstanding share of TCI
Ventures Group Series A Stock will be reclassified as .52 of a share of Liberty
Group Series A Stock (following the Liberty/Ventures Combination, the
"Liberty/Ventures Group Series A Stock") and each outstanding share of TCI
Ventures Group Series B Stock, will be reclassified as .52 of a share Liberty
Group Series B Stock (following the Liberty/Ventures Combination, the
"Liberty/Ventures Group Series B Stock").

         Following the Liberty/Ventures Combination the Liberty/Ventures Group
Series A Stock and the Liberty/Ventures Group Series B Stock (and collectively,
the "Liberty/Ventures Group Stock") will represent one hundred percent of the
equity value attributable to Liberty/Ventures Group. The Liberty/Ventures
Combination will not result in any transfer of assets or liabilities of TCI or
any of its subsidiaries or affect the rights of creditors of TCI or of holders
of TCI's or any of its subsidiaries' debt.

         Collectively, all of the aforementioned targeted groups of assets are
referred to as "Groups" and individually, may be referred to herein as a
"Group."

         The following discussion and analysis has been prepared in conjunction
with the solicitation of shareholder approval of the proposed Liberty/Ventures
Combination, and accordingly, includes references to the prepared
Liberty/Ventures Group and analysis of the financial condition and results of
operations of the proposed Liberty/Ventures Group. The Liberty Media Group and
TCI Ventures Group will continue to exist until such time as the
Liberty/Ventures Combination or another shareholder approved transaction is
consummated.

         Certain statements included herein constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company (or entities in which the Company has
interests), 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 industry trends; the regulatory and
competitive environment of the industries in which the Company, and the entities
in which the Company has interests, operate; uncertainties inherent in new
business strategies, new product launches and development plans; rapid
technological changes; the acquisition, development and/or financing of
telecommunications networks and services; the development and provision of
programming for new television and telecommunications technologies; future
financial performance, including availability, terms and deployment of capital;
the ability of vendors to deliver required equipment, software and services;
availability of qualified personnel; changes in, or failure or inability to
comply with, government regulations, including, without limitation, regulations
of the Federal Communications Commission ("FCC"), and adverse outcomes from
regulatory proceedings; changes in the nature of key strategic relationships
with partners and joint venturers; competitor responses to the Company's
products and services, and the products and services of the entities in which
the Company has interests, and the overall market acceptance of such products
and services; and other factors. These forward-looking statements (and such
risks, uncertainties and other factors) speak only as of the date of this
Report, and the Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein, to reflect any change in the Company's expectations with regard thereto,
or any other change in events, conditions or circumstances on which any such
statement is based.





                                       4
<PAGE>   6



         Targeted Stock

         Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group and Liberty/Ventures Group for the
purpose of preparing their respective combined financial statements of each such
Group, the capital structure of TCI, which encompasses the TCI Group Stock and
Liberty/Ventures Group Stock, does not affect legal title to such assets or
responsibility for such liabilities of TCI or any of its subsidiaries. TCI and
its subsidiaries each continue to be responsible for their respective
liabilities. Holders of TCI Group Stock and Liberty/Ventures Group Stock are
common stockholders of TCI and are subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities. The
issuance of Liberty/Ventures Group Stock will not affect the rights of creditors
of TCI.

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

         The common stockholders' equity value of Liberty/Ventures Group that,
at any relevant time, is attributed to TCI Group, and accordingly not
represented by outstanding Liberty/Ventures Group Stock, is referred to as
"Inter-Group Interest." Prior to consummation of the Liberty Distribution and
TCI Ventures Exchange, TCI Group had a 100% Inter-Group Interest in Liberty
Media Group and TCI Ventures Group, respectively. Following consummation of the
Liberty Distribution and TCI Ventures Exchange, TCI Group no longer has
Inter-Group Interests in Liberty Media Group and TCI Ventures Group,
respectively. For periods in which an Inter-Group Interest exists, TCI Group
accounts for its Inter-Group Interest in a manner similar to the equity method
of accounting. Following consummation of the Liberty/Ventures Combination, an
Inter-Group Interest would be created with respect to Liberty/Ventures Group
only if a subsequent transfer of cash or other property from TCI Group to
Liberty/Ventures Group is specifically designated by the Board as being made to
create an Inter-Group Interest or if outstanding shares of Liberty/Ventures
Group Stock are purchased with funds attributable to TCI Group. Management of
TCI believes that generally accepted accounting principles require that
Liberty/Ventures Group be consolidated with TCI Group for all periods in which
TCI Group held an Inter-Group Interest in Liberty/Ventures Group.

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

         All debt incurred or preferred stock issued by TCI and its subsidiaries
is (unless the Board otherwise provides) specifically attributed to and
reflected in the combined financial statements of the Group that includes the
entity which incurred the debt or issued the preferred stock or, in case the
entity incurring the debt or issuing the preferred stock is Tele-Communications,
Inc., the TCI Group. The Board could, however, determine from time to time that
debt incurred or preferred stock issued by entities included in a Group should
be specifically attributed to and reflected in the combined financial statements
of one of the other Groups to the extent that the debt is incurred or the
preferred stock is issued for the benefit of such other Group.



                                       5
<PAGE>   7



         Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective liquidity
requirements, the cash needs of one Group may exceed the liquidity sources of
such Group. In such circumstances, the other Group may transfer funds to such
Group. TCI Group has provided and will continue to provide centralized cash
management functions under which cash receipts of certain entities included in
the Liberty/Ventures Group could be remitted to TCI Group and certain cash
disbursements of the Liberty/Ventures Group could be funded by TCI Group on a
daily basis. Such transfers of funds among the Groups will be reflected as
borrowings or, if determined by the Board, in the case of a transfer from TCI
Group to Liberty/Ventures Group, reflected as the creation of, or increase in,
TCI Group's Inter-Group Interest in Liberty/Ventures Group or, in the case of a
transfer from Liberty/Ventures Group to TCI Group, reflected as a reduction in
TCI Group's Inter-Group Interest in Liberty/Ventures Group. There are no
specific criteria for determining when a transfer will be reflected as a
borrowing or as an increase or reduction in an Inter-Group Interest. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs of TCI,
the financing needs and objectives of the Groups, the investment objectives of
the Groups, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic conditions.

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

         The combined balance sheets of a Group reflect its net loans or
advances to or loans or advances from the other Group. Similarly, the respective
combined statements of operations of the Groups reflect interest income or
expense, as the case may be, associated with such loans or advances and the
respective combined statements of cash flows of the Groups reflect changes in
the amounts of loans or advances deemed outstanding. Net loans or advances
between Groups have been and will continue to be included as a component of each
respective Group's combined equity in the combined financial statements.

         Although any increase in TCI Group's Inter-Group Interest in
Liberty/Ventures Group resulting from an equity contribution by TCI Group to
Liberty/Ventures Group or any decrease in such Inter-Group Interest resulting
from a transfer of funds from Liberty/Ventures Group to the TCI Group would be
determined by reference to the market value of the Liberty/Ventures Group Series
A Stock as of the date of such transfer. Such an increase could occur at a time
when such shares could be considered undervalued and such a decrease could occur
at a time when such shares could be considered overvalued.






                                       6
<PAGE>   8



         All financial impacts of issuances and purchases of shares of TCI Group
Stock or Liberty/Ventures Group Stock, the proceeds of which are attributed to
TCI Group or Liberty/Ventures Group, respectively, will be to such extent
reflected in the combined financial statements of TCI Group or Liberty/Ventures
Group, respectively. All financial impacts of issuances of shares of
Liberty/Ventures Group Stock, the proceeds of which are attributed to TCI Group
in respect of a reduction in TCI Group's Inter-Group Interest in
Liberty/Ventures Group, will be to such extent reflected in the combined
financial statements of TCI Group. Financial impacts of dividends or other
distributions on TCI Group Stock or Liberty/Ventures Group Stock, will be
attributed entirely to TCI Group or Liberty/Ventures Group, respectively, except
that dividends or other distributions on Liberty/Ventures Group Stock will (if
at the time there is an Inter-Group Interest in Liberty/Ventures Group) result
in TCI Group being credited, and Liberty/Ventures Group being charged (in
addition to the charge for the dividend or other distribution paid), with an
amount equal to the product of the aggregate amount of such dividend or other
distribution paid or distributed in respect of outstanding shares of
Liberty/Ventures Group Stock and a fraction of the numerator of which is
Liberty/Ventures Group "Inter-Group Interest Fraction" and the denominator of
which is Liberty/Ventures Group "Outstanding Interest Fraction" (both as
defined). Financial impacts of repurchases of Liberty/Ventures Group Stock, the
consideration for which is charged to TCI Group, will be to such extent
reflected in the combined financial statements of TCI Group and will result in
an increase in the TCI Group's Inter-Group Interest in Liberty/Ventures Group.




                                       7
<PAGE>   9



         Magness Settlement

         On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the Estate
of Bob Magness (the "Magness Estate"), the late founder and former Chairman of
the Board of TCI in exchange (the "Exchange") for an equal number of shares of
TCI Group Series B Stock (which shares are entitled to ten votes per share)
owned by the Magness Estate, (b) the Magness Estate sold (the "Sale") the shares
of TCI Group Series A Stock received in the Exchange, together with
approximately 1.5 million shares of TCI Group Series A Stock that the Magness
Estate previously owned (collectively, the "Option Shares"), to two investment
banking firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment Bankers
whereby TCI has the option, but not the obligation, to purchase the Option
Shares at any time on or before June 16, 1999 (the "Option Period"). The
preceding transactions are referred to collectively as the "June 16 Stock
Transaction". During the Option Period, the Company and the Investment Bankers
are to settle quarterly any increase or decrease in the market value of the
Option Shares. If the market value of the Option Shares exceeds the Investment
Bankers' cost, Option Shares with a fair value equal to the difference between
the market value and cost will be segregated from the other Option Shares in an
account at the Investment Bankers. If the market value of the Option Shares is
less than the Investment Bankers' cost, the Company, at its option, will settle
such difference with shares of TCI Group Series A Stock or TCI Ventures Group
Series A Stock or, subject to certain conditions, with cash or letters of
credit. In addition, the Company is required to pay the Investment Bankers a
quarterly fee equal to the London Interbank Offered Rate ("LIBOR") plus 1% on
the Sale Price, as adjusted for payments made by the Company pursuant to any
quarterly settlement with the Investment Bankers. Due to the Company's ability
to settle quarterly price fluctuations and fees with shares of TCI Group Series
A Stock or TCI Ventures Group Series A Stock the Company records all amounts
received or paid under this arrangement as increases or decreases, respectively,
to equity. During the fourth quarter of 1997, the Company repurchased 4,000,000
shares of TCI Group Series A Stock from one of the Investment Bankers for an
aggregate cash purchase price of $66 million. Additionally, as a result of the
Exchange Offers and certain open market transactions that were completed to
obtain the desired weighting of TCI Group Series A Stock and TCI Ventures Group
Series A Stock, the Investment Bankers disposed of 4,210,308 shares of TCI Group
Series A Stock and acquired 23,407,118 shares (as adjusted for the Ventures
Stock Dividend) of TCI Ventures Group Series A Stock during the last half of
1997 such that the Option Shares were comprised of 16,402,082 shares of TCI
Group Series A Stock and 23,407,118 shares (as adjusted for the Ventures Stock
Dividend) of TCI Ventures Series A Stock at December 31, 1997. At December 31,
1997, the market value of the Option Shares exceeded the Investment Bankers'
cost by $325 million. Pursuant to a certain Letter Agreement, dated June 16,
1997, between Dr. Malone, TCI's Chairman and Chief Executive Officer, and the
Magness Estate, Dr. Malone agreed to waive certain rights of first refusal with
respect to shares of Series B TCI Group Stock beneficially owned by the Magness
Estate. Such rights of first refusal arise from a letter agreement, dated June
17, 1988, among Bob Magness, Kearns-Tribune Corporation and Dr. Malone, pursuant
to which Dr. Malone was granted a right of first refusal to acquire any shares
of TCI Group Series B Stock which the other parties proposed to sell. As a
result of Dr. Malone's rights under such June 17, 1988 letter agreement, such
waiver was necessary in order for the Magness Estate to consummate the Exchange
and the Sale.

         In consideration for such waiver, TCI granted Dr. Malone the right (the
"Malone Right") to acquire from time to time until June 30, 1999, from TCI up to
30,545,864 shares of the Series B TCI Group Stock acquired by TCI from the
Magness Estate pursuant to the Exchange. Such acquisition may be made in
exchange for either, or any combination of, shares of Series A TCI Group Stock
owned by Dr. Malone (exchanged on a one for one basis), or cash in an amount
equal to the average closing sale price of the Series B TCI Group Stock for the
five trading days preceding the acquisition.




                                       8
<PAGE>   10

         In connection with certain legal procedings relative to the probate of
the Magness Estate, one or more of Gary Magness and Kim Magness, Bob Magness'
sons, Sharon Magness, Bob Magness' surviving second wife and the original
personal representatives of the Magness Estate advanced various claims, causes
of action, demands, complaints and requests against one or more of the others.
In addition, Kim Magness and Gary Magness, in a Complaint And Request To Void
Sale Of TCI Stock, And For Damages And Surcharge, filed on October 29, 1997 (the
"Voiding Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI, Dr. Malone and the original personal representatives of
the Magness Estate. Among other matters, the Voiding Action challenged the June
16 Stock Transaction on various fiduciary bases and requested recision of such
transaction and damages.

         Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI, Gary Magness, Kim Magness, Sharon Magness, the
Magness Estate, the Estate of Betsy Magness (the first wife of Bob Magness) and
Dr. Malone agreed to settle their respective claims against each other relating
to the Magness Estate and the June 16 Stock Transaction, in each case without
any of those parties admitting any of the claims or allegations against that
party (the "Magness Settlement").

         In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that 10,201,041 shares of TCI Group Series A Stock and
11,666,506 shares (as adjusted for the Ventures Stock Dividend) of TCI Ventures
Group Series A Stock were returned to TCI as authorized but unissued shares, and
the Magness Estate returned to the Investment Bankers the portion of the Sales
Price attributable to such returned shares. TCI then issued to the Magness
Estate 10,017,145 shares of TCI Group Series B Stock and 12,034,298 shares (as
adjusted for the Ventures Stock Dividend) of TCI Ventures Series B Stock. In
addition, as part of the Magness Settlement, TCI issued 1,339,415 shares of TCI
Group Series B Stock to the Estate of Betsy Magness in exchange for an equal
number of shares of TCI Group Series A Stock and issued 1,531,834 shares of TCI
Ventures Group Series B Stock for an equal number of shares of TCI Ventures
Group Series A Stock.

         On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr. Malone and
Dr. Malone's wife (together with Dr. Malone, the "Malones"), under which the
Malones granted to TCI the right to acquire any shares of TCI stock which are
entitled to cast more than one vote per share (the "High-Voting Shares") owned
by the Malones, which currently consist of an aggregate of approximately 60
million High-Voting Shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third persons. In
either such event, TCI has the right to acquire the shares at a maximum price
equal to the then relevant market price of shares of "low-voting" Series A Stock
plus a ten percent premium. The Malones also agreed that if TCI were ever to be
sold to another entity, then the maximum premium that the Malones would receive
on their High-Voting Shares would be no greater than a ten percent premium over
the price paid for the relevant shares of Series A Stock. TCI paid $150 million
to the Malones in consideration of them entering into the Malone Call Agreement.




                                       9
<PAGE>   11



         Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain cases, on
behalf of the Estate of Betsy Magness and the Magness Estate (collectively, the
"Magness Family") also entered into a call agreement with TCI (with
substantially the same terms as the one entered into by the Malones, including a
call on the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of approximately 49
million High-Voting Shares. The Magness Family was paid $124 million by TCI in
consideration of them entering into the Magness Call Agreement. Additionally, on
February 9, 1998, the Magness Family entered into a shareholders' agreement (the
"Shareholders' Agreement") with the Malones and TCI under which (i) the Magness
Family and the Malones agree to consult with each other in connection with
matters to be brought to the vote of TCI's shareholders, subject to the proviso
that if they cannot mutually agree on how to vote the shares, Dr. Malone has an
irrevocable proxy to vote the High-Voting Shares owned by the Magness Family,
(ii) the Magness Family may designate a nominee for the Board and Dr. Malone has
agreed to vote his High Voting Shares for such nominee and (iii) certain "tag
along rights" have been created in favor of the Magness Family and certain "drag
along rights" have been created in favor of the Malones. In addition, the Malone
Right granted by TCI to Dr. Malone to acquire 30,545,864 shares of TCI Group
Series B Stock has been reduced to an option to acquire 14,511,570 shares of TCI
Group Series B Stock. Pursuant to the terms of the Shareholders' Agreement, the
Magness Family has the right to participate in the reduced Malone Right on a
proportionate basis with respect to 12,406,238 shares of the 14,511,570 shares
subject to the Malone Right.

         The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") will be reflected
as a $274 million reduction of additional paid-in capital. The Call Payments
will be allocated to each of the Groups based upon the number of shares of each
Group (before giving effect to the 1998 Liberty Stock Dividend and the Ventures
Stock Dividend) that were subject to the Malone Call Agreement and the Magness
Call Agreement. Accordingly, $134 million and $140 million of the Call Payments
will be allocated to TCI Group and Liberty/Ventures Group, respectively.

         Inflation

         Inflation has not had a significant impact on TCI's results of
operations during the three-year period ended December 31, 1997.




                                       10
<PAGE>   12



         Accounting Standards

         The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 128, Earnings Per Share, ("SFAS 128") in
February of 1997. SFAS 128 establishes new computation, presentation and
disclosure requirements for earnings per share ("EPS"). SFAS 128 requires
companies with complex capital structures to present basic and diluted EPS.
Basic EPS is measured as the income or loss available to common shareholders
divided by the weighted average outstanding common shares for the period.
Diluted EPS is similar to basic EPS 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 periods presented.
Potential 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
EPS. The Company adopted SFAS 128 as of December 31, 1997 and has restated all
prior period EPS data, as required. SFAS 128 did not have a material impact on
EPS for all periods presented.

         During 1997, the FASB also issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes standards for reporting and displaying of comprehensive income and
its components in the financial statements. It does not, however, require a
specific format for the statement, but requires the Company to display an amount
representing total comprehensive income for the period in that financial
statement. The Company is in the process of determining its preferred format.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.

         Year 2000

         During 1997, the Company began an enterprise-wide comprehensive review
of its computer systems and related software to ensure systems properly
recognize the year 2000 and continue to process business information. The
systems being evaluated include all internal use software and devices and those
systems and devices that manage the distribution of the Company's, as well as
third parties' products. Additionally, the Company has initiated a program of
communications with its significant suppliers, customers and affiliated
companies to determine the readiness of these third parties and the impact on
the Company as a consequence of their own year 2000 issues.

         Over the past three years, the Company began an effort to convert a
substantial portion of its financial applications to commercial products which
are anticipated to be year 2000 ready, or to outsource portions of its financial
applications to third party vendors who are expected to be year 2000 ready.
Notwithstanding such effort, the Company is in the process of finalizing its
assessment of the impact of year 2000. The Company is utilizing both internal
and external resources to identify, correct or reprogram, and test systems for
year 2000 readiness. To date, the Company has inventoried substantially all of
its cable systems and is currently evaluating the results of such inventory. The
Company expects that it will have to modify or replace certain portions of its
cable distribution plant, although the Company has not yet completed its
assessment. Confirmations have been received from certain primary suppliers
indicating that they are either year 2000 ready or have plans in place to ensure
readiness. As part of the Company's assessment of its year 2000 issue, it is
evaluating the level of validation it will require of third parties to ensure
their year 2000 readiness. The Company's manual assessment of the impact of the
year 2000 date change should be complete by mid-1998.



                                       11
<PAGE>   13




         Management of the Company has not yet determined the cost associated
with its year 2000 readiness efforts and the related potential impact on the
Company's results of operations. Amounts expended to date have not been
material, although there can be no assurance that costs ultimately required to
be paid to ensure the Company's year 2000 readiness will not have an adverse
effect on the Company's financial position. Additionally, there can be no
assurance that the systems of other companies on which the Company relies will
be converted in time or that any such failure to convert by another company will
not have an adverse effect on the Company's financial condition or position.

         SUMMARY OF OPERATIONS

         GENERAL

         Summarized operating data with respect to TCI is presented below for
the indicated periods:

<TABLE>
<CAPTION>
                                                                             Years ended December 31,
                                                                      ------------------------------------------
                                                                          1997 (b)     1996 (a)        1995 (a)
                                                                      ----------      ----------      ----------
<S>                                                                   <C>                  <C>             <C>  
Revenue                                                               $    7,570           8,022           6,506

Operating, selling, general and administrative expenses                   (4,595)         (5,746)         (4,518)
Stock compensation                                                          (488)             13             (57)
Impairment of intangible assets                                              (15)             --              --
Restructuring charges                                                         --             (41)            (17)
Depreciation and amortization                                             (1,623)         (1,616)         (1,372)
                                                                      ----------      ----------      ----------

     Operating income                                                        849             632             542

Interest expense                                                          (1,160)         (1,096)         (1,010)
Share of losses of affiliates, net                                          (930)           (450)           (213)
Gain on dispositions of assets and sale of stock                             573           1,605             337
Other, net                                                                  (127)           (128)             33
                                                                      ----------      ----------      ----------

    Earnings (loss) before income taxes                                     (795)            563            (311)

Income tax benefit (expense)                                                 234            (271)            128
                                                                      ----------      ----------      ----------

     Net earnings (loss)                                              $     (561)            292            (183)
                                                                      ==========      ==========      ==========
</TABLE>


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

(a)      Restated - see note 13 to the accompanying consolidated financial
         statements of TCI.

(b)      Restated - see note 19 to the accompanying consolidated financial 
         statements of TCI.

                                       12
<PAGE>   14



         The Company's domestic cable and communications businesses and assets
are included in TCI Group. Upon consummation of the proposed Liberty/Ventures
Combination, the Company's programming businesses and assets which are currently
included in Liberty Media Group, and the Company's principal international
businesses and assets and the Company's remaining non-cable and non-programming
domestic businesses and assets which are currently included in TCI Ventures
Group, will be included in Liberty/Ventures Group. The operating results of each
of TCI Group and Liberty/Ventures Group are separately discussed below.

         TCI GROUP

         TCI Group operates principally in the domestic cable and communications
industry. The table below sets forth, for the periods presented, the percentage
relationship that certain items bear to revenue. This summary provides trend
data relating to the normal recurring operations of TCI Group. Other items of
significance are discussed under separate captions below.

<TABLE>
<CAPTION>
                                                                              Years ended December 31,
                                                 ---------------------------------------------------------------------------------
                                                           1997                       1996 (a)                      1995 (a)
                                                 -----------------------      -----------------------      -----------------------
                                                                            dollar amounts in millions
<S>                                                   <C>       <C>                <C>       <C>                <C>       <C>     
Revenue                                               100%      $  6,429           100%      $  5,881           100%      $  4,827
Operating expenses                                    (36)        (2,293)          (38)        (2,230)          (35)        (1,686)
Selling, general and administrative expenses          (21)        (1,370)          (28)        (1,635)          (25)        (1,216)
Stock compensation                                     (3)          (192)           --             23            (1)           (40)
Restructuring charges                                  --             --            --            (37)           --             --
Depreciation and amortization                         (22)        (1,427)          (24)        (1,406)          (25)        (1,199)
                                                 --------       --------      --------       --------      --------       --------

      Operating income                                 18%      $  1,147            10%      $    596            14%      $    686
                                                 ========       ========      ========       ========      ========       ========
</TABLE>

- --------------------
(a)      Restated - see notes 1 and 12 to the combined financial statements of
         TCI Group, which are included in the Company's December 31, 1997 Annual
         Report on Form 10-K.

         The operation of TCI Group's cable television systems is regulated at
the federal, state and local levels. The Cable Communications Policy Act of 1984
(the "1984 Cable Act"), the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act") and the Telecommunications Act of 1996 (the
"1996 Telecom Act" and together with the 1992 Cable Act, the "Cable Acts")
established rules under which TCI Group's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are regulated if a
complaint is filed by a customer or if the appropriate franchise authority is
certified by the FCC to regulate rates. At December 31, 1997, approximately 71%
of TCI Group's basic customers were served by cable television systems that were
subject to such rate regulation.

         During the year ended December 31, 1997, 73% of TCI Group's revenue was
derived from Regulated Services. As noted above, any increases in rates charged
for Regulated Services are regulated by the Cable Acts. Moreover, competitive
factors may limit TCI Group's ability to increase its service rates.




                                       13
<PAGE>   15



         TCI Group has completed a number of acquisitions during the three-year
period ended December 31, 1997. The most significant of such acquisitions was
consummated on July 31, 1996 when TCI Group acquired from Viacom, Inc. an entity
that owned cable television assets valued at $2.326 billion at the acquisition
date. Upon consummation of such acquisition (the "Viacom Acquisition"), the
acquired entity was renamed TCI Pacific Communications, Inc. ("TCI Pacific").
For additional information concerning the Viacom Acquisition, see note 6 to the
combined financial statements of TCI Group, which are included in the Company's
Annual Report on Form 10-K. The following table sets forth summary information
with respect to the operating results of TCI Pacific that have been included in
TCI Group's results of operations since the July 1, 1996 acquisition date
(amounts in millions):

<TABLE>
<CAPTION>
                                                             Year ended               Five months ended
                                                          December 31, 1997           December 31, 1996
                                                          -----------------         ---------------------
<S>                                                         <C>                      <C>
          Revenue                                           $        509                            216
          Operating costs and expenses before
               depreciation and amortization                        (295)                          (133)
          Depreciation and amortization                             (121)                           (45)
                                                            ------------                   ------------

                   Operating income                         $         93                             38
                                                            ============                   ============
</TABLE>


         Through December 4, 1996, TCI Group had an investment in Primestar
Partners L.P. ("Primestar"). Primestar provided programming and marketing
support to each of its cable partners who provided satellite television service
to their customers. On December 4, 1996, TCI distributed (the "Satellite
Spin-off") to the holders of shares of TCI Group Stock all of the issued and
outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At
the time of the Satellite Spin-off, Satellite's assets and operations included
TCI Group's interest in Primestar, TCI Group's business of distributing
Primestar programming and two communications satellites. As a result of the
Satellite Spin-off, Satellite's operations subsequent to December 4, 1996 are
not consolidated with those of TCI Group.

         The following table sets forth summary information with respect to the
operating results of Satellite for the period from January 1, 1996 through date
of the Satellite Spin-off (amounts in millions):

<TABLE>
<S>                                              <C>         
         Revenue                                 $        377
         Operating expenses                              (373)
         Depreciation                                    (166)
                                                 ------------

                  Operating loss                 $       (162)
                                                 ============
</TABLE>

         TCI Group's revenue increased 9% and 22% for the years ended December
31, 1997 and 1996, respectively, as compared to the prior year. Exclusive of the
effects of acquisitions, the Satellite Spin-off and another disposition, revenue
from TCI Group's customers accounted for 3% of such 1997 increase in revenue,
primarily as a result of a 7% increase in basic revenue and a 4% decrease in
premium revenue. TCI Group experienced a 9% increase in its average basic rate,
a 1% decrease in the number of average basic customers, a 7% increase in its
average premium rate and an 11% decrease in the number of average premium
subscriptions. In addition, TCI Group's revenue increased 9% due to acquisitions
and decreased 6% due to the Satellite Spin-off and another disposition.
Advertising sales and other revenue accounted for the remaining 3% increase in
revenue.



                                       14
<PAGE>   16

         Exclusive of the effects of acquisitions, revenue from TCI Group's
customers accounted for 8% of such 1996 increase in revenue, primarily as a
result of a 10% increase in basic revenue and a 1% decrease in premium revenue.
TCI Group experienced an 8% increase in its average basic rate, a 4% increase in
the number of average basic customers, an 11% decrease in its average premium
rate and an 11% increase in the number of average premium subscriptions. In
addition, TCI Group's revenue increased 8% due to acquisitions and increased 4%
due to an increase in TCI Group's satellite customers through the date of the
Satellite Spin-off. Advertising sales and other revenue accounted for the
remaining 2% increase in revenue.

         Operating expenses increased 3% and 32% for the years ended December
31, 1997 and 1996, respectively. Exclusive of the effects of acquisitions, the
Satellite Spin-off and another disposition, such expenses increased 5% and 20%,
respectively. Programming expenses accounted for the majority of such increases.
TCI Group cannot determine whether and to what extent increases in the cost of
programming will affect its future operating costs. However, due to TCI Group's
obligations under a 25 year affiliation agreement (the "EMG Affiliation
Agreement") with Encore Media Group LLC ("Encore Media Group"), a subsidiary of
TCI that is a member of Liberty/Ventures Group, it is anticipated that TCI
Group's programming costs with respect to the "STARZ!" and "Encore" premium
services will increase in 1998 and future periods. See note 14 to the combined
financial statements of TCI Group, which are included in the Company's Annual
Report on Form 10-K.

         Selling, general and administrative expenses decreased 16% and
increased 34% for the years ended December 31, 1997 and 1996, respectively.
Exclusive of the effects of acquisitions, the Satellite Spin-off and another
disposition, such expenses decreased 6% and increased 17%, respectively. The
1997 decrease is due primarily to lower marketing costs due primarily to launch
and other incentives from programming suppliers, a reduction in salaries and
related payroll expenses due to work force reductions in the fourth quarter of
1996 and other reductions in general and administrative expenses in 1997. The
1996 increase is due primarily to an increase in salaries and related payroll
expenses, as well as increased marketing and general and administrative
expenses.

         During the fourth quarter of 1996, TCI Group restructured certain of
its operating and accounting functions. In connection with such restructuring,
TCI Group recognized a charge of $37 million related primarily to work force
reductions. Through December 31, 1997, $24 million of such charge had been paid.

         Depreciation expense decreased 4% and increased 20% for the years ended
December 31, 1997 and 1996, respectively. The 1997 decrease represents the net
effect of a decrease due to the Satellite Spin-off and another disposition that
more than offset increases attributable to acquisitions and capital
expenditures. The 1996 increase is attributable to acquisitions and capital
expenditures.

         Amortization expense increased 14% and 12% for the years ended December
31, 1997 and 1996, respectively. Such increases are primarily attributable to
the effects of acquisitions.

         Certain corporate general and administrative costs are charged to
Liberty/Ventures Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges are set at
levels that management believes to be reasonable and that would approximate the
costs Liberty/Ventures Group would incur for comparable services on a
stand-alone basis. During the years ended December 31, 1997, 1996 and 1995,
Liberty/Ventures Group was allocated $13 million, $11 million and $7 million,
respectively, in corporate general and administrative costs by TCI Group.




                                       15
<PAGE>   17



         TCI Group records stock compensation relating to restricted stock
awards, options and/or stock appreciation rights granted by TCI to certain TCI
Group employees and members of the Board. The amount of expense associated with
stock compensation is based on the vesting of the related stock options and
stock appreciation rights and the market price of the underlying common stock as
of December 31, 1997. The expense associated with stock appreciation rights is
subject to future adjustment based upon market value fluctuation and,
ultimately, on the final determination of market value when the rights are
exercised.

         Other Income and Expenses

         TCI Group's interest expense increased $76 million or 7% from 1996 to
1997 and $60 million or 6% from 1995 to 1996. The increase in 1997 is primarily
the result of higher average debt balances, as a result of the Viacom
Acquisition on July 31, 1996. The 1996 increase is the net result of higher
average debt balances, partially offset by a decrease due to a lower weighted
average interest rate. TCI Group's weighted average interest rate on borrowings
was 7.7%, 7.7% and 8.1% during 1997, 1996 and 1995, respectively.

         During the years ended December 31, 1997 and 1996, TCI Group purchased,
in the open market, certain notes payable which had an aggregate principle
balance of $409 million and $904 million, respectively. Fixed interest rates on
notes payable ranged from 8.75% to 10.13% for purchases made during 1997, and
ranged from 7.88% to 10.44% for purchases made during 1996. In connection with
such purchases, TCI Group recognized losses on early extinguishment of debt of
$39 million and $62 million during the years ended December 31, 1997 and 1996,
respectively. Such losses related to prepayment penalties amounting to $33
million and $60 million for the years ended December 31, 1997 and 1996,
respectively, and the retirement of deferred loan costs.

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

         TCI Group's investments in affiliates are comprised of limited
partnerships and other entities that are primarily engaged in the domestic cable
business. TCI Group's share of losses of affiliates were $90 million, $79
million and $3 million in 1997, 1996 and 1995, respectively. The 1997 increase
is primarily due to TCI Group's share of losses of a 49%-owned cable television
partnership that was acquired by TCI Group in July 1996. The 1996 increase is
primarily due to TCI Group's share of (i) a 1996 nonrecurring charge by an
equity investee to recognize a decline in the market value of certain securities
and (ii) the 1996 losses of the aforementioned 49%-owned cable television
partnership.

         Minority interests in earnings of consolidated subsidiaries aggregated
$168 million, $82 million and $3 million for the years ended December 31, 1997,
1996 and 1995, respectively. The majority of the 1997 and 1996 amounts represent
the accrual of dividends on the company-obligated mandatorily redeemable
preferred securities of subsidiary trusts ("Trust Preferred Securities"),
holding solely subordinated debt securities of TCI Communications, Inc., issued
in 1997 and 1996 and the accrual of dividends on certain preferred securities
issued in August 1996 by TCI Pacific in connection with the Viacom Acquisition.
See notes 6 and 10 to the combined financial statements of TCI Group, which are
included in the Company's Annual Report on Form 10-K.





                                       16
<PAGE>   18

         Net Loss

         As a result of the above-described fluctuations in the Company's
results of operations, (i) TCI Group's net loss (before earnings (loss) of
Liberty Media Group and TCI Ventures Group and preferred stock dividend
requirements) of $150 million for the year ended December 31, 1997 changed by
$356 million, as compared to TCI Group's net loss (before earnings (loss) of
Liberty Media Group and TCI Ventures Group and preferred stock dividend
requirements) of $506 million for the year ended December 31, 1996, and (ii) TCI
Group's net loss (before earnings (loss) of Liberty Media Group and TCI Ventures
Group and preferred stock dividend requirements) of $506 million for the year
ended December 31, 1996 changed by $319 million, as compared to TCI Group's net
loss (before earnings (loss) of Liberty Media Group and TCI Ventures Group and
preferred stock dividend requirements) of $187 million for the year ended
December 31, 1995.

         LIBERTY/VENTURES GROUP

         At December 31, 1997, Liberty/Ventures Group consisted principally of
the following assets and their related liabilities: (i) TCI's businesses which
provide programming services including production, acquisition and distribution
through all available formats and media of branded entertainment, educational
and informational programming and software, including multimedia products, (ii)
TCI's businesses engaged in electronic retailing, direct marketing, advertising
sales relating to programming services, infomercials and transaction processing,
(iii) TCI's businesses engaged in international cable, telephony and programming
businesses (iv) TCI's principal interests in the telephony business ("TCI
Telephony") consisting primarily of TCI's investment in a series of partnerships
formed to engage in the business of providing wireless communications services,
using the radio spectrum for broadband personal communications services ("PCS"),
to residential and business customers nationwide under the Sprint(R) brand (a
registered trademark of Sprint Communications Company, L.P.) (the "PCS
Ventures"), TCI's 28% equity interest (representing a 41% voting interest) in
Teleport Communications Group, Inc. ("TCG"), a competitive local exchange
carrier, and Western Tele-Communications, Inc. ("WTCI"), a wholly-owned
subsidiary of TCI that provides long distance transport of video, voice and data
traffic and other telecommunications services to interexchange carriers on a
wholesale basis using primarily a digital broadband microwave network located
throughout a 12 state region, (v) TCI's businesses engaged in high speed
multimedia Internet services, and (vi) other assets, including the National
Digital Television Center, Inc. ("NDTC"), which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets. A significant portion of Liberty/Ventures Group's operations are
conducted through corporations and partnerships in which Liberty/Ventures Group
holds a 20%-50% ownership interest. As Liberty/Ventures Group generally accounts
for such ownership interests using the equity method of accounting, the
financial condition and results of operations of such entities are not reflected
on a combined basis within Liberty/Ventures Group's combined financial
statements.

         During July 1997, Liberty/Ventures Group, TCI Group and a corporation
which held the 10% minority interest in Encore Media Corporation ("EMC") that
Liberty/Ventures Group did not already own entered into a series of transactions
pursuant to which the businesses of "Encore," a movie premium programming
service, and "STARZ!," a first-run movie premium programming service, were
contributed to Encore Media Group. Upon completion of the transaction,
Liberty/Ventures Group owned 80% of Encore Media Group and TCI Group owned the
remaining 20%. In connection with these transactions, the 10% minority interest
in EMC was exchanged for approximately 2.4 million shares of Liberty Group
Series A Stock, which was accounted for as an acquisition of a minority
interest.






                                       17
<PAGE>   19

         Liberty/Ventures Group received its 80% ownership interest in Encore
Media Group in exchange for (i) the contribution of its 49.9% interest in QE+
Ltd. ("QE+"), a limited partnership which distributed STARZ! prior to the
formation of Encore Media Group, (ii) the contribution of EMC, (iii) the
issuance of a $307 million note payable to TCI Group (the "EMG Promissory
Note"), (iv) the cancellation and forgiveness of amounts due for certain
services provided to QE+ equal to 4% of the gross revenue of QE+ (the "STARZ
Content Fees") and (v) the termination of an option to increase Liberty/Ventures
Group's ownership interest in QE+.

         TCI Group received the remaining 20% interest in Encore Media Group and
the aforementioned consideration from Liberty/Ventures Group in exchange for the
contribution of TCI Group's 50.1% ownership interest in QE+ and certain capital
contributions made by TCI Group to QE+. In addition, TCI Group entered into the
EMG Affiliation Agreement pursuant to which TCI Group will pay monthly fixed
amounts in exchange for unlimited access to all of the existing Encore and
STARZ! services.

         Upon formation of Encore Media Group, the operations of STARZ! are
included in the combined financial results of Liberty/Ventures Group. The EMG
Promissory Note is included in amounts due to related parties.

         Effective December 31, 1997, Liberty/Ventures Group and TCI Group
agreed to amend the above transactions. Pursuant to the amendment, the above
described series of transactions were rescinded, retroactive to July 1, 1997.
Such rescission was given effect as of December 31, 1997 for financial reporting
purposes. Simultaneously, Liberty/Ventures Group and TCI Group entered into a
new agreement whereby the EMG Affiliation Agreement was amended to permanently
reduce the monthly fixed amounts for the life of the contract, TCI Group's 20%
ownership interest in Encore Media Group was eliminated and the EMG Promissory
Note was reduced by $32 million. The amounts to be paid to Encore Media Group
pursuant to the EMG Affiliation Agreement were reduced to amounts which reflect
current market prices. See note 11 to the accompanying combined financial
statements of Liberty/Ventures Group.

         Effective July 11, 1997, pursuant to an Agreement and Plan of Merger,
dated as of February 6, 1997, as amended, by and among TCI, TCI Music Inc. ("TCI
Music"), TCI Merger Sub, a wholly-owned subsidiary of TCI Music ("DMX Merger
Sub") and DMX Inc. ("DMX"), DMX Merger Sub was merged with and into DMX, with
DMX as the surviving corporation (the "DMX Merger"). As a result of the DMX
Merger, stockholders of DMX became stockholders of TCI Music.





                                       18
<PAGE>   20

         Effective with the DMX Merger, TCI beneficially owned approximately
45.7% of the outstanding shares of the Series A Common Stock, $.01 par value per
share, of TCI Music (the "TCI Music Series A Common Stock") and 100% of the
outstanding shares of Series B Common Stock, $.01 par value per share, of TCI
Music (the "TCI Music Series B Common Stock," and together with the TCI Music
Series A Common Stock, the "TCI Music Common Stock"), which represented 89.6% of
the equity and 98.7% of the voting power of TCI Music. Simultaneously with the
DMX Merger, Liberty/Ventures Group acquired the TCI-owned TCI Music Common Stock
by issuing an $80 million promissory note (the "Music Note") to TCI and agreeing
to reimburse TCI for any amounts required to be paid by TCI pursuant to TCI's
contingent obligation under a rights agreement among TCI, TCI Music and the
rights agent (the "Rights Agreement") whereby TCI granted to each stockholder
who became a stockholder of TCI Music pursuant to the DMX Merger, one right (a
"Right") with respect to each whole share of TCI Music Series A Common Stock
acquired by such shareholder in the DMX Merger. Each Right entitles the holder
to require TCI to purchase from such holder one share of TCI Music Series A
Common Stock for $8.00 per share, subject to reduction by the aggregate amount
per share of any dividend and certain other distributions, if any, made by TCI
Music to its stockholders, and, payable at the election of TCI, in cash, a
number of shares of TCI Group Series A Stock, having an equivalent value or a
combination thereof, if during the one-year period beginning on the effective
date of the DMX Merger, the price of TCI Music Series A Common Stock does not
equal or exceed $8.00 per share for a period of at least 20 consecutive trading
days. TCI Music was included in the combined financial statements of
Liberty/Ventures Group as of the date of the DMX Merger. See note 11 to the
accompanying combined financial statements of Liberty/Ventures Group.

         In January 1997, Liberty/Ventures Group's voting interest in Flextech
p.l.c. ("Flextech"), a company engaged in the distribution and production of
programming for multi-channel video distribution systems in the United Kingdom
("UK"), was reduced to 50% and Liberty/Ventures Group ceased to include the
financial results of Flextech in its combined results of operations and began to
account for Flextech using the equity method of accounting. See note 5 to the
accompanying combined financial statements of Liberty/Ventures Group.

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

         Internationally, News Corp. and Liberty/Ventures Group formed a venture
("Fox Sports International") to operate previously existing sports services in
Latin America and Australia and a variety of new sports services throughout the
world, except in Asia and in the United Kingdom, Japan and New Zealand where
prior arrangements preclude an immediate collaboration. Liberty/Ventures Group
owns 50% of Fox Sports International with News Corp. owning the other 50%. News
Corp. contributed various international sports rights and certain trademark
rights. Liberty/Ventures Group contributed Prime Deportiva, a Spanish language
sports service distributed in Latin America and in Hispanic markets in the
United States; an interest in Torneos y Competencias S.A., an Argentinean sports
programming and production business; various international sports and satellite
transponder rights and cash. Liberty/Ventures Group also contributed its 50%
interest in Premier Sports and All-Star Sports. Both are Australian 24-hour
sports services available via multichannel, multipoint distribution systems or
cable television. See note 5 to the accompanying combined financial statements
of Liberty/Ventures Group.





                                       19
<PAGE>   21



         Pursuant to an agreement among Liberty/Ventures Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and amended
in August 1996 (the "BDTV Agreement"), Liberty/Ventures Group contributed to
BDTV INC. ("BDTV-I"), in August 1996, an option (the "Silver King Option") to
purchase 2 million shares of Class B common stock of Silver King Communications,
Inc. ("Silver King") (which shares represented voting control of Silver King at
such time) and $4 million in cash, representing the exercise price of the Silver
King Option. BDTV-I is a corporation formed by Liberty/Ventures Group and Mr.
Diller pursuant to the BDTV Agreement, in which Liberty/Ventures Group owns over
99% of the equity and none of the voting power (except for protective rights
with respect to certain fundamental corporate actions) and Mr. Diller owns less
than 1% of the equity and all of the voting power. BDTV-I exercised the Silver
King Option shortly after its contribution, thereby becoming the controlling
stockholder of Silver King. Such change in control of Silver King had been
approved by the FCC in June 1996, subject, however, to the condition that the
equity interest of Liberty/Ventures Group in Silver King not exceed 21.37%
without the prior approval of the FCC (the "FCC Order").

         Pursuant to an Agreement and Plan of Exchange and Merger entered into
in August 1996, Silver King acquired Home Shopping Network, Inc. ("HSN") by
merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN
Merger") where HSN is the surviving corporation and a subsidiary of Silver King
following the HSN Merger. Liberty/Ventures Group accounted for the HSN Merger as
a sale of a portion of its investment in HSN and accordingly, recorded a pre-tax
gain of approximately $47 million. In order to effect the HSN Merger in
compliance with the FCC Order, Liberty/Ventures Group agreed to defer receiving
certain shares of Silver King that would otherwise have become issuable to it in
the HSN Merger until such time as it was permitted to own such shares. As a
result, the HSN Merger was structured so that Liberty/Ventures Group received:
(i) 15.6 million shares of Class B common stock of Silver King, all of which
shares Liberty/Ventures Group contributed to BDTV II INC. ("BDTV-II", and
collectively with BDTV-I and BDTV III INC., "BDTV"), (ii) the contractual right
(the "Contingent Right") to be issued up to an additional 5.2 million shares of
Class B common stock of Silver King from time to time upon the occurrence of
certain events which would allow Liberty/Ventures Group to own additional shares
in compliance with the FCC Order (including events resulting in the dilution of
Liberty/Ventures Group's percentage equity interest), and (iii) 739,000 shares
of Class B common stock and 17.6 million shares of common stock of HSN
(representing approximately 19.9% of the equity and voting power of HSN).
BDTV-II is a corporation formed by Liberty/Ventures Group and Barry Diller
pursuant to the BDTV Agreement, in which the relative equity ownership and
voting power of Liberty/Ventures Group and Mr. Diller are substantially the same
as their respective equity ownership and voting power in BDTV-I. Pursuant to an
Exchange Agreement between Liberty/Ventures Group and Silver King, the shares of
HSN held by Liberty/Ventures Group following the HSN Merger are mandatorily
exchangeable from time to time for shares of common stock and Class B common
stock of Silver King (in the same ratio as the merger ratio in the HSN Merger)
either upon the occurrence of certain events or changes in laws, rules or
regulations which would entitle Liberty/Ventures Group to own directly a greater
number of shares of Silver King or in connection with the sale of the shares of
Silver King to be received in the exchange to a third party who would be
entitled to own such shares under applicable law.

         As a result of the HSN Merger, HSN is no longer included in the
combined financial results of Liberty/Ventures Group. Although Liberty/Ventures
Group no longer possesses voting control over HSN, it continues to have an
indirect equity interest in HSN through its ownership of the equity securities
of BDTV, as well as a direct interest in HSN which would be exchangeable into
shares of Silver King. Accordingly, HSN is accounted for using the equity
method. Subsequent to the HSN Merger, the surviving corporation changed its name
to HSN, Inc. ("HSNI").






                                       20
<PAGE>   22

         On April 25, 1995, Tele-Communications International, Inc. ("TINTA")
acquired a 51% ownership interest in Cablevision S.A. and certain affiliated
companies ("Cablevision") an entity engaged in the multi-channel video
distribution business in Buenos Aires, Argentina. On October 9, 1997, TINTA sold
a portion of its 51% interest in Cablevision to unaffiliated third parties (the
"Buyers") for cash proceeds of $120 million. In addition, on October 9, 1997,
Cablevision issued 3.5 million shares of stock in the aggregate to the Buyers
for $80 million in cash and notes receivable with an aggregate principal amount
of $240 million, plus accrued interest at LIBOR, due within the earlier of two
years or at the request of Cablevision's board of directors. The 1997
transactions (collectively, the "Cablevision Sale") reduced TINTA's interest in
Cablevision to 26.2%. The Buyers also purchased the additional 39% interest in
Cablevision that TINTA had the right to acquire. As a result of the Cablevision
Sale, effective October 1, 1997, TINTA ceased to consolidate Cablevision and
began to account for Cablevision using the equity method of accounting. See note
5 to the accompanying combined financial statements of Liberty/Ventures Group.

         On January 25, 1996, the stockholders of United Video Satellite Group,
Inc. ("UVSG") adopted the Agreement and Plan of Merger dated as of July 10,
1995, as amended, among UVSG, TCI and TCI Merger Sub, Inc. ("UVSG Merger Sub"),
pursuant to which UVSG Merger Sub was merged into UVSG, with UVSG as the
surviving corporation (the "UVSG Merger"). Liberty/Ventures Group acquired 12.4
million shares of UVSG Class B common stock and 2.1 million shares of UVSG Class
A common stock, together representing approximately 39% of the issued and
outstanding common stock of UVSG and approximately 85% of the total voting power
of UVSG common stock immediately after the UVSG Merger, resulting in UVSG
becoming a majority-controlled entity of Liberty/Ventures Group. The UVSG Merger
has been accounted for by the purchase method. Accordingly, the results of
operations of UVSG have been combined with those of Liberty/Ventures Group since
January 25, 1996 and Liberty/Ventures Group recorded UVSG's assets and
liabilities at fair value.

         SUMMARY OF OPERATIONS

         Liberty/Ventures Group's programming services include production,
acquisition and distribution through all available formats and media of branded
entertainment, educational and informational programming and software, including
multimedia products ("Entertainment and Information Programming Services").
Liberty/Ventures Group's international services include businesses which provide
programming services and operating television, telephone and Internet
distribution networks around the world ("International Services").
Liberty/Ventures Group operates NDTC which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets ("Digital Compression and Authorization Services") and Liberty/Ventures
Group is engaged in the business of providing high speed multimedia Internet
services ("Internet Services"). Through December 20, 1996 (the date of the HSN
Merger), Liberty/Ventures Group was also engaged in electronic retailing, direct
marketing, advertising sales relating to programming services, infomercials and
transaction processing ("Electronic Retailing Services"). To enhance the
reader's understanding, separate financial data has been provided below for
Entertainment and Information Programming Services, International Services,
Digital Compression and Authorization Services, Internet Services and Electronic
Retailing Services, which includes a retail function. Liberty/Ventures Group
holds significant equity investments, the results of which are not a component
of operating income, but are discussed below under "Other Income and Expense".
Other items of significance are discussed separately below.




                                       21
<PAGE>   23

<TABLE>
<CAPTION>
                                                                             Years ended December 31,
                                               -----------------------------------------------------------------------------------
                                                         1997 (a)                       1996                          1995
                                               -----------------------       -----------------------       -----------------------
                                                                            dollar amounts in millions
<S>                                            <C>                  <C>      <C>                  <C>      <C>                  <C>
Revenue:
     Entertainment and Information
         Programming Services                  $    967             74%      $    855             38%      $    571             33%
     International Services                         220             17            315             14            191             11
     Digital Compression and Authorization
         Services                                    94              7             75              4             53              3
     Internet Services                                7              1              1             --             --             --
     Electronic Retailing Services                   --             --            984             44            920             52
     Corporate and other                             11              1              7             --             17              1
                                               --------       --------       --------       --------       --------       --------
                                               $  1,299            100%      $  2,237            100%      $  1,752            100%
                                               ========       ========       ========       ========       ========       ========

Cost of sales, operating, selling,
         general and administrative:
     Entertainment and Information
         Programming Services                  $   (823)            76%      $   (708)            36%      $   (527)            31%
     International Services                        (145)            13           (274)            14           (165)            10
     Digital Compression and Authorization
         Services                                   (58)             5            (44)             2            (31)             2
     Internet Services                              (49)             5            (24)             1             (3)            --
     Electronic Retailing Services                   --             --           (911)            46           (962)            56
     Corporate and other                            (15)             1            (11)             1            (18)             1
                                               --------       --------       --------       --------       --------       --------
                                               $ (1,090)           100%      $ (1,972)           100%      $ (1,706)           100%
                                               ========       ========       ========       ========       ========       ========

Depreciation, amortization, other non-cash
     charges and stock compensation
     Entertainment and Information
         Programming Services                  $   (129)            19%      $    (79)            34%      $    (61)            32%
     International Services                         (71)            10            (64)            28            (36)            19
     Digital Compression and Authorization
         Services                                   (33)             5            (29)            13            (19)            10
     Internet Services                             (189)            28             (2)             1             --             --
     Electronic Retailing Services                   --             --            (37)            16            (42)            22
     Corporate and other                           (258)            38            (18)             8            (32)            17
                                               --------       --------       --------       --------       --------       --------
                                               $   (680)           100%      $   (229)           100%      $   (190)           100%
                                               ========       ========       ========       ========       ========       ========

Operating income (loss):
     Entertainment and Information
         Programming Services                  $     15                      $     68                      $    (17)
     International Services                           4                           (23)                          (10)
     Digital Compression and Authorization
         Services                                     3                             2                             3
     Internet Services                              (58)                          (25)                           (3)
     Electronic Retailing Services                   --                            36                           (84)
     Corporate and other                           (262)                          (22)                          (33)
                                               --------                      --------                      --------
                                               $   (298)                     $     36                      $   (144)
                                               ========                      ========                      ========
</TABLE>

(a)  Restated - see note 19 to the accompanying consolidated financial 
     statements of TCI.




                                       22
<PAGE>   24



         Entertainment and Information Programming Services

         Effective January 25, 1996, the results of operations of UVSG have been
combined with those of Liberty/Ventures Group. As of April 29, 1996,
Liberty/Ventures Group's regional sports programming businesses were no longer
included in the combined financial results of Liberty/Ventures Group. In
addition, effective January 1, 1997, the operations for TV Network Corporation
were discontinued and, therefore, revenue from such operations was not realized
in 1997. However, beginning July 1, 1997, upon formation of Encore Media Group,
the operations of STARZ! are included in the combined financial results of
Liberty/Ventures Group. And, as of July 11, 1997 the operations of TCI Music are
also included in the combined financial results of Liberty/Ventures Group.
Consequently, the amounts in the table above are not comparable year to year.
The following table sets forth the aggregate impact of these acquisitions and
dispositions on the results of operations of Liberty/Ventures Group for the
years ended December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                                                         1997          1996          1995
                                                       --------      --------      --------
                                                                 amounts in millions
<S>                                                    <C>           <C>            <C>
Revenue                                                $    635           574           383

Operating, selling, general and
     administrative expenses                               (569)         (496)         (390)

Depreciation, amortization, other non-cash
     charges and stock compensation                         (43)          (54)          (51)
                                                       --------      --------      --------

     Operating income (loss)                           $     23            24           (58)
                                                       ========      ========      ========
</TABLE>

         Excluding the effect of the acquisitions and dispositions described
above, revenue from Entertainment and Information Programming Services increased
18% or $51 million for the year ended December 31, 1997, as compared to the year
ended December 31, 1996. The increase is primarily attributable to higher
revenue from the distribution of the Encore services, including the thematic
multiplex services ("Multiplex"). During the year ended December 31, 1997,
revenue from distribution of the Encore services increased as a result of higher
revenue from TCI due to a higher number of units, the EMG Affiliation Agreement,
and an increase in the number of Encore and Multiplex units distributed by other
cable operators and direct broadcast satellite ("DBS") operators, when compared
to the year ended December 31, 1996.

         Operating, selling, general and administrative expenses from
Entertainment and Information Programming Services, as adjusted for the effect
of acquisitions and dispositions, increased 20% or $42 million for the year
ended December 31, 1997 compared to the year ended December 31, 1996.
Programming costs associated with the Encore services including Multiplex
increased $5 million for the year due to more recent programming being
purchased. Encore incurred approximately $2 million for costs associated with
the transition to digital technology during 1997. Increased national advertising
for Encore was responsible for approximately $20 million of the increase during
the year ended December 31, 1997 compared to 1996. Increased marketing support
payments to distributors accounted for $13 million of the increase in Encore's
operating, selling, general and administrative expenses for 1997 over 1996. The
remaining increase in operating, selling, general and administrative expenses
from the Entertainment and Information Programming Services was due to
additional personnel and related costs supporting the overall growth of the
businesses within Liberty/Ventures Group.




                                       23
<PAGE>   25



         Depreciation, amortization, other non-cash charges and stock
compensation of Entertainment and Information Programming Services increased $61
million or 244% during the year ended December 31, 1997, as compared to 1996,
excluding the effect of the acquisitions and dispositions described above.
Encore Media Group's stock compensation increased by $44 million during the year
ended December 31, 1997. In addition, ETC w/tci, Inc. ("ETC"), a developer and
distributor of for-profit education, training and communications services and
products, recorded a $15 million charge to operations during 1997 for the
impairment of certain of its intangible assets.

         Revenue from Entertainment and Information Programming Services
increased 49% or $93 million for the year ended December 31, 1996, compared to
the year ended December 31, 1995 excluding the effect of the acquisitions and
dispositions described above. Revenue from the distribution of the Encore
services increased approximately $50 million from 1995 to 1996. Approximately
$22 million of this increase was related to Multiplex. Multiplex units increased
103% from 6 million at December 31, 1995 to approximately 12.2 million units at
December 31, 1996. Encore subscribers increased 39% to approximately 11 million
at December 31, 1996 resulting in an increase in revenue of approximately $23
million in 1996. Average rates per subscriber were essentially unchanged during
these periods. The remaining increase in Encore's revenue in 1996 was due to
increased management fees from affiliates. Revenue from ETC increased $41
million or 81% from 1995 to 1996. Such increase is attributable to the June 1995
acquisition of CareerTrack, Inc. The remaining increase in revenue for
Entertainment and Information Programming Services is related to increases in
revenue from affiliate fees from Southern Satellite Systems, Inc. ("Southern")
and the increase in the STARZ Content Fees.

         Excluding the effect of the acquisitions and dispositions described
above, operating, selling, general and administrative expenses increased 55% or
$75 million for the year ended December 31, 1996, compared to the year ended
December 31, 1995. Programming costs for Encore increased approximately $13
million primarily due to upgrading the quality of programming on all Encore and
Multiplex channels. Charges for satellite transponder facilities and other
related operating activities for Encore increased approximately $2 million
during the year ended December 31, 1996 compared to 1995. The overall growth of
Encore led to an increase of approximately $4 million in marketing and other
general and administrative costs during the year ended December 31, 1996, as
compared to 1995. Operating, selling, general and administrative expenses from
ETC increased $56 million or 110% from 1995 to 1996. The 1996 increase is
attributable to the June 1995 acquisition of CareerTrack, Inc.

         Depreciation, amortization, other non-cash charges and stock
compensation of Entertainment and Information Programming Services, excluding
the effect of the acquisitions and dispositions described above, increased $15
million or 150% during the year ended December 31, 1996 compared to 1995.
Encore's stock compensation increased by approximately $14 million.

         Revenue from TCI Music contributed $23 million to the revenue from
Entertainment and Information Programming Services for the year ended December
31, 1997. Additionally, revenue from STARZ! contributed $102 million to revenue
for 1997. As discussed above, operations for TCI Music and STARZ! were not
included in the combined financial results of Liberty/Ventures Group for the
year ended December 31, 1996. Operating, selling, general and administrative
expenses for Entertainment and Information Programming Services for the year
ended December 31, 1997 included $14 million from the operations of TCI Music
and $148 million from the operations of STARZ!.




                                       24
<PAGE>   26



         Revenue from UVSG contributed $508 million and $410 million to the
revenue from Entertainment and Information Programming Services for the years
ended December 31, 1997 and 1996, respectively. As described above, the results
of operations for UVSG were not included in the combined financial results for
the year ended December 31, 1995. Operating income from Entertainment and
Information Programming Services for the years ended December 31, 1997 and 1996
include $69 million and $37 million, respectively, from the operations of UVSG.

         International Services

         This information reflects the results of operations of TINTA. Effective
January 1, 1997, TINTA ceased to consolidate Flextech and began to account for
Flextech using the equity method of accounting. As a result, Flextech's results
of operations for the year ended December 31, 1997 were not included in the
combined financial results of Liberty/Ventures Group for 1997. Additionally,
effective October 1, 1997, TINTA ceased to consolidate Cablevision and began to
account for Cablevision using the equity method of accounting. Accordingly,
effective October 1, 1997, the results of operations of Cablevision were no
longer included in the combined financial results of Liberty/Ventures Group. The
following table sets forth the aggregate results of operations of Flextech and
Cablevision that were included in International Services as of the years ended
December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                         1997          1996          1995
                                                       --------      --------      --------
                                                                 amounts in millions
<S>                                                    <C>           <C>            <C>
       Revenue                                         $    174           284           168
       Operating costs and expenses before
          depreciation and amortization                    (105)         (245)         (132)
       Depreciation and amortization                        (41)          (49)          (30)
                                                       --------      --------      --------

       Operating income (loss)                         $     28           (10)            6
                                                       ========      ========      ========
</TABLE>

         Revenue from International Services decreased by $95 million or 30%
during the year ended December 31, 1997 as compared to 1996. Such decrease is
primarily attributable to the deconsolidation of Flextech and Cablevision.
Excluding the impact of these transactions, revenue from International Services
increased by $15 million or 48% during 1997 over 1996. This increase is
primarily attributable to increased cable revenue from an acquisition in 1997 by
TINTA's Puerto Rico subsidiary (the "Puerto Rico Subsidiary").

         Operating, selling, general and administrative expenses for the
International Services decreased $129 million or 47% during the year ended
December 31, 1997 compared to the prior year. Similarly, the decrease is
primarily attributable to the deconsolidation of Flextech and Cablevision.
Excluding the impact of these transactions, operating, selling, general and
administrative expenses from International Services increased $11 million during
the year ended December 31, 1997 compared to 1996. This increase was primarily
attributable to increased expenses at the Puerto Rico Subsidiary due to an
acquisition during 1997.

         Revenue from International Services increased $124 million or 65%
during the year ended December 31, 1996 as compared to the corresponding prior
year period. Such increase was comprised of an increase in cable revenue of $78
million or 55% and an increase in programming revenue from Flextech of $46
million or 97% during the year ended December 31, 1996. The increase in cable
revenue is primarily attributable to the effect of the acquisition of
Cablevision as well as an acquisition made by Cablevision. A significant
component of the increase in programming revenue is attributable to acquisitions
made by Flextech in 1996.




                                       25
<PAGE>   27



         Operating, selling, general and administrative expenses increased $109
million or 66% for the year ended December 31, 1996, as compared to the
corresponding prior year period. Programming costs and expenses increased $64
million during 1996, a 103% increase. Such increase is attributable to
acquisitions made by Flextech in 1996 and higher programming costs during 1996.
TINTA cable costs and expenses increased $44 million or 48% during the year
ended December 31, 1996, primarily as a result of the acquisitions of
Cablevision and the acquisition made by Cablevision, and increased programming
costs.

         During 1996, TINTA revised its estimate of future revenue to be earned
from certain programming rights. As a result of such revisions, TINTA recorded
an impairment charge of $9 million in 1996 to reduce the carrying value of the
affected programming rights.

         Digital Compression and Authorization Services

         This information reflects the results of NDTC. Revenue from Digital
Compression and Authorization Services increased $19 million and $22 million or
25% and 42% during the years ended December 31, 1997 and December 31, 1996
compared to the corresponding previous years, respectively. Operating, selling,
general and administrative expenses from Digital Compression and Authorization
Services increased $14 million and $13 million or 32% or 42% during the years
ended December 31, 1997 and 1996 compared to the corresponding previous years,
respectively. A significant number of NDTC's major customers are affiliates of
TCI including entities attributed to Liberty/Ventures Group, and NDTC derives a
substantial portion of its revenue from such affiliated companies. For the years
ended December 31, 1997, 1996 and 1995 revenue from services provided to TCI and
its consolidated subsidiaries accounted for 41%, 34% and 39%, respectively, of
NDTC's total revenue.

         Internet Services

         This information reflects the results of operations of At Home
Corporation ("@Home"). Revenue from Internet Services increased $6 million
during the year ended December 31, 1997 compared to the previous year.
Operating, selling, general and administrative expenses increased $25 million or
104% during 1997 compared to 1996.

         Electronic Retailing Services

         This information reflects the results of HSN, which were included in
the combined financial results of Liberty/Ventures Group through the date of the
HSN Merger. HSN's primary business is electronic retailing conducted by Home
Shopping Club, Inc. ("HSC").

         For the year ended December 31, 1996, revenue from Electronic Retailing
Services increased $64 million, or 7% as compared to 1995. Net sales reflected
an increase of 11.5% in the number of packages shipped and a decrease of 8.5% in
the average price per unit sold. For the year ended December 31, 1996, gross
profit for Electronic Retailing Services increased $62 million, or 20%, compared
to 1995. As a percentage of net sales, gross profit increased to 39% from 34%.
The dollar increases in HSN's and HSC's gross profit relate to the higher sales
volume. The comparative increases in HSN's gross profit percentage relate to
warehouse sales and other promotional events held during 1995 which reduced
gross profit in these periods and a 1996 product sales mix which was composed of
higher gross profit merchandise.


                                       26
<PAGE>   28



         Operating, selling, general and administrative expenses decreased $51
million or 5% during 1996 compared to 1995. Excluding cost of sales, operating,
selling, general and administrative expenses were 31% of sales in 1996, compared
with 39% of sales in 1995. In late 1995 and the first quarter of 1996,
management of HSN instituted measures aimed at streamlining operations primarily
by reducing its work force and taking other actions to reduce operating
expenses. These changes resulted in reductions in operating expenses in 1996
compared with the same period in 1995.

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

         Corporate and Other

         This information includes general corporate expenses, Liberty/Ventures
Group's intercompany eliminations and the results of operations of WTCI. For
each of the years ended December 31, 1997, 1996 and 1995, WTCI's six largest
customers accounted in the aggregate for approximately 65%, 70% and 70%,
respectively, of WTCI's consolidated gross revenue. WTCI's six largest
customers' master service contracts all contain many service orders with
remaining terms varying from 1 month to approximately 15 months.

         Stock compensation for corporate and other for 1997 was $209 million.
The adjustment to stock compensation during 1996 was $7 million resulting in an
increase of $216 million during the year ended December 31, 1997 compared to
1996. Estimated compensation relating to stock appreciation rights has been
recorded through December 31, 1997 pursuant to APB Opinion No. 25. Such estimate
is subject to future adjustment based upon vesting and market value, and
ultimately, on the final determination of market value when such rights are
exercised.

         Certain TCI corporate general and administrative costs are charged to
Liberty/Ventures Group at rates set at the beginning of each year based on
projected utilization for that year. During the years ended December 31, 1997,
1996 and 1995, Liberty/Ventures Group was allocated approximately $13 million,
$11 million and $7 million, respectively, in corporate general and
administrative costs by TCI Group.

         Other Income and Expense

         Interest expense excluding interest expense to related parties was $57
million, $68 million and $55 million in 1997, 1996 and 1995, respectively.
Because the operations of HSN have not been included in the combined financial
results of Liberty/Ventures Group since December 20, 1996, interest expense
related to HSN accounted for a decrease of $10 million in Liberty/Ventures
Group's interest expense for the year ended December 31, 1997 compared to 1996.
The 1996 increase in the outstanding debt balance is primarily attributable to
the issuance of 4-1/2% Convertible Subordinated Debentures (the "TINTA
Debentures") and borrowings under Communications Capital Corp.'s credit
facility.




                                       27
<PAGE>   29



         Dividend and interest income excluding interest income from related
parties was $57 million, $39 million and $27 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Dividends amounting to $13
million were received on a new series of 30 year non-convertible 9% preferred
stock of Fox Kids Worldwide, Inc. ("FKW") (the "FKW Preferred Stock") beginning
in August 1997. A full year of dividends amounting to $19 million on shares of a
certain series of Time Warner, Inc. ("Time Warner") common stock with limited
voting rights (the "TW Exchange Stock"), offset by the loss of dividends on
Turner Broadcasting Systems, Inc. ("TBS") common stock, accounted for $11
million of the increase in 1997. Dividend income in 1996 increased compared to
1995 due to dividends amounting to $5 million received on the TW Exchange Stock
in December of 1996. Interest income from related parties decreased $8 million
and increased $14 million during the years ended December 31, 1997 and 1996,
respectively, due to changes in the outstanding balance of amounts loaned to
TCI.

         Liberty/Ventures Group's share of losses of affiliates was $850
million, $372 million and $210 million during the years ended December 31, 1997,
1996 and 1995, respectively.

         Liberty/Ventures Group's share of losses from its investment in the PCS
Ventures was $493 million, $133 million and $34 million during the years ended
December 31, 1997, 1996 and 1995, respectively. The PCS Ventures include Sprint
Spectrum Holding Company, L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or
the "Sprint PCS Partnership"), and PhillieCo Partnership I, L.P. ("PhillieCo").
The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint
Corporation ("Sprint"), Comcast Corporation ("Comcast"), Cox Communications,
Inc. ("Cox") and Liberty/Ventures Group. The partners of PhillieCo are
subsidiaries of Sprint, Cox and Liberty/Ventures Group. Liberty/Ventures Group
has a 30% interest as a partner in each of the Sprint PCS Partnerships and a 35%
interest as a partner in PhillieCo. The increases in the share of losses are
attributed primarily to selling, general and administrative costs associated
with Sprint Spectrum's efforts to increase its customer base and Sprint
Spectrum's share of losses in American PCS L.P. It is expected that Sprint PCS
will continue to incur significant operating losses and significant negative
cash flow from operating activities during the next several years while it
expands its PCS network and builds its customer base. Sprint PCS's operating
profitability will depend upon many factors, including, among others, its
ability to market its products and services successfully, achieve its projected
market penetration, manage customer turnover rates effectively and price its
products and services competitively. There can be no assurance that Sprint PCS
will achieve or sustain operating profitability or positive cash flow from
operating activities in the future. If Sprint PCS does not achieve and maintain
operating profitability and positive cash flow from operating activities on a
timely basis, it may not be able to meet its debt service requirements.




                                       28
<PAGE>   30



         Telewest Communications plc ("Telewest"), has incurred losses since its
inception. Liberty/Ventures Group's share of Telewest's net losses increased $36
million or 33% and $39 million or 56% during 1997 and 1996, respectively. Such
increases are primarily attributable to (i) increases in interest expense due to
an increase in Telewest's outstanding debt balances, (ii) increases in
depreciation and amortization resulting from Telewest's construction of cable
television and telephony networks which has increased Telewest's assets that are
subject to depreciation and (iii) changes in foreign currency transaction
losses. In connection with a previous merger transaction, Telewest issued United
States ("U.S.") dollar denominated senior debentures (the "Telewest
Debentures"). Changes in the exchange rate used to translate the Telewest
Debentures into U.K. pounds sterling ("(pound)") and the adjustment of a foreign
currency option contract to market value caused Telewest to experience
unrealized foreign currency transaction gains (losses) of $(39 million), $2
million and $(23 million) during 1997, 1996 and 1995, respectively. It is
anticipated that Telewest will continue to experience realized and unrealized
foreign currency transaction gains and losses throughout the term of the
Telewest Debentures, which mature in 2006 and 2007, if not redeemed earlier.

         The share of losses from Liberty/Ventures Group's investment in TCG was
$66 million for the year ended December 31, 1997 which represents a $15 million
increase as compared to 1996. The share of losses from TCG was $51 million for
the year ended December 31, 1996 which represents an increase of $21 million, as
compared to the share of losses of $30 million for the year ended December 31,
1995. The increases in the share of losses are largely attributed to costs
incurred by TCG in the expansion of their local telecommunications networks,
increased depreciation expense and increased interest expense partially offset
by an increase in telecommunications services revenue attributed to increased
sales of services in existing and new markets. TCG has incurred net losses since
its inception due to the acquisition, installation, development and expansion of
its existing and new telecommunications networks and the associated initial
operating expenses of such networks. These networks generally incur negative
cash flow from operating activities and operating losses until an adequate
customer base and revenue stream for such networks have been established. In
January 1998, TCG entered into certain agreements pursuant to which it agreed to
be acquired by AT&T Corp.

         During 1997, TCG issued approximately 6.6 million shares of its Class A
common stock for certain acquisitions. The total consideration paid by TCG
through the issuance of common stock for such acquisitions was approximately
$123 million. In addition, effective November 5, 1997, TCG consummated a public
offering of 7.3 million shares of its Class A common stock. TCG received net
proceeds from its sale of shares pursuant to such offering of $318 million
(after deducting expenses and fees). TCG conducted an initial public offering on
July 2, 1996 in which it sold 27 million shares of Class A common stock for
aggregate net proceeds of approximately $410 million. In connection with the
dilution of Liberty/Ventures Group's ownership interest in TCG that occurred in
connection with the above transactions, Liberty/Ventures Group recognized gains
aggregating $112 million and $13 million (before deducting deferred income tax
expense of approximately $43 million and $5 million, respectively) during the
years ended December 31, 1997 and 1996, respectively.

         In August of 1997, Liberty/Ventures Group contributed its holdings in
International Family Entertainment, Inc. to FKW in exchange for the FKW
Preferred Stock. As a result of the exchange, Liberty/Ventures Group recognized
a gain of approximately $304 million. See note 7 to the accompanying combined
financial statements of Liberty/Ventures Group.




                                       29
<PAGE>   31



         In April 1997, @Home issued 240,000 shares of convertible preferred
stock, resulting in cash proceeds of $48 million, less issuance costs. On July
11, 1997 @Home completed an initial public offering (the "@Home IPO"), in which
10.4 million shares of @Home common stock were sold for cash proceeds of
approximately $100 million. As a result of @ Home's issuance of preferred stock
and the @Home IPO, Liberty/Ventures Group's economic interest in @Home decreased
from 43% to 39% which economic interest represents an approximate 72% voting
interest. In connection with the associated dilution of Liberty/Ventures Group's
ownership interest of @Home, Liberty/Ventures Group recognized a non-cash gain
of $60 million.

         On July 18, 1995, TINTA completed an initial public offering (the
"TINTA IPO") in which 20 million shares of TINTA's Series A common stock were
sold to the public for net proceeds of approximately $301 million. In connection
with the TINTA IPO, Liberty/Ventures Group recognized a gain of $123 million.

         On October 10, 1996, Time Warner and TBS consummated a merger (the
"TBS/Time Warner Merger") whereupon Liberty/Ventures Group received
approximately 50.6 million shares of TW Exchange Stock in exchange for its TBS
holdings. As a result of the TBS/Time Warner Merger, Liberty/Ventures Group
recognized a pre-tax gain of approximately $1.5 billion in the fourth quarter of
1996.

         In connection with the dilution of Liberty/Ventures Group's ownership
interest in Telewest that occurred in connection with a 1995 merger transaction,
Liberty/Ventures Group recognized a gain of $165 million (before deducting the
related tax expense of $58 million) during the year ended December 31, 1995.

         Included in net gains upon the disposition of assets of
Liberty/Ventures Group during 1997 is (i) a $49 million gain on the Cablevision
Sale and (ii) a $58 million gain on the sale of TINTA's indirect 13% interest in
Sky Network Television New Zealand, Ltd. The net gains upon the disposition of
assets of Liberty/Ventures Group during 1996 includes a gain attributable to the
sale of certain investments for aggregate proceeds of $73 million. The net gains
upon the disposition of assets of Liberty/Ventures Group during 1995 includes a
gain attributable to the sale of the cable television subsidiaries of IVS Cable
Holdings Limited, a subsidiary of Flextech.

         The minority interests' share of net losses of attributed subsidiaries
was $25 million, $26 million and $20 million during the years ended December
31, 1997, 1996, and 1995, respectively. Such amounts include the minority
interests' share of earnings or losses for @Home, HSN, UVSG and TINTA.

         Net Earnings (Losses)

         Liberty/Ventures Group reported net earnings (losses) of $(411
million), $798 million and $4 million during the years ended December 31, 1997,
1996 and 1995, respectively. Included in such amounts was the recognition of
certain non-operating gains, net of non-operating losses aggregating $592
million, $1,571 million and $335 million during 1997, 1996 and 1995,
respectively. Liberty/Ventures Group would have reported net losses in all
periods presented excluding the impact of such gains. A significant portion of
the entities included in Liberty/Ventures Group's combined financial statements
generally have sustained losses since their respective inception dates. Any
improvements in such entities' results of operations are largely dependent upon
the ability of such entities to increase their respective subscriber bases while
maintaining pricing structures and controlling costs. There can be no assurance
that any such improvements will occur.





                                       30
<PAGE>   32

         LIQUIDITY AND CAPITAL RESOURCES

         TCI GROUP

         In January 1997, TCI Group acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that TCI Group did not previously own and certain
additional assets for aggregate consideration of approximately $970 million. TCI
Group issued approximately 16 million shares of TCI Group Series A Stock,
assumed $584 million of TKR Cable's debt and paid cash of $88 million and shares
of Time Warner common stock valued at $41 million upon consummation of such
acquisition. Prior to the acquisition date, TCI Group accounted for its 50%
interest in TKR Cable under the equity method. This acquisition has been treated
as a step acquisition for accounting purposes. Accordingly, the results of
operations of TKR Cable have been combined with those of TCI Group since the
date of acquisition and TCI Group's aggregate cost basis in TKR Cable has been
allocated to TKR Cable's assets and liabilities based on their fair values.

         During the year ended December 31, 1997, pursuant to a stock repurchase
program approved by the Board, TCI Group repurchased 4,000,000 shares of TCI
Group Series A Stock and 330,902 shares of TCI Group Series B Stock at an
aggregate cost of $72.9 million.

         Effective July 31, 1997, a wholly-owned subsidiary of TCI and a member
of the TCI Group, merged with and into Kearns-Tribune Corporation
("Kearns-Tribune"). The merger was valued at approximately $808 million. TCI
exchanged 47.2 million shares of TCI Group Series A Stock for shares of
Kearns-Tribune which held 17.9 million shares of TCI Group Stock and 10.1
million shares of Liberty Group Stock. Immediately following the merger,
Liberty/Ventures Group purchased from TCI Group the 10.1 million shares of
Liberty Group Stock that were acquired in such transaction for $168 million in
cash. The merger of Kearns-Tribune has been accounted for by the purchase
method. Accordingly, the results of operations of Kearns-Tribune have been
combined with those of TCI Group since the date of acquisition, and TCI Group
has recorded Kearns-Tribune's assets and liabilities at fair value.

         In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to the 1998 Liberty Stock Dividend and the Ventures Stock
Dividend) that were subject to the Malone Call Agreement and the Magness Call
Agreement. Accordingly, TCI Group paid $134 million during the first quarter of
1998 for its allocated share of the Call Payments. For additional information
see note 12 to the accompanying combined financial statements of TCI Group.





                                       31
<PAGE>   33

         During the fourth quarter of 1997, TCI Group entered into a Total
Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the Equity
Swap Facility, TCI Group has the right to direct the counterparty (the
"Counterparty") to use the Equity Swap Facility to purchase shares ("Equity Swap
Shares") of TCI Group Series A Stock and TCI Ventures Group Series A Stock with
an aggregate purchase price of up to $300 million. TCI Group has the right, but
not the obligation, to purchase Equity Swap Shares through the September 30,
2000 termination date of the Equity Swap Facility. During such period, TCI Group
is to settle periodically any increase or decrease in the market value of the
Equity Swap Shares. If the market value of the Equity Swap Shares exceeds the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost will be segregated from the other
Equity Swap Shares. If the market value of the Equity Swap Shares is less than
the Counterparty's cost, TCI Group, at its option, will settle such difference
with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or,
subject to certain conditions, with cash or letters of credit. In addition, TCI
Group is required to periodically pay the Counterparty a fee equal to a
LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap Shares.
Due to TCI Group's ability to issue shares to settle periodic price fluctuations
and fees under the Equity Swap Facility, TCI Group records all amounts received
or paid under this arrangement as increases or decreases, respectively, to
equity. As of December 31, 1997, the Equity Swap Facility has acquired 345,000
shares of TCI Group Series A Stock and 380,000 shares of TCI Ventures Group
Series A Stock at an aggregate cost that was approximately $3 million less than
the fair value of such Equity Swap Shares at December 31, 1997.

         Prior to July 1, 1997, TCI Group had a 50.1% partnership interest in
QE+, a limited partnership interest which distributes "STARZ!," a first-run
movie premium programming service launched in 1994. Entities attributed to
Liberty/Ventures Group held the remaining 49.9% partnership interest. Also prior
to July 1, 1997, EMC (at the time a 90%-owned subsidiary of TCI and a member of
Liberty/Ventures Group) earned management fees from QE+ equal to 20% of managed
costs, as defined. In addition, Liberty/Ventures Group earned STARZ Content Fees
for certain services provided to QE+ equal to 4% of the gross revenue of QE+.
Such STARZ Content Fees aggregated $4 million, $4 million and $1 million for the
years ended December 31, 1997, 1996 and 1995, respectively.

         During July 1997, TCI Group, Liberty/Ventures Group, and the 10%
minority holder of EMC, entered into a series of transactions pursuant to which
the businesses of "Encore," a movie premium programming service, and STARZ! were
contributed to Encore Media Group. Upon completion of the transaction,
Liberty/Ventures Group owned 80% of Encore Media Group and TCI Group owned the
remaining 20%. In connection with these transactions the 10% minority interest
in EMC was exchanged for approximately 2.4 million shares of Liberty Group
Series A Stock.

         Liberty/Ventures Group received its 80% ownership interest in Encore
Media Group in exchange for (i) the contribution of its 49.9% interest in QE+,
(ii) the contribution of EMC, (iii) the issuance of a $307 million note payable
to TCI Group, (iv) the cancellation and forgiveness of amounts due for STARZ!
Content Fees and (v) the termination of an option to increase Liberty/Ventures
Group's ownership interest in QE+.

         TCI Group received the remaining 20% interest in Encore Media Group and
the aforementioned consideration from Liberty/Ventures Group in exchange for the
contribution of TCI Group's 50.1% ownership interest in QE+ and certain capital
contributions made by TCI Group to QE+. In addition, TCI Group entered into the
EMG Affiliation Agreement pursuant to which TCI Group will pay monthly fixed
amounts in exchange for unlimited access to all of the existing Encore and
STARZ! services.




                                       32
<PAGE>   34

         Upon formation of Encore Media Group, TCI Group ceased to include QE+
in its combined financial statements, and began to account for its investment in
Encore Media Group using the equity method of accounting.
The EMG Promissory Note is included in amounts due from related parties.

         Effective December 31, 1997, Liberty/Ventures Group and TCI Group
agreed to amend the above transactions. Pursuant to the amendment, the
above-described series of transactions were rescinded, retroactive to July 1,
1997. Such rescission was given effect as of December 31, 1997 for financial
reporting purposes. Simultaneously, Liberty/Ventures Group and TCI Group entered
into a new agreement whereby the EMG Affiliation Agreement was amended to
permanently reduce the monthly fixed amounts for the life of the contract. TCI
Group's 20% ownership interest in Encore Media Group was eliminated and the EMG
Promissory Note was reduced by $32 million. The amounts to be paid to Encore
Media Group pursuant to the EMG Affiliation Agreement were reduced to amounts
which reflect current market prices.

         Due to the related party nature of the above-described transactions,
the $133 million excess of the consideration received over the carryover basis
of the assets transferred (including a deferred tax asset of $98 million) was
reflected as a decrease to combined deficit.

         TCI Group's fixed annual commitments (as adjusted) pursuant to the EMG
Affiliation Agreement increase annually from $220 million in 1998 to $315
million in 2003, and will increase with inflation through 2022.

         In January 1998, Liberty/Ventures Group's interest in an attributed
subsidiary which leases digital boxes under a capital lease was assigned to TCI
Group. In connection therewith, TCI Group assumed the capital lease obligations
totaling $176 million and paid $7 million in cash to Liberty/Ventures Group.

         On March 4, 1998, TCI Group contributed to Cablevision Systems
Corporation ("CSC") certain of its cable television systems serving
approximately 830,000 basic customers in exchange for approximately 12.2 million
newly issued CSC Class A shares. Such shares represent an approximate 33% equity
interest in CSC's total outstanding shares and an approximate 9% voting interest
in CSC in all matters except for the election of directors, in which case TCI
Group has an approximate 47% voting interest in the election of one-fourth of
CSC's directors. CSC also assumed approximately $669 million of TCI Group's
debt. TCI Group has also entered into letters of intent with CSC which provide
for TCI Group to acquire a cable system in Michigan and an additional 3% of
CSC's Class A shares and for CSC to (i) acquire cable systems serving
approximately 250,000 basic customers in Connecticut and (ii) assume $110
million of TCI Group's debt. The ability of TCI Group to sell or increase its
investment in CSC is subject to certain restrictions and limitations set forth
in a stockholders agreement with CSC.

         Including the above-described CSC transactions and another transaction
that closed in February 1998, TCI Group, as of February 28, 1998, has, since
January 1, 1997, contributed, or signed agreements or letters of intent to
contribute within the next twelve months, certain cable television systems (the
"Contributed Cable Systems") serving approximately 3.8 million basic customers
to joint Ventures in which TCI Group will retain non-controlling ownership
interests (the "Contribution Transactions"). Following the completion of the
Contribution Transactions, TCI Group will no longer consolidate the Contributed
Cable Systems. Accordingly it is anticipated that the completion of the
Contribution Transactions, as currently contemplated, will result in aggregate
estimated reductions (based on 1997 amounts) to TCI Group's debt, annual revenue
and annual operating income before depreciation, amortization and stock
compensation of approximately $4.6 billion, $1.7 billion and $783 million,
respectively. No assurance can be given that any of the pending Contribution
Transactions will be consummated.




                                       33
<PAGE>   35

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

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

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

         The Viacom Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of TCI Pacific have been combined with
those of TCI Group since the date of acquisition, and TCI Group recorded TCI
Pacific's assets and liabilities at fair value.





                                       34
<PAGE>   36

         At December 31, 1997, TCI Group had approximately $1.6 billion of
availability in unused lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although TCI
Group was in compliance with the restrictive covenants contained in its credit
facilities at said date, additional borrowings under the credit facilities are
subject to TCI Group's continuing compliance with the restrictive covenants
after giving effect to such additional borrowings. Such restrictive covenants
require, among other things, the maintenance of certain earnings, specified cash
flow and financial ratios (primarily the ratios of cash flow to total debt and
cash flow to debt service, as defined), and include certain limitations on
indebtedness, investments, guarantees, dispositions, stock repurchases and/or
dividend payments. For additional information regarding the material terms of
the lines of credit, see note 8 to the combined financial statements of TCI
Group, which are included in the Company's December 31, 1997 Annual Report on
Form 10-K.

         One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of "Operating Cash
Flow" (operating income before depreciation, amortization, stock compensation
and other non-cash charges) ($2,766 million, $2,016 million and $1,925 million
1997, 1996 and 1995, respectively) to interest expense ($1,105 million, $1,029
million and $969 million in 1997, 1996 and 1995, respectively), is determined by
reference to the combined statements of operations. TCI Group's interest
coverage ratio was 250%, 196% and 199% for 1997, 1996 and 1995, respectively.
Management of TCI Group believes that the foregoing interest coverage ratio is
adequate in light of the relative predictability of its cable television
operations and interest expense. However, TCI Group's current intent is to
continue to reduce its outstanding indebtedness such that its interest coverage
ratio could be increased. There is no assurance that TCI Group will be able to
achieve such objective. Operating Cash Flow is a measure of value and borrowing
capacity within the cable television industry and is not intended to be a
substitute for cash flows provided by operating activities, a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.

         Another measure of liquidity is net cash provided by operating
activities, as reflected in the combined statements of cash flows. Net cash
provided by operating activities ($1,595 million, $1,004 million and $1,029
million in 1997, 1996 and 1995, respectively) generally reflects net cash from
the operations of TCI Group available for TCI Group's liquidity needs after
taking into consideration the aforementioned additional substantial costs of
doing business not reflected in Operating Cash Flow.






                                       35
<PAGE>   37

         Amounts expended by TCI Group for its investing activities exceeded net
cash provided by operating activities during the years ended December 31, 1996
and 1995. However, during the year ended December 31, 1997, TCI Group's net cash
provided by operating activities exceeded amounts expended by its investing
activities. The amount of capital expended by TCI Group for property and
equipment was $538 million during 1997, as compared to $1,834 million and $1,591
million during 1996 and 1995, respectively. In light of TCI Group's plans to
upgrade the capacity of its cable distribution systems, and its plans to
increase the number of customers to digital video services, TCI Group
anticipates that its annual capital expenditures during the next several years
will significantly exceed the amount expended during 1997. In this regard, TCI
Group estimates that it will expend approximately $1.7 billion to $1.9 billion
over the next three years to expand the capacity of its cable distribution
systems. TCI Group expects that the actual amount of capital that will be
required in connection with its plans to increase the number of digital video
service customers will be significant. However, TCI Group cannot reasonably
estimate such actual capital requirement since such actual capital requirement
is dependent upon the extent of any customer increases and the average installed
per-unit cost of digital set-top devices. As described below, TCI is obligated
to purchase a significant number of digital set-top devices over the next three
years.

         In the event TCI Group is unable to achieve such objectives, management
believes that net cash provided by operating activities, the ability of TCI
Group to obtain additional financing (including the available lines of credit
and access to public debt markets), issuances and sales of TCI's equity or
equity of its subsidiaries, attributable to TCI Group, and proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See TCI Group's combined statements of cash flows
included in the combined financial statements, which are included in the
Company's Annual Report on Form 10-K.

         TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $191
million at December 31, 1997. With respect to TCI Group's guarantees of $166
million of such obligations, TCI Group has been indemnified for any loss, claim
or liability that TCI Group may incur, by reason of such guarantees. Although
there can be no assurance, management of TCI Group believes that it will not be
required to meet its obligations under such guarantees, or if it is required to
meet any of such obligations, that they will not be material to TCI Group.

         TCI Group has agreed to make fixed monthly payments to Liberty/Ventures
Group pursuant to the EMG Affiliation Agreement. The fixed annual commitments
increase annually from $220 million in 1998 to $315 million in 2003, and will
increase with inflation through 2022.

         TCI Group is a party to affiliation agreements with several of its
programming suppliers. Pursuant to these agreements, TCI Group is committed to
carry such suppliers programming on its cable systems. Several of these
agreements provide for penalties and charges in the event the programming is not
carried or not delivered to a contractually specific number of customers.

         During the third quarter of 1997, TCI Group committed to purchase
billing services pursuant to three successive five year agreements. Pursuant to
such arrangement, TCI Group is obligated to make minimum payments aggregating
approximately $1.6 billion through 2012. Such minimum payments are subject to
inflation and other adjustments pursuant to the terms of the underlying
agreements.





                                       36
<PAGE>   38

         Pursuant to certain agreements between TCI and TCI Music, TCI Group is
obligated to make minimum revenue and license fee payments to TCI Music
aggregating approximately $445 million through 2017. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.

         TCI Group is a direct obligor or guarantor of the payment of certain
amounts that may be due pursuant to motion picture output, distribution and
license agreements. As of December 31, 1997, the amount of such obligations or
guarantees was approximately $120 million. The future obligations of TCI Group
with respect to these agreements is not currently determinable because such
amount is dependent upon the number of qualifying films released theatrically by
certain motion picture studios as well as the domestic theatrical exhibition
receipts upon the release of such qualifying films.

         Effective as of December 16, 1997, NDTC, a member of Liberty/Ventures
Group, on behalf of TCI Group and other cable operators that may be designated
from time to time by NDTC ("Approved Purchasers"), entered into an agreement
(the "Digital Terminal Purchase Agreement") with General Instrument Corporation
(formerly NextLevel Systems, Inc., "GI") to purchase advanced digital set-top
devices. The hardware and software incorporated into these devices will be
designed and manufactured to be compatible and interoperable with the
OpenCable(TM) architecture specifications adopted by CableLabs, the cable
television industry's research and development consortium, in November 1997.
NDTC has agreed that Approved Purchasers will purchase, in the aggregate, a
minimum of 6.5 million set-top devices over the next three years at an average
price of $318 per basic set-top device (including a required royalty payment).
GI agreed to provide NDTC and its Approved Purchasers the most favorable prices,
terms and conditions made available by GI to any customer purchasing advanced
digital set-top devices. In connection with NDTC's purchase commitment, GI
agreed to grant warrants to purchase its common stock proportional to the number
of devices ordered by each organization, which as of the effective date of the
Digital Terminal Purchase Agreement, would have represented at least a 10%
equity interest in GI (on a fully diluted basis). It is anticipated that the
value associated with such equity interest would be attributed to TCI Group upon
purchase and deployment of the digital set-top devices.

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

         In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group has entered into various interest rate exchange
agreements ("Interest Rate Swaps") pursuant to which it (i) paid fixed interest
rates and received variable interest rates through December 1997 (the "Fixed
Rate Agreements") and (ii) pays variable interest rates and receives fixed
interest rates ranging from 4.8% to 9.7% on notional amounts of $2,400 million
at December 31, 1997 (the "Variable Rate Agreements"). During the years ended
December 31, 1997, 1996 and 1995, TCI Group's net payments pursuant to the Fixed
Rate Agreements were $7 million, $14 million and $13 million, respectively; and
TCI Group's net receipts (payments) pursuant to the Variable Rate Agreements
were (less than $1 million), $15 million, and (less than $1 million),
respectively. At December 31, 1997, all of TCI Group's Fixed Rate Agreements had
expired.





                                       37
<PAGE>   39

         During the year ended December 31, 1996, TCI Group terminated certain
Variable Rate Agreements with an aggregate notional amount of $700 million. TCI
Group received $16 million upon such terminations. TCI Group will amortize such
termination settlement over the remainder of the original terms of such Variable
Rate Agreements.

         In addition to the Variable Rate Agreements, TCI Group entered into an
Interest Rate Swap in September 1997 pursuant to which it pays a variable rate
based on the LIBOR rate (6.1% at December 31, 1997) and receives a variable rate
based on the Constant Maturity Treasury Index (6.4% at December 31, 1997) on a
notional amount of $400 million through September 2000. During the year ended
December 31, 1997, TCI Group's net receipts pursuant to such agreement
aggregated less than $1 million. At December 31, 1997, TCI Group would be
required to pay an estimated $3 million to terminate such Interest Rate Swap.

         TCI Group is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of nonperformance by the
other parties to the agreements. However, TCI Group does not anticipate that it
will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, TCI Group does not anticipate
material near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of December 31, 1997. For
additional information regarding Interest Rate Swaps, see note 8 to the combined
financial statements of TCI Group, which are included in the Company's December
31, 1997 Annual Report on Form 10-K.

         At December 31, 1997, after considering the net effect of the
aforementioned Interest Rate Swaps, TCI Group had $6,104 million (or 43%) of
fixed rate debt and $8,002 million (or 57%) of variable-rate debt. TCI Group's
interest rate exposure was primarily to changes in LIBOR rates. The aggregate
hypothetical decrease in the fair value of TCI Group's fixed rate debt and
interest rate swaps as of December 31, 1997 that would have resulted from a
hypothetical adverse change of 10% in the related LIBOR rates is estimated to be
$390 million. The aggregate hypothetical loss in earnings and cash flows on an
annual basis on TCI Group's variable rate debt and interest rate swaps as of
December 31, 1997 that would have resulted from a hypothetical adverse change of
10% in the related LIBOR rates, sustained for one year, is estimated to be $49
million.

         Approximately twenty-five percent of the franchises held by TCI Group,
involving approximately 4.8 million basic customers, expire within five years.
In connection with a renewal of a franchise, the franchising authority may
require the cable operator to comply with different and more stringent
conditions than those originally imposed, subject to the provisions of the Cable
Acts and other applicable federal, state and local law. Such provisions
establish an orderly process for franchise renewal which protects cable
operators against unfair denials of renewals when the operator's past
performance and proposal for future performance meet established standards. TCI
Group believes that its cable television systems generally have been operated in
a manner which satisfies such standards and allows for the renewal of such
franchises; however, there can be no assurance that the franchises for such
systems will be successfully renewed as they expire.

         During 1997, TCI Group has continued to experience a competitive impact
from medium power and high power DBS operators that use high frequencies to
transmit signals that can be received by home satellite dishes ("HSDs") much
smaller in size than traditional HSDs. DBS operators have the right to
distribute substantially all of the significant cable television programming
services currently carried by cable television systems. Estimated DBS customers
nationwide increased from approximately 2.2 million at the end of 1995 to
approximately 6.2 million at the end of 1997, and TCI Group expects that
competition from DBS will continue to increase. However, TCI Group is unable to
predict what effect such competition will have on TCI Group's financial
position.




                                       38
<PAGE>   40

         LIBERTY/VENTURES GROUP

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

         In connection with the DMX Merger, TCI and TCI Music entered into a
Contribution Agreement. Pursuant to the Contribution Agreement, among other
things, until December 31, 2006, certain subsidiaries of TCI transferred to TCI
Music the right to receive all revenue from sales of DMX music services to their
residential and commercial subscribers, net of an amount equal to 10% of revenue
from such sales to residential subscribers and net of the revenue otherwise
payable to DMX as license fees for DMX music services under affiliation
agreements currently in effect.

         Subsequently, TCI Music and TCI entered into an Amended and Restated
Contribution Agreement to be effective as of July 11, 1997 which provides, among
other things, for TCI to deliver, or cause certain of its subsidiaries to
deliver to TCI Music fixed monthly payments (subject to inflation and other
adjustments) through 2017.

         On June 24, 1997 Liberty/Ventures Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern and certain of
its subsidiaries (together with Southern, the "Southern Business") through a
purchase of assets (the "Southern Option"). Liberty/Ventures Group received 6.4
million shares of TW Exchange Stock valued at $306 million in consideration for
the grant. Such amount has been reflected as a deferred option premium in the
accompanying combined financial statements of Liberty/Ventures Group. In
September 1997, Time Warner exercised the Southern Option. Pursuant to the
Southern Option, Time Warner acquired the Southern Business, effective January
1, 1998, for $213 million, which was paid in cash, together with the assumption
of certain liabilities on January 2, 1998. (See note 6 to the accompanying
combined financial statements of Liberty/Ventures Group). Subsequent to the
exercise of the Southern Option, cash provided by operating activities of
Southern is no longer available as a source of cash for Liberty/Ventures Group.

         During the third quarter of 1997, Liberty/Ventures Group sold certain
assets (the "SUMMITrak Assets") to CSG Systems, Inc. ("CSG") for cash
consideration of $106 million, plus five-year warrants to purchase up to 1.5
million shares of CSG common stock at $24 per share and $12 million in cash,
once certain numbers of TCI affiliated customers are being processed on a CSG
billing system. Under certain circumstances, TCI may also be eligible to receive
certain other contingent royalties. In connection with the sale of the SUMMITrak
Assets, TCI Group committed to purchase billing services from CSG through 2012.
In light of such commitment, Liberty/Ventures Group has reflected the $30
million excess (after deducting deferred income taxes of $17 million) of the
cash received over the book value of the SUMMITrak Assets as an increase to
combined equity.

         In January 1998, Liberty/Ventures Group's interest in an attributed
subsidiary, which leases certain digital boxes under a capital lease, was
assigned to TCI Group. In connection therewith the TCI Group assumed the capital
lease obligations totaling $176 million and paid $7 million in cash to
Liberty/Ventures Group.





                                       39
<PAGE>   41

         As of December 31, 1997, Liberty/Ventures Group holds approximately 57
million shares of TW Exchange Stock. Holders of TW Exchange Stock are entitled
to receive dividends ratably with Time Warner common stock. Liberty/Ventures
Group received $19 million and $5 million in cash dividends for the years ended
December 31, 1997 and 1996, respectively. It is anticipated that Time Warner
will continue to pay dividends on its common stock and consequently
Liberty/Ventures Group will receive dividends on the TW Exchange Stock it holds.
However, there can be no assurance that such dividends will continue to be paid.
Liberty/Ventures Group received $13 million in cash dividends on the FKW
Preferred Stock during the year ended December 31, 1997. The FKW Preferred Stock
is a 30 year non-convertible 9% preferred stock with a stated value of $345
million.

         Liberty/Ventures Group has a certain revolving line of credit which
provides for borrowings of up to $500 million. Borrowings of $292 million were
outstanding at December 31, 1997. As security for this indebtedness,
Liberty/Ventures Group pledged a portion of its TW Exchange Stock. At December
31, 1997, Liberty/Ventures Group had a revolving loan facility from TCI Group
(the "Revolving Credit Facility") which had a five-year term commencing on
September 10, 1997 and which permitted aggregate borrowings at any one time
outstanding of up to $500 million (subject to reduction as provided below).
Interest and a commitment fee on the Revolving Credit Facility are payable by
Liberty/Ventures Group to TCI Group on a quarterly basis. The maximum amount of
borrowings permitted under the Revolving Credit Facility will be reduced on a
dollar-for-dollar basis by up to $300 million if and to the extent that the
aggregate amount of any additional capital that TCI Telephony is required to
contribute to Sprint PCS Partnerships subsequent to consummation of the Exchange
Offers is less than $300 million. No borrowings were outstanding pursuant to the
Revolving Credit Facility at December 31, 1997. In March 1998, Liberty/Ventures
Group entered into a bank credit facility with a term of one year which provides
for aggregate borrowings of up to $400 million. If the available borrowings
under such bank credit facility are not sufficient to fund Liberty/Ventures
Group's capital requirements, no assurance can be given that Liberty/Ventures
Group will be able to obtain any required additional financing on terms
acceptable to it, or at all. TCI could raise additional capital for
Liberty/Ventures Group by, among other things, engaging in public offerings or
private placements of common stock or through issuance of debt securities or
preferred equity securities attributed to Liberty/Ventures Group.
Liberty/Ventures Group's failure to meet its contractual and other capital
requirements could have significant adverse consequences to a particular
operating company or affiliate and to Liberty/Ventures Group.





                                       40
<PAGE>   42

         Liberty/Ventures Group's ability to obtain sufficient capital resources
to make its expected additional capital contributions to the Sprint PCS
Partnerships and other entities in which it has investments are limited. Encore
Media Group, Netlink USA ("Netlink"), WTCI and NDTC are the only wholly-owned
subsidiaries attributed to Liberty/Ventures Group that are operating companies
and such entities are currently Liberty/Ventures Group's only source of cash
provided by operating activities. As a result, Liberty/Ventures Group has
limited ability to generate funds internally to fund capital requirements and
limited cash flow from operating activities to support external financings. The
other operating companies attributed to Liberty/Ventures Group have other
investors, public or private, and the payment of dividends, or the making of
loans or advances by any one of such Liberty/Ventures Group attributed entities
to any other of such Liberty/Ventures Group attributed entities would be subject
to various business considerations, as well as any legal restrictions, including
pursuant to agreements among the investors. During 1997, Encore Media Group
obtained a new $625 million senior, secured facility (the "EMG Senior Facility")
in the form of a $225 million reducing revolving line of credit and a $400
million, 364-day revolving credit facility convertible to a term loan. The
credit agreement for the EMG Senior Facility contains certain provisions which
limit Encore Media Group as to additional indebtedness, sale of assets, liens,
guarantees, and distributions. Additionally, Encore Media Group must maintain
certain specified financial ratios. No borrowings were outstanding on the EMG
Senior Facility at December 31, 1997.

         TINTA's business strategy requires that it have the ability to access
or raise sufficient funds to allow it to take advantage of new acquisition and
joint venture opportunities as they arise, which management of TINTA believes
will require substantial additional funds. TINTA's ability to obtain debt
financing to assist its operating companies and to meet its capital obligations
at other than the subsidiary level are limited because TINTA does not conduct
any operations directly. Furthermore, because TINTA's assets consist primarily
of ownership interests in foreign subsidiaries and affiliates, the repatriation
of any cash provided by such subsidiaries' and affiliates' operating activities
in the form of dividends, loans or other payments is subject to, among other
things, exchange rate fluctuations, tax laws and other economic considerations,
as well as applicable statutory and contractual restrictions. Moreover, the
liquidity sources of TINTA's foreign subsidiaries and affiliates are generally
intended to be applied towards the respective liquidity requirements of such
foreign subsidiaries and affiliates, and accordingly, do not represent a direct
source of liquidity to TINTA. Accordingly, with the exception of any liquidity
that may be provided to TINTA by the Puerto Rico Subsidiary, no assurance can be
given that TINTA will have access to any cash generated by its foreign operating
subsidiaries and affiliates.

         TINTA has invested in most of its subsidiaries and affiliates with
strategic and local partners. Financial and operational considerations, as well
as laws that limit foreign equity positions, will likely require TINTA to
continue to invest with partners. Many foreign countries limit foreign
investment to a minority equity position or require the board of directors to be
largely independent, which, can result in TINTA having diminished ability to
implement strategies that TINTA may favor, or cause dividends or distributions.

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





                                       41
<PAGE>   43

         During the year ended December 31, 1997, pursuant to a stock repurchase
program approved by the Board, TCI purchased 916,500 shares of Liberty Group
Series A Stock in open market transactions and 219,937 shares of Liberty Group
Series A Stock from the spouse of an officer and director of TCI at an aggregate
cost to Liberty/Ventures Group of $18 million. During 1997, pursuant to a stock
repurchase program approved by the Board, TCI purchased 338,196 shares of TCI
Ventures Group Series A Stock in open market transactions at a cost to
Liberty/Ventures Group of $4 million.

         Effective July 31, 1997, a wholly-owned subsidiary of TCI attributed to
TCI Group merged with and into Kearns-Tribune. TCI exchanged 47.2 million shares
of TCI Group Series A Stock for shares of Kearns-Tribune which held 17.9 million
shares of TCI Group Stock and 10.1 million shares of Liberty Group Series A
Stock. Liberty/Ventures Group paid TCI Group $168 million for the 10.1 million
shares of Liberty Group Stock that were acquired in such transaction.

         During the third quarter of 1997, TCI commenced a tender offer (the
"Liberty Tender Offer") to purchase up to an aggregate of 22.5 million shares of
Liberty Group Stock at a price of $20 per share through October 3, 1997. During
the fourth quarter of 1997, TCI repurchased 21.7 million shares of Liberty Group
Series A Stock and 82,074 shares of Liberty Group Series B Stock at an aggregate
cost to Liberty/Ventures Group of approximately $435 million pursuant to the
Liberty Tender Offer. All of the above described stock purchases are reflected
as a reduction of combined equity in the accompanying combined financial
statements of Liberty/Ventures Group.

         During the fourth quarter of 1997, TCI entered into the Equity Swap
Facility. Pursuant to the Equity Swap Facility, TCI has the right to direct the
Counterparty to use the Equity Swap Facility to purchase Equity Swap Shares of
TCI Group Series A Stock and TCI Ventures Group Series A Stock with an aggregate
purchase price of up to $300 million. TCI has the right, but not the obligation,
to purchase Equity Swap Shares through the September 30, 2000 termination date
of the Equity Swap Facility. During such period, TCI is to settle periodically
any increase or decrease in the market value of the Equity Swap Shares. If the
market value of the Equity Swap Shares exceeds the Counterparty's cost, Equity
Swap Shares with a fair value equal to the difference between the market value
and cost will be segregated from the other Equity Swap Shares. If the market
value of the Equity Swap Shares is less than the Counterparty's cost, TCI, at
its option, will settle such difference with shares of TCI Group Series A Stock
or TCI Ventures Group Series A Stock or, subject to certain conditions, with
cash or letters of credit. In addition, TCI is required to periodically pay the
Counterparty a fee equal to a LIBOR-based rate on the Counterparty's cost to
acquire the Equity Swap Shares. Due to TCI's ability to issue shares to settle
periodic price fluctuation and fees under the Equity Swap Facility, TCI records
all amounts received or paid under this arrangement as increases or decreases to
equity. As of December 31, 1997, the Equity Swap Facility has acquired 345,000
shares of TCI Group Series A Stock and 380,000 shares of TCI Ventures Group
Series A Stock at an aggregate cost that was approximately $3 million less than
the fair value of such Equity Swap Shares at December 31, 1997. All of the TCI
Ventures Group Series A Stock held in the Equity Swap Facility is attributed to
Liberty/Ventures Group.

         On January 12, 1998, TCI purchased 12.4 million shares of UVSG Series A
common stock held by Lawrence Flinn, Jr., UVSG's Chairman Emeritus, in exchange
for 12.7 million shares of TCI Ventures Group Series A Stock and 7.3 million
shares of Liberty Group Series A Stock. As a result of such transaction
Liberty/Ventures Group increased its ownership in the equity of UVSG to
approximately 73% and voting power increased to 93%.





                                       42
<PAGE>   44

         The board of directors of TINTA authorized TINTA to repurchase from
time to time up to 5% (approximately 5.3 million shares) of its outstanding
TINTA Series A common stock. Through December 31, 1997, TINTA had repurchased
3.4 million shares under such program for an aggregate purchase price of $42
million.

         The board of directors of UVSG has authorized UVSG to repurchase from
time to time up to an aggregate of one million shares of UVSG's Class A common
stock using existing cash resources. Through December 31, 1997, UVSG had
repurchased 124,000 shares of stock for a total of $2 million.

         The Music Note may be reduced by the payment of cash or the issuance by
TCI of shares of Liberty/Ventures Group Stock for the benefit of entities
attributed to TCI Group. Additionally, Liberty/Ventures Group may elect to pay
$50 million of the Music Note by delivery of a Stock Appreciation Rights
Agreement that will give TCI Group the right to receive 20% of the appreciation
in value of Liberty/Ventures Group's investment in TCI Music, to be determined
at July 11, 2002. The obligation under the Rights Agreement could be as high as
$65 million.

         The EMG Promissory Note was repaid during the first quarter of 1998.

         Liberty/Ventures Group intends to continue to develop its entertainment
and information programming services and has made certain financial commitments
related to the acquisition of programming. As of December 31, 1997, Encore Media
Group's future minimum obligation related to certain film licensing agreements
was $695 million. The amount of the total obligation is not currently estimable
because such amount is dependent upon the number of qualifying films released
theatrically by certain motion picture studios as well as the domestic
theatrical exhibition receipts upon the release of such qualifying films.
Continued development may require additional financing and it cannot be
predicted whether Encore Media Group will obtain such financing. If additional
financing cannot be obtained, Encore Media Group could attempt to sell assets
but there can be no assurance that asset sales, if any, can be consummated at a
price and on terms acceptable to Encore Media Group. Further, Liberty/Ventures
Group and/or TCI could attempt to sell equity securities but, again, there can
be no certainty that such a sale could be accomplished on acceptable terms.

         In connection with the Magness Settlement, reached in the litigation
brought against TCI and other parties in connection with the administration of
the Estate of Bob Magness, TCI made the Call Payments aggregating $274 million.
The Call Payments were allocated to each of the Groups. Accordingly,
Liberty/Ventures Group paid $140 million during the first quarter of 1998 for
its allocated share of the Call Payments. See note 11 to the accompanying
combined financial statements of Liberty/Ventures Group.

         In February 1998, pursuant to an Investment Agreement among Universal
Studios, Inc. ("Universal"), HSNI, HSN and Liberty/Ventures Group, dated as of
October 1997 and amended and restated as of December 1997, HSNI consummated a
transaction (the "Universal Transaction") through which USA Networks Partners,
Inc., a subsidiary of Universal, sold its 50% interest in USA Networks, a New
York general partnership ("USAI") to HSNI and Universal contributed the
remaining 50% interest in USAI and its domestic television production and
distribution operations to HSNI. Subsequent to the Universal Transaction, HSNI
was renamed USAI. In connection with the Universal Transaction, Universal, HSNI,
HSN and Liberty/Ventures Group became parties to a number of other agreements
relating to, among other things, (i) the management of USAI, (ii) the purchase
and sale or other transfer of voting securities of USAI, including securities
convertible or exchangeable for voting securities of USAI, and (iii) the voting
of such securities.





                                       43
<PAGE>   45

         At the closing of the Universal Transaction, Universal (i) was issued 6
million shares of USAI's Class B Common Stock, 7 million shares of USAI's Common
Stock and 109 million common equity shares ("LLC Shares") of USANi LLC, a
limited liability company formed to hold all of the businesses of USAI and its
subsidiaries, except for its broadcasting business and its equity interest in
Ticketmaster Group, Inc. and (ii) received a cash payment of $1.3 billion.
Pursuant to an Exchange Agreement relating to the LLC Shares (the "LLC Exchange
Agreement"), 74 million of the LLC Shares issued to Universal are each
exchangeable for one share of USAI's Class B Common Stock and the remainder of
the LLC Shares issued to Universal are each exchangeable for one share of USAI's
Common Stock.

         At the closing of the Universal Transaction, Liberty/Ventures Group was
issued 1.2 million shares of USAI's Class B Common Stock, representing all of
the remaining shares of USAI's Class B Common Stock issuable pursuant to
Liberty/Ventures Group's Contingent Right. Of such shares, 800,000 shares of
Class B Common Stock were contributed to BDTV IV Inc. ("BDTV-IV"), a
newly-formed entity having substantially the same terms as BDTV-I and BDTV-II
(with the exception of certain transfer restrictions). In addition,
Liberty/Ventures Group purchased 10 LLC Shares at the closing of the Universal
Transaction for an aggregate purchase price of $200. Liberty/Ventures Group has
also agreed to contribute $300 million in cash to USANI LLC by June 30, 1998 in
exchange for an aggregate of 15 million LLC Shares and/or shares of USAI's
Common Stock. Liberty/Ventures Group's cash purchase price will increase at an
annual interest rate of 7.5% beginning from the date of the closing of the
Universal Transaction through the date of Liberty/Ventures Group's purchase of
such securities. Pursuant to the LLC Exchange Agreement, each LLC Share issued
or to be issued to Liberty/Ventures Group is exchangeable for one share of
USAI's Common Stock.

         In connection with the Universal Transaction, each of Universal and
Liberty/Ventures Group has been granted a preemptive right with respect to
future issuances of USAI's capital stock, subject to certain limitations, to
maintain their respective percentage ownership interests in USAI that they had
immediately prior to such issuances. In addition, with respect to issuances of
USAI's capital stock in certain specified circumstances, Universal will be
obligated to maintain the percentage ownership interest in USAI that it had
immediately prior to such issuances. In addition, USAI, Universal and
Liberty/Ventures Group have agreed that if the parties agree prior to June 30,
1998 (the date of mandatory cash contributions) on the identity of assets owned
by Liberty/Ventures Group that are to be contributed to USANi LLC and the form
and terms of such contributions, Liberty/Ventures Group will contribute those
assets in exchange for LLC Shares valued at $20 per share. If Liberty/Ventures
Group contributes such additional assets, Liberty/Ventures Group has the right
to elect to reduce the number of LLC Shares it is obligated to purchase for cash
by an amount equal to 45% of the value of the assets contributed by
Liberty/Ventures Group. If Liberty/Ventures Group exercises the option to
contribute assets and thereby reduces its cash contribution amount, Universal
will be required to purchase a number of additional LLC Shares (valued at $20
per share) equal to the value of Liberty/Ventures Group's asset contribution,
less the amount by which Liberty/Ventures Group's asset contribution is applied
towards reducing Liberty/Ventures Group's cash contribution. In addition,
Universal may purchase an additional number of LLC Shares (valued at $20 per
share), equal to the value of Liberty/Ventures Group's asset contribution which
is not applied towards reducing Liberty/Ventures Group's cash contribution.





                                       44
<PAGE>   46

         Sprint PCS's business plan will require additional capital financing
prior to the end of 1998. Sources of funding for Sprint PCS's capital
requirements may include vendor financing, public offerings or private
placements of equity and/or debt securities, commercial bank loans and/or
capital contributions from the Sprint PCS Partners. However, there can be no
assurance that any additional financing can be obtained on a timely basis, on
terms acceptable to Sprint PCS or the Sprint PCS Partners and within the
limitations contained in the agreements governing Sprint PCS's existing debt.

         Additionally, the proposed budget for 1998 has not yet been approved by
the Sprint PCS partnership board, although the board has authorized management
to operate Sprint PCS in accordance with such budget. The Sprint PCS Partners
may mutually agree to make additional capital contributions. However, the Sprint
PCS Partners have no such obligation in the absence of an approved budget, and
there can be no assurance the Sprint PCS Partners will reach such an agreement
or approve the 1998 proposed budget. In addition, the failure by the Sprint PCS
Partners to approve a business plan may impair the ability of Sprint PCS to
obtain required financing. Failure to obtain any such additional financing or
capital contributions from the Sprint PCS Partners could result in the delay or
abandonment of Sprint PCS's development and expansion plans and expenditures,
the failure to meet regulatory requirements or other potential adverse
consequences.

         Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership board has
resulted in the occurrence of a "Deadlock Event" under the Sprint PCS
partnership agreement as of January 1, 1998. Under the Sprint PCS partnership
agreement, if one of the Sprint PCS Partners refers the budget issue to the
chief executive officers of the corporate parents of the Sprint PCS Partners for
resolution pursuant to specified procedures and the issue remains unresolved,
buy/sell provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS Partners of the interests of the other Sprint PCS
Partners, or, in certain circumstances, liquidation of Sprint PCS. Discussions
among the Sprint PCS Partners about restructuring their interests in Sprint PCS
in lieu of triggering such buy/sell procedures are ongoing. However, there is no
certainty the discussions will result in a change to the partnership structure
or will avert the triggering of the resolution and buy/sell procedures referred
to above or a liquidation of Sprint PCS.

         @Home is investing significantly in the development of its network
infrastructure and hiring new personnel rapidly in anticipation of potential
growth in its business, which is in a very early state of development. As of
December 31, 1997 there were minimal subscribers to its @Home services. @Home
believes that the cash proceeds of approximately $100 million from its initial
public offering on July 11, 1997, together with existing cash, cash equivalents
and capital lease financing, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next 12 months. @Home may,
however, require additional funds if its estimates of working capital and/or
capital expenditure and/or lease financing requirements change or prove
inaccurate or in order for @Home to respond to unforeseen technological or
marketing hurdles or to take advantage of unanticipated opportunities. Over the
longer term, it is likely that @Home will require substantial additional funds
to continue to fund its infrastructure investment, product development,
marketing, sales and customer support needs. There can be no assurance that any
such funds will be available at the time or times needed, or available on terms
acceptable to @Home. If adequate funds are not available, or are not available
on acceptable terms, @Home may not be able to continue its network
implementation, to develop new products and services or otherwise to respond to
competitive pressures. Such inability could have a material adverse effect on
@Home's business, operating results and financial condition.





                                       45
<PAGE>   47

         @Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home has
issued warrants to purchase 10.9 million shares of @Home's Series A common
stock. Of these warrants 10.2 million of such shares were exercisable as of
March 4, 1998.

         During the period in which each of TCI, Cox, Comcast and CSC have
agreed (subject to certain exceptions and limitations) to use @Home as its
exclusive provider of high speed residential consumer Internet access services,
a stockholders agreement among such parties and @Home provides that in the event
the number of exclusive homes passed attributable to TCI decreases below 80% of
the number of homes passed of TCI and its controlled affiliates as of June 1996,
then TCI will be required to offer to sell a proportionate amount of its equity
in @Home to certain other stockholders of @Home at fair market value. Since June
1996, TCI has sold or transferred certain cable systems that reduce TCI's number
of base homes passed. In addition, TCI has announced the proposed sale or
transfer of additional cable systems that would further reduce TCI's number of
base homes passed. In the event that such cable systems continue to be exclusive
to @Home, such cable systems and their homes passed would continue to be
included in TCI's homes passed for purposes of determining whether or not TCI is
obligated to offer a portion of its equity interest in @Home to Cox, Comcast and
CSC, even though such cable systems are no longer owned or controlled by TCI. If
TCI does not require that such cable systems remain exclusive to @Home,
Liberty/Ventures Group could be required to sell shares to Cox, Comcast, CSC and
certain other stockholders of @Home, at fair market value. There can be no
assurance that, if Liberty/Ventures Group is required to sell shares of @Home,
the price paid to Liberty/Ventures Group would represent adequate consideration
to Liberty/Ventures Group because such fair market value may not adequately
reflect Liberty/Ventures Group's expectation of the long term value of such
investments in @Home. In addition to the exceptions to the general exclusivity
obligations, Cox and Comcast have the right to terminate the exclusivity
provisions with respect to TCI, Cox and Comcast in the event TCI does not attain
certain customer penetration levels for the @Home service relative to the
customer penetration levels of Cox and Comcast, as of June 4, 1999, and each
anniversary thereafter until 2002. Such termination could have a material
adverse effect on @Home and the value of Liberty/Ventures Group's interest in
@Home.

         In addition, although TCI, Cox, Comcast and CSC are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are subject to a number
of exceptions which allow them to compete with @Home in certain circumstances.

         Many of Liberty/Ventures Group's entities operate in industries,
primarily the telecommunications industry and the Internet services industry,
which have experienced and are expected to continue to experience (i) rapid and
significant changes in technology, (ii) ongoing improvements in the capacity and
quality of such services, (iii) frequent and new product and service
introductions, and (iv) enhancements and changes in end-user requirements and
preferences. The degree to which these changes will affect such entities and the
ability of such entities to compete in their respective businesses cannot be
predicted. Also, alternative technologies may develop for the provision of
services similar to those provided by such entities. Such entities may be
required to select in advance one technology over another, but it will be
impossible to predict with any certainty, at the time such entity is required to
make its investment, which technology will prove to be the most economic,
efficient or capable of attracting customer usage. Neither PCS systems nor the
delivery of Internet services over the cable infrastructure have any significant
commercial operating history in the United States and there can be no assurance
that operation of either of these businesses will become profitable. If markets
fail to develop, develop more slowly than expected, or become highly
competitive, Liberty/Ventures Group's operating results and financial condition
may be materially adversely affected.




                                       46
<PAGE>   48

         The Satellite Home Viewer Act of 1988, as amended in 1994 (the "SHV
Act") provides for a "home satellite dish compulsory copyright license" for the
retransmission of network and superstation signals and programming to the home
satellite dish market. Under the terms of the SHV Act, satellite carriers are
responsible for paying copyright fees to a federal copyright fee collection
agency for the sale of superstation signals. On October 27, 1997, the Librarian
finalized his decision to accept the Copyright Arbitration Rate Panel's ("CARP")
recommendation that copyright fees for direct-to-home satellite carriage of
superstations and distant network television broadcast signals be raised to
$0.27 per subscriber, per month. The CARP also recommended that these increases
be retroactive to July 1, 1997, however, the Librarian ruled to effect the
change January 1, 1998. Superstation copyright fees previously ranged from $0.14
to $0.175 per subscriber, per month while network affiliate fees approximated
$0.06 per subscriber, per month. Several programming packagers of home satellite
services and distributors of programming to C-band direct-to-home programming
packagers have announced price increases to cover the increase in the copyright
fee. Accordingly, UVSG and Netlink anticipate that they may also be able to pass
the increases on to both their retail and direct-to-home wholesale customers via
price increases. Such increases may cause a decrease in the number of
subscribers to such services. The increased overall cost of Superstations
resulting from the increased copyright could also impact the purchasing
decisions made by program packagers and marketers of programs to the
direct-to-home industry. Various bills are being considered by Congress which if
enacted would amend and extend the satellite license and/or potentially change
the copyright royalty fee.

         Certain of the countries in which TINTA has operating companies or in
which TINTA may operate in the future, may be subject to a substantially greater
degree of social, political and economic instability than is the case in other
countries. Risks associated with social, political and economic instability in a
particular country could materially adversely affect the results of operations
and financial condition of any subsidiary or affiliate of TINTA located within
such country or that has significant operations there (and thereby have a
potentially material adverse effect on the results of operations or financial
condition of TINTA) and could result in the loss of TINTA's investment in such
subsidiary or affiliate or the loss by such subsidiary or affiliate of its
assets in such country.

         TINTA is exposed to foreign exchange risk caused by unfavorable and
potentially volatile fluctuations of the U.S. dollar (the functional currency of
TINTA) against the U.K. pound sterling, the Japanese yen, the Argentine peso and
various other foreign currencies that are the functional currencies of certain
of TINTA's operating subsidiaries and affiliates. Since the enactment of a
convertibility plan in April 1991, the Argentine government has maintained an
exchange rate of one Argentine peso to one U.S. dollar. No assurance can be
given that such an exchange rate will be maintained in future periods. Changes
in the value of the U.S. dollar against any foreign currency that is the
functional currency of an operating subsidiary or affiliate of TINTA will cause
TINTA to experience unrealized foreign currency translation losses or gains with
respect to amounts already invested in such foreign currencies. TINTA and
certain of its operating subsidiaries and affiliates are also exposed to foreign
currency risk to the extent that they enter into transactions denominated in
currencies other than their respective functional currencies.





                                       47
<PAGE>   49

         Because TINTA generally views its foreign operating subsidiaries and
affiliates as long-term investments, TINTA generally does not attempt to hedge
existing investments in its foreign affiliates and subsidiaries. With respect to
funding commitments that are denominated in currencies other than the U.S.
dollar, TINTA historically has sought to reduce its exposure to short-term
(generally no more than 90 days) movements in the applicable exchange rates once
the timing and amount of such funding commitments become fixed. Although TINTA
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, TINTA believes that, given
the nature of its business, it is not possible or practical to eliminate TINTA's
exposure to unfavorable fluctuations in foreign currency exchange rates. As of
December 31, 1997, TINTA was not exposed to material near-term losses in future
earnings, fair values or cash flows resulting from derivative financial
instruments.

         Flextech has undertaken to finance the working capital requirements of
one of the joint ventures (the "Principal Joint Venture") formed with BBC
Worldwide Limited ("BBC Worldwide"). If Flextech defaults in its funding
obligation to the Principal Joint Venture and fails to cure within 42 days after
receipt of notice from BBC Worldwide, BBC Worldwide is entitled, within the
following 90 days, to require that TINTA assume all of Flextech's funding
obligations to the Principal Joint Venture. Flextech is obligated to provide the
Principal Joint Venture with a primary credit facility of (pound)88 million
($145 million) and, subject to certain restrictions, a standby credit facility
of (pound)30 million ($50 million). Borrowings under the primary and standby
credit facility would be represented by shares of loan stock of the Principal
Joint Venture, bearing interest at 2% above LIBOR.

         TINTA and/or other subsidiaries of TCI have guaranteed notes payable
and other obligations of certain of Liberty/Ventures Group's affiliates (the
"Guaranteed Obligations"). At December 31, 1997, the U.S. dollar equivalent of
the amounts borrowed pursuant to the Guaranteed Obligations was $26 million.
Certain of the Guaranteed Obligations allow for additional borrowings in future
periods. TINTA also has guaranteed the obligation of an affiliate to pay fees
for the license to exhibit certain films through the year 2000. If TINTA were to
fail to fulfill its obligations under the guarantees, the beneficiaries have the
right to demand an aggregate payment of approximately $46 million at December
31, 1997. Although TINTA has not had to perform under such guarantee to date,
TINTA cannot be certain that it will not be required to perform under such
guarantee in the future.

         Effective as of December 16, 1997, NDTC, on behalf of TCIC and the
Approved Purchasers, entered into the Digital Terminal Purchase Agreement with
GI to purchase advanced digital set-top devices. The hardware and software
incorporated into these devices will be designed and manufactured to be
compatible and interoperable with the OpenCable(TM) architecture specifications
adopted by CableLabs, the cable television industry's research and development
consortium, in November 1997. NDTC has agreed that Approved Purchasers will
purchase, in the aggregate, a minimum of 6.5 million set-top devices during the
calendar years 1998, 1999 and 2000 at an average price of $318 per set-top
device. GI agreed to provide NDTC and its Approved Purchasers the most favorable
prices, terms and conditions made available by GI to any customer purchasing
advanced digital set-top devices. In connection with NDTC's purchase commitment,
GI agreed to grant warrants to purchase its common stock proportional to the
number of devices ordered by each organization, which as of the effective date
of the Digital Terminal Purchase Agreement, would have represented at least a
10% equity interest in GI (on a fully diluted basis). It is anticipated that the
value associated with such equity interest would be attributed to TCI Group upon
purchase and deployment of the digital set-top devices. NDTC has the right to
terminate the Digital Terminal Purchase Agreement if, among other reasons GI
fails to meet a material milestone designated in the Digital Terminal Purchase
Agreement with respect to the development, testing and delivery of advanced
digital set-top devices.



                                       48
<PAGE>   50



         Also in December 1997, NDTC entered into a memorandum of understanding
with GI which contemplates the sale to GI of certain of the assets of NDTC's
set-top authorization business, the license of certain related technology to GI,
and an additional cash payment in exchange for approximately 21.4 million shares
of stock of GI. In connection therewith, NDTC would also enter into a service
agreement pursuant to which it will provide certain services to GI's set-top
authorization business. The transaction is subject to the signing of definitive
agreements; accordingly, there can be no assurance that it will be consummated.

         The FCC has initiated a number of rulemakings to implement various
provisions of the 1996 Telecom Act. Among other things, the 1996 Telecom Act
also requires the FCC to establish rules and implementation schedules to ensure
that video programming is fully accessible to the hearing impaired through
closed captioning. On August 22, 1997, the FCC released new rules which will
require substantial closed captioning over an eight to ten year phase in period
with only limited exceptions. As a result, Liberty/Ventures Group's programming
interests are expected to incur significant additional costs for closed
captioning. A number of parties petitioned the FCC to reconsider various
provisions of these rules, and such petitions remain pending.

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



                                       49
<PAGE>   51

                          INDEPENDENT AUDITORS' REPORT




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


We have audited the accompanying consolidated balance sheets of
Tele-Communications, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tele-Communications,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.  

The accompanying consolidated financial statements as of December 31, 1997 and 
for the year then ended have been restated, as described in note 19.


                                              KPMG Peat Marwick LLP



Denver, Colorado
March 20, 1998, 
    except for note 19
    which is as of January 6, 1999



                                       50
<PAGE>   52

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                                        1997**       1996*
                                                                      -------      -------
Assets                                                                 amounts in millions
- ------
<S>                                                                   <C>              <C>
Cash and cash equivalents                                             $   284          444

Trade and other receivables, net                                          529          448

Prepaid expenses                                                           83           81

Prepaid program rights                                                    104           61

Committed program rights                                                  115          136

Investments in affiliates, accounted for under the equity method,
    and related receivables (notes 5 and 13)                            3,048        2,985

Investment in Time Warner, Inc. ("Time Warner") (note 6)                3,555        2,027
                                                                       

Property and equipment, at cost:
    Land                                                                   96           77
    Distribution systems                                               10,784       10,039
    Support equipment and buildings                                     1,558        1,541
                                                                      -------      -------
                                                                       12,438       11,657
    Less accumulated depreciation                                       4,759        4,129
                                                                      -------      -------
                                                                        7,679        7,528
                                                                      -------      -------

Franchise costs                                                        17,910       17,875
    Less accumulated amortization                                       2,763        2,439
                                                                      -------      -------
                                                                       15,147       15,436
                                                                      -------      -------

Other assets, net of amortization (note 14)                             1,943        1,023
                                                                      -------      -------

                                                                      $32,487       30,169
                                                                      =======      =======
</TABLE>

*  Restated - see note 13.
** Restated - see note 19.                                           (continued)



                                       51
<PAGE>   53

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                     Consolidated Balance Sheets, continued

                           December 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                  1997**         1996*
                                                                                --------       --------
Liabilities and Stockholders' Equity                                              amounts in millions
- ------------------------------------
<S>                                                                             <C>                 <C>
Accounts payable                                                                $    169            266

Accrued interest                                                                     258            274

Accrued programming expense                                                          399            347

Other accrued expenses                                                               997            812

Deferred option premium (note 6)                                                     306             --

Debt (note 9)                                                                     15,250         14,926

Deferred income taxes (note 15)                                                    6,108          5,962

Other liabilities                                                                    664            253
                                                                                --------       --------
      Total liabilities                                                           24,151         22,840
                                                                                --------       --------
Minority interests in equity of consolidated subsidiaries                          1,684          1,493

Redeemable securities:
   Preferred stock (note 10)                                                         655            658
   Common stock (note 2)                                                               5             --

Company-obligated mandatorily redeemable preferred securities of
    subsidiary trusts ("Trust Preferred Securities") holding solely
    subordinated debt securities of TCI Communications, Inc. ("TCIC")
    (note 11)                                                                      1,500          1,000

Stockholders' equity (note 12):
    Series Preferred Stock, $.01 par value                                            --             --
    Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock,
       $.01 par value                                                                 --             --
    Common stock, $1 par value:
       Series A TCI Group. Authorized 1,750,000,000 shares; issued
         605,616,143 shares in 1997 and 696,325,478 shares in 1996                   606            696
       Series B TCI Group. Authorized 150,000,000 shares; issued
         78,203,044 shares in 1997 and 84,647,065 shares in 1996                      78             85
       Series A Liberty Media Group.  Authorized 750,000,000 shares;
         issued 344,962,521 shares in 1997 and 341,766,655 shares in 1996            345            342
       Series B Liberty Media Group. Authorized 75,000,000 shares; issued
         35,180,385 shares in 1997 and 31,784,053 shares in 1996                      35             32
       Series A TCI Ventures Group. Authorized 750,000,000 shares; issued
         377,386,032 shares in 1997                                                  377             --
       Series B TCI Ventures Group. Authorized 75,000,000 shares; issued
         32,532,800 shares in 1997                                                    33             --
    Additional paid-in capital                                                     5,043          3,547
    Cumulative foreign currency translation adjustment, net of taxes                   4             26
    Unrealized holding gains for available-for-sale securities, net of
       taxes                                                                         774             15
    Accumulated deficit                                                             (812)          (251)
                                                                                --------       --------
                                                                                   6,483          4,492
    Treasury stock and common stock held by subsidiaries, at cost (note 12)       (1,991)          (314)
                                                                                --------       --------

          Total stockholders' equity                                               4,492          4,178
                                                                                --------       --------

Commitments and contingencies (note 16)
                                                                                $ 32,487         30,169
                                                                                ========       ========
</TABLE>

*  Restated - see note 13.
** Restated - see note 19.

See accompanying notes to consolidated financial statements.



                                       52
<PAGE>   54

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                1997**        1996*         1995*
                                                               -------      -------      -------
                                                                      amounts in millions,
                                                                    except per share amounts
<S>                                                            <C>            <C>          <C>  
Revenue:
   Communications and programming services                     $ 7,570        7,038        5,586
   Net sales from electronic retailing services                     --          984          920
                                                               -------      -------      -------
                                                                 7,570        8,022        6,506
                                                               -------      -------      -------
Operating costs and expenses:
   Operating                                                     2,850        2,917        2,161
   Cost of sales from electronic retailing services                 --          605          603
   Selling, general and administrative                           1,745        2,224        1,754
   Stock compensation                                              488          (13)          57
   Impairment of intangible assets                                  15           --           --
   Restructuring charges                                            --           41           17
   Depreciation                                                  1,077        1,093          899
   Amortization                                                    546          523          473
                                                               -------      -------      -------
                                                                 6,721        7,390        5,964
                                                               -------      -------      -------

       Operating income                                            849          632          542

Other income (expense):
   Interest expense                                             (1,160)      (1,096)      (1,010)
   Interest and dividend income                                     88           64           52
   Share of losses of affiliates, net (note 5)                    (930)        (450)        (213)
   Loss on early extinguishment of debt (note 9)                   (39)         (71)          (6)
   Minority interests in losses (earnings) of consolidated
     subsidiaries, net                                            (154)         (56)          17
   Gain on sale of stock by subsidiaries and equity
     investees (notes 5 and 14)                                    172           12          288
   Gain on disposition of assets                                   401        1,593           49
   Other, net                                                      (22)         (65)         (30)
                                                               -------      -------      -------
                                                                (1,644)         (69)        (853)
                                                               -------      -------      -------

     Earnings (loss) before income taxes                          (795)         563         (311)

Income tax benefit (expense) (note 15)                             234         (271)         128
                                                               -------      -------      -------

     Net earnings (loss)                                          (561)         292         (183)

Dividend requirements on preferred stocks                          (42)         (35)         (34)
                                                               -------      -------      -------

     Net earnings (loss) attributable to common
       stockholders                                            $  (603)         257         (217)
                                                               =======      =======      =======
</TABLE>


* Restated - see note 13.
**Restated - see note 19.                                           (continued)


                                       53
<PAGE>   55

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                Consolidated Statements of Operations, continued

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                          1997**           1996*             1995*
                                                                      ------------      ------------     ------------
                                                                                   amounts in millions,
                                                                                except per share amounts
<S>                                                                   <C>                <C>             <C>  
Net earnings (loss) attributable to common stockholders (note 3):
     TCI Class A and Class B common stock                             $         --                --              (78)
     TCI Group Series A and Series B common stock                             (537)             (799)            (112)
     Liberty Media Group Series A and Series B common stock                    125             1,056              (27)
     TCI Ventures Group Series A and Series B common stock                    (191)               --               --
                                                                      ------------      ------------     ------------
                                                                      $       (603)              257             (217)
                                                                      ============      ============     ============
Basic earnings (loss) attributable to
   common stockholders per common share
   (note 3):
     TCI Class A and Class B common stock                             $         --                --             (.12)
                                                                      ============      ============     ============
     TCI Group Series A and Series B common stock                     $       (.85)            (1.20)            (.17)
                                                                      ============      ============     ============
     Liberty Media Group Series A and Series B common stock           $        .34              2.82             (.07)
                                                                      ============      ============     ============
     TCI Ventures Group Series A and Series B common stock            $       (.47)               --               --
                                                                      ============      ============     ============

Diluted earnings (loss) attributable to
   common stockholders per common and
   potential common share (note 3):
     TCI Class A and Class B common stock                             $         --                --             (.12)
                                                                      ============      ============     ============
     TCI Group Series A and Series B common stock                     $       (.85)            (1.20)            (.17)
                                                                      ============      ============     ============
     Liberty Media Group Series A and Series B common stock           $        .31              2.58             (.07)
                                                                      ============      ============     ============
     TCI Ventures Group Series A and Series B common stock            $       (.47)               --               --
                                                                      ============      ============     ============
</TABLE>

* Restated - see note 13.
**Restated - see note 19.

See accompanying notes to consolidated financial statements.


                                       54
<PAGE>   56

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                 Consolidated Statement of Stockholders' Equity

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                       Common Stock                              
                                                             --------------------------------------------------------------------
                                               Class B               TCI                  TCI Group          Liberty Media Group 
                                              Preferred      --------------------   ---------------------- ----------------------
                                                Stock        Class A     Class B     Series A    Series B   Series A    Series B 
                                               --------      ---------  ---------   ----------- ---------- ----------  ----------
<S>                                            <C>           <C>        <C>         <C>         <C>        <C>         <C>
Balance at January 1, 1995                     $   --           577          89          --         --         --         --
   Net loss                                        --            --          --          --         --         --         --
   Issuance of common stock in public
     offering                                      --            20          --          --         --         --         --
   Issuance of common stock in private
     offering                                      --             1          --          --         --         --         --
   Issuance of common stock for
     acquisitions and investments                  --            59          --          --         --         --         --
   Issuance of Class A common stock to
     subsidiary of TCI in reorganization
     of TCI                                        --            --          --          --         --         --         --
   Issuance of Class A common stock to
     subsidiary in exchange for investment         --            --          --          --         --         --         --
   Retirement of Class A common stock
     previously held by subsidiary                 --            --          --          --         --         --         --
   Exchange of common stock held by
     subsidiaries of TCI for Convertible
     Redeemable Participating Preferred
     Stock, Series F ("Series F Preferred
     Stock")                                       --           (86)         (4)         --         --         --         --
   Conversion of Series F Preferred Stock
     held by subsidiary for Series A TCI
     Group common stock                            --            --          --         101         --         --         --
   Distribution of Series A and Series B
     Liberty Media Group common stock to
     TCI common stockholders                       --            --          --          --         --        337         32
   Costs associated with Liberty
     Distribution (see note 1)                     --            --          --          --         --         --         --
   Redesignation of TCI common stock into
     Series A and Series B TCI Group
     common stock                                  --          (571)        (85)        571         85         --         --
   Accreted dividends on all classes of
     preferred stock                               --            --          --          --         --         --         --
   Accreted dividends on all classes of
     preferred stock not subject to
     mandatory redemption requirements             --            --          --          --         --         --         --
   Payment of preferred stock dividends            --            --          --          --         --         --         --
   Issuance of common stock by subsidiary          --            --          --          --         --         --         --
   Foreign currency translation adjustment         --            --          --          --         --         --         --
   Change in unrealized holding gains for
     available-for-sale securities                 --            --          --          --         --         --         --
   Adjustment to reflect elimination of
     reporting delay with respect to
     certain foreign subsidiaries                  --            --          --          --         --         --         --
                                               ------        ------      ------      ------     ------     ------     ------

Balance at December 31, 1995                   $   --            --          --         672         85        337         32
                                               ======        ======      ======      ======     ======     ======     ======


<CAPTION>
                                                                        Unrealized
                                                                          holding                  Treasury
                                                                           gains                   stock and
                                                           Cumulative  (losses) for                  common
                                                            foreign     available-                 stock held
                                             Additional    currency      for-sale                      by           Total
                                              paid-in     translation,  securities,  Accumulated  subsidiaries, stockholders'
                                              capital     net of taxes  net of taxes   deficit*     at cost        equity*
                                             ---------    ------------  ------------   --------     --------      ---------
                                         amounts in millions
<S>                                           <C>                <C>         <C>        <C>         <C>          <C>  
Balance at January 1, 1995                    $   2,791          (4)         94         (359)       (610)           2,578
   Net loss                                          --          --          --         (183)         --             (183)
   Issuance of common stock in public
     offering                                       381          --          --           --          --              401
   Issuance of common stock in private
     offering                                        29          --          --           --          --               30
   Issuance of common stock for
     acquisitions and investments                 1,329          --          --           --          --            1,388
   Issuance of Class A common stock to
     subsidiary of TCI in reorganization
     of TCI                                          (6)         --          --           --           6               --
   Issuance of Class A common stock to
     subsidiary in exchange for investment           (1)         --          --           --           1               --
   Retirement of Class A common stock
     previously held by subsidiary                   29          --          --           --         (29)              --
   Exchange of common stock held by
     subsidiaries of TCI for Convertible
     Redeemable Participating Preferred
     Stock, Series F ("Series F Preferred
     Stock")                                       (542)         --          --           --         632               --
   Conversion of Series F Preferred Stock
     held by subsidiary for Series A TCI
     Group common stock                             213          --          --           --        (314)              --
   Distribution of Series A and Series B
     Liberty Media Group common stock to
     TCI common stockholders                       (369)         --          --           --          --               --
   Costs associated with Liberty
     Distribution (see note 1)                       (8)         --          --           --          --               (8)
   Redesignation of TCI common stock into
     Series A and Series B TCI Group
     common stock                                    --          --          --           --          --               --
   Accreted dividends on all classes of
     preferred stock                                (34)         --          --           --          --              (34)
   Accreted dividends on all classes of
     preferred stock not subject to
     mandatory redemption requirements               10          --          --           --          --               10
   Payment of preferred stock dividends             (10)         --          --           --          --              (10)
   Issuance of common stock by subsidiary            51          --          --           --          --               51
   Foreign currency translation adjustment           --          (5)         --           --          --               (5)
   Change in unrealized holding gains for
     available-for-sale securities                   --          --         244           --          --              244
   Adjustment to reflect elimination of
     reporting delay with respect to
     certain foreign subsidiaries                    --          --          --           (1)         --               (1)
                                                 ------      ------      ------       ------      ------           ------

Balance at December 31, 1995                      3,863          (9)        338         (543)       (314)           4,461
                                                 ======      ======      ======       ======      ======           ======
</TABLE>

*Restated - see notes 13 and 19.
                                                                     (continued)


                                       55
<PAGE>   57

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

            Consolidated Statement of Stockholders' Equity, continued

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                        Common Stock                         
                                                                  -----------------------------------------------------------
                                                    Class B                TCI Group                 Liberty Media Group     
                                                   Preferred      ----------------------------   ----------------------------
                                                     Stock          Series A        Series B       Series A        Series B  
                                                   ---------      -------------   ------------   ------------    ------------
                                                                                                                         
<S>                                               <C>                   <C>              <C>           <C>              <C>
Balance at December 31, 1995                     $       --            672              85            337              32
   Net earnings                                          --             --              --             --              --
   Issuance of common stock for
     acquisition                                         --             11              --              6              --
   Issuance of common stock upon
     conversion of notes                                 --              2              --              2              --
   Issuance of common stock upon
     conversion of preferred stock                       --              1              --             --              --
   Exchange of cost investment for TCI
     Group and Liberty Media Group common
     stock                                               --             (6)             --             (3)             --
   Contribution of common stock to
     subsidiary                                          --             16              --             --              --
   Spin-off of TCI Satellite
     Entertainment, Inc.                                 --             --              --             --              --
   Accreted dividends on all classes of
     preferred stock                                     --             --              --             --              --
   Accreted dividends on all classes of
     preferred stock not subject to
     mandatory redemption requirements                   --             --              --             --              --
   Payment of preferred stock dividends                  --             --              --             --              --
   Foreign currency translation adjustment               --             --              --             --              --
   Recognition of unrealized holding
     gains on available-for-sale securities              --             --              --             --              --
   Recognition of unrealized holding
     losses on available-for-sale securities             --             --              --             --              --
   Change in unrealized holding gains for
     available-for-sale securities                       --             --              --             --              --
                                                 ----------     ----------      ----------     ----------      ----------
Balance at December 31, 1996                     $       --            696              85            342              32
                                                 ==========     ==========      ==========     ==========      ==========


<CAPTION>
                                                                            Unrealized
                                                                              holding                     Treasury
                                                               Cumulative       gains                    stock and
                                                                foreign    (losses) for                    common
                                                                currency     available-                     stock
                                                Additional     translation    for-sale                     held by         Total
                                                  paid-in      adjustment,   securities,   Accumulated  subsidiaries, stockholders'
                                                  capital     net of taxes   net of taxes    deficit*       at cost      equity*
                                                ----------    ------------  -------------  -----------  ------------  -------------
                                                     amounts in millions
<S>                                                <C>              <C>          <C>          <C>           <C>          <C>  
Balance at December 31, 1995                        3,863            (9)          338          (543)         (314)        4,461
   Net earnings                                        --            --            --           292            --           292
   Issuance of common stock for
     acquisition                                      248            --            --            --            --           265
   Issuance of common stock upon
     conversion of notes                               (2)           --            --            --            --             2
   Issuance of common stock upon
     conversion of preferred stock                     15            --            --            --            --            16
   Exchange of cost investment for TCI
     Group and Liberty Media Group common
     stock                                           (121)           --            --            --            --          (130)
   Contribution of common stock to
     subsidiary                                       (16)           --            --            --            --            --
   Spin-off of TCI Satellite
     Entertainment, Inc.                             (405)           --            --            --            --          (405)
   Accreted dividends on all classes of
     preferred stock                                  (35)           --            --            --            --           (35)
   Accreted dividends on all classes of
     preferred stock not subject to
     mandatory redemption requirements                 10            --            --            --            --            10
   Payment of preferred stock dividends               (10)           --            --            --            --           (10)
   Foreign currency translation adjustment             --            35            --            --            --            35
   Recognition of unrealized holding
     gains on available-for-sale securities            --            --          (428)           --            --          (428)
   Recognition of unrealized holding
     losses on available-for-sale securities           --            --            64            --            --            64
   Change in unrealized holding gains for
     available-for-sale securities                     --            --            41            --            --            41
                                                 --------      --------      --------      --------      --------      --------
Balance at December 31, 1996                        3,547            26            15          (251)         (314)        4,178
                                                 ========      ========      ========      ========      ========      ========
</TABLE>

*Restated - see notes 13 and 19.
                                                                     (continued)


                                       56
<PAGE>   58

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

            Consolidated Statement of Stockholders' Equity, continued

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                    Common Stock                                  
                                                           ----------------------------------------------------------------------
                                               Class B           TCI Group        Liberty Media Group        TCI Ventures Group   
                                              Preferred    --------------------- ------------------------  ----------------------
                                                Stock       Class A     Class B   Series A     Series B     Series A     Series B 
                                               --------    ---------- ---------- -----------  -----------  ----------   ----------
<S>                                           <C>             <C>        <C>         <C>        <C>           <C>       <C>
Balance at December 31, 1996                  $     --        696          85         342           32           --           --

    Net loss                                        --         --          --          --           --           --           --
    Issuance of TCI Ventures Group common
      stock in exchange for TCI Group
      common stock after giving effect to
      stock split (note 1)                          --       (189)        (16)         --           --          377           33
    Costs associated with TCI Ventures
      Exchange                                      --         --          --          --           --           --           --
    Exchange of common stock with an
      officer/director (note 13)                    --         --           7          --            3           --           --
    Issuance of common stock for
      acquisitions and investment                   --         63           2           2           --           --           --
    Issuance of Series A TCI Group common
      stock in exchange for Series B TCI
      Group common stock (the "Exchange")
      (note 13)                                     --         31          --          --           --           --           --
    Recognition of fees related to
      Exchange (note 13)                            --         --          --          --           --           --           --
    Repurchase of common stock                      --         --          --          --           --           --           --
    Cancellation of common stock                    --         --          --          --           --           --           --
    Reclassification to redeemable
      securities of redemption amount of
      common stock subject to put
      obligation                                    --         --          --          --           --           --           --
    Gain from issuance of equity by
      equity investee                               --         --          --          --           --           --           --
    Issuance of common stock upon
      exercise of stock options                     --         --          --          --           --           --           --
    Issuance of restricted stock granted
      pursuant to stock incentive plan              --          1          --          --           --           --           --
    Issuance of common stock upon
      conversion of notes and preferred
      stock                                         --          3          --           1           --           --           --
    Issuance of common stock to
      Tele-Communications, Inc. Employee
      Stock Purchase Plan                           --          1          --          --           --           --           --
    Accreted dividends on all classes of
      preferred stock                               --         --          --          --           --           --           --
    Accreted dividends on all classes of
      preferred stock not subject to
      mandatory redemption requirements             --         --          --          --           --           --           --
    Payment of preferred stock dividends            --         --          --          --           --           --           --
    Foreign currency translation
      adjustment                                    --         --          --          --           --           --           --
    Change in unrealized holding gains
      for available-for-sale securities             --         --          --          --           --           --           --
                                              --------   --------    --------    --------     --------     --------     --------

Balance at December 31, 1997                  $     --        606          78         345           35          377           33
                                              ========   ========    ========    ========     ========     ========     ========


<CAPTION>
                                                                          Unrealized
                                                                            holding                     Treasury
                                                           Cumulative        gains                     stock and
                                                            foreign      (losses) for                   common
                                                            currency      available-                   stock held
                                            Additional     translation     for-sale                        by            Total
                                              paid-in      adjustment,    securities,   Accumulated   subsidiaries,  stockholders'
                                              capital      net of taxes   net of taxes    deficit*       at cost        equity*
                                              -------      ------------   ------------  -----------   -------------  -------------
                                               amounts in millions
<S>                                           <C>                  <C>           <C>        <C>           <C>          <C>  
Balance at December 31, 1996                  $   3,547            26            15         (251)         (314)        4,178

    Net loss                                         --            --            --         (561)           --          (561)
    Issuance of TCI Ventures Group common
      stock in exchange for TCI Group
      common stock after giving effect to
      stock split (note 1)                         (205)           --            --           --            --            --
    Costs associated with TCI Ventures
      Exchange                                       (7)           --            --           --            --            (7)
    Exchange of common stock with an
      officer/director (note 13)                    160            --            --           --          (170)           --
    Issuance of common stock for
      acquisitions and investment                 1,058            --            --           --          (484)          641
    Issuance of Series A TCI Group common
      stock in exchange for Series B TCI
      Group common stock (the "Exchange")
      (note 13)                                     481            --            --           --          (512)           --
    Recognition of fees related to
      Exchange (note 13)                            (11)           --            --           --            --           (11)
    Repurchase of common stock                       --            --            --           --          (529)         (529)
    Cancellation of common stock                    (18)           --            --           --            18            --
    Reclassification to redeemable
      securities of redemption amount of
      common stock subject to put
      obligation                                     (4)           --            --           --            --            (4)
    Gain from issuance of equity by 
      equity investee                                66            --            --           --            --            66
    Issuance of common stock upon
      exercise of stock options                       4            --            --           --            --             4
    Issuance of restricted stock granted
      pursuant to stock incentive plan                3            --            --           --            --             4
    Issuance of common stock upon
      conversion of notes and preferred
      stock                                           3            --            --           --            --             7
    Issuance of common stock to
      Tele-Communications, Inc. Employee
      Stock Purchase Plan                             8            --            --           --            --             9
    Accreted dividends on all classes of
      preferred stock                               (42)           --            --           --            --           (42)
    Accreted dividends on all classes of
      preferred stock not subject to
      mandatory redemption requirements              10            --            --           --            --            10
    Payment of preferred stock dividends            (10)           --            --           --            --           (10)
    Foreign currency translation
      adjustment                                     --           (22)           --           --            --           (22)
    Change in unrealized holding gains
      for available-for-sale securities              --            --           759           --            --           759
                                               --------      --------      --------     --------      --------      --------

Balance at December 31, 1997                      5,043             4           774         (812)       (1,991)        4,492
                                               ========      ========      ========     ========      ========      ========
</TABLE>

* Restated - see notes 13 and 19.

See accompanying notes to consolidated financial statements.


                                       57
<PAGE>   59

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                 1997**          1996*           1995*
                                                                              ----------      ----------      ----------
                                                                                           amounts in millions
                                                                                               (see note 4)
<S>                                                                           <C>                    <C>            <C>  
Cash flows from operating activities:
   Net earnings (loss)                                                        $     (561)            292            (183)
   Adjustments to reconcile net earnings (loss) to net cash provided by
      operating activities:
        Stock compensation                                                           488             (13)             57
        Payments of obligation relating to stock compensation                       (132)             (3)             (9)
        Impairment of intangible assets                                               15              --              --
        Restructuring charges                                                         --              41              17
        Payments of restructuring charges                                            (24)             (8)            (17)
        Depreciation and amortization                                              1,623           1,616           1,372
        Share of losses of affiliates, net                                           930             450             213
        Loss on early extinguishment of debt                                          39              71               6
        Minority interests in earnings (losses) of consolidated
             subsidiaries, net                                                       154              56             (17)
        Gain on sale of stock by subsidiaries and equity investees                  (172)            (12)           (288)
        Gain on disposition of assets                                               (401)         (1,593)            (49)
        Deferred income tax expense (benefit)                                       (275)            233            (161)
        Other noncash charges (credits)                                               10              11             (28)
        Changes in operating assets and liabilities, net of the effect of
          acquisitions:
             Change in receivables                                                   (53)           (115)            (70)
             Change in inventories                                                    --              (8)             16
             Change in prepaids                                                      (77)            (23)            (86)
             Change in accrued interest                                              (23)             40              45
             Change in other accruals and payables                                   169             243             139
                                                                              ----------      ----------      ----------
              Net cash provided by operating activities                            1,710           1,278             957
                                                                              ----------      ----------      ----------

Cash flows from investing activities:
   Cash paid for acquisitions                                                       (323)           (664)           (488)
   Capital expended for property and equipment                                      (709)         (2,055)         (1,782)
   Proceeds from disposition of assets                                               541             341             166
   Additional investments in and loans to affiliates                                (636)           (778)         (1,135)
   Repayments of loans to affiliates                                                 133             647              18
   Cash received in exchanges                                                         18              66              11
   Other investing activities                                                       (179)            (26)           (134)
                                                                              ----------      ----------      ----------
              Net cash used in investing activities                               (1,155)         (2,469)         (3,344)
                                                                              ----------      ----------      ----------

Cash flows from financing activities:
   Borrowings of debt                                                              2,513           8,163           8,152
   Repayments of debt                                                             (3,036)         (7,969)         (6,567)
   Prepayment penalties                                                              (33)            (60)             --
   Proceeds from issuance of subsidiary common stock and preferred stock             148             223             445
   Proceeds from issuance of common stock                                              5              --             431
   Proceeds from issuance of Trust Preferred Securities                              490             971              --
   Contributions by minority shareholders of subsidiaries                              6             319              --
   Repurchase of common stock                                                       (529)             --              --
   Repurchase of subsidiary common stock                                             (42)             --              --
   Payment of dividends on subsidiary preferred stock and Trust Preferred
      Securities                                                                    (179)            (95)             (6)
   Payment of preferred stock dividends                                              (42)            (35)            (24)
   Other financing activities                                                        (16)             --              --
                                                                              ----------      ----------      ----------
               Net cash provided (used) by financing activities                     (715)          1,517           2,431
                                                                              ----------      ----------      ----------
               Net increase (decrease) in cash and cash equivalents                 (160)            326              44
               Cash and cash equivalents at beginning of year                        444             118              74
                                                                              ----------      ----------      ----------
               Cash and cash equivalents  at end of year                      $      284             444             118
                                                                              ==========      ==========      ==========
</TABLE>

*  Restated - see note 13.
** Restated - see note 19.

See accompanying notes to consolidated financial statements.


                                       58
<PAGE>   60

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1996 and 1995

(1)      Basis of Presentation

         Nature of Business

         Tele-Communications, Inc. ("TCI" or the "Company"), through its
         subsidiaries and affiliates, is principally engaged in the
         construction, acquisition, ownership, and operation of cable television
         systems and the provision of satellite-delivered video entertainment,
         information and home shopping programming services to various video
         distribution media, principally cable television systems. The Company
         also has investments in cable and telecommunications operations and
         television programming in certain international markets as well as
         investments in companies and joint ventures involved in developing and
         providing programming for new television and telecommunications
         technologies.

         Principles of Consolidation

         The accompanying consolidated financial statements include the accounts
         of TCI and those of all majority-owned subsidiaries. All significant
         intercompany accounts and transactions have been eliminated in
         consolidation. Preferred stock of TCI which is owned by subsidiaries of
         TCI eliminates in consolidation. Common stock of the Company held by
         subsidiaries is treated similar to treasury stock in consolidation.

         Targeted Stock

         On August 3, 1995, the stockholders of TCI authorized the Board of
         Directors of TCI (the "Board") to issue two new series of stock,
         Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
         par value $1.00 per share ("Liberty Group Series A Stock") and
         Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
         par value $1.00 per share ("Liberty Group Series B Stock," and together
         with the Liberty Group Series A Stock, the "Liberty Group Stock"). The
         Liberty Group Stock is intended to reflect the separate performance of
         TCI's assets which produce and distribute programming services
         ("Liberty Media Group"). Additionally, the stockholders, of TCI
         approved the redesignation of the previously authorized Class A and
         Class B common stock into Tele-Communications, Inc. Series A TCI Group
         Common Stock, par value $1.00 per share (the "TCI Group Series A
         Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock,
         par value $1.00 per share (the "TCI Group Series B Stock", and together
         with the TCI Group Series A Stock, the "TCI Group Stock"),
         respectively. On August 10, 1995, TCI distributed, in the form of a
         dividend, 2.25 shares of Liberty Group Stock (as adjusted for stock
         dividends - see below) for each four shares of TCI Group Stock owned
         (the "Liberty Distribution").

                                                                     (continued)

                                       59
<PAGE>   61

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         On August 28, 1997, the stockholders of TCI authorized the Board to
         issue the Tele-Communications, Inc. Series A TCI Ventures Group Common
         Stock, par value $1.00 per share (the "TCI Ventures Group Series A
         Stock") and Tele-Communications, Inc. Series B TCI Ventures Group
         Common Stock, par value $1.00 per share (the "TCI Ventures Group Series
         B Stock," and together with TCI Ventures Group Series A Stock, the "TCI
         Ventures Group Stock"). The TCI Ventures Group Stock is intended to
         reflect the separate performance of the "TCI Ventures Group," which is
         comprised of TCI's principal international assets and businesses and
         substantially all of TCI's non-cable and non-programming assets.

         In August 1997, TCI commenced offers (the "Exchange Offers") to
         exchange shares of TCI Ventures Group Series A Stock and TCI Ventures
         Group Series B Stock for up to 188,661,300 shares of TCI Group Series
         A Stock and up to 16,266,400 shares of TCI Group Series B Stock,
         respectively. The exchange ratio for the Exchange Offers was two
         shares (as adjusted) of the applicable series of TCI Ventures Group
         Stock for each share of the corresponding series of TCI Group Stock
         properly tendered up to the indicated maximum numbers. Upon the
         September 10, 1997 consummation of the Exchange Offers, 188,661,300
         shares of TCI Group Series A Stock and 16,266,400 shares of TCI Group
         Series B Stock were exchanged for 377,322,600 shares of TCI Ventures
         Group Series A Stock and 32,532,800 shares of TCI Ventures Group
         Series B Stock (as adjusted for a stock dividend, see below) (the "TCI
         Ventures Exchange").

         As of December 31, 1997, the TCI Group Stock is intended to reflect the
         separate performance of TCI and its subsidiaries and assets not
         attributed to Liberty Media Group or TCI Ventures Group. Such
         subsidiaries and assets are referred to as "TCI Group" and are
         comprised primarily of TCI's domestic cable and communications
         business. Collectively, the TCI Group, the Liberty Media Group and the
         TCI Ventures Group are referred to as the "Groups" and individually,
         may be referred to herein as a "Group." The TCI Group Series A Stock,
         TCI Ventures Group Series A Stock and the Liberty Group Series A Stock
         are sometimes collectively referred to herein as the "Series A Stock,"
         and the TCI Group Series B Stock, TCI Ventures Group Series B Stock and
         Liberty Group Series B Stock are sometimes collectively referred to
         herein as the "Series B Stock."

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

                                                                     (continued)

                                       60
<PAGE>   62

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

         The common stockholders' equity value of TCI Ventures Group or Liberty
         Media Group that, at any relevant time, is attributed to the TCI Group,
         and accordingly not represented by outstanding TCI Ventures Group Stock
         or Liberty Group Stock, respectively, is referred to as "Inter-Group
         Interest." Prior to consummation of the Liberty Distribution and TCI
         Ventures Exchange, TCI Group had a 100% Inter-Group Interest in Liberty
         Media Group and TCI Ventures Group, respectively. Following
         consummation of the Liberty Distribution and TCI Ventures Exchange, TCI
         Group no longer has Inter-Group Interests in Liberty Media Group and
         TCI Ventures Group, respectively. For periods in which an Inter-Group
         Interest exists, TCI Group accounts for its Inter-Group Interest in a
         manner similar to the equity method of accounting. Following
         consummation of the Liberty Distribution and the TCI Ventures Exchange,
         an Inter-Group Interest would be created with respect to Liberty Media
         Group or TCI Ventures Group only if a subsequent transfer of cash or
         other property from TCI Group to Liberty Media Group or TCI Ventures
         Group is specifically designated by the Board as being made to create
         an Inter-Group Interest or if outstanding shares of Liberty Group Stock
         or TCI Ventures Stock, respectively, are purchased with funds
         attributable to TCI Group. Management of TCI believes that generally
         accepted accounting principles require that Liberty Media Group or TCI
         Ventures Group be consolidated with TCI Group for all periods in which
         TCI Group held an Inter-Group Interest in Liberty Media Group or TCI
         Ventures Group, respectively.

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

         All debt incurred or preferred stock issued by TCI and its subsidiaries
         is (unless the Board otherwise provides) specifically attributed to and
         reflected in the combined financial statements of the Group that
         includes the entity which incurred the debt or issued the preferred
         stock or, in case the entity incurring the debt or issuing the
         preferred stock is Tele-Communications, Inc., the TCI Group. The Board
         could, however, determine from time to time that debt incurred or
         preferred stock issued by entities included in a Group should be
         specifically attributed to and reflected in the combined financial
         statements of one of the other Groups to the extent that the debt is
         incurred or the preferred stock is issued for the benefit of such other
         Group.


                                                                     (continued)

                                       61
<PAGE>   63

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Although it is management's intention that each Group would normally
         arrange for the external financing required to satisfy its respective
         liquidity requirements, the cash needs of one Group may exceed the
         liquidity sources of such Group. In such circumstances, one of the
         other Groups may transfer funds to such Group. Such transfers of funds
         among the Groups will be reflected as borrowings or, if determined by
         the Board, in the case of a transfer from TCI Group to either Liberty
         Media Group or TCI Ventures Group, reflected as the creation of, or
         increase in, TCI Group's Inter-Group Interest in such Group or, in the
         case of a transfer from either Liberty Media Group or TCI Ventures
         Group to TCI Group, reflected as a reduction in TCI Group's Inter-Group
         Interest in such Group. There are no specific criteria for determining
         when a transfer will be reflected as a borrowing or as an increase or
         reduction in an Inter-Group Interest. The Board expects to make such
         determinations, either in specific instances or by setting generally
         applicable policies from time to time, after consideration of such
         factors as it deems relevant, including, without limitation, the needs
         of TCI, the financing needs and objectives of the Groups, the
         investment objectives of the Groups, the availability, cost and time
         associated with alternative financing sources, prevailing interest
         rates and general economic conditions.

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

         The combined balance sheets of a Group reflect its net loans or
         advances to or loans or advances from the other Groups. Similarly, the
         respective combined statements of operations of the Groups reflect
         interest income or expense, as the case may be, associated with such
         loans or advances and the respective combined statements of cash flows
         of the Groups reflect changes in the amounts of loans or advances
         deemed outstanding. In the historical combined financial statements,
         net loans or advances between Groups have been and will continue to be
         included as a component of each respective Group's combined equity.

         Although any increase in TCI Group's Inter-Group Interest in Liberty
         Media Group or TCI Ventures Group resulting from an equity contribution
         by the TCI Group to Liberty Media Group or TCI Ventures Group or any
         decrease in such Inter-Group Interest resulting from a transfer of
         funds from Liberty Media Group or TCI Ventures Group to the TCI Group
         would be determined by reference to the market value of the Liberty
         Group Series A Stock, or the TCI Ventures Group Series A Stock,
         respectively, as of the date of such transfer. Such an increase could
         occur at a time when such shares could be considered undervalued and
         such a decrease could occur at a time when such shares could be
         considered overvalued.


                                                                     (continued)

                                       62
<PAGE>   64

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         All financial impacts of issuances and purchases of shares of TCI Group
         Stock, TCI Ventures Group Stock or Liberty Group Stock, the proceeds of
         which are attributed to TCI Group, TCI Ventures Group or Liberty Media
         Group, respectively, will be to such extent reflected in the combined
         financial statements of TCI Group, TCI Ventures Group or Liberty Media
         Group, respectively. All financial impacts of issuances of shares of
         TCI Ventures Group Stock or Liberty Group Stock, the proceeds of which
         are attributed to TCI Group in respect of a reduction in TCI Group's
         Inter-Group Interest in TCI Ventures Group or Liberty Media Group,
         respectively, will be to such extent reflected in the combined
         financial statements of TCI Group. Financial impacts of dividends or
         other distributions on TCI Group Stock, TCI Ventures Group Stock or
         Liberty Group Stock, will be attributed entirely to TCI Group, TCI
         Ventures Group or Liberty Media Group, respectively, except that
         dividends or other distributions on TCI Ventures Group Stock or Liberty
         Group Stock will (if at the time there is an Inter-Group Interest in
         TCI Ventures Group or Liberty Media Group, respectively) result in TCI
         Group being credited, and TCI Ventures Group or Liberty Media Group
         being charged (in addition to the charge for the dividend or other
         distribution paid), with an amount equal to the product of the
         aggregate amount of such dividend or other distribution paid or
         distributed in respect of outstanding shares of TCI Ventures Group
         Stock or Liberty Group Stock and a fraction of the numerator of which
         is TCI Ventures Group or Liberty Media Group "Inter-Group Interest
         Fraction" and the denominator of which is the TCI Ventures Group or the
         Liberty Media Group "Outstanding Interest Fraction" (both as defined).
         Financial impacts of repurchases of TCI Ventures Group Stock or Liberty
         Group Stock, the consideration for which is charged to TCI Group, will
         be to such extent reflected in the combined financial statements of TCI
         Group and will result in an increase in TCI Group's Inter-Group
         Interest in TCI Ventures Group or Liberty Media Group, respectively.

         Industry Segments

         Effective December 31, 1997, the Company adopted the provisions of
         Statement of Financial Accounting Standard No. 131, Disclosures about
         Segments of an Enterprise and Related Information ("SFAS 131"). The
         Company has restated its prior year segment disclosures to conform to
         the requirements of SFAS 131. The Company has significant operations
         principally in two industry segments: cable and communications services
         and programming services. Substantially all of the Company's domestic
         cable and communications businesses and assets ("cable") are attributed
         to the TCI Group, and substantially all of the Company's programming
         businesses and assets ("programming") are attributed to the Liberty
         Media Group. The Company's principal international businesses and
         assets and the Company's remaining non-cable and non-programming
         domestic businesses and assets are included in TCI Ventures Group. No
         individual business or asset within TCI Ventures Group constitutes a
         reportable segment of the Company as contemplated by SFAS 131. See note
         17 for additional segment information.


                                                                     (continued)

                                       63
<PAGE>   65

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Stock Dividends

         Effective February 6, 1998, the Company issued stock dividends to
         holders of Liberty Group Stock (the "1998 Liberty Stock Dividend") and
         TCI Ventures Group Stock (the "Ventures Stock Dividend"). The 1998
         Liberty Stock Dividend consisted of one share of Liberty Group Stock
         for every two shares of Liberty Group Stock owned. The Ventures Stock
         Dividend consisted of one share of TCI Venture Group Stock for every
         one share of TCI Ventures Group Stock owned. The 1998 Liberty Stock
         Dividend and the Ventures Stock Dividend have been treated as stock
         splits, and accordingly, all share and per share amounts have been
         restated to reflect the 1998 Liberty Stock Dividend and the Ventures
         Stock Dividend.

(2)      Summary of Significant Accounting Policies

         Cash Equivalents

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

         Receivables

         Receivables are reflected net of an allowance for doubtful accounts.
         Such allowance at December 31, 1997 and 1996 was not significant.

         Program Rights

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

         Investments

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

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

                                                                     (continued)

                                       64
<PAGE>   66

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

         Property and Equipment

         Property and equipment is stated at cost, including acquisition costs
         allocated to tangible assets acquired. Construction costs, including
         interest during construction and applicable overhead, are capitalized.
         During 1997, 1996 and 1995, interest capitalized was not significant.

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

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

         Franchise Costs

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

         Impairment of Long-Lived Assets

         The Company periodically reviews the carrying amounts of property,
         plant and equipment and its identifiable intangible assets to determine
         whether current events or circumstances warrant adjustments to such
         carrying amounts. If an impairment adjustment is deemed necessary, such
         loss is measured by the amount that the carrying value of such assets
         exceeds their fair value. Considerable management judgment is necessary
         to estimate the fair value of assets, accordingly, actual results could
         vary significantly from such estimates. Assets to be disposed of are
         carried at the lower of their financial statement carrying amount or
         fair value less costs to sell.

                                                                     (continued)

                                       65
<PAGE>   67

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Derivative Financial Instruments

         The Company has entered into variable and fixed interest rate exchange
         agreements ("Interest Rate Swaps") which it uses to manage interest
         rate risk arising from the Company's financial liabilities. Such
         Interest Rate Swaps are accounted for as hedges; and accordingly,
         amounts receivable or payable under Interest Rate Swaps are recognized
         as adjustments to interest expense. Gains and losses on early
         terminations of Interest Rate Swaps are included in the carrying amount
         of the related debt and amortized as yield adjustments over the
         remaining term of the derivative financial instruments or the 
         remaining term of the related debt, whichever is shorter. The Company 
         does not use such instruments for trading purposes.

         Derivative financial instruments that can be settled, at the Company's
         option, in shares of the Company's common stock are accounted for as
         equity instruments. Periodic settlements of amounts payable/receivable
         pursuant to such financial instruments are included in additional
         paid-in capital.

         In conjunction with a stock repurchase program or similar transaction,
         the Company may elect to sell put options on its own common stock.
         Proceeds from any such sales are reflected as an increase to additional
         paid-in capital and an amount equal to the maximum redemption amount
         under unexpired put options is reflected as redeemable common stock.

         From time to time, the Company uses certain derivative financial
         instruments to manage its foreign currency risks. Because the Company
         generally views its foreign operating subsidiaries and affiliates as
         long-term investments, the Company generally does not attempt to hedge
         existing investments in its foreign affiliates and subsidiaries.
         However, the Company may enter into forward contracts to reduce its
         exposure to short-term (generally no more than one year) movements in
         the exchange rates applicable to firm funding commitments that are
         denominated in currencies other than the U.S. dollar. When high
         correlation of changes in the market value of the forward contract and
         changes in the fair value of the firm commitment is probable, the
         forward contract is accounted for as a hedge. Changes in the market
         value of a forward contract that qualifies as a hedge and any gains or
         losses on early termination of such a forward contract are deferred and
         included in the measurement of the item (generally an investment in, or
         an advance to, a foreign affiliate) that results from the funding of
         such commitment. Market value changes in derivative financial
         instruments that do not qualify as hedges are recognized currently in
         the consolidated statements of operations. To date, the Company's use
         of forward contracts, as described above, has not had a material impact
         on the Company's financial position or results of operations.

         Minority Interests

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

                                                                     (continued)

                                       66
<PAGE>   68

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Included in minority interests in equity of consolidated subsidiaries
         is $927 million and $923 million in 1997 and 1996, respectively, of
         preferred stocks (and accumulated dividends thereon) of certain
         subsidiaries. The current dividend requirements on these preferred
         stocks aggregate $49 million per annum and such dividend requirements
         are reflected as minority interests in the accompanying consolidated
         statements of operations.

         Foreign Currency Translation

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

         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.

         Revenue Recognition

         Cable revenue for customer fees, equipment rental, advertising,
         pay-per-view programming and revenue sharing agreements is recognized
         in the period that services are delivered. Installation revenue is
         recognized in the period the installation services are provided to the
         extent of direct selling costs. Any remaining amount is deferred and
         recognized over the estimated average period that customers are
         expected to remain connected to the cable television system.

         Stock Based Compensation

         Statement of Financial Accounting Standards No. 123, Accounting for
         Stock-Based Compensation ("SFAS 123") establishes financial accounting
         and reporting standards for stock-based employee compensation plans as
         well as transactions in which an entity issues its equity instruments
         to acquire goods or services from non-employees. As allowed by SFAS
         123, the Company continues to account for stock-based compensation
         pursuant to Accounting Principles Board Opinion No. 25 ("APB Opinion
         No. 25"). The Company has included the disclosures required by SFAS 123
         in note 12.

         Estimates

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

                                                                     (continued)

                                       67
<PAGE>   69

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Reclassifications

         Certain amounts have been reclassified for comparability with the 1997
         presentation.

(3)      Earnings (Loss) Per Common and Potential Common Share

         The Financial Accounting Standards Board issued Statement of Financial
         Accounting Standard No. 128, Earnings Per Share, ("SFAS 128") in
         February of 1997. SFAS 128 establishes new computation, presentation
         and disclosure requirements for earnings per share ("EPS"). SFAS 128
         requires companies with complex capital structures to present basic and
         diluted EPS. Basic EPS is measured as the income or loss available to
         common stockholders divided by the weighted average outstanding common
         shares for the period. Diluted EPS is similar to basic EPS 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. Potential 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
         EPS. The Company adopted SFAS 128 as of December 31, 1997 and has
         restated all prior period EPS data, as required. SFAS 128 did not have
         a material impact on EPS for any period presented.

         (a)      TCI Class A and B Common Stock

                  The basic and diluted loss attributable to common stockholders
                  per common share for the period from January 1, 1995 through
                  the Liberty Distribution was computed by dividing net loss
                  attributable to common stockholders by the weighted average
                  number of common shares outstanding (648 million). Potential
                  common shares were not included in the computation of weighted
                  average shares outstanding because their inclusion would be
                  anti-dilutive.

         (b)      TCI Group Stock

                  The basic and diluted loss attributable to TCI Group common
                  stockholders per common share for the years ended December 31,
                  1997, December 31, 1996 and the period from the Liberty
                  Distribution through December 31, 1995 was computed by
                  dividing net loss attributable to TCI Group common
                  stockholders ($537 million, $799 million and $112 million,
                  respectively) by the weighted average number of common shares
                  outstanding of TCI Group Stock during the period (632 million,
                  665 million and 656 million, respectively). Potential common
                  shares were not included in the computation of weighted
                  average shares outstanding because their inclusion would be
                  anti-dilutive. At December 31, 1997, 1996, and 1995, there
                  were 113 million, 126 million, and 74 million potential common
                  shares, respectively, consisting of fixed and nonvested
                  performance awards and convertible securities that could
                  potentially dilute future EPS calculations in periods of net
                  income. Such potential common share amounts do not take into 
                  account the assumed number of shares that would be 
                  repurchased by the Company upon the exercise of the fixed 
                  and nonvested performance awards. No material changes in the 
                  weighted average outstanding shares or potential common 
                  shares occurred after December 31, 1997.

                                                                     (continued)

                                       68
<PAGE>   70

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         (c)      Liberty Group Stock

                  The basic earnings attributable to Liberty Media Group common
                  stockholders per common share for the years ended December 31,
                  1997 and 1996 was computed by dividing net earnings
                  attributable to Liberty Media Group common stockholders by the
                  weighted average number of common shares outstanding of
                  Liberty Group Stock during the period, as adjusted for the
                  effect of the 1998 Liberty Stock Dividend (366 million and 374
                  million, respectively).

                  The diluted earnings attributable to Liberty Media Group
                  common stockholders per common and potential common share for
                  the years ended December 31, 1997 and 1996 was computed by
                  dividing earnings attributable to Liberty Media Group common
                  stockholders by the weighted average number of common and
                  potential common shares outstanding of Liberty Group Stock
                  during the period, as adjusted for the effect of the 1998
                  Liberty Stock Dividend (403 million and 409 million,
                  respectively). Shares issuable upon conversion of the Series
                  C-Liberty Group Preferred Stock, the Convertible Preferred
                  Stock, Series D (the "Series D Preferred Stock"), the
                  Redeemable Convertible Liberty Media Group Preferred Stock,
                  Series H, convertible notes payable and other fixed and
                  nonvested performance awards have been included in the
                  computation of weighted average shares, as illustrated below.
                  Numerator adjustments for dividends and interest associated
                  with the convertible preferred shares and convertible notes
                  payable, respectively, were not made to the computation of
                  diluted earnings per share as such dividends and interest are
                  paid or payable by TCI Group. See notes 9 and 10 for
                  descriptions of the convertible notes payable and convertible
                  preferred shares, respectively. See note 12 for descriptions
                  of the dilutive stock options.

                  The basic and diluted loss attributable to Liberty Media Group
                  common stockholders per common share for the period from the
                  Liberty Distribution to December 31, 1995 was computed by
                  dividing net loss attributable to Liberty Media Group common
                  stockholders by the weighted average number of common shares
                  outstanding of Liberty Group Stock during the period, as
                  adjusted for the effect of the 1998 Liberty Stock Dividend
                  (369 million). Potential common shares were not included in
                  the computation of weighted average shares outstanding because
                  their inclusion would be anti-dilutive. After giving
                  consideration to the effect of the 1998 Liberty Stock
                  Dividend, no material changes in the weighted average
                  outstanding shares or potential common shares occurred after
                  December 31, 1997.

                                                                     (continued)

                                       69
<PAGE>   71

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Information concerning the reconciliation of basic EPS to dilutive EPS
         with respect to Liberty Group Stock is presented below:

<TABLE>
<CAPTION>
                                                                           Years ended December 31,
                                                                   ----------------------------------------
                                                                       1997          1996           1995
                                                                   ----------     ----------     ----------
                                                                 amounts in millions, except per share amounts
<S>                                                                <C>                 <C>              <C> 
                   Basic EPS:
                      Earnings (loss) available to common
                           shareholders                            $      125          1,056            (27)
                                                                   ==========     ==========     ==========
                      Weighted average common shares                      366            374            369
                                                                   ==========     ==========     ==========
                      Basic earnings (loss) per share
                           attributable to common shareholders     $     0.34           2.82          (0.07)

                   Diluted EPS:
                      Earnings (loss) available to common
                           shareholders                            $      125          1,056            (27)
                                                                   ==========     ==========     ==========
                      Weighted average common shares                      366            374            369
                      Add dilutive potential common shares:
                           Employee and director options                    4              3             --
                           Convertible notes payable                       19             21             --
                           Series C Preferred Stock                         4              4             --
                           Series D Preferred Stock                         6              5             --
                           Series H Preferred Stock                         4              2             --
                                                                   ----------     ----------     ----------
                           Dilutive potential common shares                37             35             --
                                                                   ----------     ----------     ----------
                      Diluted weighted average common shares              403            409            369
                                                                   ==========     ==========     ==========
                      Diluted earnings (loss) per share
                           attributable to common shareholders     $     0.31           2.58          (0.07)
                                                                   ==========     ==========     ==========
</TABLE>

         (d)     TCI Ventures Group Stock

                 The basic and diluted loss attributable to TCI Ventures Group
                 common stockholders per common share for the period from the
                 TCI Ventures Exchange to December 31, 1997 was computed by
                 dividing net loss attributable to TCI Ventures Group common
                 stockholders by the weighted average number of common shares
                 outstanding of TCI Ventures Group Stock during the period, as
                 adjusted for the effect of the Ventures Stock Dividend (410
                 million). Potential common shares were not included in the
                 computation of weighted average shares outstanding because
                 their inclusion would be anti-dilutive.

                 At December 31, 1997, there were 35 million potential common
                 shares consisting of fixed and nonvested performance awards 
                 and convertible securities that could potentially dilute 
                 future EPS calculations in periods of net income. Such 
                 potential common share amount does not take into account the
                 assumed number of shares that would be repurchased by the 
                 Company upon the exercise of the fixed and nonvested 
                 performance awards. After giving consideration to the effect 
                 of the Ventures Stock Dividend, no material changes in the 
                 weighted average outstanding shares or potential common shares 
                 occurred after December 31, 1997.


                                                                     (continued)

                                       70
<PAGE>   72

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(4)      Supplemental Disclosures to Consolidated Statements of Cash Flows

         Cash paid for interest was $1,183 million, $1,056 million and $965
         million for the years ended December 31, 1997, 1996 and 1995,
         respectively. Cash paid for income taxes was $141 million, $41 million,
         and $63 million in 1997, 1996 and 1995, respectively. In addition, the
         Company received income tax refunds amounting to $36 during the year
         ended December 31, 1997.

         Significant noncash investing and financing activities are reflected in
         the following table. See also note 8 for the impact of the spin-off of
         TCI Satellite Entertainment, Inc.

<TABLE>
<CAPTION>
                                                                                         Years ended
                                                                                         December 31,
                                                                          ------------------------------------------
                                                                             1997            1996            1995
                                                                          ----------      ----------      ----------
                                                                                       amounts in millions
<S>                                                                       <C>                 <C>             <C>    
          Cash paid for acquisitions:
              Fair value of assets acquired                               $   (1,857)         (5,064)         (3,582)
              Liabilities assumed, net of current assets                         720           1,811             445
              Deferred tax liability recorded in acquisitions                    145           1,379           1,083  
              Minority interests in equity of acquired entities                   93             113             (49)  
              Common stock and preferred stock issued in acquisitions          1,060             457           1,615
              Preferred stock of subsidiaries issued in acquisitions              --             640              --
              TCI common stock and preferred stock held by acquired
                company                                                         (484)             --              --
                                                                          ----------      ----------      ----------
                Cash paid for acquisitions                                $     (323)           (664)           (488)
                                                                          ==========      ==========      ==========

          Cash received in exchanges:
              Aggregate cost basis of assets acquired                     $     (392)           (709)            (10)
              Historical cost of assets exchanged                                399             754              13
              Gain recorded on exchange of assets                                 11              21               8
                                                                          ----------      ----------      ----------
                                                                          $       18              66              11
                                                                          ==========      ==========      ==========

          Costs of distribution agreements                                $      173              --              --
                                                                          ==========      ==========      ==========
          Exchange of consolidated subsidiaries for note receivable
              and equity investments                                      $       --             894              --
                                                                          ==========      ==========      ==========
</TABLE>

         The Company ceased to consolidate Flextech p.l.c. ("Flextech") and
         Cablevision S.A. ("Cablevision") and began to account for Flextech and
         Cablevision using the equity method of accounting, effective January 1,
         1997 and October 1, 1997, respectively. The effects of changing the
         method of accounting for the Company's ownership interest in Flextech
         and Cablevision from the consolidation method to the equity method are
         summarized below (amounts in millions):

<TABLE>
<S>                                                                            <C>           
           Assets (other than cash and cash equivalents) reclassified to 
             equity investments                                                $          596
           Liabilities reclassified to equity investments                                (484)
           Minority interests in equity of subsidiaries reclassified to
                equity investments                                                       (151)
                                                                               --------------
           Decrease in cash and cash equivalents                               $          (39)
                                                                               ==============
</TABLE>


                                                                     (continued)

                                       71
<PAGE>   73

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(5)      Investments in Affiliates

         The Company has various investments accounted for under the equity
         method. The following table includes the Company's carrying value and
         percentage ownership of the more significant investments at December
         31, 1997.

<TABLE>
<CAPTION>
                                                                            December 31, 1997
                                                                         -----------------------
                                                                          Percentage   Carrying
                                                                          Ownership      Value
                                                                         ------------  ---------
                                                                           amounts in millions
<S>                                                                        <C>           <C>   
         Sprint Spectrum Holding Company, L.P., MinorCo, L.P. 
              and PhillieCo, L.P.                                          30% - 35%     607
         Telewest Communications plc ("Telewest")                            26.6%       324
         Teleport Communications Group, Inc. ("TCG")                          28%        295
         InterMedia Capital Partners IV, L.P. ("InterMedia IV")
              and InterMedia Capital Management IV, L.P. ("ICM IV")          48.7%       262
         Flextech                                                            36.8%       261
         Cablevision                                                         26.2%       239
         BDTV INC. and BDTV II, INC                                           99%        229
         Various foreign equity investments (other than
              Telewest, Flextech and Cablevision)                           various      213
         QVC, Inc.                                                           42.6%       134
         Home Shopping Network, Inc. ("HSN")                                 19.9%       119
</TABLE>

         Summarized unaudited combined financial information for affiliates is
         as follows:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                           ---------------------------
                                                              1997             1996
                                                           -----------     -----------
                    Combined Financial Position                  amounts in millions
                    ---------------------------
<S>                                                        <C>                   <C>  
                       Property and equipment, net         $     6,478           4,920
                       Franchise costs, net                      2,993           3,913
                       Other assets, net                        17,658          13,362
                                                           -----------     -----------
                         Total assets                      $    27,129          22,195
                                                           ===========     ===========

                       Debt                                $    14,245           8,969
                       Other liabilities                         5,496           5,787
                       Owners' equity                            7,388           7,439
                                                           -----------     -----------

                          Total liabilities and equity     $    27,129          22,195
                                                           ===========     ===========
</TABLE>


                                                                     (continued)

                                       72
<PAGE>   74

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                Years ended December 31,
                                                       ------------------------------------------
                                                          1997            1996            1995
                                                       ----------      ----------      ----------
                    Combined Operations                           amounts in millions
                    -------------------
<S>                                                    <C>                  <C>             <C>  
                       Revenue                         $    8,207           6,088           4,619
                       Operating expenses                  (8,219)         (5,576)         (4,001)
                       Depreciation and
                           amortization                    (1,485)         (1,070)           (588)
                                                       ----------      ----------      ----------

                           Operating income (loss)         (1,497)           (558)             30

                       Interest expense                      (857)           (615)           (373)
                       Other, net                            (447)           (354)           (153)
                                                       ----------      ----------      ----------

                           Net loss                    $   (2,801)         (1,527)           (496)
                                                       ==========      ==========      ==========
</TABLE>

         The Company is a partner in a series of partnerships formed to engage
         in the business of providing wireless communications services, using
         the radio spectrum for broadband personal communications services
         ("PCS"), to residential and business customers nationwide, using the
         "Sprint" brand (the "PCS Ventures"). The PCS Ventures include Sprint
         Spectrum Holding Company, L.P. ("Sprint Spectrum") and MinorCo, L.P.
         (collectively, "Sprint PCS" or the "Sprint PCS Partnerships") and
         PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS
         Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast
         Corporation, Cox Communications, Inc. ("Cox") and the Company. The
         partners of PhillieCo are subsidiaries of Sprint, Cox and the Company.
         The Company has a 30% partnership interest in each of the Sprint PCS
         Partnerships and a 35% interest as a partner in PhillieCo. During the
         years ended December 31, 1997 and 1996, the PCS Ventures accounted for
         $493 million and $167 million, respectively, of the Company's share of
         affiliate losses. The 1996 amount includes $34 million related to prior
         periods.

                                                                     (continued)

                                       73
<PAGE>   75

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         From inception through December 1997, the four partners have
         contributed approximately $4 billion to the Sprint PCS Partnerships (of
         which the Company contributed an aggregate of approximately $1.3
         billion). The remaining capital that the Sprint PCS Partnerships will
         require to fund the construction and operation of the PCS systems and
         the commitments made to its affiliates will be substantial. The
         partners had agreed in forming the Sprint PCS Partnerships to
         contribute up to an aggregate of approximately $4.2 billion of equity
         thereto, from inception through fiscal 1999, subject to certain
         requirements. The Company expects that the remaining approximately $200
         million of such amount (of which the Company's share is approximately
         $60 million) will be contributed by the end of the second quarter of
         1998 (although there can be no assurance that any additional capital
         will be contributed). The Company expects that the Sprint PCS
         Partnerships will require additional equity thereafter.

         Pursuant to an agreement entered into in connection with certain
         financings by Sprint Spectrum, under certain circumstances the partners
         in Sprint Spectrum may be required to make additional contributions to
         Sprint Spectrum to fund projected cash shortfalls to the extent that
         the amount of the partners' aggregate contributions to Sprint Spectrum
         (exclusive of certain amounts, including amounts invested in certain
         affiliates of Sprint Spectrum), following December 31, 1995 are less
         than $1.0 billion.

         Sprint PCS's business plan will require additional capital financing
         prior to the end of 1998. Sources of funding for Sprint PCS's capital
         requirements may include vendor financing, public offerings or private
         placements of equity and/or debt securities, commercial bank loans
         and/or capital contributions from the Sprint PCS partners. However,
         there can be no assurance that any additional financing can be obtained
         on a timely basis, on terms acceptable to Sprint PCS or the Sprint PCS
         partners and within the limitations contained in the agreements
         governing Sprint PCS's existing debt.

         Additionally, the proposed budget for 1998 has not yet been approved by
         the Sprint PCS partnership board, although the board has authorized
         management to operate Sprint PCS in accordance with such budget. The
         Sprint PCS partners may mutually agree to make additional capital
         contributions. However, the Sprint PCS partners have no such obligation
         in the absence of an approved budget, and there can be no assurance the
         Sprint PCS partners will reach such an agreement or approve the 1998
         proposed budget. In addition, the failure by the Sprint PCS partners to
         approve a business plan may impair the ability of Sprint PCS to obtain
         required financing. Failure to obtain any such additional financing or
         capital contributions from the Sprint PCS partners could result in the
         delay or abandonment of Sprint PCS's development and expansion plans
         and expenditures, the failure to meet regulatory requirements or other
         potential adverse consequences.

                                                                     (continued)

                                       74
<PAGE>   76

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Furthermore, the fact that the proposed budget for Sprint PCS for
         fiscal 1998 has not yet been approved by the Sprint PCS partnership
         board has resulted in the occurrence of a "Deadlock Event" under the
         Sprint PCS partnership agreement as of January 1, 1998. Under the
         Sprint PCS partnership agreement, if one of the Sprint PCS partners
         refers the budget issue to the chief executive officers of the
         corporate parents of the Sprint PCS partners for resolution pursuant to
         specified procedures and the issue remains unresolved, buy/sell
         provisions would be triggered, which may result in the purchase by one
         or more of the Sprint PCS partners of the interests of the other Sprint
         PCS partners, or, in certain circumstances, liquidation of Sprint PCS.
         Discussions among the Sprint PCS partners about restructuring their
         interests in Sprint PCS in lieu of triggering such buy/sell procedures
         are ongoing. However, there is no certainty the discussions will result
         in a change to the partnership structure or will avert the triggering
         of the resolution and buy/sell procedures referred to above or a
         liquidation of Sprint PCS.

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

         During 1997, TCG issued approximately 6.6 million shares of its Class A
         common stock for certain acquisitions. The total consideration paid by
         TCG through the issuance of common stock for such acquisitions was
         approximately $123 million. In addition, effective November 5, 1997,
         TCG consummated a public offering of 17.2 million shares of its Class A
         common stock. Of the 17.2 million shares, 7.3 million shares were
         offered by TCG and 9.9 million shares were offered by MediaOne of
         Delaware, Inc. (formerly Continental Cablevision, Inc., "MediaOne").
         TCG did not receive any proceeds from the sale of shares by MediaOne,
         which represented all of MediaOne's interest in TCG. TCG received net
         proceeds from its sale of shares pursuant to the above offering of
         $317.6 million (after deducting expenses and fees). As a result of the
         above transactions, the Company's ownership interest in TCG decreased
         from 31% to 28%. In connection with the dilution of the Company's
         ownership interest in TCG, the Company recognized non-cash gains in
         1997 aggregating $112 million (before deducting deferred income tax
         expense of approximately $43 million).

         In January 1998, TCG entered into certain agreements pursuant to which
         it agreed to be acquired by AT&T Corporation ("AT&T"). Upon
         consummation of such merger, TCI would receive in exchange for all of
         its interest in TCG, approximately 46.95 million shares of AT&T common
         stock, which shares would be attributed to the TCI Ventures Group. The
         transaction is subject to a number of regulatory and other conditions,
         accordingly, there can be no assurance that such transaction will be
         consummated on the terms contemplated by the parties, or at all.

                                                                     (continued)

                                       75
<PAGE>   77

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         In July 1996, the Company completed a series of transactions that
         resulted in the transfer of all or part of the Company's ownership
         interests in certain cable television systems to InterMedia IV in
         exchange for a 49% limited partnership interest in InterMedia IV and
         assumed debt of $120 million. Simultaneously, the Company received a
         cable television system and cash from InterMedia IV in exchange for a
         cable television system that had been recently acquired by the Company.
         The Company recognized no gain or loss in connection with the
         above-described transactions. The $225 million excess of the Company's
         investment in InterMedia IV over the Company's share of the partners'
         capital of InterMedia IV is being amortized over an estimated useful
         life of 20 years. Including such amortization, the Company's share of
         InterMedia IV's losses was $46 million and $16 million during the years
         ended December 31, 1997 and 1996, respectively.

         ICM IV owns a 1.12% limited partnership interest in InterMedia IV. The
         Company acquired its limited partnership interest in ICM IV in August
         1997 pursuant to the transactions described in note 13.

         As of April 29, 1996, Liberty Media Group, The News Corporation Limited
         ("News Corp.") and Tele-Communications International, Inc., a
         majority-owned subsidiary of the Company ("TINTA"), formed two sports
         programming ventures. In the United States, Liberty Media Group and
         News Corp. formed Fox/Liberty Networks LLC ("Fox Sports") into which
         Liberty Media Group contributed interests in its national and regional
         sports networks and into which News Corp. contributed its fx cable
         network and certain other assets. Liberty Media Group received a 50%
         interest in Fox Sports and a distribution of $350 million in cash. No
         gain or loss was recognized as the cash distribution approximated the
         carrying value of the assets contributed.

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

         During the third quarter of 1997, Fox Sports International distributed
         (i) its 35% interest in Torneos to Liberty/TINTA and (ii) certain
         Australian sports rights to News Corp.

                                                                     (continued)

                                       76
<PAGE>   78

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

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

         As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty
         Media Group and therefore, the financial results of HSN are no longer
         included in the combined financial results of Liberty Media Group.
         Although Liberty Media Group no longer possesses voting control over
         HSN, it continues to have an indirect equity interest in HSN through
         its ownership of the equity securities of BDTV-I and BDTV-II as well as
         a direct interest in HSN which would be exchangeable into shares of
         Silver King. Accordingly, HSN, BDTV-I and BDTV-II are accounted for
         using the equity method. Subsequent to the HSN Merger, the surviving
         corporation was renamed HSN, Inc. ("HSNI").

                                                                     (continued)

                                       77
<PAGE>   79

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         In February 1998, pursuant to an Investment Agreement among Universal
         Studios, Inc. ("Universal"), HSNI, HSN and Liberty Media Group, dated
         as of October 1997 and amended and restated as of December 1997 (the
         "Investment Agreement"), HSNI consummated a transaction (the "Universal
         Transaction") through which USA Networks Partners, Inc., a subsidiary
         of Universal, sold its 50% interest in USA Networks, a New York general
         partnership ("USA Networks") to HSNI and Universal contributed the
         remaining 50% interest in USA Networks and its domestic television
         production and distribution operations to HSNI. In connection with the
         Universal Transaction, Universal, HSNI, HSN and Liberty Media Group
         became parties to a number of other agreements relating to, among other
         things, (i) the management of HSNI, (ii) the purchase and sale or other
         transfer of voting securities of HSNI, including securities convertible
         or exchangeable for voting securities of HSNI, and (iii) the voting of
         such securities.

         At the closing of the Universal Transaction, Universal (i) was issued
         3,190,000 shares of HSNI's Class B Common Stock, 3,560,000 shares of
         HSNI's Common Stock and 54,327,170 common equity shares ("LLC Shares")
         of USANi LLC, a limited liability company ("USANi LLC") formed to hold
         all of the businesses of HSNI and its subsidiaries, except for its
         broadcasting business and its equity interest in Ticketmaster and (ii)
         received a cash payment of $1.3 billion. Pursuant to an Exchange
         Agreement relating to the LLC Shares (the "LLC Exchange Agreement"),
         36,810,000 of the LLC Shares issued to Universal are each exchangeable
         for one share of HSNI's Class B Common Stock and the remainder of the
         LLC Shares issued to Universal are each exchangeable for one share of
         HSNI's Common Stock.

         At the closing of the Universal Transaction, Liberty Media Group was
         issued 589,161 shares of HSNI's Class B Common Stock, representing all
         of the remaining shares of HSNI's Class B Common Stock issuable
         pursuant to Liberty Media Group's Contingent Right. Of such shares,
         400,000 shares of Class B Common Stock were contributed to BDTV IV Inc.
         ("BDTV-IV"), a newly-formed entity having substantially the same terms
         as BDTV-I and BDTV-II (with the exception of certain transfer
         restrictions). In addition, Liberty Media Group purchased 5 LLC Shares
         at the closing of the Universal Transaction for an aggregate purchase
         price of $200. Liberty Media Group has also agreed to contribute $300
         million in cash to USANI LLC by June 30, 1998 in exchange for an
         aggregate of 7,500,000 LLC Shares and/or shares of HSNI's Common Stock.
         Liberty Media Group's cash purchase price will increase at an annual
         interest rate of 7.5% beginning from the date of the closing of the
         Universal Transaction through the date of Liberty Media Group's
         purchase of such securities (the "Liberty Closing"). Pursuant to the
         LLC Exchange Agreement, each LLC Share issued or to be issued to
         Liberty Media Group is exchangeable for one share of HSNI's Common
         Stock.

                                                                     (continued)

                                       78
<PAGE>   80

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         In connection with the Universal Transaction, each of Universal and
         Liberty Media Group has been granted a preemptive right with respect to
         future issuances of HSNI's capital stock, subject to certain
         limitations, to maintain their respective percentage ownership
         interests in HSNI that they had immediately prior to such issuances. In
         addition, with respect to issuances of HSNI's capital stock in certain
         specified circumstances, Universal will be obligated to maintain the
         percentage ownership interest in HSNI that it had immediately prior to
         such issuances. In addition, HSNI, Universal and Liberty Media Group
         have agreed that if the parties agree prior to June 30, 1998 (the date
         of mandatory cash contributions) on the identity of assets owned by
         Liberty Media Group that are to be contributed to the LLC and the form
         and terms of such contributions, Liberty Media Group will contribute
         those assets in exchange for LLC Shares valued at $40 per share. If
         Liberty Media Group contributes such additional assets, Liberty Media
         Group has the right to elect to reduce the number of LLC Shares it is
         obligated to purchase for cash by an amount equal to 45% of the value
         of the assets contributed by Liberty Media Group. If Liberty Media
         Group exercises the option to contribute assets and thereby reduces its
         cash contribution amount, Universal will be required to purchase a
         number of additional LLC shares (valued at $40 per share) equal to the
         value of Liberty Media Group's asset contribution, less the amount by
         which Liberty Media Group's asset contribution is applied towards
         reducing Liberty Media Group's cash contribution. In addition,
         Universal may purchase an additional number of LLC shares (valued at
         $40 per share), equal to the value of Liberty Media Group's asset
         contribution which is not applied towards reducing Liberty Media
         Group's cash contribution.

         Telewest is a company that is currently operating and constructing
         cable television and telephone systems in the United Kingdom ("UK").
         Telewest was formed on October 3, 1995 upon the merger (the "Telewest
         Merger") of Telewest Communications plc ("Telewest Communications")
         with SBC CableComms (UK). Prior to the Telewest Merger, the Company had
         an effective ownership interest of approximately 36% in Telewest
         Communications. As a result of the dilution of the Company's ownership
         interest in Telewest that occurred in connection with the Telewest
         Merger, the Company recognized a gain of approximately $165 million
         (before deducting deferred income taxes of $58 million). Telewest
         accounted for $145 million, $109 million and $70 million of the
         Company's share of its affiliates' losses during the years ended
         December 31, 1997, 1996 and 1995, respectively.

                                                                     (continued)

                                       79
<PAGE>   81

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         In January 1997, the Company's voting interest in Flextech, a company
         engaged in the distribution and production of programming for
         multichannel video distribution systems in the United Kingdom ("UK"),
         was reduced to 50% and the Company ceased to consolidate Flextech and
         began to account for Flextech using the equity method of accounting. In
         April 1997, Flextech and BBC Worldwide Limited formed two separate
         joint ventures (the "BBC Joint Ventures") and entered into certain
         related transactions. The consummation of the BBC Joint Ventures and
         related transactions resulted in, among other things, a reduction of
         the Company's economic ownership interest in Flextech from 46.2% to
         36.8%. The Company continues to maintain a voting interest in Flextech
         of approximately 50%. As a result of such dilution, the Company
         recorded a $152 million increase to the carrying value of the Company's
         investment in Flextech, a $53 million increase to deferred income tax
         liability and a $66 million increase to equity and a $33 million
         increase to minority interests in consolidated subsidiaries. No gain
         was recognized in the statement of operations due primarily to certain
         contingent obligations of the Company with respect to one of the BBC
         Joint Ventures. Flextech accounted for $16 million of the Company's
         share of its affiliates' losses during the year ended December 31,
         1997.

         On April 25, 1995, TINTA acquired a 51% ownership interest in
         Cablevision, an entity engaged in the multi-channel video distribution
         business in Buenos Aires, Argentina, for an adjusted purchase price of
         $282.0 million, before liabilities assumed. The purchase price was paid
         with cash consideration of $195.2 million (including a previously paid
         $20 million deposit) and TINTA's issuance of $86.8 million principal
         amount of secured negotiable promissory notes payable to the selling
         shareholders.

         On October 9, 1997, TINTA sold a portion of its 51% interest in
         Cablevision to unaffiliated third parties (the "Buyers") for cash
         proceeds of $120 million. In addition, on October 9, 1997, Cablevision
         issued 3,541,829 shares of stock in the aggregate to the Buyers for $80
         million in cash and notes receivable with an aggregate principal amount
         of $240 million, plus accrued interest at LIBOR, due within the earlier
         of two years or at the request of Cablevision's board of directors. The
         above transactions, (collectively, the "Cablevision Sale") reduced
         TINTA's interest in Cablevision to 26.24%. TINTA recognized a gain of
         $49 million on the Cablevision Sale. As a result of the Cablevision
         Sale, effective October 1, 1997, TINTA ceased to consolidate
         Cablevision and began to account for Cablevision using the equity
         method of accounting. Cablevision accounted for $3 million of the
         Company's share of its affiliates' losses during the year ended
         December 31, 1997.

         In addition to Telewest, Flextech and Cablevision, the Company has
         other less significant equity method investments in video distribution
         and programming businesses located in the UK, other parts of Europe,
         Asia, Latin America and certain other foreign countries. In the
         aggregate, such other foreign equity method investments accounted for
         $84 million, $70 million and $54 million of the Company's share of its
         affiliates' losses in 1997, 1996 and 1995, respectively.

                                                                     (continued)

                                       80
<PAGE>   82

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         During the year ended December 31, 1997, TSX Corporation ("TSX"), an
         equity affiliate of the Company, and Antec Corporation ("Antec) entered
         into a business combination with Antec being the surviving entity. In
         connection with such transaction, the Company recognized a $29 million
         gain (before deducting deferred income tax expense of approximately $12
         million) representing the difference between the fair value of the
         Antec shares received ($52 million) and the carrying value of the
         Company's investment in TSX at the date of the transaction ($23
         million). Upon completion of this transaction, the Company's ownership
         interest decreased from an approximate 45% interest in TSX to an
         approximate 16% ownership interest in Antec. The Company accounts for
         its investment in Antec using the cost method.

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

(6)      Investment in Time Warner

         On October 10, 1996, Time Warner and Turner Broadcasting System, Inc.
         ("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby TBS
         shareholders received 0.75 of a Time Warner common share for each TBS
         Class A and Class B common share held, and each holder of TBS Class C
         preferred stock received 0.80 of a Time Warner common share for each of
         the 6 shares of TBS Class B common stock into which each share of Class
         C preferred stock could have been converted.

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

                                                                     (continued)

                                       81
<PAGE>   83

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         In connection with the TBS/Time Warner Merger, Liberty Media Group
         received approximately 50.6 million shares of the TW Exchange Stock in
         exchange for its TBS holdings. As a result of the TBS/Time Warner
         Merger, Liberty Media Group recognized a pre-tax gain of approximately
         $1.5 billion in the fourth quarter of 1996. Additionally, Liberty Media
         Group and Time Warner entered into, among other agreements, an
         agreement providing for the grant to Time Warner of an option (the
         "Contract Option") to enter into a contract with Southern Satellite
         Systems, Inc. ("Southern"), a wholly-owned subsidiary of Liberty Media
         Group which distributes the TBS SuperStation ("WTBS") signal in the
         United States and Canada, pursuant to which Southern would provide Time
         Warner with certain uplinking and distribution services relating to
         WTBS and would assist Time Warner in converting WTBS from a
         superstation into a copyright paid cable programming service. On June
         24, 1997, under the new agreement, Liberty Media Group granted Time
         Warner an option, expiring October 10, 2002, to acquire the business of
         Southern and certain of its subsidiaries (together with Southern, the
         "Southern Business") through a purchase of assets (the "Southern
         Option"). Liberty Media Group received 6.4 million shares of TW
         Exchange Stock valued at $306 million in consideration for the grant.
         Such amount has been reflected as a deferred option premium in the
         accompanying December 31, 1997 consolidated balance sheet. In September
         1997, Time Warner exercised the Southern Option. Pursuant to the
         Southern Option, Time Warner acquired the Southern Business, effective
         January 1, 1998, for $213.3 million, which was paid in cash together
         with the assumption of certain liabilities on January 2, 1998.

         As security for borrowings under one of its credit facilities, Liberty
         Media Group has pledged a portion of its TW Exchange Stock. At December
         31, 1997 such pledged portion had an aggregate fair value of
         approximately $1.4 billion.

(7)      Acquisitions and Dispositions

         On March 4, 1998, the Company contributed to Cablevision Systems
         Corporation ("CSC") certain of its cable television systems serving
         approximately 830,000 basic customers to CSC in exchange for
         approximately 12.2 million newly issued CSC Class A shares. Such shares
         represent an approximate 33% equity interest in CSC's total outstanding
         shares and an approximate 9% voting interest in CSC in all matters
         except for the election of directors, in which case the Company has an
         approximate 47% voting interest in the election of one fourth of CSC's
         directors. CSC also assumed approximately $669 million of TCI's debt.
         The Company has also entered into letters of intent with CSC which
         provide for the Company to acquire a cable system in Michigan and an
         additional 3% of CSC's Class A shares and for CSC to (i) acquire cable
         systems serving approximately 250,000 customers in Connecticut and (ii)
         assume $110 million of the Company's debt. The ability of the Company
         to sell or increase its investment in CSC is subject to certain
         restrictions and limitations set forth in a stockholders agreement with
         CSC. The Company will account for its approximate 33% interest in CSC
         under the equity method.

                                                                     (continued)

                                       82
<PAGE>   84

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Including the above-described CSC transactions and another transaction
         that closed in February 1998, the Company, as of February 28, 1998,
         has, since January 1, 1997, contributed, or signed agreements or
         letters of intent to contribute within the next twelve months, certain
         cable television systems (the "Contributed Cable Systems") serving
         approximately 3.8 million basic customers to joint ventures (the
         "Contribution Transactions") in which the Company will retain
         non-controlling ownership interests. Following the completion of the
         Contribution Transactions, the Company will no longer consolidate the
         Contributed Cable Systems. Accordingly, it is anticipated that the
         completion of the Contribution Transactions, as currently contemplated,
         will result in aggregate estimated reductions (based on 1997 amounts)
         to debt, annual revenue and annual operating income before
         depreciation, amortization and stock compensation of $4.6 billion, $1.7
         billion and $783 million, respectively. No assurance can be given that
         any of the pending Contribution Transactions will be consummated.

         On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of
         Liberty Media Group, which held non-voting class C common stock of
         International Family Entertainment, Inc. ("IFE") ("Class C Stock") and
         $23 million of IFE 6% convertible secured notes due 2004, convertible
         into Class C Stock, ("Convertible Notes"), contributed its Class C
         Stock and Convertible Notes to Fox Kids Worldwide, Inc. ("FKW") in
         exchange for a new series of 30 year non-convertible 9% preferred stock
         of FKW with a stated value of $345 million (the "FKW Preferred Stock").
         As a result of the exchange, Liberty Media Group recognized a pre-tax
         gain of approximately $304 million.

         Effective July 31, 1997, a wholly-owned subsidiary of TCI merged with
         and into Kearns-Tribune Corporation ("Kearns-Tribune") . The merger was
         valued at $808 million. TCI exchanged 47.2 million shares of TCI Group
         Series A Stock for shares of Kearns-Tribune which held 17.9 million
         shares of TCI Group Stock and 10.1 million shares of Liberty Group
         Stock. The merger of Kearns-Tribune has been accounted for by the
         purchase method. Accordingly, the results of operations of
         Kearns-Tribune Corporation have been combined with those of the Company
         since the date of acquisition, and the Company recorded
         Kearns-Tribune's assets and liabilities at fair value. Assuming the
         acquisition of Kearns-Tribune had occurred on January 1, 1996, the
         Company's pro forma results of operations would not have been
         materially different from the Company's historical results of
         operations for the years ended December 31, 1997 and 1996.

         In January 1997, the Company acquired the 50% ownership interest in TKR
         Cable Company ("TKR Cable") that the Company did not previously own and
         certain additional assets for aggregate consideration of approximately
         $970 million. The Company issued approximately 16 million shares of TCI
         Group Stock, assumed $584 million of TKR Cable's debt and paid cash of
         $88 million and shares of Time Warner common stock valued at $41
         million upon consummation of such acquisition. Prior to the acquisition
         date, the Company accounted for its 50% interest in TKR Cable under the
         equity method. This acquisition has been treated as a step acquisition
         for accounting purposes. Accordingly, the results of operations of TKR
         Cable have been combined with those of TCI Group since the date of
         acquisition and TCI Group's aggregate cost basis in TKR Cable has been
         allocated to TKR Cable's assets and liabilities based on their fair
         values. Assuming the acquisition of TKR Cable had occurred on January
         1, 1996, the Company's pro forma results of operations would not have
         been materially different from the Company's historical results of
         operations for the years ended December 31, 1997 and 1996.

                                                                     (continued)

                                       83
<PAGE>   85

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

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

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

         The Viacom Acquisition has been accounted for by the purchase method.
         Accordingly, the results of operations of TCI Pacific have been
         consolidated with those of the Company since the date of acquisition,
         and the Company recorded TCI Pacific's assets and liabilities at fair
         value. On a pro forma basis, the Company's revenue and TCI Group's net
         loss and net loss per share would have been increased by $280 million,
         $55 million and $.08, respectively, for the year ended December 31, 
         1996 if TCI Pacific had been consolidated with the Company since
         January 1, 1996.

                                                                     (continued)

                                       84
<PAGE>   86

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         As of January 26, 1995, TCI, TCIC and TeleCable Corporation
         ("TeleCable") consummated a transaction, whereby TeleCable was merged
         into TCIC. The aggregate $1.6 billion purchase price was satisfied by
         TCIC's assumption of approximately $300 million of TeleCable's net
         liabilities and the issuance to TeleCable's shareholders of
         approximately 42 million shares of TCI Class A common stock and 1
         million shares of Series D Preferred Stock with an aggregate initial
         liquidation value of $300 million (see note 10).

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

         Through December 4, 1996, the Company had an investment in a direct
         broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"),
         which the Company accounted for by the equity method. Primestar
         provides programming and marketing support to each of its cable
         partners who provide satellite television service to their customers.
         On December 4, 1996, the Company distributed (the "Satellite Spin-off")
         to the holders of shares of TCI Group Stock all of the issued and
         outstanding common stock of TCI Satellite Entertainment, Inc.
         ("Satellite"). At the time of the Satellite Spin-off, Satellite's
         assets and operations included the Company's interest in Primestar, the
         Company's business of distributing Primestar programming and two
         communications satellites. As a result of the Satellite Spin-off,
         Satellite's operations are no longer consolidated with the Company's.
         In addition, the Satellite Spin-off effected a change in the conversion
         rate for each of the Company's equity and debt securities that are
         convertible into TCI Group Series A Stock. See notes 9, 10 and 12.

         Summarized financial information of Satellite as of December 4, 1996
         and from January 1, 1996 through December 4, 1996 is as follows
         (amounts in millions):

<TABLE>
<CAPTION>
             Financial Position
             ------------------
<S>                                                          <C>       
                Cash, receivables and other assets           $      104
                Investment in Primestar                              32
                Property and equipment, net                       1,111
                                                             ----------
                                                             $    1,247

                Accounts payable and accrued liabilities     $       60
                Due to Primestar                                    458
                Due to TCI                                          324
                Equity                                              405
                                                             ----------
                                                             $    1,247
             Operations
             ----------
                Revenue                                      $      377
                Operating expenses                                 (373)
                Depreciation                                       (166)
                                                             ----------

                  Loss before income tax benefit                   (162)

                Income tax benefit                                   53
                                                             ----------
                  Net loss                                   $     (109)
                                                             ==========
</TABLE>

                                                                     (continued)


                                       85
<PAGE>   87

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(9)      Debt

         Debt is summarized as follows:

<TABLE>
<CAPTION>
                                                  Weighted average            December 31,
                                                   interest rate at   -----------------------------
                                                  December 31, 1997        1997            1996
                                                  -----------------   ------------     ------------
                                                                       amounts in millions
<S>                                                      <C>          <C>                     <C>  
           Debt of subsidiaries:
               Notes payable (a)                         8.0%         $      9,017            9,308
               Bank credit facilities (b)                6.8%                5,233            4,813
               Commercial paper                          6.3%                  533              638
               Convertible notes (c)                     9.5%                   40               43
               Other debt, at varying rates                                    427              124
                                                                      ------------     ------------
                                                                      $     15,250           14,926
                                                                      ============     ============
</TABLE>

         (a)      During the year ended December 31, 1997, the Company purchased
                  in the open market certain notes payable which had an
                  aggregate principal balance of $409 million and fixed interest
                  rates ranging from 8.75% to 10.13% (the "1997 Purchases"). In
                  connection with the 1997 Purchases, the Company recognized a
                  loss on early extinguishment of debt of $39 million. Such loss
                  related to prepayment penalties amounting to $33 million and
                  the retirement of deferred loan costs.

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

         (b)      At December 31, 1997, subsidiaries of the Company had
                  approximately $2.6 billion in unused lines of credit,
                  excluding amounts related to lines of credit which provide
                  availability to support commercial paper.

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


                                                                     (continued)

                                       86
<PAGE>   88

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         (c)      The convertible notes, which are stated net of unamortized
                  discount of $166 million and $178 million at December 31, 1997
                  and 1996, respectively, mature on December 18, 2021. The notes
                  require, so long as conversion of the notes has not occurred,
                  an annual interest payment through 2003 equal to 1.85% of the
                  face amount of the notes. During the year ended December 31,
                  1997, certain of these notes were converted, pursuant to their
                  existing terms, into 2,533,116 shares of TCI Group Series A
                  Stock, 1,448,341 shares of Liberty Group Series A Stock and
                  256,484 shares of Series A Common Stock, $1.00 par value per
                  share, of Satellite ("Satellite Series A Common Stock") and
                  63,432 shares of TCI Ventures Group Series A Stock. At
                  December 31, 1997, the notes were convertible, at the option
                  of the holders, into an aggregate of 24,163,259 shares of TCI
                  Group Series A Stock, 19,416,889 shares of Liberty Group
                  Series A Stock, 20,711,364 shares of TCI Ventures Group Series
                  A Stock and 3,451,897 shares of Satellite Series A Common
                  Stock.

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

         Also, as security for borrowings under another of the Company's credit
         facilities, the Company has pledged a portion of its Time Warner common
         stock with an estimated market value of $1.4 billion.

         The fair value of the debt of the Company's subsidiaries is estimated
         based on the quoted market prices for the same or similar issues or on
         the current rates offered to the Company for debt of the same remaining
         maturities. At December 31, 1997, the fair value of the Company's debt
         was $16,037 million, as compared to a carrying value of $15,250 million
         on such date.

         In order to achieve the desired balance between variable and fixed rate
         indebtedness, the Company has entered into various Interest Rate Swaps
         pursuant to which it (i) paid fixed interest rates (the "Fixed Rate
         Agreements") and received variable interest rates through December 1997
         and (ii) pays variable interest rates (the "Variable Rate Agreements")
         and receives fixed interest rates ranging from 4.8% to 9.7% on notional
         amounts of $2,400 million at December 31, 1997. During the years ended
         December 31, 1997, 1996 and 1995, the Company's net payments pursuant
         to the Fixed Rate Agreements were $7 million, $14 million and $13
         million, respectively; and the Company's net receipts (payments)
         pursuant to the Variable Rate Agreements were (less than $1 million),
         $15 million and (less than $1 million), respectively. At December 31,
         1997, all of the Company's Fixed Rate Agreements had expired.

         During the year ended December 31, 1996, the Company terminated certain
         Variable Rate Agreements with an aggregate notional amount of $700
         million. The Company received $16 million upon such terminations. The
         Company will amortize such termination settlement over the remainder of
         the original terms of the terminated Variable Rate Agreements.

                                                                     (continued)

                                       87
<PAGE>   89

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Information concerning the Company's Variable Rate Agreements at
         December 31, 1997 is as follows (dollar amounts in millions):

<TABLE>
<CAPTION>
                                                                                    Amount to be paid
             Expiration                     Interest rate          Notional         (received) upon
               date                         to be received          amount          termination (a)
             ----------                     --------------         --------         -----------------
<S>                                           <C>                <C>                <C>        
           September 1998                     4.8%-5.4%          $       450        $         4
           April 1999                            7.4%                     50                 (1)
           September 1999                        6.4%                    350                 (1)
           February 2000                      5.8%-6.6%                  300                 (2)
           March 2000                         5.8%-6.0%                  675                  1
           September 2000                        5.1%                     75                  2
           March 2027                            9.7%                    300                (15)
           December 2036                         9.7%                    200                 (6)
                                                                 -----------        -----------
                                                                 $     2,400        $       (18)
                                                                 ===========        ===========
</TABLE>

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

         (a)      The estimated amount that the Company would pay or receive to
                  terminate the agreements at December 31, 1997, taking into
                  consideration current interest rates and the current
                  creditworthiness of the counterparties, represents the fair
                  value of the Interest Rate Swaps.

         In addition to the Variable Rate Agreements, the Company entered into
         an Interest Rate Swap in September 1997 pursuant to which it pays a
         variable rate based on the London Interbank Offered Rate ("LIBOR")
         (6.1% at December 31, 1997) and receives a variable rate based on the
         Constant Maturity Treasury Index (6.4% at December 31, 1997) on a
         notional amount of $400 million through September 2000. During the year
         ended December 31, 1997, the Company's net receipts pursuant to such
         agreement were less than $1 million. At December 31, 1997, the Company
         would be required to pay an estimated $3 million to terminate such
         Interest Rate Swap.

         The Company is exposed to credit losses for the periodic settlements of
         amounts due under the Interest Rate Swaps in the event of
         nonperformance by the other parties to the agreements. However, the
         Company does not anticipate that it will incur any material credit
         losses because it does not anticipate nonperformance by the
         counterparties. Further, the Company does not anticipate material
         near-term losses in future earnings, fair values or cash flows
         resulting from derivative financial instruments as of December 31,
         1997.

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

                                                                     (continued)

                                       88
<PAGE>   90

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

<TABLE>
<S>                                    <C>         
                   1998                $       976*
                   1999                      1,001
                   2000                      1,554
                   2001                      1,329
                   2002                      1,292
</TABLE>

                  *  Includes $533 million of commercial paper.

(10)     Redeemable Preferred Stocks

         The conversion rates identified below for the redeemable preferred
         stocks that are convertible into TCI Group Series A Stock were
         adjusted, as applicable, on December 4, 1996 as a result of the
         Satellite Spin-off. See note 8. The conversion rates for the redeemable
         preferred stocks that are convertible into Liberty Group Series A Stock
         and TCI Ventures Group Series A Stock have been adjusted to give effect
         to the 1998 Liberty Stock Dividend and the Ventures Stock Dividend,
         respectively. See note 1.

         Convertible Preferred Stock, Series C. TCI issued 70,575 shares of a
         series of TCI Series Preferred Stock designated "Convertible Preferred
         Stock, Series C," par value $.01 per share, as partial consideration
         for an acquisition by TCI. All of the issued and outstanding shares of
         Series C Preferred Stock were retired on December 31, 1997, with the
         effect that such retired shares have been restored to the status of
         authorized and unissued shares of Series Preferred Stock, and may be
         reissued as shares of another series of Series Preferred Stock but may
         not be reissued as Series C Preferred Stock.

         Series C-TCI Group Preferred Stock. On December 31, 1997, TCI issued
         70,575 shares designated as convertible preferred stock, Series C-TCI
         Group (the "Series C-TCI Group Preferred Stock") as partial
         consideration for retired Series C Preferred Stock. See also Series
         C-Liberty Media Group Preferred Stock below. There were 70,575 shares
         of Series C-TCI Group Preferred Stock authorized and outstanding at
         December 31, 1997.

         Upon the liquidation, dissolution or winding up of TCI, holders of the
         Series C-TCI Group Preferred Stock will be entitled to receive from the
         assets of TCI available for distribution to stockholders an amount in
         cash, per share, equal to the liquidation value of the Series C-TCI
         Group Preferred Stock. The Series C-TCI Group Preferred Stock ranks
         senior to the TCI common stock and the Class B Preferred Stock and on a
         parity with all other currently outstanding classes and series of TCI
         preferred stock as to rights to receive assets upon liquidation,
         dissolution or winding up of the affairs of TCI.

         The Series C-TCI Group Preferred Stock is subject to optional
         redemption by TCI at any time after August 8, 2001, in whole or in
         part, at a redemption price, per share, equal to the liquidation value
         of the Series C-TCI Group Preferred Stock of $2,208.35 per share. The
         Series C-TCI Group Preferred Stock is required to be redeemed by TCI at
         any time on or after August 8, 2001 at the option of the holder, in
         whole or in part (provided that the aggregate liquidation value of the
         shares to be redeemed is in excess of $1 million), in each case at a
         redemption price, per share, equal to the liquidation value.

                                                                     (continued)

                                       89
<PAGE>   91

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         As of December 31, 1997, subject to anti-dilution adjustments, each
         share of Series C-TCI Group preferred Stock is currently convertible,
         at the option of the holder, into 132.86 shares of TCI Group Series A
         Stock. Subject to certain provisions, if the holders of Series C-TCI
         Group Preferred Stock would be entitled to receive upon conversion
         thereof any TCI capital stock that is redeemable or exchangeable at the
         election of TCI ("Series C-TCI Group Redeemable Capital Stock"), and
         all of the outstanding shares or other units of such Series C-TCI Group
         Redeemable Capital Stock are redeemed, exchanged or otherwise acquired
         in full, then, from and after such event (a "Series C-TCI Group
         Redemption Event"), the holders of Series C-TCI Group Preferred Stock
         then outstanding shall be entitled to receive upon conversion of such
         shares, in lieu of shares of such Series C-TCI Group Redeemable Capital
         Stock, the kind and amount of shares of stock and other securities and
         property receivable upon such Series C-TCI Group Redemption Event by a
         holder of the number of shares or units of Series C-TCI Group
         Redeemable Capital Stock into which such shares of Series C-TCI Group
         Preferred Stock could have been converted immediately prior to the
         effectiveness of such Series C-TCI Group Redemption Event (assuming
         that such holder failed to exercise any applicable right of election
         with respect thereto and received per share or unit of such Series
         C-TCI Group Redeemable Capital Stock the kind and amount of stock and
         other securities and property received per share or unit by the holders
         of a plurality of the non-electing shares or units thereof) and,
         thereafter, the holders of the Series C-TCI Group Preferred Stock shall
         have no other conversion rights with respect to such Series C-TCI Group
         Redeemable Capital Stock.

         If TCI distributes the stock of a subsidiary of TCI as a dividend to
         all holders of TCI Group Series A Stock (a "TCI Group Spin Off"), TCI
         shall make appropriate provision so the holders of the Series C-TCI
         Preferred Stock have the right to exchange their shares of Series C-TCI
         Group Preferred Stock on the effective date of the TCI Group Spin Off
         for convertible preferred stock of TCI and convertible preferred stock
         of such subsidiary that together have an aggregate liquidation
         preference equal to the liquidation preference of a share of Series
         C-TCI Group Preferred Stock on the effective date of the TCI Group Spin
         Off and that otherwise each have terms, conditions, designations,
         voting powers, rights on liquidation and other preferences and
         relative, participating, optional or other special rights, and
         qualifications, limitations or restrictions applicable to such
         convertible preferred stock that are identical, or as nearly so as is
         practicable in the judgment of the Board, to those of the Series C-TCI
         Group Preferred Stock for which such convertible preferred stock is to
         be exchanged.

                                                                     (continued)

                                       90
<PAGE>   92

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         In the event an "Exchange Offer" is made by TCI or a subsidiary of TCI
         (the applicable of the foregoing being the "Series C-TCI Group
         Offeror"), the Series C-TCI Group Offeror shall concurrently therewith
         make an equivalent offer to the holders of Series C-TCI Group Preferred
         Stock pursuant to which such holders may tender shares of Series C-TCI
         Group Preferred Stock, based upon the number of shares of TCI Group
         Series A Common Stock into which such tendered shares are then
         convertible (and in lieu of tendering outstanding shares of TCI Group
         Series A Common Stock), together with such other consideration as may
         be required to be tendered pursuant to such Exchange Offer, and receive
         in exchange therefor, in lieu of securities of the Series C-TCI Group
         Offeror offered in such Exchange Offer ("Exchange Securities") (and
         other property, if applicable), convertible preferred stock of the
         issuer of the Exchange Securities with an aggregate liquidation
         preference equal to the aggregate liquidation preference of the shares
         of Series C-TCI Group Preferred Stock exchanged therefor and that
         otherwise has terms, conditions, designations, voting powers, rights on
         liquidation and other preferences and relative, participating, optional
         or other special rights, and qualifications, limitations or
         restrictions applicable to such convertible preferred stock that are
         identical, or as nearly so as is practicable in the judgment of the
         Board, to those of the Series C-TCI Group Preferred Stock for which
         such convertible preferred stock is to be exchanged. For the purposes
         of the foregoing, "Exchange Offer" means an issuer tender offer,
         including, without limitation, one that is effected through the
         distribution of rights or warrants, made to holders of TCI Group Series
         A Stock (or to holders of other stock of TCI receivable by a holder of
         Series C-TCI Group Preferred Stock upon conversion thereof), to issue
         stock of TCI or of a subsidiary of TCI and/or other property to a
         tendering stockholder in exchange for shares of TCI Group Series A
         Stock (or such other stock).

         The holders of Series C-TCI Group Preferred Stock are entitled to vote
         on an as converted basis on all matters submitted to a vote of holders
         of the capital stock of TCI entitled to vote generally on the election
         of directors. Holders of Series C-TCI Group Preferred Stock are not
         entitled to vote as a separate class except as otherwise may be
         required by the Delaware General Corporation Law ("DGCL").

         Series C-Liberty Media Group Preferred Stock. On December 31, 1997, TCI
         issued 70,575 shares designated as convertible preferred stock, Series
         C-Liberty Media Group (the "Series C-Liberty Media Group Preferred
         Stock") as remaining consideration for retired Series C Preferred
         Stock. There were 70,575 shares of Series C-Liberty Media Group
         Preferred Stock authorized and outstanding at December 31, 1997.

         Upon the liquidation, dissolution or winding up of TCI, holders of the
         Series C-Liberty Media Group Preferred Stock will be entitled to
         receive from the assets of TCI available for distribution to
         stockholders an amount in cash, per share, equal to the liquidation
         value of the Series C-Liberty Media Group Preferred Stock. The Series
         C-Liberty Media Group Preferred Stock ranks senior to the TCI common
         stock and the Class B Preferred Stock and on a parity with all other
         currently outstanding classes and series of TCI preferred stock as to
         rights to receive assets upon liquidation, dissolution or winding up of
         the affairs of TCI.

                                                                     (continued)

                                       91
<PAGE>   93

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         The Series C-Liberty Media Group Preferred Stock is subject to optional
         redemption by TCI at any time after August 8, 2001, in whole or in
         part, at a redemption price, per share, equal to the liquidation value
         of the Series C-Liberty Media Group Preferred Stock of $579.31 per
         share. The Series C-Liberty Media Group Preferred Stock is required to
         be redeemed by TCI at any time on or after August 8, 2001 at the option
         of the holder, in whole or in part (provided that the aggregate
         liquidation value of the shares to be redeemed is in excess of $1
         million), in each case at a redemption price, per share, equal to the
         liquidation value.

         As of December 31, 1997, subject to anti-dilution adjustments, each
         share of Series C-Liberty Media Group Preferred Stock was convertible,
         at the option of the holder, into 37.5 shares of Liberty Group Series A
         Stock plus one additional share for every two such shares received upon
         conversion. Subject to certain provisions, if (i) TCI redeems all the
         outstanding shares of Liberty Group Series A Stock in accordance with
         the terms thereof, or (ii) the holders of Series C-Liberty Media Group
         Preferred Stock would be entitled to receive upon conversion thereof
         any TCI capital stock that is redeemable or exchangeable at the
         election of TCI ("Series C-Liberty Media Group Redeemable Capital
         Stock"), and all of the outstanding shares or other units of such
         Series C-Liberty Media Group Redeemable Capital Stock are redeemed,
         exchanged or otherwise acquired in full, then, from and after either
         such event (each event referred to in clause (i) and (ii) being a
         "Series C-Liberty Media Group Redemption Event"), the holders of Series
         C-Liberty Media Group Preferred Stock then outstanding shall be
         entitled to receive upon conversion of such shares of Series C-Liberty
         Media Group Preferred Stock, in lieu of shares of Liberty Group Series
         A Stock or such Series C-Liberty Media Group Redeemable Capital Stock,
         as the case may be, the kind and amount of shares of stock and other
         securities and property receivable upon such Series C-Liberty Media
         Group Redemption Event by a holder of the number of shares of Liberty
         Group Series A Stock or shares or units of such Series C-Liberty Media
         Group Redeemable Capital Stock, as the case may be, into which such
         shares of Series C-Liberty Media Group Preferred Stock could have been
         converted immediately prior to the effectiveness of such Series
         C-Liberty Media Group Redemption Event (assuming that such holder
         failed to exercise any applicable right of election with respect
         thereto and received per share of Liberty Group Series A Common Stock
         or per share or unit of such Series C-Liberty Media Group Redeemable
         Capital Stock, as the case may be, the kind and amount of stock and
         other securities and property received per share or unit by the holders
         of a plurality of the non-electing shares or units thereof) and,
         thereafter, the holders of the Series C-Liberty Media Group Preferred
         Stock shall have no other conversion rights with respect to the Liberty
         Group Series A Stock or such Series C-Liberty Media Group Redeemable
         Capital Stock, as the case may be.

                                                                     (continued)

                                       92
<PAGE>   94

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         If TCI distributes the stock of a subsidiary of TCI as a dividend to
         all holders of Liberty Group Series A Stock (a "Liberty Media Group
         Spin Off"), TCI shall make appropriate provision so the holders of the
         Series C-Liberty Media Group Preferred Stock have the right to exchange
         their shares of Series C-Liberty Media Group Preferred Stock on the
         effective date of the Liberty Media Group Spin Off for convertible
         preferred stock of TCI and convertible preferred stock of such
         subsidiary that together have an aggregate liquidation preference equal
         to the liquidation preference of a share of Series C-Liberty Media
         Group Preferred Stock on the effective date of the Liberty Media Group
         Spin Off and that otherwise each have terms, conditions, designations,
         voting powers, rights on liquidation and other preferences and
         relative, participating, optional or other special rights, and
         qualifications, limitations or restrictions applicable to such
         convertible preferred stock that are identical, or as nearly so as is
         practicable in the judgment of the Board, to those of the Series
         C-Liberty Media Group Preferred Stock for which such convertible
         preferred stock is to be exchanged.

         In the event an "Exchange Offer" is made by TCI or a subsidiary of TCI
         (the applicable of the foregoing being the "Series C-Liberty Media
         Group Offeror"), the Series C-Liberty Media Group Offeror shall
         concurrently therewith make an equivalent offer to the holders of
         Series C-Liberty Media Group Preferred Stock pursuant to which such
         holders may tender shares of Series C-Liberty Media Group Preferred
         Stock, based upon the number of shares of Liberty Group Series A Stock
         into which such tendered shares are then convertible (and in lieu of
         tendering outstanding shares of Liberty Group Series A Stock), together
         with such other consideration as may be required to be tendered
         pursuant to such Exchange Offer, and receive in exchange therefor, in
         lieu of securities of the Series C-Liberty Media Group Offeror offered
         in such Exchange Offer ("Liberty Media Group Exchange Securities") (and
         other property, if applicable), convertible preferred stock of the
         issuer of such Liberty Media Group Exchange Securities with an
         aggregate liquidation preference equal to the aggregate liquidation
         preference of the shares of Series C-Liberty Media Group Preferred
         Stock exchanged therefor and that otherwise has terms, conditions,
         designations, voting powers, rights on liquidation and other
         preferences and relative, participating, optional or other special
         rights, and qualifications, limitations or restrictions applicable to
         such convertible preferred stock that are identical, or as nearly so as
         is practicable in the judgment of the Board, to those of the Series
         C-Liberty Media Group Preferred Stock for which such convertible
         preferred stock is to be exchanged. For purposes of the foregoing,
         "Exchange Offer" means an issuer tender offer, including, without
         limitation, one that is effected through the distribution of rights or
         warrants, made to holders of Liberty Group Series A Stock (or to
         holders of other stock of TCI receivable by a holder of Series
         C-Liberty Media Group Preferred Stock upon conversion thereof), to
         issue stock of TCI or of a subsidiary of TCI and/or other property to a
         tendering stockholder in exchange for shares of Liberty Group Series A
         Stock (or such other stock).

         The holders of Series C-Liberty Media Group Preferred Stock are
         entitled to vote on an as converted basis on all matters submitted to a
         vote of holders of the capital stock of TCI entitled to vote generally
         on the election of directors. Holders of Series C-Liberty Media Group
         Preferred Stock are not entitled to vote as a separate class except as
         otherwise may be required by the DGCL.

                                                                     (continued)

                                       93
<PAGE>   95

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Convertible Preferred Stock, Series D. The Company designated and
         issued 1,000,000 shares of a series of TCI Series Preferred Stock
         designated "Convertible Preferred Stock, Series D", par value $.01 per
         share, as partial consideration for the merger between TCIC and
         TeleCable (see note 7). At December 31, 1997, there were 994,797 shares
         of Series D Preferred Stock outstanding.

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

         Each share of Series D Preferred Stock is convertible, at the option of
         the holder, into 10 shares of TCI Group Series A Stock and 2.5 shares
         of Liberty Group Series A Stock, subject to adjustment upon certain
         events specified in the certificate of designation establishing Series
         D Preferred Stock. In addition to the aforementioned shares of TCI
         common stock, holders of Series D Preferred Stock are entitled to
         receive (i) one share of Liberty Group Series A Stock for every two
         such shares received upon conversion, (ii) one additional share of
         Liberty Group Series A Stock for every two such shares issued,
         including those issued pursuant to (i) above, and (iii) one share of
         Satellite Series A Common Stock for each share of Series D Preferred
         Stock converted. Such shares of Satellite Series A Common Stock
         represent the number of shares of Satellite common stock that they
         would have received had they converted their Series D Preferred Stock
         into TCI Group Series A Stock prior to the Satellite Spin-off. To the
         extent any cash dividends are not paid on any dividend payment date,
         the amount of such dividends will be deemed converted into shares of
         TCI Group Series A Stock at a conversion rate equal to 95% of the then
         current market price of TCI Group Series A Common Stock, and upon
         issuance of TCI Group Series A Common Stock to holders of Series D
         Preferred Stock in respect of such deemed conversion, such dividend
         will be deemed paid for all purposes.

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

                                                                     (continued)

                                       94
<PAGE>   96

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

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

         On February 20, 1998, the Company issued a Notice of Redemption which
         called for the redemption of all of its outstanding Convertible
         Preferred Stock, Series D, on April 1, 1998, for a redemption price of
         $304.0233 per share. The shares of Convertible Preferred Stock, Series
         D, that are redeemed are to be retired and restored to the status of
         authorized and unissued shares of Series Preferred Stock.

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

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

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

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

                                                                     (continued)

                                       95
<PAGE>   97

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

         Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G
         Preferred Stock") and Redeemable Convertible Liberty Media Group
         Preferred Stock, Series H ("Series H Preferred Stock"). In January,
         1996, TCI designated and issued 7,259,380 shares of a series of TCI
         Series Preferred Stock designated "Redeemable Convertible TCI Group
         Preferred Stock, Series G" and 7,259,380 shares of a series of TCI
         Series Preferred Stock designated "Redeemable Convertible Liberty Media
         Group Preferred Stock, Series H" as consideration for an acquisition.
         At December 31, 1997, there were 6,567,344 shares of Series G Preferred
         Stock and 6,567,894 shares of Series H Preferred Stock outstanding.

         The initial liquidation value for the Series G Preferred Stock and
         Series H Preferred Stock is $21.60 per share and $5.40 per share,
         respectively, subject in both cases, to increase in an amount equal to
         aggregate accrued but unpaid dividends, if any. Dividends will begin to
         accrue on the Series G and Series H Preferred Stock on the first
         anniversary of issuance of the Series G and Series H Preferred Stock,
         and will thereafter be payable semi-annually commencing January 25,
         1997, at the rate of 4% per annum on the liquidation value. Any
         dividends paid on the Series G and Series H Preferred Stock may be
         paid, at TCI's election, in cash or shares of TCI Group Series A Stock.
         Additional dividends will accrue on unpaid dividends initially at a
         rate of 4% per annum. The dividend rate on dividends that remain unpaid
         on the next succeeding dividend payment date will increase to 8.625%
         per annum.

         Each share of Series G Preferred Stock is convertible at the option of
         the holder at any time prior to the close of business on the last
         business day prior to redemption into 1.19 shares of TCI Group Series A
         Stock and each share of Series H Preferred Stock is convertible at any
         time prior to the close of business on the last business day prior to
         redemption into (i) .2625 shares of Liberty Group Series A Stock, plus
         (ii) one additional share of Liberty Group Series A Stock for every two
         such shares received upon such conversion, plus (iii) one additional
         share of Liberty Group Series A Stock for every two shares of such
         stock held after calculating the shares pursuant to (i) and (ii) above.
         The conversion rights of Series G and Series H Preferred Stock are
         subject to adjustment in certain circumstances.

                                                                     (continued)

                                       96
<PAGE>   98

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

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

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

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

         The Series G and Series H Preferred Stock will rank prior to TCI common
         stock and the TCI Class B Preferred Stock and on a parity with all
         other currently outstanding classes and series of TCI preferred stock
         as to rights to receive assets upon liquidation, dissolution or winding
         up of the affairs of the Company.

                                                                     (continued)

                                       97
<PAGE>   99

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

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

         The Company, through certain subsidiary trusts, (the "Trusts"), had
         preferred securities outstanding at December 31, 1997 as follows:

<TABLE>
<CAPTION>
              Subsidiary Trust                       Interest Rate    Face Amount
              ----------------                       -------------    -----------
                                                                      in millions
<S>                                                      <C>       <C>            
         TCI Communications Financing I                  8.72%     $           500
         TCI Communications Financing II                10.00%                 500
         TCI Communications Financing III                9.65%                 300
         TCI Communications Financing IV                 9.72%                 200
                                                                   ---------------
                                                                   $         1,500
                                                                   ===============
</TABLE>

         The Trusts exist for the exclusive purpose of issuing the Trust
         Preferred Securities and investing the proceeds thereof into
         Subordinated Deferrable Interest Notes (the "Subordinated Debt
         Securities") of TCIC. The Subordinated Debt Securities have interest
         rates equal to the interest rate of the corresponding Trust Preferred
         Securities and have maturity dates ranging from 30 to 49 years from the
         date of issuance. The Subordinated Debt Securities are unsecured
         obligations of TCIC and are subordinate and junior in right of payment
         to certain other indebtedness of the Company. Upon redemption of the
         Subordinated Debt Securities, the Trust Preferred Securities will be
         mandatorily redeemable. TCIC effectively provides a full and
         unconditional guarantee of the Trusts' obligations under the Trust
         Preferred Securities.

         The Trust Preferred Securities are presented together in a separate
         line item in the accompanying consolidated balance sheets captioned
         "Company-obligated mandatorily redeemable preferred securities of
         subsidiary trusts holding solely subordinated debt securities of TCI
         Communications, Inc." Dividends accrued on the Trust Preferred
         Securities aggregated $132 million and $71 million for the years ended
         December 31, 1997 and 1996, respectively, and are included in minority
         interests in earnings of consolidated subsidiaries in the accompanying
         consolidated financial statements.

                                                                     (continued)

                                       98
<PAGE>   100
\
                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(12)     Stockholders' Equity

         Common Stock

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

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

         Stock Repurchases

         During the year ended December 31, 1997, pursuant to a stock repurchase
         program approved by the Board, Liberty Media Group repurchased 916,500
         shares of Liberty Group Series A Stock in open market transactions and
         219,937 shares of Liberty Group Series A Stock from the spouse of an
         officer and director of TCI at an aggregate cost of approximately $18
         million. Such shares were canceled and returned to an authorized but
         unissued status.

         In addition, pursuant to the stock repurchase program, 4,000,000 shares
         of TCI Group Series A Stock, 330,902 shares of TCI Group Series B Stock
         and 338,196 shares of TCI Ventures Group Series B Stock were
         repurchased at an aggregate cost of $77 million. Such shares are
         reflected as treasury stock in the accompanying consolidated financial
         statements.

         Effective July 31, 1997, TCI merged Kearns-Tribune into a wholly-owned
         TCI subsidiary attributed to TCI Group. TCI exchanged 47.2 million
         shares of TCI Group Series A Stock for shares of Kearns-Tribune which
         held 17.9 million shares of TCI Group Stock and 10.1 million shares of
         Liberty Group Stock. Such shares are reflected as common stock held by
         subsidiaries in the accompanying consolidated financial statements.

         During the third quarter of 1997, Liberty Media Group commenced a
         tender offer (the "Liberty Tender Offer") to purchase up to an
         aggregate of 22.5 million shares of Liberty Group Stock at a price of
         $20 per share through October 3, 1997. During the fourth quarter of
         1997, Liberty Media Group repurchased 21.7 million shares of Liberty
         Group Series A Stock and 82,074 shares of Liberty Group Series B Stock
         at an aggregate cost of approximately $435 million pursuant to the
         Liberty Tender Offer. Such purchases are reflected as treasury stock in
         the accompanying consolidated financial statements.

                                                                     (continued)

                                       99
<PAGE>   101

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Employee Benefit Plans

         The Company has several employee stock purchase plans to provide
         employees an opportunity to create a retirement fund including
         ownership interests in TCI. The primary employee stock purchase plan
         provides for employees to contribute up to 10% of their compensation to
         a trust for investment in several diversified investment choices,
         including investment in Company common stock. The Company, by annual
         resolution of the Board, generally contributes up to 100% of the amount
         contributed by employees. Such TCI contribution is invested in TCI
         Group Stock, Liberty Group Stock and TCI Ventures Group Stock. Certain
         of the Company's subsidiaries have their own employee benefit plans.
         Contributions to all plans aggregated $38 million, $35 million and $28
         million for 1997, 1996 and 1995, respectively.

         Preferred Stock

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

         Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock.
         The Company is authorized to issue 1,675,096 shares of Class B
         Preferred Stock and 1,552,490 of such shares are issued and
         outstanding, net of shares held by a TCI subsidiary.

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

                                                                     (continued)

                                      100
<PAGE>   102

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

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

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

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

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

                                                                     (continued)

                                      101
<PAGE>   103

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

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

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

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

                                                                     (continued)

                                      102
<PAGE>   104

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Redeemable Convertible Preferred Stock, Series E. The Company is
         authorized to issue 400,000 shares of Redeemable Convertible Preferred
         Stock, Series E, par value $.01 per share. Subsidiaries of TCI
         previously held all of the issued and outstanding shares of such stock,
         amounting to 246,402 shares. The holders of the Series E Preferred
         Stock exchanged such Subsidiary Shares for shares of Series F Preferred
         Stock immediately prior to the record date of the Liberty Distribution.
         See note 1.

         Stock-Based Compensation

         As of December 31, 1997, the Company and its subsidiaries had several
         stock-based compensation plans for certain employees, officers,
         directors and other persons. Such plans are described below.

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

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

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

                                                                     (continued)

                                      103
<PAGE>   105

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         In connection with the Liberty Distribution, each holder of an
         outstanding option or SAR received an additional option or stock
         appreciation right, as applicable, covering a number of shares of
         Liberty Group Series A Stock equal to 56% (as adjusted) of the number
         of shares of Class A common stock theretofore subject to the
         outstanding option or stock appreciation right, and the outstanding
         option or stock appreciation right would continue in effect as an
         option or stock appreciation right covering the same number of shares
         of TCI Group Series A Stock (as redesignated) that were theretofore
         subject to the option or stock appreciation right. The aggregate
         pre-adjustment strike price of the outstanding options or stock
         appreciation rights was allocated between the outstanding options or
         stock appreciation rights and the newly issued options or stock
         appreciation rights in a ratio determined by the Compensation Committee
         of TCI. The following descriptions of stock options and/or stock
         appreciation rights have been adjusted to reflect such change.

         As a result of the TCI Ventures Exchange, the Compensation Committee of
         TCI elected to adjust the options in tandem with SARs to purchase TCI
         Group Series A Stock to reflect the expected shift of attributable
         value from TCI Group to the newly created TCI Ventures Group. The
         options in tandem with SARs to purchase TCI Group Series A Stock
         outstanding immediately prior to the TCI Ventures Exchange were
         canceled and reissued as two separately exercisable options in tandem
         with SARS: (i) with 70% of the options in tandem with SARs allocated to
         an option in tandem with SARs to purchase TCI Group Series A Stock, and
         (ii) with 30% of the options in tandem with SARs allocated to an option
         in tandem with SARs to purchase TCI Ventures Group Series A Stock. The
         terms of these adjusted options in tandem with SARs, including the
         exercise price and the date of grant, are in all material respects the
         same as the terms of the original options in tandem with SARs. The
         following descriptions of stock options and/or stock appreciation
         rights have been adjusted to reflect such change.

         Awards granted subsequent to the Liberty Distribution may include 
         Awards relating to TCI Group Series A Stock or Liberty Group Series A
         Stock and Awards granted subsequent to the TCI Ventures Exchange may 
         include Awards relating to TCI Group Series A Stock, Liberty Group
         Series A Stock or TCI Ventures Group Series A Stock in such amounts and
         types as the Compensation Committee of TCI determines in accordance
         with the terms of the Incentive Plans.

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

                                                                     (continued)

                                      104
<PAGE>   106

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

         The following table presents the number and weighted average exercise
         price ("WAEP") of certain options in tandem with SARs to purchase Class
         A common stock, TCI Group Series A Stock, Liberty Group Series A Stock
         and TCI Ventures Group Series A Stock pursuant to the Incentive Plans.
         The number of options to purchase Liberty Group Series A Stock and TCI
         Ventures Group Series A Stock, and the WAEP thereof, has been adjusted
         to give effect to the 1998 Liberty Stock Dividend and the TCI Ventures
         Dividend, respectively.

                                                                     (continued)

                                      105
<PAGE>   107

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                                               TCI
                                                                                   Liberty                  Ventures
                                Class A                  TCI Group                  Group                     Group
                                common                   Series A                  Series A                  Series A
                                stock         WAEP        Stock         WAEP        Stock         WAEP        Stock         WAEP
                               ---------    --------    -----------    -------     ---------     -------     -------       ------
                                                      amounts in thousands, except for WAEP
<S>                            <C>          <C>          <C>           <C>         <C>           <C>        <C>            <C>
Outstanding at
    January 1, 1995             11,321      $ 18.13           --                        --                        --
      Converted from
         Class A options       (11,219)       18.15       11,219      $ 13.58           --                        --
      Adjustment for
         Liberty
         Distribution               --                        --                     6,311      $  8.07           --
      Granted                       --                     7,508        16.99        5,819        10.63           --
      Exercised                    (92)       16.07         (934)       12.45         (511)        7.41           --
      Canceled                     (10)       17.25          (91)       13.07          (51)        7.77           --
                               -------                   -------                   -------                   -------

Outstanding at
    December 31, 1995               --                    17,702        15.08       11,568         9.39           --
      Exercised                     --                      (196)       12.70         (132)        7.93           --
      Canceled                      --                      (132)       15.35          (42)        8.45           --
                               -------                   -------                   -------                   -------

Outstanding at
    December 31, 1996               --                    17,374        12.97       11,394         9.41           --
      Adjustment for TCI
         Ventures Exchange          --                    (7,874)       14.21           --                    15,748      $  7.11
      Granted                       --                    12,314        15.26        3,514        15.91           --
      Exercised                     --                    (5,621)       11.95       (2,502)        8.41       (1,035)        6.77
      Canceled                      --                       (72)       14.31          (47)       10.21           (2)        7.10
                               -------                   -------                   -------                   -------

Outstanding at
    December 31, 1997               --                    16,121        14.47       12,359        11.45       14,711         7.13
                               =======                   =======                   =======                   =======

Exercisable at
    December 31, 1997               --                     4,363        12.82        5,156         9.09        4,723         6.31
                               =======                   =======                   =======                   =======

Vesting Period                      --                     5 yrs                     5 yrs                     5 yrs
                               =======                   =======                   =======                   =======
</TABLE>

                                                                     (Continued)


                                      106
<PAGE>   108

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         On December 13, 1995, pursuant to the 1994 Plan, the Company awarded
         330,000 restricted shares of TCI Group Series A Stock and 67,500
         restricted shares of Liberty Group Series A Stock to certain officers
         and other key employees of the Company. Based on the terms at the date
         of grant, such restricted shares vest as to 50% in December 1999 and as
         to the remaining 50% in December 2000. Such restricted shares had a
         fair value of $20.625 and $11.67, respectively, on the date of grant.

         On July 23, 1997, pursuant to the 1996 Plan, the Company awarded
         400,000 restricted shares of TCI Group Series A Stock to an officer and
         a director of the Company. Such restricted shares vest as to 50% in
         July 2001 and as to the remaining 50% in July 2002. Such restricted
         shares had a fair value of $15.81 on the date of grant.

         On December 16, 1997, the Company granted, subject to shareholder
         approval, options in tandem with stock appreciation rights to acquire
         2,800,000 shares of TCI Ventures Group Series B Stock to an officer and
         director of the Company. The options in tandem with stock appreciation
         rights have an exercise price of $10.37 and vest ratably over five
         years with such vesting period beginning December 16, 1997, first
         become exercisable on December 16, 1998 and expire on December 16,
         2007.

         SARs with respect to 508,350 shares of TCI Group Series A Stock,
         569,553 shares of Liberty Group Series A Stock and 814,726 shares of
         TCI Ventures Group Series A Stock were outstanding at December 31,
         1997. These rights have an adjusted strike price of $.52, $.36 and $.26
         per share, respectively. All such SARs are 100% vested at December 31,
         1997 and expire on March 28, 2001. The Company has the option of paying
         the holder in stock or cash. During the year ended December 31, 1997,
         SARs with respect to 442,162 shares of TCI Group Series A Stock,
         231,163 shares of Liberty Group Series A Stock and 237,200 shares of
         TCI Ventures Group Series A Stock were exercised.

         Tele-Communications, Inc. Director Stock Option Plan. On August 3,
         1995, stockholders of the Company approved the Director Stock Option
         Plan (the "DSOP") including the grant, effective as of November 16,
         1994, to each person that as of that date was a member of the Board and
         was not an employee of the Company or any of its subsidiaries, of
         options to purchase 50,000 shares of TCI Class A common stock. Pursuant
         to the DSOP, options to purchase 300,000 shares of TCI Class A common
         stock were granted at an exercise price of $22.00 per share. Such
         options had a weighted average fair value of $16.49 on the date of
         grant. Options issued pursuant to the DSOP vest and become exercisable
         over a five-year period from the date of grant and expire 10 years from
         the date of grant. During the year ended December 31, 1995, options to
         purchase 50,000 shares of TCI Group Series A Stock and options to
         purchase 28,125 shares of Liberty Group Series A Stock were canceled.
         During the year ended December 31, 1996, options to purchase 150,000
         shares of TCI Group Series A Stock and options to purchase 84,375
         shares of Liberty Group Series A Stock with a WAEP of $14.75 and
         $11.52, respectively, were issued pursuant to the DSOP. Such options
         had a weighted average fair value of $9.83 and $7.67, respectively, on
         the date of grant.

                                                                     (continued)

                                      107
<PAGE>   109

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         At December 31, 1997, 370,000 options with respect to TCI Group Stock
         granted pursuant to the DSOP were outstanding, 162,000 of which were
         exercisable. Such options had a range of exercise prices of $12.25 to
         $16.99, with a WAEP of $14.04, and a weighted average remaining
         contractual life of 7.68 years.

         At December 31, 1997, 225,000 options with respect to Liberty Group
         Stock granted pursuant to the DSOP were outstanding, 101,250 of which
         were exercisable. Such options had a range of exercise prices of $9.78
         to $11.67, with a WAEP of $10.43, and a weighted average remaining
         contractual life of 7.63 years.

         Tele-Communications International, Inc. Stock Incentive Plan. In 1995,
         TINTA adopted the Tele-Communications International, Inc. 1995 Stock
         Incentive Plan (the "TINTA 1995 Plan"). The TINTA 1995 Plan provides
         for Awards to be made in respect of a maximum of 3,000,000 shares of
         TINTA Series A common stock ("TINTA Series A Stock") (subject to
         certain anti-dilution adjustments). Shares of TINTA Series A Stock that
         are subject to Awards that expire, terminate or are annulled for any
         reason without having been exercised (or deemed exercised, by virtue of
         the exercise of a related stock appreciation right), or are forfeited
         prior to becoming vested will return to the pool of such shares
         available for grant under the TINTA 1995 Plan.

         On December 13, 1995, stock options in tandem with SARs to purchase
         1,302,000 shares of TINTA Series A Stock were granted pursuant to the
         TINTA 1995 Plan. Of such grant, 1,252,000 options in tandem with SARs
         were granted to employees of TINTA. Additionally, on December 13, 1995
         TCI granted to one of its officers 50,000 options in tandem with SARs
         to acquire TINTA Series A Stock owned by it. Such options vest evenly
         over five years, first became exercisable August 4, 1996 and expire on
         August 4, 2005. During 1997, TINTA granted stock options in tandem with
         SARs to purchase 1,130,000 shares of TINTA Series A Stock. Such options
         vest evenly over five years, first become exercisable one year after
         date of grant, and expire ten years after date of grant.

         The following table presents the number and WAEP of certain options in
         tandem with SARs to purchase TINTA Series A Stock pursuant to the TINTA
         1995 Plan (amounts in thousands, except for WAEP).

<TABLE>
<CAPTION>
                                                             TINTA
                                                         Series A Stock          WAEP
                                                         --------------     --------------
<S>                                                       <C>              <C>
         Outstanding at January 1, 1995                             --

                Granted                                          1,302     $         16.00
                                                          ------------

         Outstanding at December 31, 1995 and 1996               1,302               16.00

                Granted                                          1,130               14.69
                                                          ------------

         Outstanding at December 31, 1997                        2,432               15.39
                                                          ============

         Exercisable at December 31, 1997                          521               16.00
                                                          ============

         Vesting Period                                       5 yrs
                                                          ============
</TABLE>


                                                                     (continued)

                                      108
<PAGE>   110

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         On December 13, 1995, pursuant to the TINTA 1995 Plan, 40,000
         restricted shares of TINTA Series A Stock were awarded to certain
         officers and directors of TINTA. Such restricted shares vest as to 50%
         in December 1999 and as to the remaining 50% in December 2000. Such
         restricted shares had a fair value of $25.375 on the date of grant.

         On July 23, 1997, pursuant to the TINTA 1995 Plan, 150,000 restricted
         shares of TINTA Series A Stock were awarded to a director of TINTA.
         Such restricted shares vest as to 50% in July 2001 and as to the
         remaining 50% in July 2002. Such restricted shares had a fair value of
         $14.625 on the date of grant.

         Tele-Communications International, Inc. Nonemployee Director Stock
         Option Plan. On April 11, 1996, TINTA adopted the Tele-Communications
         International, Inc. 1996 Nonemployee Director Stock Option Plan (the
         "TINTA Director Plan"). The TINTA Director Plan provides for grants to
         be made to nonemployee directors of TINTA of options to purchase a
         maximum of 1,000,000 shares of TINTA Series A Stock (subject to certain
         anti-dilution adjustments). Shares that are subject to such options
         that expire or terminate for any reason without having been exercised
         will return to the pool of shares underlying options available to grant
         under the TINTA Director Plan. Pursuant to the TINTA Director Plan,
         options to purchase 200,000 shares of TINTA Series A Stock were granted
         in April 1996 at an exercise price of $16.00 per share. Such options
         had a weighted average fair value of $14.01 on the date of grant.
         Options issued pursuant to the TINTA Director Plan vest and become
         exercisable over a five-year period from the date of grant and expire
         10 years from the date of grant.

         At December 31, 1997, 200,000 options with respect to TINTA Series A
         Stock granted pursuant to the TINTA Director Plan were outstanding,
         40,000 of which were exercisable. Such options had a weighted average
         remaining contractual life of 9 years.


                                                                     (continued)

                                      109
<PAGE>   111

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Founders Options. Effective December 1, 1996, certain officers and key
         employees of the Company were each granted options (the "Telephony
         Option") representing 1.0% of the Company's common equity in TCI
         Telephony Services, Inc., a consolidated subsidiary of the Company,
         ("Telephony Services"). The aggregate exercise price for each such
         option was equal to 1.0% of (i) the Company's cumulative investment in
         Telephony Services as of December 1, 1996, adjusted for a 6% per annum
         interest factor from the date each such investment was made to the date
         of such exercise, less (ii) the sum of (x) $500 million and (y) the
         amount of the tax benefits generated by Telephony Services (up to $500
         million) as and when used by TCI. Such options had a fair value of
         $1,347,700 per option on the date of grant. Each such option was
         replaced during 1997 with a separate SAR with respect to each of
         Telephony Services' two direct wholly-owned subsidiaries, TCI Teleport
         Holdings, Inc. ("TCI Teleport") and TCI Wireless Holdings, Inc. ("TCI
         Wireless"). Each of the SAR with respect to TCI Teleport (the "CLEC
         SAR") and the SAR with respect to TCI Wireless (the "Wireless SAR")
         entitles the holder to the excess of the value of the shares subject to
         the SAR (based on the percentage that such shares represent of the
         total value of the common equity of TCI Teleport or TCI Wireless, as
         applicable, as of the exercise date) over the "strike price" (i.e., 1%
         of TCI's cumulative investment in TCI Teleport or TCI Wireless, as
         applicable, and their respective subsidiaries at December 1, 1996, plus
         a 6% per annum interest factor from the date when each such investment
         was made to the date of exercise). The material terms of the CLEC SAR
         and the Wireless SAR are the same as those of the Telephony Option,
         except that the strike price for each such SAR is an allocated portion
         of the exercise price under the Telephony Option based on TCI's
         cumulative investment in TCI Teleport and TCI Wireless. All such SARs
         will vest and become exercisable in five equal annual installments,
         with the first annual installment vesting on February 1, 1997, and will
         expire on February 1, 2006. Any exercise by one of such executive
         officers of all or part of the CLEC SAR would need to be accompanied by
         the exercise by such executive officer of a pro rata portion of
         Wireline Option described below.

         Each such officer and key employee was also granted a similar option
         (the "Wireline Option") representing 1.0% of the Company's common
         equity in TCI Wireline, Inc., another consolidated subsidiary of the
         Company, ("Wireline"). The aggregate exercise price for each such
         Wireline Option is equal to 1.0% of the Company's cumulative investment
         in Wireline as of December 1, 1996, adjusted for a 6% per annum
         interest factor from the date each such investment was made to the date
         of such exercise. All of such options vest 20% per annum beginning
         February 1, 1997 and expire on February 1, 2006. Such options had a
         fair value of $4,400 per option on the date of grant. Such options must
         be exercised on a pro rata basis with the CLEC SARs discussed above.


                                                                     (continued)

                                      110
<PAGE>   112

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Effective December 1, 1996, certain officers and key employees of the
         Company were each granted options (the "Internet Option") representing
         1% of the Company's common equity in TCI Internet Services, Inc. ("TCI
         Internet"), a consolidated subsidiary of the Company. The aggregate
         exercise price for each Internet Option was equal to 1.0% of the
         Company's cumulative investment in TCI Internet as of December 1, 1996,
         adjusted for a 6% per annum interest factor from the date each such
         investment was made to the date of such exercise price. Such options
         vest 20% per annum beginning February 1, 1997 and expire on February 1,
         2006. Such options had a fair value of $346,800 on the date of grant.
         In anticipation of the transfer to TCI.NET, Inc. ("TCI.NET") of the
         Internet services distribution business conducted through subsidiaries
         of TCI Internet, each such option was replaced during 1997 with an
         option to acquire a number of shares equal to 1.0% of TCI's common
         equity in TCI.NET at December 1, 1996 and a SAR with respect to a
         number of shares equal to 1.0% of TCI's common equity in TCI Internet
         at December 1, 1996. The material terms of the option to acquire shares
         of TCI.NET are the same as those of the Internet Option, except that
         the exercise price, which will be payable to TCI. NET, is an allocated
         portion of the exercise price under the Internet Option based on TCI's
         cumulative investment in the Internet services distribution business
         relative to the balance of its cumulative investment in TCI Internet at
         December 1, 1996. The SAR entitles the holder to the excess of the
         value of the shares subject to the SAR (based on the percentage that
         such shares represent of the total value of the common equity of TCI
         Internet as of the exercise date) over 1% of TCI's cumulative
         investment in TCI Internet at December 1, 1996, plus a 6% per annum
         interest factor from the date when each such investment was made to the
         date of exercise. Any exercise by the holder of all or part of the
         TCI.NET option must be accompanied by the exercise by such holder of a
         pro rata portion of the TCI Internet SAR, and vice versa.

         At December 31, 1997, 14 CLEC SARs and 20 Wireless SARs were
         outstanding, none and 4, respectively, of which were exercisable. Such
         SARs had exercise prices of $452,243 and $985,446, respectively, and an
         average remaining contractual life of 9 years.

         At December 31, 1997, 14 Wireline Options were outstanding, none of
         which were exercisable. Such options had an exercise price of $13,314
         and an average remaining contractual life of 9 years.

         At December 31, 1997, 22 TCI Internet SARs and 22 TCI.NET options were
         outstanding, none of which were exercisable. Such SARs and options had
         exercise prices of $35,048 and $22,025, respectively, and an average
         remaining contractual life of 9 years.

         United Video Satellite Group, Inc. Equity Incentive Plan and United
         Video Satellite Group, Inc. Stock Option Plan for Non-Employee
         Directors. United Video Satellite Group, Inc., a subsidiary of the
         Company, ("UVSG") sponsors the United Video Satellite Group, Inc.
         Equity Incentive Plan under which 4.0 million shares of UVSG's Class A
         Common Stock are authorized to be issued in connection with the
         exercise of awards of stock options, stock appreciation rights and
         restricted stock granted under the plan. UVSG's Equity Incentive Plan
         provides that the price at which each share of stock covered by an
         option may be acquired shall in no event be less than 100% of the fair
         market value of the stock on the date the option is granted, except in
         certain limited circumstances. Additionally, UVSG sponsors the United
         Video Satellite Group, Inc. Stock Option Plan for Non-Employee
         Directors under which 165,000 shares of UVSG's Class A Common Stock are
         authorized to be issued in connection with the exercise of stock
         options granted thereunder.


                                                                     (continued)

                                      111
<PAGE>   113

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         At December 31, 1997, 3.2 million shares of UVSG's Class A Common Stock
         were reserved for issuance under the stock option plans. The options
         granted under the stock option plans expire ten years from the date of
         grant. Options outstanding are as follows (amounts in thousands, except
         for WAEP):

<TABLE>
<CAPTION>
                                                UVSG
                                           Class A Common
                                                Stock             WAEP
                                           ---------------    ----------
<S>                                                <C>        <C>       
         At January 1, 1995                        2,739      $     6.78
              Exercised                             (674)           1.46
              Canceled                                (5)          12.62
                                              ----------

         At December 31, 1995                      2,060            8.51
              Granted                                638           22.22
              Exercised                             (407)           8.08
              Canceled                              (402)          18.42
                                              ----------

         At December 31, 1996                      1,889           11.12
              Granted                                458           17.09
              Exercised                           (1,045)           8.09
              Canceled                              (126)          11.76
                                              ----------

         At December 31, 1997                      1,176           16.07
                                              ==========

         Exercisable at December 31, 1997            354
                                              ==========
</TABLE>

         Exercise prices for options outstanding as of December 31, 1997 ranged
         from $8 to $27. The weighted-average remaining contractual life of such
         options is 8.1 years.

         At Home Corporation Stock Option Plans. At Home Corporation, a
         subsidiary of the Company, ("@ Home") adopted certain stock option
         plans (the "@ Home Plans") during 1996 and 1997. The @ Home Plans
         provide for the grant of incentive stock options, nonqualified stock
         options, restricted stock awards and stock bonuses to employees,
         directors and consultants of @ Home. Options under the @ Home Plans
         generally vest at the rate of 25% after one year and ratably on a
         monthly basis for three years thereafter.

         Options outstanding are as follows ( amounts in thousands, except for
         WAEP):

<TABLE>
<CAPTION>
                                                @ Home
                                            Series A Common
                                                 Stock            WAEP
                                            ---------------   ----------
<S>                                           <C>             <C>       
         At January 1, 1996                           --      $       --
              Granted                              5,296             .06
              Exercised                           (4,875)            .06
              Canceled                              (198)            .05
                                              ----------

         At December 31, 1996                        223             .06
              Granted                              5,158            6.30
              Exercised                           (2,170)            .25
              Canceled                              (153)           3.78
                                              ----------

         At December 31, 1997                      3,058           10.26
                                              ==========

         Exercisable at December 31, 1997          1,642
                                              ==========
</TABLE>

                                                                     (continued)

                                      112
<PAGE>   114

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Exercise prices for options outstanding as of December 31, 1997 ranged
         from $.05 to $24.50. The weighted-average remaining contractual life of
         such options is 9.29 to 9.90 years. The weighted-average fair value of
         options granted during 1997 and 1996 was $3.29 and $.01, respectively

         The estimated fair values of the Options noted above are based on the
         Black-Scholes model and are stated in current annualized dollars on a
         present value basis. The key assumptions used in the model for purposes
         of these calculations generally include the following: (a) a discount
         rate equal to the 10-year Treasury rate on the date of grant; (b) a 35%
         volatility factor, (c) the 10-year option term; (d) the closing price
         of the respective common stock on the date of grant; and (e) an
         expected dividend rate of zero.

         Estimated compensation relating to restricted stock awards, options
         with tandem SARs and SARs has been recorded through December 31, 1997
         pursuant to APB Opinion No. 25. Such estimate is subject to future
         adjustment based upon market value, and ultimately, on the final
         determination of market value when the rights are exercised or the
         restricted stock awards are vested. Had the Company accounted for its
         stock based compensation pursuant to the fair value based accounting
         method in SFAS 123, the Company's net earnings (loss) and net earnings
         (loss) per share would have changed to the pro forma amounts indicated
         below (amounts in millions, except per share amounts):

<TABLE>
<CAPTION>
                                                                      1997                1996
                                                                 --------------      --------------
<S>                                                              <C>                 <C>
Pro forma net earnings (loss) attributable to common
    stockholders                                                 $         (608)                256

Pro forma basic net earnings (loss) attributable to
    common stockholders per common share


      TCI Group Series A and Series B                            $         (.86)              (1.20)
      Liberty Media Group Series A and Series B                  $          .34                2.82
      TCI Ventures Group Series A and Series B                   $         (.47)                 --

Pro forma diluted net earnings (loss) attributable to common
    stockholders per common and potential common share


      TCI Group Series A and Series B                            $         (.86)              (1.20)
      Liberty Media Group Series A and Series B                  $          .31                2.58
      TCI Ventures Group Series A and Series B                   $         (.47)                 --
</TABLE>

                                                                     (continued)

                                      113
<PAGE>   115

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Treasury Stock and Common Stock Held by Subsidiaries, at Cost

<TABLE>
<CAPTION>
                                                                  December 31, 1997                      December 31, 1996
                                                          --------------------------------         ------------------------------
                                                             Number of                              Number of
                                                             shares           Cost basis             shares          Cost basis
                                                          --------------   ---------------         ------------   ---------------
                                                                           (dollar amounts in millions)
<S>                                                        <C>            <C>                <C>                  <C>            
         Treasury stock is summarized as follows:
               Series A TCI Group Stock                    11,296,324     $           180                  --     $            --
               Series B TCI Group Stock                    30,876,766                 518                  --                  --
               Series A Liberty Group Stock                25,082,172                 489                  --                  --
               Series B Liberty Group Stock                    82,074                   2                  --                  --
               Series B TCI Ventures Group
                   Stock                                      338,196                   4                  --                  --
         Common stock held by subsidiaries is
             summarized as follows:
               Series A TCI Group Stock                   125,645,656                 464         116,853,196                 314
               Series B TCI Group Stock                     9,112,500                 160                  --                  --
               Series A Liberty Group Stock                 6,654,367                 113                  --                  --
               Series B Liberty Group Stock                 3,417,187                  61                  --                  --
                                                                          ---------------                         ---------------
                                                                          $         1,991                         $           314
                                                                          ===============                         ===============
</TABLE>

         General

         During the fourth quarter of 1997, the Company entered into a Total
         Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to
         the Equity Swap Facility, the Company has the right to direct the
         counterparty (the "Counterparty") to use the Equity Swap Facility to
         purchase shares ("Equity Swap Shares") of TCI Group Series A Common
         Stock and TCI Ventures Group Series A Stock with an aggregate purchase
         price of up to $300 million. The Company has the right, but not the
         obligation, to purchase Equity Swap Shares through the September 30,
         2000 termination date of the Equity Swap Facility. During such period,
         the Company is to settle periodically any increase or decrease in the
         market value of the Equity Swap Shares. If the market value of the
         Equity Swap Shares exceeds the Counterparty's cost, Equity Swap Shares
         with a fair value equal to the difference between the market value and
         cost will be segregated from the other Equity Swap Shares. If the
         market value of Equity Swap Shares is less than the Counterparty's
         cost, the Company, at its option, will settle such difference with
         shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock
         or, subject to certain conditions, with cash or letters of credit. In
         addition, the Company is required to periodically pay the Counterparty
         a fee equal to a LIBOR-based rate on the Counterparty's cost to acquire
         the Equity Swap Shares. Due to the Company's ability to issue shares to
         settle periodic price fluctuations and fees under the Equity Swap
         Facility, the Company records all amounts received (paid) under this
         arrangement as increases (decreases) to equity. As of December 31,
         1997, the Equity Swap Facility had acquired 345,000 shares of TCI Group
         Series A Stock and 380,000 shares of TCI Ventures Group Series A Stock
         at an aggregate cost that was approximately $3 million less than the
         fair value of such Equity Swap Shares at December 31, 1997.

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

                                                                     (continued)

                                      114
<PAGE>   116

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         At December 31, 1997, there were 113,221,305 shares of TCI Group Series
         A Stock, 46,015,274 shares of Liberty Group Series A Stock, 36,237,250
         shares of TCI Ventures Group Series A Stock, and 2,800,000 shares of
         TCI Ventures Group Series B Stock reserved for issuance under exercise
         privileges related to options, convertible debt securities and
         convertible preferred stock, and upon vesting of restricted stock
         awards described in this note 12 and in notes 9 and 10. In addition,
         one share of Series A Stock of each Group is reserved for each
         outstanding share of Series B Stock of each Group.

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

                                                                     (continued)

                                      115
<PAGE>   117

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(13)     Transactions with Officers and Directors

         On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
         Series A Stock (which shares are entitled to one vote per share) to the
         Estate of Bob Magness (the "Magness Estate"), the late founder and
         former Chairman of the Board of TCI in exchange (the "Exchange") for an
         equal number of shares of TCI Group Series B Stock (which shares are
         entitled to ten votes per share) owned by the Magness Estate, (b) the
         Magness Estate sold (the "Sale") the shares of TCI Group Series A Stock
         received in the Exchange, together with approximately 1.5 million
         shares of TCI Group Series A Stock that the Magness Estate previously
         owned (collectively, the "Option Shares"), to two investment banking
         firms (the "Investment Bankers") for approximately $530 million (the
         "Sale Price") and (c) TCI entered into an agreement with the Investment
         Bankers whereby TCI has the option, but not the obligation, to purchase
         the Option Shares at any time on or before June 16, 1999 (the "Option
         Period"). The preceding transactions are referred to collectively as
         the "June 16 Stock Transaction". During the Option Period, the Company
         and the Investment Bankers are to settle quarterly any increase or
         decrease in the market value of the Option Shares. If the market value
         of the Option Shares exceeds the Investment Bankers' cost, Option
         Shares with a fair value equal to the difference between the market
         value and cost will be segregated from the other Option Shares in an
         account at the Investment Bankers. If the market value of the Option
         Shares is less than the Investment Bankers' cost, the Company, at its
         option, will settle such difference with shares of TCI Group Series A
         Stock or TCI Ventures Group Series A Stock or, subject to certain
         conditions, with cash or letters of credit. In addition, the Company is
         required to pay the Investment Bankers a quarterly fee equal to the
         LIBOR rate plus 1% on the Sale Price, as adjusted for payments made by
         the Company pursuant to any quarterly settlement with the Investment
         Bankers. Due to the Company's ability to settle quarterly price
         fluctuations and fees with shares of TCI Group Series A Stock or TCI
         Ventures Group Series A Stock, the Company records all amounts received
         or paid under this arrangement as increases or decreases, respectively,
         to equity. During the fourth quarter of 1997, the Company repurchased
         4,000,000 shares of TCI Group Series A Stock from one of the Investment
         Bankers for an aggregate cash purchase price of $66 million.
         Additionally, as a result of the Exchange Offers and certain open
         market transactions that were completed to obtain the desired weighting
         of TCI Group Series A Stock and TCI Ventures Group Series A Stock, the
         Investment Bankers disposed of 4,210,308 shares of TCI Group Series A
         Stock and acquired 23,407,118 shares (as adjusted for the Ventures
         Stock Dividend) of TCI Ventures Group Series A Stock during the last
         half of 1997 such that the Option Shares were comprised of 16,402,082
         shares of TCI Group Series A Stock and 23,407,118 shares (as adjusted
         for the Ventures Stock Dividend) of TCI Ventures Series A Stock at
         December 31, 1997. At December 31, 1997, the market value of the Option
         Shares exceeded the Investment Bankers' cost by $325 million. Pursuant
         to a certain Letter Agreement dated June 16, 1997, between Dr. Malone,
         TCI's Chairman and Chief Executive Officer, and the Magness Estate, Dr.
         Malone agreed to waive certain rights of first refusal with respect to
         shares of Series B TCI Group Stock beneficially owned by the Magness
         Estate. Such rights of first refusal arise from a letter agreement
         dated June 17, 1988, among Bob Magness, Kearns-Tribune Corporation and
         Dr. Malone, pursuant to which Dr. Malone was granted a right of first
         refusal to acquire any shares of TCI Group Series B Stock which the
         other parties proposed to sell. As a result of Dr. Malone's rights
         under such June 17, 1988 letter agreement, such waiver was necessary in
         order for the Magness Estate to consummate the Exchange and the Sale.

         In consideration for such waiver, TCI granted Dr. Malone the right 
         (the "Malone Right") to acquire from time to time until June 30, 1999, 
         from TCI up to 30,545,864 shares of the Series B TCI Group Stock 
         acquired by TCI from the Magness Estate pursuant to the Exchange. Such 
         acquisition may be made in exchange for either, or any combination of, 
         shares of Series A TCI Group Stock owned by Dr. Malone (exchanged on a 
         one for one basis), or cash in an amount equal to the average closing 
         sale price of the Series B TCI Group Stock for the five trading days 
         preceding the acquisition.

         In connection with certain legal proceedings relative to the probate 
         of the Magness Estate, one or more of Gary Magness and Kim Magness, 
         Bob Magness' sons, Sharon Magness, Bob Magness' surviving second wife 
         and the original personal representatives of the Magness Estate 
         advanced various claims, causes of action, demands, complaints and 
         requests against one or more of the others. In addition, Kim Magness 
         and Gary Magness, in a Complaint And Request To Void Sale Of TCI 
         Stock, And For Damages And Surcharge, filed on October 29, 1997 (the 
         "Voiding Action"), advanced various claims relating to the June 16 
         Stock Transaction against TCI, Dr. Malone and the original personal 
         representatives of the Magness Estate. Among other matters, the 
         Voiding Action challenged the June 16 Stock Transaction on various 
         fiduciary bases and requested recision of such transaction and damages.

         Pursuant to an agreement effective as of January 5, 1998 (the 
         "Settlement Agreement"), TCI, Gary Magness, Kim Magness, Sharon 
         Magness, the Magness Estate, the Estate of Betsy Magness (the first 
         wife of Bob Magness) and Dr. Malone agreed to settle their respective 
         claims against each other relating to the Magness Estate and the June 
         16 Stock Transaction, in each case without any of those parties 
         admitting any of the claims or allegations against that party (the 
         "Magness Settlement").



                                                                     (continued)

                                      116
<PAGE>   118

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         In connection with the Magness Settlement, portions of the Exchange and
         Sale were unwound such that 10,201,041 shares of TCI Group Series A
         Stock and 11,666,506 shares (as adjusted for the Ventures Stock
         Dividend) of TCI Ventures Group Series A Stock were returned to TCI as
         authorized but unissued shares, and the Magness Estate returned to the
         Investment Bankers the portion of the Sales Price attributable to such
         returned shares. TCI then issued to the Magness Estate 10,017,145
         shares of TCI Group Series B Stock and 12,034,298 shares (as adjusted
         for the Ventures Stock Dividend) of TCI Ventures Group Series B Stock.
         In addition, as part of the Magness Settlement, TCI issued 1,339,415
         shares of TCI Group Series B Stock to the Estate of Betsy Magness in
         exchange for an equal number of shares of TCI Group Series A Stock and
         issued 1,531,834 shares of TCI Ventures Group Series B Stock for an
         equal number of shares of TCI Ventures Group Series A Stock.

         On February 9, 1998, in connection with the Magness Settlement, TCI
         entered into a call agreement (the "Malone Call Agreement") with Dr.
         Malone and Dr. Malone's wife (together with Dr. Malone, the
         "Malones"), under which the Malones granted to TCI the right to
         acquire any shares of TCI stock which are entitled to cast more than
         one vote per share (the "High-Voting Shares") owned by the Malones,
         which  currently consist of an aggregate of approximately 60 million
         High-Voting Shares upon Dr. Malone's death or upon a contemplated sale
         of the High-Voting Shares (other than a minimal amount) to third
         persons. In either such event, TCI has the right to acquire the shares
         at a maximum price equal to the then relevant market price of shares
         of "low-voting" Series A Stock plus a ten percent premium. The Malones
         also agreed that if TCI were ever to be sold to another entity, then
         the maximum premium that the Malones would receive on their
         High-Voting Shares would be no greater than a ten percent premium over
         the price paid for the relevant shares of Series A Stock. TCI paid
         $150 million to the Malones in consideration of them entering into the
         Malone Call Agreement.

         Also on February 9, 1998, in connection with the Magness Settlement,
         certain members of the Magness family, individually, and in certain
         cases, on behalf of the Estate of Betsy Magness and the Magness Estate
         (collectively, the "Magness Family") also entered into a call
         agreement with TCI (with substantially the same terms as the one
         entered into by the Malones, including a call on the shares owned by
         the Magness Family upon Dr. Malone's death) (the "Magness Call
         Agreement") on the Magness Family's aggregate of approximately 49
         million High-Voting Shares. The Magness Family was paid $124 million
         by TCI in consideration of them entering into the Magness Call
         Agreement. Additionally, on February 9, 1998, the Magness Family
         entered into a shareholders' agreement (the "Shareholders' Agreement")
         with the Malones and TCI under which (i) the Magness Family and the
         Malones agree to consult with each other in connection with matters to
         be brought to the vote of TCI's shareholders, subject to the proviso
         that if they cannot mutually agree on how to vote the shares, Dr.
         Malone has an irrevocable proxy to vote the High-Voting Shares owned
         by the Magness Family, (ii) the Magness Family may designate a nominee
         for the Board and Dr. Malone has agreed to vote his High Voting Shares
         for such nominee and (iii) certain "tag along rights" have been
         created in favor of the Magness Family and certain "drag along rights"
         have been created in favor of the Malones. In addition, the Malone
         Right granted by TCI to Dr. Malone to acquire 30,545,864 shares of TCI
         Group Series B Stock has been reduced to an option to acquire
         14,511,570 shares of TCI Group Series B Stock. Pursuant to the terms
         of the Shareholders' Agreement, the Magness Family has the right to
         participate in the reduced Malone Right on a proportionate basis with
         respect to 12,406,238 shares of the 14,511,570 shares subject to the
         Malone Right.

         The aggregate amount paid by TCI pursuant to the Malone Call Agreement
         and Magness Call Agreement will be reflected as a $274 million
         reduction of additional paid-in capital during the first quarter of
         1998.

                                                                     (continued)

                                      117
<PAGE>   119

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         On September 25, 1997, certain subsidiaries of the Company entered into
         an Asset Contribution Agreement with, among others, Fisher
         Communications Associates, L.L.C., which is controlled by a director of
         the Company. On January 15, 1998, pursuant to the agreement, the cable
         television assets of the applicable cable systems of the Company were
         contributed to Peak Cablevision in exchange for a 66.7% partnership
         interest in Peak Cablevision. Additionally, cable television assets of
         Fisher Communications, L.L.C. were contributed in 1998 in exchange of a
         33.3% interest in Peak Cablevision. In connection with the formation of
         Peak Cablevision, the Company contributed approximately 87,000
         customers passing 136,500 homes and Fisher Communications, L.L.C.
         contributed approximately 27,000 customers, passing 42,100 homes. The
         Company contributed debt amounting to $93 million and Fisher
         Communications, L.L.C. contributed debt amounting to $19 million.

         On July 23, 1997, an executive officer who is also a director of the
         Company acquired from the Company an aggregate of 7,296,324 shares of
         TCI Group Series B Stock and 3,417,187 shares of Liberty Group Series B
         Stock, in exchange for a like number of shares of TCI Group Series A
         Stock and Liberty Group Series A Stock, respectively, held by such
         executive officer and director.

         On July 24, 1997, the Company repurchased 219,937 shares of Liberty
         Group Series A Stock from the spouse of an executive officer who is
         also a director of the Company at an aggregate cost of approximately $4
         million.

         On June 10, 1997 (the "IP Phase I Closing Date"), the Company issued
         139,513 shares of TCI Group Series B Stock (the "IP I Shares") to the
         IP Series B Trust I ("Trust"). An executive officer who is also a
         director of the Company is the trustee of the Trust. The IP I Shares
         were issued in connection with a partial closing under two Partnership
         Interest Purchase Agreements both dated as of June 10, 1997 (the "IP-I
         and IP-III Purchase Agreements"), pursuant to which the Company
         acquired on the IP Phase I Closing Date (a) a 99.998% limited
         partnership interest in InterMedia Capital Management III, L.P., (b) a
         75% limited partnership interest in InterMedia CM - LP, and (c) a
         99.998% limited partnership interest in InterMedia Capital Management,
         L.P. in exchange for total consideration of the IP I Shares and cash
         and assumption of current liabilities in an aggregate amount of $6
         million. As a result of such transactions the Company increased its
         direct and indirect ownership of the limited partnership interests of
         InterMedia Partners, a California limited partnership, from
         approximately 53.6% to 54.7% and obtained the right to receive an
         administrative fee from InterMedia Partners and the right to receive a
         20% overriding interest on any distributions in excess of the partners'
         capital contributions. In light of such increased ownership interests
         and rights and the January 1, 1998 consummation of a transaction in
         which InterMedia Partners acquired substantially all of the equity
         interests held by partners other than TCI, the Company retroactively
         adopted the equity method of accounting for its investment in
         InterMedia Partners for all periods ended prior to January 1, 1998. On
         January 1, 1998, the Company began consolidating its investment in
         InterMedia Partners. The restatement of the Company's financial
         statements to adopt the equity method of accounting for InterMedia
         Partners resulted in a $125 million decrease to its investment in
         Intermedia Partners, a $50 million decrease to its deferred tax
         liability, and a $75 million increase to its accumulated deficit at
         December 31, 1996. In addition, such restatement resulted in a $14
         million increase to its net earnings in 1996 and a $12 million increase
         to its net loss in 1995. InterMedia Partners, InterMedia IV and ICM IV
         are all managed by the same management group. See note 5.

         On August 5, 1997 (the "IP Phase II Closing Date"), the Company issued
         2,405,942 shares of TCI Group Series B Stock (the "IP II Shares") to
         the IP Series B Trust II ("Trust II"). An executive officer who is also
         a director of the Company is the trustee of the Trust II. The IP II
         Shares were issued in connection with the closing under the Partnership
         Interest Purchase Agreement dated as of August 5, 1997, and a partial
         and final closing under the IP-I and IP-III Purchase Agreements,
         pursuant to which the Company acquired on the IP Phase II Closing Date
         a 99.997% limited partnership interest in ICM IV and an additional
         .001% limited partnership interest in InterMedia Capital Management,
         L.P. in exchange for total consideration of the IP II Shares and cash
         and assumption of liabilities in an aggregate amount of $18 million.
         See note 5.


                                                                     (continued)

                                      118
<PAGE>   120

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         In connection with the three Partnership Interest Purchase Agreements,
         a director of the Company received a consulting fee in the amount of
         $400,000 in cash and 31,030 shares of TCI Group Series B Stock and the
         son of a director of the Company received an advisory fee in the amount
         of 36,364 shares of TCI Group Series B Stock.

         In connection with the Kearns-Tribune merger (see note 7), the former
         Chairman of the Board of Kearns-Tribune who is also a director of TCI
         (the "Former Kearns-Tribune Chairman") received (i) a cash payment of
         $1.6 million and (ii) an assignment of all of Kearns-Tribune right,
         title and interest in and to all patented mining claims owned by
         Kearns-Tribune, including but not limited to royalties, buildings,
         fixtures, surface rights, licenses and contracts related thereto, which
         patented mining claims are valued at $438,000. With respect to the
         assignment of the mining claims, the Former Kearns-Tribune Chairman
         agreed to assume all liabilities with respect thereto and agreed to
         indemnify Kearns-Tribune for any and all liabilities of Kearns-Tribune,
         if any, relating to the mining claims, including those arising from
         past operations. As of December 31, 1997, Kearns-Tribune had made the
         cash payment to the Former Kearns-Tribune Chairman and was in process
         of completing the transfers of the mining claims to a corporation
         designated by the Former Kearns-Tribune Chairman. The parties
         anticipate the remaining mining claim transfers will be completed in
         fiscal 1998.

         On March 4, 1997, an executive officer who is also a director of the
         Company received an advance from a wholly-owned subsidiary of the
         Company in the amount of $6 million. On March 5, 1997, such individual
         received a second advance from a wholly-owned subsidiary of the Company
         in the amount of $6 million. The terms of the advances were
         memorialized by a promissory note. The interest rate on such loans is
         1% over the one-month LIBOR rate compounded annually. Principal
         outstanding on the note is due March 31, 1999 and interest is payable
         annually on March 1 of each year. The loan is unsecured.

         On the date of the Satellite Spin-off, the Company granted options to
         two of its executive officers and a key employee of TCIC to acquire an
         aggregate of 1,660,190 shares of Satellite Series A Common Stock. The
         exercise price for each such option is equal to $8.86 per share. Such
         options vest 20% per annum beginning February 1, 1997 and expire on
         February 1, 2006.

         Effective January 31, 1996, a director of the Company purchased
         one-third of the Company's interest in two limited partnerships and
         obtained two ten-year options to purchase the Company's remaining
         partnership interests. The purchase price for the one-third partnership
         interests was 37.209 shares of WestMarc Communications, Inc.
         ("WestMarc", a wholly-owned subsidiary of the Company) Series C
         Cumulative Compounding Preferred Stock owned by such director, and the
         purchase price for the ten-year options was $100 for each option. All
         options were exercised during the first quarter of 1998. The aggregate
         exercise price of $3,000,000 was satisfied with five non-interest
         bearing promissory notes that are due and payable to the Company in
         2008.

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

                                                                     (continued)

                                      119
<PAGE>   121

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(14)     Sale of Subsidiary Stock

         In April 1997, @Home issued 240,000 shares of convertible preferred
         stock, resulting in cash proceeds of $48 million, less issuance costs.
         On July 11, 1997, @Home completed its initial public offering (the
         "@Home IPO"), in which 10,350,000 shares of @Home common stock were
         sold for cash proceeds of approximately $100 million. As a result of
         the @Home IPO, the Company's economic interest in @Home decreased from
         43% to 39% which economic interest represents an approximate 72% voting
         interest. In connection with the associated dilution of the Company's
         ownership interest of @Home, the Company recognized a gain of $60
         million.

         Effective October 2, 1997, @Home entered into a Letter Agreement and
         Term Sheet with CSC, and it's parent, CSC Parent Corporation ("CSC
         Parent"), Comcast Corporation ("Comcast"), Cox Enterprises, Inc.
         ("Cox"), Kleiner, Perkins, Caufield & Byers and TCI (the "CSC
         Agreement"). In accordance with the provisions of the CSC Agreement,
         CSC has entered into a Master Distribution Agreement for the
         distribution of @Home's high speed residential consumer Internet access
         services on substantially the same terms and conditions as agreements
         previously entered into with TCI, Comcast and Cox. In connection with
         the CSC Agreement, @Home issued to CSC warrants to purchase an
         aggregate of 10,946,936 shares of @Home's Series A Common Stock at an
         exercise price of $.50 per share. Of these warrants, warrants to
         purchase 10,231,298 of such shares were exercisable as of March 4,
         1998, subject to the receipt of all necessary governmental consents or
         approvals, and the balance will become exercisable as and to the extent
         certain Connecticut cable television systems are transferred from TCI
         and its controlled affiliates to CSC, CSC's parent or their controlled
         affiliates. Following the exercise of all of CSC's warrants, the
         Company's equity interest and voting power in @Home will decrease to
         approximately 36% and 69%, respectively. See note 19.

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

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


                                                                     (continued)

                                      120
<PAGE>   122

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(15)     Income Taxes

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

         Income tax benefit (expense) for the years ended December 31, 1997,
         1996 and 1995 consists of:

<TABLE>
<CAPTION>
                                    Current         Deferred          Total
                                    -------         --------          -----
                                              amounts in millions
<S>                               <C>                    <C>             <C>
Year ended December 31, 1997:
  Federal                         $      (10)            264             254
  State and local                        (31)             11             (20)
                                  ----------      ----------      ----------
                                  $      (41)            275             234
                                  ==========      ==========      ==========
Year ended December 31, 1996:
  Federal                         $      (25)           (184)           (209)
  State and local                        (13)            (49)            (62)
                                  ----------      ----------      ----------
                                  $      (38)           (233)           (271)
                                  ==========      ==========      ==========

Year ended December 31, 1995:
  Federal                         $      (23)            138             115
  State and local                        (10)             23              13
                                  ----------      ----------      ----------
                                  $      (33)            161             128
                                  ==========      ==========      ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                               Years ended December 31,
                                                      -------------------------------------------
                                                          1997            1996            1995
                                                      ------------     ----------      ----------
                                                                   amounts in millions
<S>                                                   <C>                   <C>              <C>
Computed "expected" tax benefit (expense)             $      278            (197)            109
Amortization not deductible for tax purposes                 (27)            (22)            (25)
Minority interest in losses (earnings) of                                                       
    consolidated subsidiaries                                 27              (3)              9
Gain on sale of subsidiary stock                              21              --              43
State and local income taxes, net of federal
    income tax benefit                                        (5)            (50)             (3)
Increase in valuation allowance                              (26)            (24)             --
Other                                                        (34)             25              (5)
                                                      ----------      ----------      ----------
                                                      $      234            (271)            128
                                                      ==========      ==========      ==========
</TABLE>

                                                                     (continued)

                                      121
<PAGE>   123

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                               ------------------------------------
                                                                                    1997                 1996
                                                                               ---------------      ---------------
                                                                                         amounts in millions
<S>                                                                            <C>                  <C>
           Deferred tax assets:
               Net operating loss carryforwards                                $           920                  721
                 Less - valuation allowance                                               (183)                (150)
               Investment tax credit carryforwards                                         117                  118
                 Less - valuation allowance                                                (41)                 (41)
               Alternative minimum tax credit carryforwards                                 95                   95
               Investments in affiliates, due principally to losses of
                 affiliates recognized for financial statement purposes in
                 excess of losses recognized for income tax purposes                       175                  282
               Future deductible amount attributable to accrued
                 stock appreciation rights and deferred compensation                       132                   24
               Future deductible amounts principally due to
                 non-deductible accruals                                                   150                   55
               Other                                                                         5                   --
                                                                               ---------------      ---------------
                    Net deferred tax assets                                              1,370                1,104
                                                                               ---------------      ---------------

           Deferred tax liabilities:
               Property and equipment, principally due to
                 differences in depreciation                                             1,295                1,193
               Franchise costs, principally due to differences in
                 amortization                                                            4,354                4,676
               Investment in affiliates, due principally to
                 undistributed earnings of affiliates                                    1,552                  917
               Intangible assets, principally due to differences in
                 amortization                                                                9                   36
               Leases capitalized for tax purposes                                           4                   90
               Other                                                                       264                  154
                                                                               ---------------      ---------------
                    Total gross deferred tax liabilities                                 7,478                7,066
                                                                               ---------------      ---------------
                    Net deferred tax liability                                 $         6,108                5,962
                                                                               ===============      ===============
</TABLE>

         The valuation allowance for deferred tax assets as of December 31, 1997
         and 1996 was $224 million and $191 million, respectively.

         At December 31, 1997, the Company had net operating loss carryforwards
         for income tax purposes aggregating approximately $2,021 million of
         which, if not utilized to reduce taxable income in future periods, $136
         million expires in 2003, $117 million in 2004, $355 million in 2005,
         $288 million in 2006, $138 million in 2009, $167 million in 2010, $285
         million in 2011 and $544 million in 2012. Certain subsidiaries of the
         Company had additional net operating loss carryforwards for income tax
         purposes aggregating approximately $233 million and these net operating
         losses are subject to certain rules limiting their usage.

         At December 31, 1997, the Company had remaining available investment
         tax credits of approximately $62 million which, if not utilized to
         offset future federal income taxes payable, expire at various dates
         through 2005. Certain subsidiaries of the Company had additional
         investment tax credit carryforwards aggregating approximately $55
         million and these investment tax credit carryforwards are subject to
         certain rules limiting their usage.

                                                                     (continued)

                                      122
<PAGE>   124

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Certain of the federal income tax returns of TCI and its subsidiaries
         which filed separate income tax returns are presently under examination
         by the Internal Revenue Service (the "IRS") for the years 1993 through
         1995 (the "IRS Examinations"). In the opinion of management, any
         additional tax liability, not previously provided for, resulting from
         the IRS Examinations ultimately determined to be payable, should not
         have a material adverse effect on the consolidated financial position
         of the Company.

(16)     Commitments and Contingencies

         On October 5, 1992, the United States Congress enacted the Cable
         Television Consumer Protection and Competition Act of 1992 (the "1992
         Cable Act"). In 1993 and 1994, the Federal Communications Commission
         (the "FCC") adopted certain rate regulations required by the 1992 Cable
         Act and imposed a moratorium on certain rate increases. As a result of
         such actions, the Company's basic and tier service rates and its
         equipment and installation charges (the "Regulated Services") are
         subject to the jurisdiction of local franchising authorities and the
         FCC. Basic and tier service rates are evaluated against competitive
         benchmark rates as published by the FCC, and equipment and installation
         charges are based on actual costs. Any rates for Regulated Services
         that exceeded the benchmarks were reduced as required by the 1993 and
         1994 rate regulations. The rate regulations do not apply to the
         relatively few systems which are subject to "effective competition" or
         to services offered on an individual service basis, such as premium
         movie and pay-per-view services.

         The Company believes that it has complied in all material respects with
         the provisions of the 1992 Cable Act, including its rate setting
         provisions. However, the Company's rates for Regulated Services are
         subject to review by the FCC, if a complaint has been filed by a
         customer, or the appropriate franchise authority, if such authority has
         been certified by the FCC to regulate rates. If, as a result of the
         review process, a system cannot substantiate its rates, it could be
         required to retroactively reduce its rates to the appropriate benchmark
         and refund the excess portion of rates received. Any refunds of the
         excess portion of tier service rates would be retroactive to the date
         of complaint. Any refunds of the excess portion of all other Regulated
         Service rates would be retroactive to one year prior to the
         implementation of the rate reductions.

         The Company is obligated to pay fees for the rights to exhibit certain
         films that are released by various producers through 2017 (the "Film
         Licensing Obligations"). Based on customer levels at December 31, 1997,
         these agreements require minimum payments aggregating approximately
         $695 million. The aggregate amount of the Film Licensing Obligations
         under these license agreements is not currently estimable because such
         amount is dependent upon the number of qualifying films released
         theatrically by certain motion picture studios as well as the domestic
         theatrical exhibition receipts upon the release of such qualifying
         films. Nevertheless, the Company's aggregate payments under the Film
         Licensing Obligations could prove to be significant.

                                                                     (continued)

                                      123
<PAGE>   125

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         The Company is a party to affiliation agreements with several of its
         programming suppliers. Pursuant to these agreements, the Company is
         committed to carry such suppliers programming on its cable systems.
         Several of these agreements provide for penalties and charges in the
         event the programming is not carried or not delivered to a
         contractually specified number of customers.

         During the third quarter of 1997, the Company committed to purchase
         billing services from an unaffiliated third party pursuant to three
         successive five year agreements. Pursuant to such arrangement, the
         Company is obligated to make minimum payments aggregating approximately
         $1.6 billion through 2012. Such minimum payments are subject to
         inflation and other adjustments pursuant to the terms of the underlying
         agreements.

         The Company has guaranteed notes payable and other obligations of
         affiliated and other companies with outstanding balances of
         approximately $469 million at December 31, 1997. With respect to the
         Company's guarantees of $166 million of such obligations, the Company
         has been indemnified for any loss, claim or liability that the Company
         may incur, by reason of such guarantees. Although there can be no
         assurance, management of the Company believes that it will not be
         required to meet its obligations under such guarantees, or if it is
         required to meet any of such obligations, that they will not be
         material to the Company.

         On July 11, 1997, TCI Music, Inc. ("TCI Music") merged with DMX, Inc.
         Following such merger (the "DMX Merger"), the Company owned 89.6% of
         the common equity and 98.7% of the voting power of TCI Music. In
         December 1997, TCI Music issued convertible preferred stock and common
         stock in connection with two acquisitions. After giving effect to such
         issuances and assuming the conversion of the TCI Music convertible
         preferred stock, TCI, at December 31, 1997, owned TCI Music securities
         representing 81.1% of TCI Music's common stock and 97.5% of the voting
         power attributable to such TCI Music common stock. In connection with
         the DMX Merger, the Company assumed a contingent obligation to purchase
         14,896,648 shares (6,812,393 of which are owned by subsidiaries of the
         Company) of TCI Music common stock at a price of $8.00 per share. Such
         obligation may be settled, at the Company's option, with shares of TCI
         Group Series A Stock or with cash. The Company has recorded its
         contingent obligation to purchase such shares as a component of
         minority interest in equity of consolidated subsidiaries the
         accompanying consolidated financial statements.

         The Company leases business offices, has entered into converter lease
         agreements, pole rental agreements, transponder lease agreements and
         uses certain equipment under lease arrangements. Rental expense under
         such arrangements amounted to $212 million, $187 million and $142
         million in 1997, 1996 and 1995, respectively.

         Future minimum lease payments under noncancellable operating leases for
         each of the next five years are summarized as follows (amounts in
         millions):

<TABLE>
<CAPTION>
               Years ending
               December 31,
               ------------
<S>                                   <C>       
                  1998                $      215
                  1999                       181
                  2000                       151
                  2001                       118
                  2002                       100
                  Thereafter                 439
</TABLE>


                                                                     (continued)

                                      124
<PAGE>   126

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         It is expected that, in the normal course of business, expiring leases
         will be renewed or replaced by leases on other properties; thus, it is
         anticipated that future minimum lease commitments will not be less than
         the amount shown for 1998.

         Effective as of December 16, 1997, National Digital Television Center,
         Inc. ("NDTC"), a subsidiary of TCI and a member of the TCI Ventures
         Group, on behalf of TCIC and other cable operators that may be 
         designated from time to time by NDTC ("Approved Purchasers"), entered
         into an agreement (the "Digital Terminal Purchase Agreement") with
         General Instrument Corporation (formerly NextLevel Systems, Inc.,
         "GI") to purchase advanced digital set-top devices. The hardware and
         software incorporated into these devices will be designed and
         manufactured to be compatible and interoperable with the OpenCable(TM)
         architecture specifications adopted by CableLabs, the cable television
         industry's research and development consortium, in November 1997. NDTC
         has agreed that Approved Purchasers will purchase, in the aggregate, a
         minimum of 6.5 million set-top devices over the next three years at an
         average price of $318 per set-top device. GI agreed to provide NDTC
         and its Approved Purchasers the most favorable prices, terms and
         conditions made available by GI to any customer purchasing advanced
         digital set-top devices. In connection with NDTC's purchase
         commitment, GI agreed to grant warrants to purchase its common stock
         proportional to the number of devices ordered by each organization,
         which as of the effective date of the Digital Terminal Purchase
         Agreement, would have represented at least a 10% equity interest in GI
         (on a fully diluted basis). It is anticipated that the value
         associated with such equity interest would be attributed to TCI Group
         upon purchase and deployment of the digital set-top devices. 

         Also in December 1997, NDTC entered into a memorandum of understanding
         (the "GI MOU") with GI which contemplates the sale to GI of certain of
         the assets of NDTC's set-top authorization business, the license of
         certain related technology to GI, and an additional cash payment in
         exchange for approximately 21.4 million shares of stock of GI. In
         connection therewith, NDTC would also enter into a services agreement
         pursuant to which it will provide certain services to GI's set-top
         authorization business. The transaction is subject to the signing of
         definitive agreements; accordingly, there can be no assurance that it
         will be consummated.

         Certain key employees of the Company and members of the Board hold
         restricted stock awards, options and options with tandem SARs to
         acquire shares of certain subsidiaries' common stock. Estimates of the
         compensation related to SARs have been recorded in the accompanying
         consolidated financial statements pursuant to APB Opinion No. 25. Such
         estimates are subject to future adjustment based upon the market value
         of the respective common stock and, ultimately, on the final market
         value when the rights are exercised.


                                                                     (continued)

                                      125
<PAGE>   127

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         Estimates of compensation relating to phantom stock appreciation rights
         ("PSARs") granted to employees of a subsidiary of TCI have been
         recorded in the accompanying combined financial statements, but are
         subject to future adjustment based upon a valuation model derived from
         such subsidiary's cash flow, working capital and debt.

         During 1997, the Company began an enterprise-wide comprehensive review
         of its computer systems and related software to ensure systems properly
         recognize the year 2000 and continue to process business information.
         The systems being evaluated include all internal use software and
         devices and those systems and devices that manage the distribution of
         the Company's, as well as third parties' products. Additionally, the
         Company has initiated a program of communications with its significant
         suppliers, customers and affiliated companies to determine the
         readiness of these third parties and the impact on the Company if those
         third parties fail to remediate their own year 2000 issues.

         Over the past three years, the Company began an effort to convert a
         substantial portion of its financial applications to commercial
         products, which are anticipated to be year 2000 ready or to outsource
         portions of its financial applications to third party vendors who are
         expected to be year 2000 ready. Notwithstanding such effort, the
         Company is in the process of finalizing its assessment of the impact of
         year 2000. The Company is utilizing both internal and external
         resources to identify, correct or reprogram, and test systems for year
         2000 readiness. To date, the Company has inventoried substantially all
         of its cable systems and is currently evaluating the results of such
         inventory. The Company expects that it will have to modify or replace
         certain portions of its cable distribution plant, although the Company
         has not yet completed its assessment. Confirmations have been received
         from certain primary suppliers indicating that they are either year
         2000 ready or have plans in place to ensure readiness. As part of the
         Company's assessment of its year 2000 issue, it is evaluating the level
         of validation it will require of third parties to ensure their year
         2000 readiness. The Company's manual assessment of the impact of the
         year 2000 date change should be complete by mid-1998.

         Management of the Company has not yet determined the cost associated
         with its year 2000 readiness efforts and the related potential impact
         on the Company's results of operations. Amounts expended to date have
         not been material, although there can be no assurance that costs
         ultimately required to be paid to ensure the Company's year 2000
         readiness will not have an adverse effect on the Company's financial
         position. Additionally, there can be no assurance that the systems of
         other companies on which the Company relies will be converted in time
         or that any such failure to convert by another company will not have
         an adverse effect on the Company's financial condition or position.

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

                                                                     (continued)

                                      126
<PAGE>   128

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(17)     Information about the Company's Segments

         The Company has two reportable segments: domestic cable and
         communications services and domestic programming services. Domestic
         cable and communications services receive video, audio and data signals
         from various sources, and amplify and distribute the signals by coaxial
         cable and optical fiber to the premises of customers who pay a fee for
         the service. Domestic programming services produces, acquires, and
         distributes, through all available formats and media, branded
         entertainment and informational programming and software, including
         multimedia products, delivered in both analog and digital form. The
         Company's domestic cable and communications services business and
         assets are included in TCI Group, and the Company's domestic
         programming business and assets are included in Liberty Media Group.
         The Company's principal international businesses and assets and the
         Company's remaining non-cable and non-programming domestic businesses
         and assets are included in TCI Ventures Group.

         The accounting policies of the segments are the same as those described
         in the summary of significant accounting policies. The Company
         evaluates performance based on a measure of operating cash flow
         (defined as operating income before depreciation, amortization, stock
         compensation and other non-cash charges). Operating cash flow is a
         measure of value and borrowing capacity within the cable television
         industry and is not intended to be a substitute for cash flow provided
         by operating activities, a measure of performance prepared in
         accordance with generally accepted accounting principles, and should
         not be relied upon as such. The Company generally accounts for
         intersegment sales and transfers as if the sales or transfers were to
         third parties, that is, at current market prices.

         The Company's reportable segments are strategic business units that
         offer different products and services. They are managed separately
         because each segment requires different technology and marketing
         strategies.


                                                                     (continued)

                                      127
<PAGE>   129

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

<TABLE>
<CAPTION>
                                                  Domestic cable     Domestic
                                                 & communications   programming          All
                                                     services         services          other           Total
                                                 ----------------   -----------        -------        --------
                                                                      amounts in millions
<S>                                                <C>                   <C>             <C>           <C>  
         Year ended December 31, 1997:
         -----------------------------
         Revenues from external customers
             including intersegment revenue        $    6,429            374             969           7,772
         Intersegment revenue                              --            173              29             202
         Segment operating cash flow                    2,766             55             154           2,975

         Year ended December 31, 1996:
         -----------------------------
         Revenues from external customers
             including intersegment revenue        $    5,881          1,339             926           8,146
         Intersegment revenue                              --            107              17             124
         Segment operating cash flow                    2,016            164              96           2,276

         Year ended December 31, 1995:
         -----------------------------
         Revenues from external customers
             including intersegment revenue        $    4,827          1,441             326           6,594
         Intersegment revenue                              --             80               8              88
         Segment operating cash flow                    1,925             16              47           1,988

         As of December 31, 1997
         -----------------------
         Segment assets                            $   23,578          5,039           3,944          32,561
         Investment in equity method investees            414            524           2,098           3,036
         Expenditures for segment assets                  538              4             167             709

         As of December 31, 1996
         -----------------------
         Segment assets                            $   22,819          3,059           4,260          30,138
         Investment in equity method investees            361            545           2,069           2,975
         Expenditures for segment assets                1,834             12             209           2,055
</TABLE>


                                                                     (continued)

                                      128
<PAGE>   130

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         A reconciliation of reportable segment amounts to the Company's
         consolidated balances is as follows:

<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                               ------------------------------------------
                                                                  1997            1996            1995
                                                               ----------      ----------      ----------
                                                                         amounts in millions
<S>                                                            <C>                  <C>             <C>  
         Revenue
         -------
         Total revenue for reportable segments                 $    6,803           7,220           6,268
         Other revenue                                                969             926             326
         Elimination of intersegment revenue                         (202)           (124)            (88)
                                                               ----------      ----------      ----------
                  Total consolidated revenue                   $    7,570           8,022           6,506
                                                               ==========      ==========      ==========

         Operating Cash Flow to Earnings (Loss) Before
         ---------------------------------------------
              Income Tax
              ----------
         Total operating cash flow for reportable segments     $    2,821           2,180           1,941
         Other operating cash flow                                    154              96              47
         Other items excluded from operating cash flow:
                  Depreciation                                     (1,077)         (1,093)           (899)
                  Amortization                                       (546)           (523)           (473)
                  Stock compensation                                 (488)             13             (57)
                  Impairment of intangible assets                     (15)             --              --
                  Restructuring charges                                --             (41)            (17)
                  Interest expense                                 (1,160)         (1,096)         (1,010)
                  Interest and dividend income                         88              64              52
                  Share of losses of affiliates, net                 (930)           (450)           (213)
                  Loss on early extinguishment of debt                (39)            (71)             (6)
                  Minority interest in losses (earnings)             (154)            (56)             17
                  Gain on sale of stock by subsidiary and
                     equity investee                                  172              12             288
                  Gain on disposition of assets                       401           1,593              49
                  Other, net                                          (22)            (65)            (30)
                                                               ----------      ----------      ----------
                     Earnings (loss) before income taxes       $     (795)            563            (311)
                                                               ==========      ==========      ==========
</TABLE>


                                                                     (continued)

                                      129
<PAGE>   131

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                    As of December 31,
                                                               --------------------------
                                                                  1997             1996
                                                               ----------      ----------
                                                                  amounts in millions
<S>                                                            <C>                 <C>   
         Assets
         ------
         Total assets for reportable segments                  $   28,617          25,878
         Other segment assets                                       3,944           4,260
         Consolidating and eliminating adjustments                    (74)             31
                                                               ----------      ----------
                  Consolidated total                           $   32,487          30,169
                                                               ==========      ==========

         Other Significant Items
         -----------------------
         Equity method investments for reportable segments     $      938             906
         Other equity method investments                            2,098           2,069
         Consolidating and eliminating adjustments                     12              10
                                                               ----------      ----------
                  Consolidated equity method investments       $    3,048           2,985
                                                               ==========      ==========

         Expenditures for reportable segment assets            $      542           1,846
         Other asset expenditures                                     167             209
                                                               ----------      ----------
                  Consolidated total asset expenditures        $      709           2,055
                                                               ==========      ==========
</TABLE>

         Substantially all revenue and assets of TCI's reportable segments are
         attributed to or located in the United States.

         The Company does not have a single external customer which represents
         10 percent or more of its consolidated revenues.

                                                                     (continued)

                                      130
<PAGE>   132

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(18)     Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>
                                                                           1st          2nd           3rd           4th
                                                                         Quarter      Quarter       Quarter       Quarter
                                                                         -------      -------       -------       -------
                                                                                         amounts in millions,
                                                                                        except per share data
<S>                                                                      <C>             <C>          <C>          <C>  
           1997:
           -----
             Revenue                                                     $  1,827        1,887        1,934        1,922
                                                                         ========     ========     ========     ========
             Operating income                                            $    349          253          222           25 
                                                                         ========     ========     ========     ========
             Net loss                                                    $    (58)        (154)         (22)        (327)
                                                                         ========     ========     ========     ========
             Basic earnings (loss) attributable to common
               stockholders per common share:

                   TCI Group Stock                                       $   (.12)        (.25)        (.34)        (.11)
                                                                         ========     ========     ========     ========
                   Liberty Group Stock (a)                               $    .04          .02          .44         (.17)
                                                                         ========     ========     ========     ========
                   TCI Ventures Group Stock (b)                          $     --           --          .07         (.54)
                                                                         ========     ========     ========     ========

             Diluted earnings (loss) attributable to common
               stockholders per common and potential common share:

                   TCI Group Stock                                       $   (.12)        (.25)        (.34)        (.11)
                                                                         ========     ========     ========     ========
                   Liberty Group Stock (a)                               $    .04          .01          .40         (.17)
                                                                         ========     ========     ========     ========
                   TCI Ventures Group Stock(b)                           $     --           --          .07         (.54)
                                                                         ========     ========     ========     ========

           1996:
           -----
             Revenue                                                     $  1,861        1,948        2,058        2,155
                                                                         ========     ========     ========     ========
             Operating income                                            $    172          169          220           71
                                                                         ========     ========     ========     ========
             Net earnings (loss):
                As previously reported                                   $   (121)        (187)        (138)         724
                Adjustment to adopt equity  method of
                  accounting for investee                                      (2)          (2)          20           (2)
                                                                         --------     --------     --------     --------
                As adjusted                                              $   (123)        (189)        (118)         722
                                                                         ========     ========     ========     ========

             Basic earnings (loss) attributable to common
                stockholders per common share:

                  TCI Group Stock:
                    As previously reported                               $   (.22)        (.30)        (.25)        (.46)
                    Adjustment to adopt equity  method of accounting
                      for investee                                             --           --          .03           --
                                                                         --------     --------     --------     --------
                    As adjusted                                          $   (.22)        (.30)        (.22)        (.46)
                                                                         ========     ========     ========     ========

                  Liberty Group Stock (a)                                $    .04          .01          .05         2.73
                                                                         ========     ========     ========     ========

             Diluted earnings (loss) attributable to common
                stockholders per common and potential common share:

                  TCI Group Stock:
                    As previously reported                               $   (.22)        (.30)        (.25)        (.46)
                    Adjustment to adopt equity  method of accounting
                      for investee                                             --           --          .03           --
                                                                         --------     --------     --------     --------
                    As adjusted                                          $   (.22)        (.30)        (.22)        (.46)
                                                                         ========     ========     ========     ========

                  Liberty Group Stock (a)                                $    .04          .01          .04         2.49
                                                                         ========     ========     ========     ========
</TABLE>

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

          (a)     Adjusted to give effect to the 1998 Liberty Stock Dividend.

          (b)     Adjusted to give effect to the Ventures Stock Dividend.

(19)     Restatement Associated With Costs of Distribution Agreements

         The Company has restated its consolidated financial statements to
record non-cash costs of certain distribution agreements as assets to be
amortized over the exclusivity periods set forth in the respective distribution
agreements. Such non-cash costs had originally been expensed in the period that
the underlying warrants had become exercisable. This restatement resulted in a
$164 million increase to other assets and a $99 million increase to minority
interests in consolidated subsidiaries at December 31, 1997. In addition, the
restatement resulted in a $65 million decrease to net loss and a $.15 decrease
to basic and diluted net loss attributable to common stockholders per share of
TCI Ventures Group Stock for the year ended December 31, 1997. See note 14.

                                      131
<PAGE>   133

                          INDEPENDENT AUDITORS' REPORT




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


We have audited and reported separately herein on the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries as of December 31, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997.

We have also audited the accompanying combined balance sheets of
Liberty/Ventures Group (a combination of certain assets of Tele-Communications,
Inc., as defined in note 1) as of December 31, 1997 and 1996, and the related
combined statements of operations, equity, and cash flows for each of the years
in the three-year period ended December 31, 1997. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

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

The combined financial statements of Liberty/Ventures Group are presented for
purposes of additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries. As more fully described in note 1,
the combined financial statements of Liberty/Ventures Group are intended to
reflect the performance of the businesses of Tele-Communications, Inc., which
produce and distribute programming services, Tele-Communications, Inc.'s
principal international assets and substantially all of Tele-Communications,
Inc.'s domestic non-cable and non-programming assets. The combined financial
statements of Liberty/Ventures Group should be read in conjunction with the
consolidated financial statements of Tele-Communications, Inc. and subsidiaries.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of
Liberty/Ventures Group as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.

The accompanying combined financial statements as of December 31, 1997 and for
the year then ended have been restated, as described in Note 14.



                                              KPMG Peat Marwick LLP



Denver, Colorado
March 20, 1998,
     except for Notes 2 and 14
     which are as of September 14, 1998 and January 6, 1999, respectively




                                      132
<PAGE>   134

                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                             Combined Balance Sheets
                           December 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                                       1997*      1996
                                                                      ------     ------
Assets                                                               amounts in millions
<S>                                                                   <C>           <C>
Cash and cash equivalents                                             $  224        444

Trade and other receivables, net                                         127        140

Prepaid program rights                                                   104         88

Committed program rights                                                 117         21

Investments in affiliates, accounted for under the equity method,
   and related receivables (note 5)                                    2,654      2,630

Investment in Time Warner, Inc. ("Time Warner") (note 6)
                                                                       3,538      2,017

Other investments and related receivables (note 7)                       695        245

Property and equipment, at cost:
   Land                                                                    8          8
   Distribution systems                                                  856        766
   Support equipment and buildings                                       153        221
                                                                      ------     ------
                                                                       1,017        995
   Less accumulated depreciation                                         280        248
                                                                      ------     ------
                                                                         737        747
                                                                      ------     ------
Intangible assets:
   Excess cost over acquired net assets                                  429        796
   Franchise costs                                                       108        243
                                                                      ------     ------
                                                                         537      1,039
      Less accumulated amortization                                       86        106
                                                                      ------     ------
                                                                         451        933
                                                                      ------     ------

Other assets, at cost, net of amortization (note 10)                     280         91
                                                                      ------     ------

                                                                      $8,927      7,356
                                                                      ======     ======
</TABLE>

*Restated - see note 14.
                                                                     (continued)



                                      133
<PAGE>   135


                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                       Combined Balance Sheets, continued

                           December 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                   1997*          1996
                                                                                ----------     ----------
Liabilities and Combined Equity                                                    amounts in millions
- -------------------------------
<S>                                                                             <C>                    <C>
Accounts payable                                                                $       40             72

Accrued liabilities                                                                    168            156

Program rights payable                                                                 156             34

Customer prepayments                                                                   137            119

Deferred option premium (note 6)                                                       306             --

Capital lease obligations (note 13)                                                    387            200

Debt (note 8)                                                                          757            528

Deferred income taxes (note 9)                                                         957            802

Other liabilities                                                                       90             87
                                                                                ----------     ----------

        Total liabilities                                                            2,998          1,998
                                                                                ----------     ----------

Minority interests in equity of attributed subsidiaries (notes 5 and 11)               620            413

Combined equity (note 11):
   Combined equity                                                                   4,011          5,038
   Accumulated other comprehensive earnings, net of taxes                              768             41
                                                                                ----------     ----------
                                                                                     4,779          5,079
   Due to (from) related parties                                                       530           (134)
                                                                                ----------     ----------
     Total combined equity                                                           5,309          4,945
                                                                                ----------     ----------

Commitments and contingencies (notes 2, 5 and 13)                               $    8,927          7,356
                                                                                ==========     ==========
</TABLE>

*Restated - see note 14.


See accompanying notes to combined financial statements.



                                      134
<PAGE>   136


                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                        Combined Statements of Operations

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                    1997*             1996              1995
                                                                                ------------      ------------      ------------
                                                                                               amounts in millions
<S>                                                                             <C>                      <C>                 <C>
Revenue:
   Unaffiliated parties                                                         $      1,104             1,136               746
   Related parties (note 11)                                                             195               117                86
   Net sales from electronic retailing services                                           --               984               920
                                                                                ------------      ------------      ------------
                                                                                       1,299             2,237             1,752
                                                                                ------------      ------------      ------------

Cost of sales, operating costs and expenses:
   Cost of sales                                                                          --               605               603
   Operating                                                                             682               750               547
   Selling, general and administrative                                                   348               563               510
   Charges from related parties (note 11)                                                 60                54                30
   Impairment of assets                                                                   15                 9                --
   Stock compensation (note 11)                                                          296                10                16
   Restructuring charges                                                                  --                --                17
   Depreciation and amortization                                                         196               210               173
                                                                                ------------      ------------      ------------
                                                                                       1,597             2,201             1,896
                                                                                ------------      ------------      ------------

        Operating income (loss)                                                         (298)               36              (144)

Other income (expense):
   Interest expense                                                                      (57)              (68)              (55)
   Interest expense to related parties (note 11)                                         (18)               --                (6)
   Dividend and interest income                                                           57                39                27
   Interest income from related parties (note 11)                                          6                14                --
   Share of losses of affiliates, net (note 5)                                          (850)             (372)             (210)
   Minority interests in losses of attributed subsidiaries                                25                26                20
   Gain on dispositions, net (notes 5, 6 and 7)                                          420             1,558                47
   Gain on sale of stock by attributed subsidiaries (notes 10 and 12)                     60                --               123
   Gain on issuance of stock by affiliates (note 5)                                      112                13               165
   Other, net                                                                              2                 9               (19)
                                                                                ------------      ------------      ------------
                                                                                        (243)            1,219                92
                                                                                ------------      ------------      ------------

        Earnings (loss) before income taxes                                             (541)            1,255               (52)

Income tax benefit (expense) (note 9)                                                    130              (457)               56
                                                                                ------------      ------------      ------------

        Net earnings (loss)                                                     $       (411)              798                 4
                                                                                ============      ============      ============

Comprehensive earnings                                                          $        316               517               231
                                                                                ============      ============      ============
</TABLE>

* Restated - see note 14.

See accompanying notes to combined financial statements.


                                      135
<PAGE>   137





                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                          Combined Statements of Equity

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                     Accumulated
                                                                        other            Due to
                                                                     comprehensive       (from)          Total
                                                        Combined        earnings,        related        combined
                                                         equity*       net of tax        parties         equity*
                                                       ----------      ----------      ----------      ----------
                                                                           amounts in millions
<S>                                                    <C>              <C>             <C>          <C>  
Balance at January 1, 1995                             $    2,563              95              29           2,687
  Net earnings                                                  4              --              --               4
  Foreign currency translation adjustment                      --              (5)             --              (5)
  Change in unrealized holding gains on
     available-for-sale securities                             --             232              --             232
  Gain in connection with issuance of stock of
     affiliate (note 5)                                        51              --              --              51
  Deferred tax assets transferred to related party            (16)             --              --             (16)
  Contribution to combined equity for acquisitions             19              --              --              19
  Stock compensation                                           11              --               3              14
  Intergroup tax allocation                                   (56)             --              (1)            (57)
  Other transfers from (to) related parties, net            1,083              --             (24)          1,059
                                                       ----------      ----------      ----------      ----------

Balance at December 31, 1995                                3,659             322               7           3,988
   Net earnings                                               798              --              --             798
   Foreign currency translation adjustment                     --              35              --              35
   Recognition of previously unrealized gains on
     available-for-sale securities                             --            (364)             --            (364)
   Change in unrealized holding gains on
     available-for-sale securities                             --              48              --              48
   Repurchase of common stock                                 (38)             --              --             (38)
   Issuance of stock by attributed subsidiary                  10              --              --              10
   Stock compensation                                          (7)             --              (2)             (9)
   Intergroup tax allocation                                  (53)             --              32             (21)
   Other transfers from (to) related parties, net             669              --            (171)            498
                                                       ----------      ----------      ----------      ----------

Balance at December 31, 1996                                5,038              41            (134)          4,945
   Net loss                                                  (411)             --              --            (411)
   Foreign currency translation adjustment                     --             (22)             --             (22)
   Change in unrealized holding gains on
     available-for-sale securities                             --             749              --             749
   Contribution to combined equity for issuance
     of common stock to TCI Employee Stock
     Purchase Plan                                              2              --              --               2
   Repurchase of common stock                                (625)             --              --            (625)
   Excess of consideration paid over carryover
     basis of net assets acquired from related
     party                                                   (219)             --              --            (219)
   Gain in connection with issuance of stock of
     affiliate (note 5)                                        66              --              --              66
   Issuance of stock by attributed subsidiary                  19              --              --              19
   Issuance of common stock                                    30              --              --              30
   Excess of cash received over carryover basis
     of SUMMITrak Assets                                       30              --              --              30
   Stock compensation                                          68              --             167             235
   Intergroup tax allocation                                 (193)             --              33            (160)
   Other transfers from related parties, net                  206              --             464             670
                                                       ----------      ----------      ----------      ----------

Balance at December 31, 1997                           $    4,011             768             530           5,309
                                                       ==========      ==========      ==========      ==========
</TABLE>

* Restated - see note 14.

See accompanying notes to combined financial statements.



                                      136
<PAGE>   138





                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                        Combined Statements of Cash Flows

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                         1997*           1996                1995
                                                                                    ------------     ------------       ----------
                                                                                                     amounts in millions
                                                                                                        (see note 4)
<S>                                                                                  <C>                      <C>                <C>
Cash flows from operating activities:
   Net earnings (loss)                                                               $      (411)             798                4
   Adjustments to reconcile net earnings (loss) to net cash provided (used) by
     operating activities:
        Depreciation and amortization                                                        196              210              173
        Impairment of assets                                                                  15                9               --
        Stock compensation                                                                   296               10               16
        Payments of stock compensation                                                       (75)              (1)              (3)
        Share of losses of affiliates, net                                                   850              372              210
        Deferred income tax expense (benefit)                                                 16              471               (9)
        Intergroup tax allocation                                                           (159)             (21)             (56)
        Minority interests in earnings of attributed subsidiaries                            (25)             (26)             (20)
        Gain on issuance of stock by affiliates                                             (112)             (13)            (165)
        Gain on sale of stock by attributed subsidiaries                                     (60)              --             (123)
        Gain on disposition of assets, net                                                  (420)          (1,558)             (47)
        Other noncash charges                                                                 17                9                7
        Changes in operating assets and liabilities, net of the effect of
          acquisitions and dispositions:
             Change in receivables                                                             9              (53)             (16)
             Change in prepaid expenses and committed program rights                          (3)             (12)             (54)
             Change in payables, accruals and customer prepayments                            38               50               76
                                                                                    ------------     ------------       ----------

                 Net cash provided (used) by operating activities                            172              245               (7)
                                                                                    ------------     ------------       ----------

Cash flows from investing activities:
   Cash paid for acquisitions                                                                (41)            (168)            (251)
   Capital expended for property and equipment                                              (168)            (221)            (190)
   Cash balances of deconsolidated subsidiaries                                              (39)              --               --
   Investments in and loans to affiliates and others                                        (683)            (536)          (1,110)
   Return of capital from affiliates                                                           5                6               20
   Collections on loans to affiliates and others                                             133               24               15
   Cash paid for cable distribution fees                                                      --              (32)             (44)
   Cash proceeds from dispositions                                                           302              170              100
   Other, net                                                                                (11)             (13)             (19)
                                                                                    ------------     ------------       ----------

                 Net cash used by investing activities                                      (502)            (770)          (1,479)
                                                                                    ------------     ------------       ----------
</TABLE>

                                                                     (continued)



                                      137
<PAGE>   139


                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                  Combined Statements of Cash Flows, continued

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                        1997*            1996           1995
                                                                                     ----------      ----------      ----------
                                                                                                     amounts in millions
                                                                                                        (see note 4)
<S>                                                                                   <C>             <C>             <C>
Cash flows from financing activities:
   Borrowings of debt                                                                       667             470             537
   Repayments of debt and capital lease obligations                                        (348)           (628)           (366)
   Issuance of debentures                                                                    --             345              --
   Contribution for issuance of common stock                                                  2              --              --
   Cash transfers from related parties                                                      310             293           1,047
   Repurchase of common stock                                                              (625)            (38)             --
   Repurchase of common stock by attributed subsidiary                                      (42)             --              --
   Net proceeds from issuance of stock by attributed subsidiaries                           148              10             376
   Contributions by minority shareholders of attributed subsidiaries                          4             319               2
   Other, net                                                                                (6)             (9)              5
                                                                                     ----------      ----------      ----------

                 Net cash provided by financing activities                                  110             762           1,601
                                                                                     ----------      ----------      ----------

                 Effect of exchange rate changes on cash                                     --               4              (3)
                                                                                     ----------      ----------      ----------

                    Net increase (decrease) in cash and cash equivalents                   (220)            241             112

                    Cash and cash equivalents at beginning of year                          444             203              91
                                                                                     ----------      ----------      ----------

                    Cash and cash equivalents at end of year                         $      224             444             203
                                                                                     ==========      ==========      ==========
</TABLE>
* Restated - see note 14.
See accompanying notes to combined financial statements.



                                      138
<PAGE>   140


                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

                         December 31, 1997,1996 and 1995

(1)      Basis of Presentation

         The accompanying combined financial statements include the accounts of
         the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that
         are attributed to Liberty/Ventures Group, as defined below. All
         significant intercompany accounts and transactions have been
         eliminated. The combined financial statements of Liberty/Ventures Group
         are presented for purposes of additional analysis of the consolidated
         financial statements of TCI and subsidiaries and should be read in
         conjunction with such consolidated financial statements.

         On June 24, 1998, the Board of Directors of TCI (the "Board") announced
         its intention, subject to shareholder approval, to combine "Liberty
         Media Group", a group of TCI's assets which produce and distribute
         programming services, and "TCI Ventures Group", a group of assets
         comprised of TCI's principal international assets and businesses and
         substantially all of TCI's non-cable and non-programming assets
         (collectively, "Liberty/Ventures Group"). Under the terms of the
         proposed combination (the "Liberty/Ventures Combination"), each
         outstanding share of Tele-Communications, Inc. Series A TCI Ventures
         Group Common Stock, par value $1.00 per share (the "TCI Ventures Group
         Series A Stock") will be reclassified as .52 of a share of
         Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
         par value $1.00 per share (the "Liberty Group Series A Stock" and
         following the Liberty/Ventures Combination, the "Liberty/Ventures Group
         Series A Stock") and each outstanding share of Tele-Communications,
         Inc. Series B TCI Ventures Group Common Stock, par value $1.00 per
         share (the "TCI Ventures Group Series B Stock, " and together with the
         TCI Ventures Group Series A Stock, the "TCI Ventures Group Stock") will
         be reclassified as .52 of a share of Tele-Communications, Inc. Series B
         Liberty Media Group Common Stock, par value $1.00 per share (the
         "Liberty Group Series B Stock, and following the Liberty/Ventures
         Combination, the "Liberty/Ventures Group Series B Stock" and together
         with the Liberty Group Series A Stock, the "Liberty Group Stock").

         Following the Liberty/Ventures Combination, the Liberty/Ventures Group
         Series A Stock and the Liberty/Ventures Group Series B Stock
         (collectively, the "Liberty/Ventures Group Stock") will represent one
         hundred percent of the equity value attributable to Liberty/Ventures
         Group. The Liberty/Ventures Combination will not result in any transfer
         of assets or liabilities of TCI or any of its subsidiaries or affect
         the rights of creditors of TCI or of holders of TCI's or any of its
         subsidiaries' debt.



                                                                     (continued)


                                      139
<PAGE>   141
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         At December 31, 1997, Liberty/Ventures Group consisted principally of
         the following assets and their related liabilities: (i) TCI's
         businesses which provide programming services including production,
         acquisition and distribution through all available formats and media of
         branded entertainment, educational and informational programming and
         software, including multimedia products, (ii) TCI's businesses engaged
         in electronic retailing, direct marketing, advertising sales relating
         to programming services, infomercials and transaction processing, (iii)
         TCI's businesses engaged in international cable, telephony and
         programming businesses (Tele-Communications International, Inc.
         "TINTA") (iv) TCI's principal interests in the telephony business
         consisting primarily of TCI's investment in a series of partnerships
         formed to engage in the business of providing wireless communications
         services, using the radio spectrum for broadband personal
         communications services ("PCS"), to residential and business customers
         nationwide under the Sprint(R) brand (a registered trademark of Sprint
         Communications Company, L.P.) (the "PCS Ventures"), TCI's 28% equity
         interest (representing a 41% voting interest) in Teleport
         Communications Group Inc. ("TCG"), a competitive local exchange
         carrier, and Western Tele-Communications, Inc. ("WTCI"), a wholly-owned
         subsidiary of TCI that provides long distance transport of video, voice
         and data traffic and other telecommunications services to interexchange
         carriers on a wholesale basis using primarily a digital broadband
         microwave network located throughout a 12 state region, (v) TCI's
         businesses engaged in high speed multimedia Internet services,
         including TCI's interest in At Home Corporation ("@Home") and (vi)
         other assets, including National Digital Television Center, Inc.
         ("NDTC"), which provides digital compression and authorization services
         to programming suppliers and to video distribution outlets.

         Targeted Stock

         On August 3, 1995, the stockholders of TCI authorized the Board to
         issue the Liberty Group Stock which was intended to reflect the
         separate performance of Liberty Media Group, and on August 10, 1995,
         TCI distributed, in the form of a dividend, the Liberty Group Stock.
         Additionally, the stockholders, of TCI approved the redesignation of
         the previously authorized Class A and Class B common stock into
         Tele-Communications, Inc. Series A TCI Group Common Stock, par value
         $1.00 per share (the "TCI Group Series A Stock") and
         Tele-Communications, Inc. Series B TCI Group Common Stock, par value
         $1.00 per share (the "TCI Group Series B Stock", and together with the
         TCI Group Series A Stock, the "TCI Group Stock"), respectively. On
         August 28, 1997, the stockholders of TCI authorized the Board to issue
         the TCI Ventures Group Stock which was intended to reflect the separate
         performance of TCI Ventures Group, and on September 10, 1997, upon the
         consummation of offers commenced by TCI to exchange shares of TCI Group
         Stock for TCI Ventures Group Stock (the "Exchange Offers"), TCI
         exchanged TCI Group Stock for TCI Ventures Group Stock in the maximum
         amount set forth in the Exchange Offers.


                                                                     (continued)



                                      140
<PAGE>   142
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         TCI Group Stock is intended to reflect the separate performance of TCI
         and its subsidiaries and assets not attributed to Liberty/Ventures
         Group. Such subsidiaries and assets, which are comprised primarily of
         TCI's domestic cable and communications businesses, are collectively
         referred to as "TCI Group". Collectively, Liberty/Ventures Group and
         TCI Group are referred to as the "Groups" and individually are referred
         to as a "Group". The TCI Group Series A Stock, Liberty Group Series A
         Stock and TCI Ventures Group Series A Stock are sometimes collectively
         referred to herein as the "Series A Stock," and the TCI Group Series B
         Stock, Liberty Group Series B Stock and TCI Ventures Group Series B
         Stock are sometimes collectively referred to herein as the "Series B
         Stock."

         Notwithstanding the attribution of assets and liabilities, equity and
         items of income and expense among TCI Group and Liberty/Ventures Group
         for the purpose of preparing their respective combined financial
         statements, the change in the capital structure of TCI resulting from
         the redesignation of TCI Group Stock and issuance of Liberty Group
         Stock and TCI Ventures Group Stock, as well as the Liberty/Ventures
         Group Stock resulting from the Liberty/Ventures Combination, does not
         affect the ownership or the respective legal title to assets or
         responsibility for liabilities of TCI or any of its subsidiaries. TCI
         and its subsidiaries each continue to be responsible for their
         respective liabilities. Holders of Liberty/Ventures Group Stock will be
         common stockholders of TCI and are subject to risks associated with an
         investment in TCI and all of its businesses, assets and liabilities.

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

         After the Liberty/Ventures Combination, existing debt securities of TCI
         that are convertible into or exchangeable for shares of TCI Ventures
         Group Stock will, as a result of the operation of antidilution
         provisions, be adjusted so that there will be delivered upon their
         conversion or exchange the number of shares of Liberty/Ventures Group
         Stock that would have been issuable in the Liberty/Ventures Combination
         with respect to the TCI Ventures Group Stock issuable upon conversion
         or exchange had such conversion or exchange occurred prior to the
         record date for the Liberty/Ventures Combination. Options to purchase
         TCI Ventures Group Stock outstanding at the time of the
         Liberty/Ventures Combination will be adjusted such that the holders of
         such options will have options to purchase that number of shares of
         Liberty/Ventures Group Stock which the holder would have been entitled
         to receive had the holder exercised such option to purchase TCI
         Ventures Group Stock prior to the record date for the Liberty/Ventures
         Combination. The aggregate exercise price of the previously outstanding
         options to purchase TCI Ventures Group Stock is not effected by the
         Liberty/Ventures Combination.

                                                                     (continued)


                                      141
<PAGE>   143
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         After the Liberty/Ventures Combination, existing preferred stock and
         debt securities of TCI that are convertible into or exchangeable for
         shares of Liberty Group Stock will not result in any changes. Such
         securities will continue to be convertible or exchangeable into the
         same number of shares of Liberty/Ventures Group Stock. Similarly,
         options to purchase Liberty Group Stock outstanding at the time of the
         Liberty/Ventures Combination will not result in any changes. Such
         options will remain options to purchase that number of shares of
         Liberty/Ventures Group Stock having the same exercise price of the
         previously outstanding options to purchase Liberty Group Stock.

         The issuance of shares of Liberty/Ventures Group Stock upon such
         conversion, exchange or exercise of such convertible securities will
         not result in any transfer of funds or other assets from TCI Group to
         Liberty/Ventures Group in consideration of such issuance. In the case
         of the exercise of such options to purchase Liberty/Ventures Group
         Stock, the proceeds received upon the exercise of such options will be
         attributed to Liberty/Ventures Group.

         The common stockholders' equity value of Liberty/Ventures Group that,
         at any relevant time, is attributed to TCI Group, and accordingly not
         represented by outstanding Liberty/Ventures Group Stock is referred to
         as "Inter-Group Interest." Following consummation of the
         Liberty/Ventures Combination an Inter-Group Interest would be created
         with respect to Liberty/Ventures Group only if a subsequent transfer of
         cash or other property from TCI Group to Liberty/Ventures Group is
         specifically designated by the Board as being made to create an
         Inter-Group Interest or if outstanding shares of Liberty/Ventures Group
         Stock are purchased with funds attributable to TCI Group.

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

         All debt incurred or preferred stock issued by TCI and its subsidiaries
         is (unless the Board otherwise provides) specifically attributed to and
         reflected in the combined financial statements of the Group that
         includes the entity which incurred the debt or issued the preferred
         stock or, in case the entity incurring the debt or issuing the
         preferred stock is Tele-Communications, Inc., TCI Group. The Board
         could, however, determine from time to time that debt incurred or
         preferred stock issued by entities included in a Group should be
         specifically attributed to and reflected in the combined financial
         statements of one of the other Groups to the extent that the debt is
         incurred or the preferred stock is issued for the benefit of such other
         Group.

                                                                     (continued)




                                      142
<PAGE>   144

                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         Although it is management's intention that each Group would normally
         arrange for the external financing required to satisfy its respective
         liquidity requirements, the cash needs of one Group may exceed the
         liquidity sources of such Group. In such circumstance, the other Group
         may transfer funds to such Group. Such transfers of funds among the
         Groups will be reflected as borrowings or, if determined by the Board,
         in the case of a transfer from TCI Group to Liberty/Ventures Group,
         reflected as the creation of, or increase in, TCI Group's Inter-Group
         Interest in Liberty/Ventures Group or, in the case of a transfer from
         Liberty/Ventures Group to TCI Group, reflected as a reduction in TCI
         Group's Inter-Group Interest in Liberty/Ventures Group. There are no
         specific criteria for determining when a transfer will be reflected as
         a borrowing or as an increase or reduction in an Inter-Group Interest.
         The Board expects to make such determinations, either in specific
         instances or by setting generally applicable policies from time to
         time, after consideration of such factors as it deems relevant,
         including, without limitation, the needs of TCI, the financing needs
         and objectives of the Groups, the investment objectives of the Groups,
         the availability, cost and time associated with alternative financing
         sources, prevailing interest rates and general economic conditions.

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

         The combined balance sheets of a Group reflect its net loans or
         advances to or borrowings from the other Group. Similarly, the
         respective combined statements of operations of the Groups reflect
         interest income or expense, as the case may be, associated with such
         loans or advances and the respective combined statements of cash flows
         of the Groups reflect changes in the amounts of loans or advances
         deemed outstanding. In the historical combined financial statements,
         net loans or advances between Groups have been and will continue to be
         included as a component of each respective Group's combined equity.

         Although any increase in TCI Group's Inter-Group Interest in
         Liberty/Ventures Group resulting from an equity contribution by TCI
         Group to Liberty/Ventures Group or any decrease in such Inter-Group
         Interest resulting from a transfer of funds from Liberty/Ventures Group
         to TCI Group would be determined by reference to the market value of
         the Liberty/Ventures Group Stock, as of the date of such transfer, such
         an increase could occur at a time when such shares could be considered
         undervalued and such a decrease could occur at a time when such shares
         could be considered overvalued.

                                                                     (continued)



                                      143
<PAGE>   145
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         All financial impacts of issuances and purchases of shares of TCI Group
         Stock or Liberty/Ventures Group Stock, the proceeds of which are
         attributed to TCI Group or Liberty/Ventures Group, respectively, will
         be to such extent reflected in the combined financial statements of TCI
         Group or Liberty/Ventures Group, respectively. All financial impacts of
         issuances of shares of Liberty/Ventures Group Stock, the proceeds of
         which are attributed to TCI Group in respect of a reduction in TCI
         Group's Inter-Group Interest in Liberty/Ventures Group, will be to such
         extent reflected in the combined financial statements of TCI Group.
         Financial impacts of dividends or other distributions on TCI Group
         Stock or Liberty/Ventures Group Stock, will be attributed entirely to
         TCI Group or Liberty/Ventures Group, respectively, except that
         dividends or other distributions on Liberty/Ventures Group Stock will
         (if at the time there is an Inter-Group Interest in Liberty/Ventures
         Group) result in TCI Group being credited, and Liberty/Ventures Group
         being charged (in addition to the charge for the dividend or other
         distribution paid), with an amount equal to the product of the
         aggregate amount of such dividend or other distribution paid or
         distributed in respect of outstanding shares of Liberty/Ventures Group
         Stock and a fraction of the numerator of which is the Liberty/Ventures
         Group "Inter-Group Interest Fraction" and the denominator of which is
         the Liberty/Ventures Group "Outstanding Interest Fraction" (both as
         defined). Financial impacts of repurchases of Liberty/Ventures Group
         Stock, the consideration for which is charged to TCI Group, will be to
         such extent reflected in the combined financial statements of TCI Group
         and will result in an increase in TCI Group's Inter-Group Interest in
         Liberty/Ventures Group.

(2)      Proposed Merger

         TCI and AT&T Corp. ("AT&T") have agreed to a merger (the "AT&T/TCI
         Merger") pursuant to, and subject to the terms and conditions set forth
         in the Agreement and Plan of Restructuring and Merger, dated as of June
         23, 1998 (the "Merger Agreement"), among TCI, AT&T and an indirect
         wholly-owned subsidiary of AT&T. In the Merger, TCI will become a
         wholly-owned subsidiary of AT&T and each share of TCI Group Series A
         Stock will be converted into .7757 of a share of common stock, par
         value $1.00 per share, of AT&T ("AT&T Common Stock") and each share of
         TCI Group Series B Stock will be converted into .8533 of a share of
         AT&T Common Stock. The Liberty/Ventures Combination is not conditioned
         upon the AT&T/TCI Merger, however, upon closing of the AT&T/TCI Merger,
         the shareholders of Liberty/Ventures Group will be issued separate
         shares of a new targeted stock of AT&T in exchange for the shares of
         Liberty/Ventures Group Stock held. If the Liberty/Ventures Combination
         does not occur prior to the AT&T/TCI Merger, then in the AT&T/TCI
         Merger, each share of TCI Ventures Group Series A Stock and TCI
         Ventures Group Series B Stock will be converted into .52 of a share of
         the new targeted stock of AT&T into which the Liberty Group Series A
         Stock will be exchanged ("New Liberty Media Group Class A Tracking
         Stock") and the Liberty Group Series B Stock will be exchanged ("New
         Liberty Media Group Class B Tracking Stock" and together with the New
         Liberty Media Group Class A Tracking Stock "New Liberty Media Group
         Tracking Stock"), respectively.


                                                                     (continued)



                                      144
<PAGE>   146
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Effective with the AT&T/TCI Merger, TCI's Convertible Preferred Stock
         Series C-Liberty Media Group will be converted into a number of shares
         of New Liberty Media Group Class A Tracking Stock equal to the current
         conversion rate of such preferred stock (56.25 shares per preferred
         share) and TCI's Redeemable Convertible Liberty Media Group Preferred
         Stock, Series H will be converted into a number of shares of New
         Liberty Media Group Class A Tracking Stock equal to the current
         conversion rate of such preferred stock (0.590625 share per preferred
         share).

         The shares of New Liberty Media Group Tracking Stock to be issued in
         the AT&T/TCI Merger will be a newly authorized class of common stock of
         AT&T which will be intended to reflect the separate performance of the
         businesses and assets attributed to Liberty/Ventures Group. Pursuant to
         the Merger Agreement, immediately prior to the AT&T/TCI Merger, certain
         assets attributed to Liberty/Ventures Group (including, among others,
         the shares of AT&T Common Stock to be received in the merger of AT&T
         and TCG (see note 5), the stock of @Home held by Liberty/Ventures
         Group, the assets and business of the NDTC and Liberty/Ventures Group's
         equity interest in WTCI) will be transferred to TCI Group in exchange
         for approximately $5.5 billion in cash. Also, upon consummation of the
         AT&T/TCI Merger, through a new tax sharing agreement between
         Liberty/Ventures Group and AT&T, Liberty/Ventures Group will become
         entitled to the benefit of all of the net operating loss carryforwards
         available to the entities included in TCI's consolidated income tax
         return as of the date of the AT&T/TCI Merger. Additionally, certain
         warrants currently attributed to TCI Group will be transferred to
         Liberty/Ventures Group in exchange for up to $176 million in cash.
         Certain agreements to be entered into at the time of the AT&T/TCI
         Merger as contemplated by the Merger Agreement will, among other
         things, provide preferred vendor status to Liberty/Ventures Group for
         digital basic distribution on AT&T's systems of new programming
         services created by Liberty/Ventures Group and its affiliates, provide
         for a renewal of existing affiliation agreements and provide for the
         business of Liberty/Ventures Group to continue to be managed following
         the AT&T/TCI Merger by certain members of TCI's management who manage
         the businesses of Liberty/Ventures Group.

         If TCI terminates the Merger Agreement due to (i) the failure of AT&T's
         stockholders to approve the AT&T/TCI Merger prior to March 31, 1999,
         (ii) the withdrawal or modification by the AT&T Board of Directors of
         its approval of the transaction, or (iii) the failure to obtain
         necessary governmental and regulatory approvals by September 30, 1999,
         which failure occurs as a result of the announcement by AT&T of a
         significant transaction which delays receipt of such governmental
         approvals, AT&T will pay to TCI the sum of $1.75 billion in cash. If
         AT&T terminates the Merger Agreement, under certain circumstances,
         including the failure of TCI stockholders to approve the transaction
         prior to March 31, 1999 or the withdrawal or modification by the Board
         of its approval of the Merger, TCI will pay to AT&T the sum of $1.75
         billion in cash.


                                                                     (continued)



                                      145
<PAGE>   147
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Consummation of the AT&T/TCI Merger is subject to the satisfaction or
         waiver of customary conditions to closing, including but not limited
         to, the separate approvals of the stockholders of AT&T and TCI, receipt
         of all necessary governmental consents and approvals, and effectiveness
         of the registration statement registering the AT&T Common Stock and New
         Liberty Media Group Tracking Stock to be issued to TCI stockholders in
         the AT&T/TCI Merger. As a result, there can be no assurance that the
         AT&T/TCI Merger will be consummated or, if the AT&T/TCI Merger is
         consummated, as to the date of such consummation.

(3)      Summary of Significant Accounting Policies

         Cash Equivalents

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

         Receivables

         Receivables are reflected net of an allowance for doubtful accounts.
         Such allowance at December 31, 1997 and 1996 was not material.

         Program Rights

         Prepaid program rights are amortized on a film-by-film basis over the
         specific number of exhibitions. Committed program rights include
         exhibition and other exploitation rights acquired under license
         agreements or through production and output agreements. Committed
         program rights and program rights payable are recorded at the estimated
         cost of the programs when the film is available for airing less
         prepayments.

         Investments

         All marketable equity securities held by Liberty/Ventures Group are
         classified as available-for-sale and are carried at fair value.
         Unrealized holding gains and losses on securities classified as
         available-for-sale are carried net of taxes as a separate component of
         combined equity. Realized gains and losses are determined on a
         specific-identification basis.

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


                                                                     (continued)




                                      146
<PAGE>   148

                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Changes in Liberty/Ventures Group's proportionate share of the
         underlying equity of an attributed subsidiary or equity method
         investee, which result from the issuance of additional equity
         securities by such attributed subsidiary or equity investee, generally
         are recognized as gains or losses in Liberty/Ventures Group's combined
         statements of operations.

         Property and Equipment

         Property and equipment, including significant improvements, is stated
         at cost which includes acquisition costs allocated to tangible assets
         acquired. Equipment acquired under capital leases are stated at the
         present value of minimum lease payments, not to exceed the fair value
         of the leased asset. Construction and initial customer installation
         costs, including interest during construction, material, labor and
         applicable overhead, are capitalized. Interest capitalized during 1997,
         1996 and 1995 was not material.

         Depreciation is computed on a straight-line basis using estimated
         useful lives of 3 to 20 years for distribution systems (3 to 5 years
         for converters and in-home wiring and 10 to 20 years for the remaining
         components of the distribution system) and 3 to 40 years for support
         equipment and buildings (3 to 5 years for support equipment and 10 to
         40 years for buildings and improvements). Equipment held under capital
         leases are depreciated on a straight-line basis over the shorter of the
         lease term or estimated useful life of the asset.

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

         Excess Cost Over Acquired Net Assets

         Excess cost over acquired net assets consists of the difference between
         the cost of acquiring non-cable entities and amounts assigned to their
         tangible assets. Such amounts are amortized on a straight-line basis
         over 10 to 30 years.

         Franchise Costs

         Franchise costs generally include the difference between the cost of
         acquiring cable companies and amounts allocated to their tangible
         assets. Such amounts are amortized on a straight-line basis over 40
         years.


                                                                     (continued)



                                      147
<PAGE>   149
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Impairment of Long-lived Assets

         Liberty/Ventures Group periodically reviews the carrying amounts of
         property, plant and equipment and its intangible assets to determine
         whether current events or circumstances warrant adjustments to such
         carrying amounts. If an impairment adjustment is deemed necessary, such
         loss is measured by the amount that the carrying value of such assets
         exceeds their fair value. Considerable management judgment is necessary
         to estimate the fair value of assets, accordingly, actual results could
         vary significantly from such estimates. Assets to be disposed of are
         carried at the lower of their financial statement carrying amount or
         fair value less costs to sell.

         Minority Interests

         Recognition of minority interests' share of losses of attributed
         subsidiaries is generally limited to the amount of such minority
         interests' allocable portion of the common equity of those attributed
         subsidiaries. Further, the minority interests' share of losses is not
         recognized if the minority holders of common equity of attributed
         subsidiaries have the right to cause Liberty/Ventures Group to
         repurchase such holders' common equity.

         Foreign Currency Translation

         The functional currency of Liberty/Ventures Group is the United States
         ("U.S.") dollar. The functional currency of TINTA's foreign operations
         generally is the applicable local currency for each foreign subsidiary
         and foreign equity method investee. In this regard, the functional
         currency of certain of TINTA's foreign subsidiaries and foreign equity
         investees is the Argentine peso, the United Kingdom ("UK") pound
         sterling ("(pound)" or "pounds"), the French franc ("FF") and the
         Japanese yen ("(Y)"). All amounts presented herein with respect to
         operations in Argentina are stated in U.S. dollars because the
         Argentine government has maintained an exchange rate of one U.S. dollar
         to one Argentine peso since April of 1991. However, no assurance can be
         given that the Argentine government will maintain such an exchange rate
         in future periods. Assets and liabilities of foreign subsidiaries and
         foreign equity investees are translated at the spot rate in effect at
         the applicable reporting date, and the combined statements of
         operations and Liberty/Ventures Group's share of the results of
         operations of its foreign equity affiliates are translated at the
         average exchange rates in effect during the applicable period. The
         resulting unrealized cumulative translation adjustment, net of
         applicable income taxes, is recorded as a separate component of
         combined 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.

         Cash flows from attributed foreign subsidiaries are calculated in their
         functional currencies. The effect of exchange rate changes on cash
         balances held in foreign currencies is reported as a separate line item
         in the accompanying statements of cash flows.


                                                                     (continued)



                                      148
<PAGE>   150
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Unless otherwise indicated, convenience translations of foreign
         currencies into U.S. dollars are calculated using the applicable spot
         rate at December 31, 1997, as published in The Wall Street Journal.

         Foreign Currency Derivatives

         From time to time, Liberty/Ventures Group uses certain derivative
         financial instruments to manage its foreign currency risks. Amounts
         receivable or payable pursuant to derivative financial instruments that
         qualify as hedges of existing assets, liabilities and firm commitments
         are deferred and reflected as an adjustment of the carrying amount of
         the hedged item. Market value changes in all other derivative financial
         instruments are recognized currently in the combined statements of
         operations. At December 31, 1997 and 1996, Liberty/Ventures Group had
         no significant deferred hedging gains or losses.

         Revenue Recognition

         Programming revenue is recognized in the period during which
         programming is provided, pursuant to affiliation agreements.
         Advertising revenue is recognized, net of agency commissions, in the
         period during which underlying advertisements are broadcast. Cable
         revenue is recognized in the period that services are rendered. Cable
         installation revenue is recognized in the period the related services
         are provided to the extent of direct selling costs. Any remaining
         amount is deferred and recognized over the estimated average period
         that customers are expected to remain connected to the cable television
         system.

         Comprehensive Earnings

         Effective December 31, 1997, Liberty/Ventures Group adopted the
         provisions of Statement of Financial Accounting Standards No. 130,
         Reporting Comprehensive Income ("Statement 130"). Liberty/Ventures
         Group has reclassified its prior period combined balance sheets and
         combined statements of operations to conform to the requirements of
         Statement 130. Statement 130 requires that all items which are
         components of comprehensive earnings be reported in a financial
         statement in the period in which they are recognized. Liberty/Ventures
         Group has included cumulative foreign currency translation adjustments
         and unrealized holding gains and losses on available-for-sale
         securities in other comprehensive earnings that are recorded directly
         in combined equity. Pursuant to Statement 130, these items are
         reflected, net of related tax effects, as components of other
         comprehensive earnings in Liberty/Ventures Group's combined statements
         of operations, and are included in accumulated other comprehensive
         earnings in Liberty/Ventures Group's combined balance sheets and
         combined statements of equity.

         Estimates

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


                                                                     (continued)



                                      149
<PAGE>   151
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



(4)      Supplemental Disclosures to Combined Statements of Cash Flows

         Cash paid for interest was $60 million, $52 million and $53 million for
         the years ended December 31, 1997, 1996 and 1995, respectively. Cash
         paid for income taxes during the years ended December 31, 1997 and 1996
         was $35 million and $14 million, respectively. Cash paid for taxes for
         the year ended December 31, 1995 was not material. In addition,
         Liberty/Ventures Group received income tax refunds amounting to $15
         million during the year ended December 31, 1996.

<TABLE>
<CAPTION>
                                                                                                    Years ended
                                                                                                    December 31,
                                                                                    ------------------------------------------
                                                                                       1997            1996            1995
                                                                                    ----------      ----------      ----------
                                                                                                amounts in millions
<S>                                                                                 <C>              <C>             <C>
          Cash paid for acquisitions:
             Fair value of assets acquired                                          $      481             688             625
             Net liabilities assumed                                                      (209)           (115)           (133)
             Debt issued to related party and others                                      (404)            (52)            (87)
             Contribution to combined equity from TCI for
                acquisition                                                                 --            (196)            (19)
             Deferred tax asset (liability) recorded in acquisition                        112             (37)           (177)
             Excess of consideration paid over carryover basis of
                net assets acquired from related party                                     219              --              --
             Increase in minority interests in equity of
                attributed subsidiaries due to issuance of shares
                by attributed subsidiary                                                    --             (43)             --
             Minority interests in equity of acquired attributed
                subsidiaries                                                              (128)            (77)             42
             Liberty Group Stock issued                                                    (30)             --              --
                                                                                    ----------      ----------      ----------
                  Cash paid for acquisitions                                        $       41             168             251
                                                                                    ==========      ==========      ==========
</TABLE>


Significant noncash investing and financing activities are as follows for the
years ended December 31,:

<TABLE>
<CAPTION>
                                                                                       1997            1996            1995
                                                                                    ----------      ----------      ----------
                                                                                                amounts in millions
<S>                                                                                 <C>                     <C>             <C>
          Property and equipment purchased under capital leases                     $      176              64              77
                                                                                    ==========      ==========      ==========

          Common stock received in exchange for option (note 6)                     $      306              --              --
                                                                                    ==========      ==========      ==========

          Preferred stock received in exchange for common stock
             and note receivable (note 7)                                           $      371              --              --
                                                                                    ==========      ==========      ==========

          Costs of distribution agreements                                          $      173              --              --
                                                                                    ==========      ==========      ==========

          Exchange of attributed subsidiaries for note receivable
             and equity investments                                                 $       --             574              --
                                                                                    ==========      ==========      ==========
</TABLE>


                                                                     (continued)



                                      150
<PAGE>   152
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         Liberty/Ventures Group ceased to include Flextech p.l.c. ("Flextech")
         and Cablevision S.A. ("Cablevision") in its combined financial results
         and began to account for Flextech and Cablevision using the equity
         method of accounting, effective January 1, 1997 and October 1, 1997,
         respectively. The effects of changing the method of accounting as of
         December 31, 1997 for Liberty/Ventures Group's ownership interests in
         Flextech and Cablevision from the consolidation method to the equity
         method are summarized below (amounts in millions):

<TABLE>
<S>                                                                            <C>            
                Assets (other than cash and cash equivalents) reclassified
                    to investments in affiliates                               $         (596)
                Liabilities reclassified to investments in affiliates                     484
                Minority interests in equity of attributed subsidiaries
                    reclassified to investments in affiliates                             151
                                                                               --------------

                Decrease in cash and cash equivalents                          $           39
                                                                               ==============
</TABLE>

(5)      Investments in Affiliates

         Liberty/Ventures Group has various investments accounted for under the
         equity method. The following table includes Liberty/Ventures Group's
         carrying amount and percentage ownership of the more significant
         investments at December 31, 1997 and the carrying amount at December
         31, 1996.

<TABLE>
<CAPTION>
                                                           December 31, 1997                    December 31, 1996
                                           --------------------------------------------  ------------------------
                                                 Percentage              Carrying                   Carrying
                                                  Ownership               Amount                     Amount
                                           --------------------   ---------------------  ------------------------
                                                                   dollar amounts in millions
<S>                                               <C>                   <C>                          <C>
         PCS Ventures                             30% - 35%             $         607                     830
         Telewest Communications plc
              ("Telewest")                         27%                            324                     488
         TCG                                       28%                            295                     276
         Flextech                                  37%                            261                      --
         Cablevision                               26%                            239                      --
         USA Networks, Inc. ("USAI") and
              related investments                  21%                            348                     342
         Various foreign equity
              investments (other than
              Telewest, Flextech and
              Cablevision)                        various                         209                     222
         QVC, Inc.                                 43%                            134                     104
         Other                                     various                        237                     368
                                                                        -------------           -------------
                                                                        $       2,654                   2,630
                                                                        =============           =============
</TABLE>

                                                                     (continued)



                                      151
<PAGE>   153
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



Summarized unaudited combined financial information for affiliates is as
follows:

<TABLE>
<CAPTION>
                                                              December 31,
                                                 --------------------------------------
                                                         1997                 1996
                                                 ------------------   -----------------
Combined Financial Position                                  amounts in millions
- ---------------------------
<S>                                              <C>                  <C>  
   Investments                                   $            3,857               2,747
   Property and equipment, net                                5,419               4,360
   Franchise costs and other intangibles, net                 5,617               4,264
   Other assets, net                                          9,460               5,984
                                                 ------------------   -----------------

     Total assets                                $           24,353              17,355
                                                 ==================   =================

   Debt                                          $           11,554               5,492
   Other liabilities                                          5,351               4,301
   Owners' equity                                             7,448               7,562
                                                 ------------------   -----------------

      Total liabilities and equity               $           24,353              17,355
                                                 ==================   =================
</TABLE>

<TABLE>
<CAPTION>
                                                       Years ended December 31,
                                             ------------------------------------------
                                                1997            1996            1995
                                             ----------      ----------      ----------
Combined Operations                                      amounts in millions
- -------------------
<S>                                          <C>             <C>             <C>  
   Revenue                                   $    7,107           4,576           3,615
   Operating expenses                            (7,635)         (4,727)         (3,435)
   Depreciation and
       amortization                              (1,152)           (547)           (359)
                                             ----------      ----------      ----------

       Operating loss                            (1,680)           (698)           (179)

   Interest expense                                (656)           (375)           (220)
   Other, net                                      (443)           (267)           (198)
                                             ----------      ----------      ----------

       Net loss                              $   (2,779)         (1,340)           (597)
                                             ==========      ==========      ==========
</TABLE>


         The PCS Ventures include Sprint Spectrum Holding Company, L. P.
         ("Sprint Spectrum") and MinorCo, L.P. (collectively, "Sprint PCS" or
         the "Sprint PCS Partnerships") and PhillieCo Partnership I, L.P.
         ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
         subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation
         ("Comcast"), Cox Communications, Inc. ("Cox") and Liberty/Ventures
         Group. The partners of PhillieCo are subsidiaries of Sprint, Cox and
         Liberty/Ventures Group. Liberty/Ventures Group has a 30% partnership
         interest in each of the Sprint PCS Partnerships and a 35% partnership
         interest in PhillieCo. During the years ended December 31, 1997, 1996
         and 1995, the PCS Ventures accounted for $493 million, $133 million and
         $34 million, respectively, of Liberty/Ventures Group's share of
         affiliates' losses.

                                                                     (continued)



                                      152
<PAGE>   154
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         From inception through December 31, 1997, the four partners have
         contributed approximately $4.0 billion to the Sprint PCS Partnerships
         (of which Liberty/Ventures Group contributed an aggregate of
         approximately $1.3 billion). The partners had agreed in forming the
         Sprint PCS Partnerships to contribute up to $4.2 billion of equity,
         thereto from inception through fiscal 1999, subject to certain
         requirements. The remaining $200 million (of which Liberty/Ventures
         Group's share is approximately $60 million) will be contributed by the
         end of the second quarter of 1998. Sprint PCS's business plan will
         require additional capital financing prior to the end of 1998. Sources
         of funding for Sprint PCS's capital requirements may include vendor
         financing, public offerings or private placements of equity and/or debt
         securities, commercial bank loans and/or capital contributions from the
         Sprint PCS partners. However, there can be no assurance that any
         additional financing can be obtained on a timely basis, on terms
         acceptable to Sprint PCS or the Sprint PCS partners and within the
         limitations contained in the agreements governing Sprint PCS's existing
         debt.

         Additionally, the proposed budget for 1998 has not yet been approved by
         the Sprint PCS partnership board, although the board has authorized
         management to operate Sprint PCS in accordance with such budget. The
         Sprint PCS partners may mutually agree to make additional capital
         contributions. However, the Sprint PCS partners have no such obligation
         in the absence of an approved budget, and there can be no assurance the
         Sprint PCS partners will reach such an agreement or approve the 1998
         proposed budget. In addition, the failure by the Sprint PCS partners to
         approve a business plan may impair the ability of Sprint PCS to obtain
         required financing. Failure to obtain any such additional financing or
         capital contributions from the Sprint PCS partners could result in the
         delay or abandonment of Sprint PCS's development and expansion plans
         and expenditures, the failure to meet regulatory requirements or other
         potential adverse consequences.

         Furthermore, the fact that the proposed budget for Sprint PCS for
         fiscal 1998 has not yet been approved by the Sprint PCS partnership
         board has resulted in the occurrence of a "Deadlock Event" under the
         Sprint PCS partnership agreement as of January 1, 1998. Under the
         Sprint PCS partnership agreement, if one of the Sprint PCS partners
         refers the budget issue to the chief executive officers of the
         corporate parents of the Sprint PCS partners for resolution pursuant to
         specified procedures and the issue remains unresolved, buy/sell
         provisions would be triggered, which may result in the purchase by one
         or more of the Sprint PCS partners of the interests of the other Sprint
         PCS partners, or, in certain circumstances, liquidation of Sprint PCS.
         Discussions among the Sprint PCS partners about restructuring their
         interests in Sprint PCS in lieu of triggering such buy/sell procedures
         are ongoing. However, there is no certainty the discussions will result
         in a change to the partnership structure or will avert the triggering
         of the resolution and buy/sell procedures referred to above or a
         liquidation of Sprint PCS.

                                                                     (continued)



                                      153
<PAGE>   155
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Telewest is a company that is currently operating and constructing
         cable television and telephony systems in the UK. Telewest was formed
         on October 3, 1995 upon the merger (the "Telewest Merger") of Telewest
         with SBC CableComms (UK). Prior to the Telewest Merger,
         Liberty/Ventures Group had an effective ownership interest of
         approximately 36% in Telewest. As a result of the dilution of
         Liberty/Ventures Group's ownership interest in Telewest that occurred
         in connection with the Telewest Merger, Liberty/Ventures Group
         recognized a gain of approximately $165 million (before deducting
         deferred income taxes of $58 million). Telewest accounted for $145
         million, $109 million and $70 million of Liberty/Ventures Group's share
         of its affiliates' losses during the years ended December 31, 1997,
         1996 and 1995, respectively.

         At December 31, 1997, Liberty/Ventures Group held 133 million of
         Telewest's convertible preference shares, which are convertible into
         Telewest's ordinary shares on a one-for-one basis under certain terms
         and conditions, and 246 million of Telewest's ordinary shares. On
         December 31, 1997, the reported closing price on the London Stock
         Exchange of the Telewest ordinary shares was (pound)0.70 per share
         ($1.16 per share).

         TCG, a competitive local exchange carrier, conducted an initial public
         offering (the "TCG IPO") on July 2, 1996 in which it sold 27 million
         shares of Class A common stock at $16.00 per share to the public for
         aggregate net proceeds of approximately $410 million. As a result of
         the TCG IPO, Liberty/Ventures Group's ownership interest in TCG was
         reduced from approximately 35% to approximately 31%. Accordingly,
         Liberty/Ventures Group recognized a gain amounting to $13 million
         (before deducting deferred income tax expense of approximately $5
         million).

         During 1997, TCG issued approximately 6.6 million shares of its Class A
         common stock for certain acquisitions. The total consideration paid by
         TCG through the issuance of common stock for such acquisitions was
         approximately $123 million. In addition, effective November 5, 1997,
         TCG consummated a public offering of 7.3 million shares of its Class A
         common stock. TCG received net proceeds from its sale of shares
         pursuant to such offering of $318 million (after deducting expenses and
         fees). As a result of the above transactions, Liberty/Ventures Group's
         ownership interest in TCG decreased from 31% to 28%. In connection with
         the dilution of Liberty/Ventures Group's ownership interest in TCG,
         Liberty/Ventures Group recognized non-cash gains in 1997 aggregating
         $112 million (before deducting deferred income tax expense of
         approximately $43 million). TCG accounted for $66 million, $51 million
         and $30 million of Liberty/Ventures Group's share of its affiliates'
         losses during the years ended December 31, 1997, 1996 and 1995,
         respectively.

         In January 1998, TCG entered into certain agreements pursuant to which
         it agreed to be acquired by AT&T. Upon consummation, Liberty/Ventures
         Group would receive in exchange for all of its interest in TCG,
         approximately 47 million shares of AT&T Common Stock.

                                                                     (continued)



                                      154
<PAGE>   156
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         On December 31, 1997, Liberty/Ventures Group owned 1 million shares of
         TCG's Class A common stock and 49 million shares of TCG's Class B
         common stock. TCG's Class A common stock had a closing price on the
         Nasdaq financial market of $54.875 per share on December 31, 1997.

         On April 25, 1995, TINTA acquired a 51% ownership interest in
         Cablevision, an entity engaged in the multi-channel video distribution
         business in Buenos Aires, Argentina, for an adjusted purchase price of
         $282 million, before liabilities assumed. The purchase price was paid
         with cash consideration of $195 million (including a previously paid
         $20 million deposit) and TINTA's issuance of $87 million principal
         amount of secured negotiable promissory notes payable to the selling
         shareholders.

         On October 9, 1997, TINTA sold a portion of its 51% interest in
         Cablevision to unaffiliated third parties (the "Buyers") for cash
         proceeds of $120 million. A portion of such proceeds were loaned to TCI
         pursuant to an unsecured promissory note. See note 11. In addition, on
         October 9, 1997, Cablevision issued approximately 3.5 million shares of
         stock in the aggregate to the Buyers for $80 million in cash and notes
         receivable with an aggregate principal amount of $240 million, plus
         accrued interest at the London Interbank Offered Rate ("LIBOR"), due
         within the earlier of two years or at the request of Cablevision's
         board of directors. The 1997 transactions, (collectively, the
         "Cablevision Sale") reduced TINTA's interest in Cablevision to 26.2%.
         TINTA recognized a gain of $49 million on the Cablevision Sale. As a
         result of the Cablevision Sale, effective October 1, 1997, TINTA ceased
         to consolidate Cablevision and began to account for Cablevision using
         the equity method of accounting. Cablevision accounted for $3 million
         of Liberty/Ventures Group's share of its affiliates' losses during the
         year ended December 31, 1997.

         The $154 million excess of TINTA's aggregate historical cost basis in
         Cablevision over TINTA's proportionate share of Cablevision's net
         assets is being amortized over an estimated useful life of 20 years.

         As of April 29, 1996, Liberty/Ventures Group and The News Corporation
         Limited ("News Corp.") formed two sports programming Ventures. In the
         U.S., Liberty/Ventures Group and News Corp. formed Fox/Liberty Networks
         LLC ("Fox Sports") into which Liberty/Ventures Group contributed
         interests in its national and regional sports networks and into which
         News Corp. contributed its fx cable network and certain other assets.
         Liberty/Ventures Group received a 50% interest in Fox Sports and a
         distribution of $350 million in cash. No gain or loss was recognized as
         the cash distribution approximated the carrying amount of the assets
         contributed.


                                                                     (continued)



                                      155
<PAGE>   157
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         Internationally, News Corp. and a limited liability company wholly
         owned by TCI and attributed to Liberty/Ventures Group
         ("Liberty/TINTA"), formed a venture ("Fox Sports International") to
         operate previously existing sports services in Latin American and
         Australia and a variety of new sports services throughout the world
         except in Asia and in the United Kingdom, Japan and New Zealand where
         prior arrangements preclude an immediate collaboration. Liberty/TINTA
         owns 50% of Fox Sports International with News Corp. owning the other
         50%. News Corp. contributed various international sports rights and
         certain trademark rights. Liberty/TINTA contributed Prime Deportiva, a
         Spanish language sports service distributed in Latin America and in
         Hispanic markets in the United States; an interest in Torneos y
         Competencias S.A. ("Torneos"), an Argentinean sports programming and
         production business; various international sports and satellite
         transponder rights and cash. Liberty/TINTA also contributed its 50%
         interest in Premier Sports and All-Star Sports. Both are Australian
         24-hour sports services available via multi-channel, multi-point
         distribution systems or cable television. Fox Sports International
         accounted for $30 million and $21 million of Liberty/Ventures Group's
         share of its affiliates' losses during the years ended December 31,
         1997 and 1996, respectively. During the third quarter of 1997, Fox
         Sports International distributed (i) its 35% interest in Torneos to
         Liberty/TINTA and (ii) certain Australian sports rights to News Corp.

         Pursuant to an agreement among Liberty/Ventures Group, Barry Diller and
         certain of their respective affiliates entered into in August 1995 and
         amended in August 1996 (the "BDTV Agreement"), Liberty/Ventures Group
         contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the
         "Silver King Option") to purchase 2 million shares of Class B common
         stock of Silver King Communications, Inc. ("Silver King") (which shares
         represented voting control of Silver King at such time) and $4 million
         in cash, representing the exercise price of the Silver King Option.
         BDTV-I is a corporation formed by Liberty/Ventures Group and Mr. Diller
         pursuant to the BDTV Agreement, in which Liberty/Ventures Group owns
         over 99% of the equity and none of the voting power (except for
         protective rights with respect to certain fundamental corporate
         actions) and Mr. Diller owns less than 1% of the equity and all of the
         voting power. BDTV-I exercised the Silver King Option shortly after its
         contribution, thereby becoming the controlling stockholder of Silver
         King. Such change in control of Silver King had been approved by the
         Federal Communications Commission ("FCC") in June 1996, subject,
         however, to the condition that the equity interest of Liberty/Ventures
         Group in Silver King not exceed 21.37% without the prior approval of
         the FCC (the "FCC Order").



                                                                     (continued)



                                      156
<PAGE>   158
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Pursuant to an Agreement and Plan of Exchange and Merger entered into
         in August 1996, Silver King acquired Home Shopping Network, Inc.
         ("HSN") by merger of HSN with a subsidiary of Silver King in December
         1996 (the "HSN Merger") where HSN is the surviving corporation and a
         subsidiary of Silver King following the HSN Merger. Liberty/Ventures
         Group accounted for the HSN Merger as a sale of a portion of its
         investment in HSN and accordingly, recorded a pre-tax gain of
         approximately $47 million. In order to effect the HSN Merger in
         compliance with the FCC Order, Liberty/Ventures Group agreed to defer
         receiving certain shares of Silver King that would otherwise have
         become issuable to it in the HSN Merger until such time as it was
         permitted to own such shares. As a result, the HSN Merger was
         structured so that Liberty/Ventures Group received (i) 15.6 million
         shares of Class B common stock of Silver King, all of which shares
         Liberty/Ventures Group contributed to BDTV II INC. ("BDTV-II"), (ii)
         the contractual right (the "Contingent Right") to be issued up to an
         additional 5.2 million shares of Class B common stock of Silver King
         from time to time upon the occurrence of certain events which would
         allow Liberty/Ventures Group to own additional shares in compliance
         with the FCC Order (including events resulting in the dilution of
         Liberty/Ventures Group's percentage equity interest), and (iii)
         approximately 739,000 shares of Class B common stock and 17.6 million
         shares of common stock of HSN (representing approximately 19.9% of the
         equity of HSN). BDTV-II is a corporation formed by Liberty/Ventures
         Group and Barry Diller pursuant to the BDTV Agreement, in which the
         relative equity ownership and voting power of Liberty/Ventures Group
         and Mr. Diller are substantially the same as their respective equity
         ownership and voting power in BDTV-I. Liberty/Ventures Group accounts
         for its investments in BDTV-I and BDTV-II under the equity method.

         As a result of the HSN Merger, HSN is no longer included in the
         combined financial results of Liberty/Ventures Group. Subsequent to the
         HSN Merger, Silver King was renamed HSN, Inc. ("HSNI").

         At December 31, 1997, Liberty/Ventures Group held 41 million shares and
         share equivalents of HSNI, including shares held through BDTV-I and
         BDTV-II, after giving effect of a 2 for 1 stock dividend effective in
         March 1998. HSNI's closing price on the Nasdaq financial market, as
         adjusted, on December 31, 1997 was $25.75.

         In February 1998, pursuant to an Investment Agreement among Universal
         Studios, Inc. ("Universal"), HSNI, HSN and Liberty/Ventures Group,
         dated as of October 1997 and amended and restated as of December 1997,
         HSNI consummated a transaction (the "Universal Transaction") through
         which USA Networks Partners, Inc., a subsidiary of Universal, sold its
         50% interest in USAI, a New York general partnership, to HSNI and
         Universal contributed the remaining 50% interest in USAI and its
         domestic television production and distribution operations to HSNI.
         Subsequent to these transactions, HSNI was renamed USAI. In connection
         with the Universal Transaction, Universal, USAI, HSN and
         Liberty/Ventures Group became parties to a number of other agreements
         relating to, among other things, (i) the management of USAI, (ii) the
         purchase and sale or other transfer of voting securities of USAI,
         including securities convertible or exchangeable for voting securities
         of USAI, and (iii) the voting of such securities.


                                                                     (continued)



                                      157
<PAGE>   159
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         In connection with the Universal Transaction, each of Universal and
         Liberty/Ventures Group has been granted a preemptive right with respect
         to future issuances of USAI's capital stock, subject to certain
         limitations, to maintain their respective percentage ownership
         interests in USAI that they had immediately prior to such issuances. In
         addition, with respect to issuances of USAI's capital stock in certain
         specified circumstances, Universal will be obligated to maintain the
         percentage ownership interest in USAI that it had immediately prior to
         such issuances. At the closing of the Universal Transaction, Universal
         (i) was issued 6 million shares of USAI's Class B Common Stock, 7
         million shares of USAI's Common Stock and 109 million common equity
         shares ("LLC Shares") of USANi LLC, a limited liability company formed
         to hold all of the businesses of USAI and its subsidiaries, except for
         its broadcasting business and its equity interest in Ticketmaster
         Group, Inc. and (ii) received a cash payment of $1.3 billion. Pursuant
         to an Exchange Agreement relating to the LLC Shares (the "LLC Exchange
         Agreement"), 74 million of the LLC Shares issued to Universal are each
         exchangeable for one share of USAI's Class B Common Stock and the
         remainder of the LLC Shares issued to Universal are each exchangeable
         for one share of USAI's Common Stock.

         At the closing of the Universal Transaction, Liberty/Ventures Group was
         issued 1.2 million shares of USAI's Class B Common Stock, representing
         all of the remaining shares of USAI's Class B Common Stock issuable
         pursuant to Liberty/Ventures Group's Contingent Right. Of such shares,
         800,000 shares of Class B Common Stock were contributed to BDTV IV INC.
         ("BDTV-IV"), a newly-formed entity having substantially the same terms
         as BDTV-I and BDTV-II (with the exception of certain transfer
         restrictions). In addition, Liberty/Ventures Group purchased 10 LLC
         Shares at the closing of the Universal Transaction for an aggregate
         purchase price of $200. At that time, Liberty/Ventures Group agreed to
         contribute $300 million in cash to USANI LLC by June 30, 1998 in
         exchange for an aggregate of 15 million LLC Shares and/or shares of
         USAI's Common Stock. Liberty/Ventures Group's cash purchase price will
         increase at an annual interest rate of 7.5% beginning from the date of
         the closing of the Universal Transaction through the date of
         Liberty/Ventures Group's purchase of such securities. Pursuant to the
         LLC Exchange Agreement, each LLC Share issued or to be issued to
         Liberty/Ventures Group is exchangeable for one share of USAI's Common
         Stock.

         On June 5, 1995, Flextech, a company engaged in the distribution and
         production of programming for multi-channel video distribution systems
         in the UK, completed the sale of newly issued Flextech ordinary shares
         and newly issued convertible non-preference shares ("Flextech
         Non-Preference Shares") to subsidiaries of Hallmark Cards Incorporated
         ("Hallmark") (the "Hallmark Subscription") and US WEST, Inc. ("US
         WEST") (the "US WEST Subscription") in exchange for (pound)48 million
         ($77 million using the applicable exchange rate) in cash and
         convertible redeemable preferred shares of Thomson Directories Limited,
         respectively. The Hallmark Subscription and the US WEST Subscription
         are collectively referred to herein as the "Flextech Transactions."



                                                                     (continued)



                                      158
<PAGE>   160
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         In connection with the Flextech Transactions, Liberty/Ventures Group
         recorded a $51 million increase to combined equity and a $93 million
         increase to minority interests in equity of subsidiaries. No gain was
         recognized in the combined statements of operations due primarily to
         the existence of certain contingent obligations of TINTA to purchase
         Flextech Non-Preference Shares and/or Flextech ordinary shares of TINTA
         from subsidiaries of US WEST and Hallmark.

         In January 1997, Liberty/Ventures Group's voting interest in Flextech
         was reduced to 50% and Liberty/Ventures Group ceased to include
         Flextech in its combined financial results and began to account for
         Flextech using the equity method of accounting. In April 1997, Flextech
         and BBC Worldwide Limited ("BBC Worldwide") formed two separate joint
         Ventures (the "BBC Joint Ventures") and entered into certain related
         transactions. The consummation of the BBC Joint Ventures and related
         transactions resulted in, among other things, a reduction of
         Liberty/Ventures Group's economic ownership interest in Flextech from
         46.2% to 36.8%. Liberty/Ventures Group continues to maintain a voting
         interest in Flextech of approximately 50%. As a result of such
         dilution, Liberty/Ventures Group recorded a $152 million increase to
         the carrying value of Liberty/Ventures Group's investment in Flextech,
         a $53 million increase to deferred income tax liability, a $66 million
         increase to combined equity and a $33 million increase to minority
         interests in attributed subsidiaries. No gain was recognized in the
         statement of operations due primarily to certain contingent obligations
         of Liberty/Ventures Group with respect to one of the BBC Joint
         Ventures. Flextech accounted for $16 million of Liberty/Ventures
         Group's share of its affiliates' losses during the year ended December
         31, 1997.

         Flextech has undertaken to finance the working capital requirements of
         a joint venture with BBC Worldwide (the "Principal Joint Venture"). If
         Flextech defaults in its funding obligation to the Principal Joint
         Venture and fails to cure within 42 days after receipt of notice from
         BBC Worldwide, BBC Worldwide is entitled, within the following 90 days,
         to require that TINTA assume all of Flextech's funding obligations to
         the Principal Joint Venture. Flextech is obligated to provide the
         Principal Joint Venture with a primary credit facility of (pound)88
         million ($145 million) and subject to certain restrictions, a standby
         credit facility of (pound)30 million ($50 million).

         The $20 million excess of Liberty/Ventures Group's historical cost
         basis in Flextech over Liberty/Ventures Group's proportionate share of
         Flextech's net assets is being amortized over an estimated useful life
         of 20 years.

         Based on the (pound)5.27 ($8.70) per share closing price of the
         Flextech ordinary shares on the London Stock Exchange, the Flextech
         ordinary shares owned by Liberty/Ventures Group had an aggregate market
         value of (pound)305 million ($503 million) at December 31, 1997.


                                                                     (continued)



                                      159
<PAGE>   161
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         In addition to Telewest, Flextech, Fox Sports International and
         Cablevision, Liberty/Ventures Group has other less significant equity
         method investments in video distribution and programming businesses
         located in the UK, other parts of Europe, Asia, Latin America and
         certain other foreign countries. In the aggregate, such other foreign
         equity method investments accounted for $84 million, $70 million and
         $54 million of Liberty/Ventures Group's share of its affiliates' losses
         in 1997, 1996 and 1995, respectively.

         Liberty/Ventures Group and/or other subsidiaries of TCI have guaranteed
         notes payable and other obligations of certain of its affiliates (the
         "Guaranteed Obligations"). At December 31, 1997, the U.S. dollar
         equivalent of the amounts borrowed pursuant to the Guaranteed
         Obligations aggregated $26 million.

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

(6)      Investment in Time Warner

         On October 10, 1996, Time Warner and Turner Broadcasting System, Inc.
         ("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby TBS
         shareholders received 0.75 of a Time Warner common share for each TBS
         Class A and Class B common share held, and each holder of TBS Class C
         preferred stock received 0.80 of a Time Warner common share for each of
         the 6 shares of TBS Class B common stock into which each share of Class
         C preferred stock could have been converted.

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


                                                                     (continued)



                                      160
<PAGE>   162
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         In connection with the TBS/Time Warner Merger, Liberty/Ventures Group
         received approximately 50.6 million shares of the TW Exchange Stock in
         exchange for its TBS holdings. As a result of the TBS/Time Warner
         Merger, Liberty/Ventures Group recognized a pre-tax gain of
         approximately $1.5 billion in the fourth quarter of 1996. Additionally,
         Liberty/Ventures Group and Time Warner entered into, among other
         agreements, an agreement providing for the grant to Time Warner of an
         option to enter into a contract with Southern Satellite Systems, Inc.
         ("Southern"), a wholly-owned subsidiary of Liberty/Ventures Group which
         distributes the TBS SuperStation ("WTBS") signal in the United States
         and Canada, pursuant to which Southern would provide Time Warner with
         certain uplinking and distribution services relating to WTBS and would
         assist Time Warner in converting WTBS from a superstation into a
         copyright paid cable programming service. On June 24, 1997, under the
         new agreement, Liberty/Ventures Group granted Time Warner an option,
         expiring October 10, 2002, to acquire the business of Southern and
         certain of its subsidiaries (together with Southern, the "Southern
         Business") through a purchase of assets (the "Southern Option").
         Liberty/Ventures Group received 6.4 million shares of TW Exchange Stock
         valued at $306 million in consideration for the grant. Such amount has
         been reflected as a deferred option premium in the accompanying
         combined balance sheet as of December 31, 1997. In September 1997, Time
         Warner exercised the Southern Option. Pursuant to the Southern Option,
         Time Warner acquired the Southern Business, effective January 1, 1998,
         for $213 million, which was paid in cash together with the assumption
         of certain liabilities on January 2, 1998.

         As security for borrowings under one of its credit facilities,
         Liberty/Ventures Group has pledged a portion of its TW Exchange Stock.
         At December 31, 1997 such pledged portion had an aggregate fair value
         of approximately $1.4 billion.
         See note 8.

(7)      Other Investments

         Other investments and related receivables are summarized as follows:

<TABLE>
<CAPTION>
                                                                    December 31,
                                                              -------------------------
                                                                 1997           1996
                                                              ----------     ----------
                                                                 amounts in millions
<S>                                                           <C>             <C>
Marketable equity securities, at fair value                   $      248            115

Investment in preferred stock, at cost, including premium            371             --

Other investments, at cost, and related receivables                   76            130
                                                              ----------     ----------
                                                              $      695            245
                                                              ==========     ==========
</TABLE>


                                                                     (continued)



                                      161
<PAGE>   163
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of TCI
         attributed to Liberty/Ventures Group, which held non-voting class C
         common stock of International Family Entertainment, Inc. ("IFE")
         ("Class C Stock") and $23 million of IFE 6% convertible secured notes
         due 2004, convertible into Class C Stock, ("Convertible Notes"),
         contributed its Class C Stock and Convertible Notes to Fox Kids
         Worldwide, Inc. ("FKW") in exchange for a new series of 30 year
         non-convertible 9% preferred stock of FKW with a stated value of $345
         million. As a result of the exchange, Liberty/Ventures Group recognized
         a pre-tax gain of approximately $304 million.

         During the year ended December 31, 1997, TSX Corporation ("TSX"), an
         equity affiliate of Liberty/Ventures Group, and Antec Corporation
         ("Antec") entered into a business combination with Antec being the
         surviving entity. In connection with such transaction, Liberty/Ventures
         Group recognized a $29 million gain (before deducting deferred income
         tax expense of approximately $12 million) representing the difference
         between the fair value of the Antec shares received ($52 million) and
         the carrying value of Liberty/Ventures Group's investment in TSX at the
         date of the transaction ($23 million). Upon completion of this
         transaction, the Company's ownership interest decreased from an
         approximate 45% interest in TSX to an approximate 16% ownership
         interest in Antec.

         Management of Liberty/Ventures Group estimates the market value,
         calculated using a variety of approaches including, multiple of cash
         flow, per subscriber value, a value of comparable public or private
         businesses or publicly quoted market prices, of all of Liberty/Ventures
         Group's other investments aggregated $766 million and $357 million at
         December 31, 1997 and 1996, respectively. No independent appraisals
         were conducted for those assets.

(8)      Debt

         Debt is summarized as follows:

<TABLE>
<CAPTION>
                                                                Weighted
                                                                average
                                                                interest
                                                                  rate                 December 31,
                                                             ---------------  ------------------------------------
                                                                                    1997                 1996
                                                                              ---------------      ---------------
                                                                                       amounts in millions
<S>                                                              <C>           <C>                 <C>
           Bank credit facilities:
             Communications Capital Corp (a)                      6.3%          $         292                   --
             TCI Music, Inc. (b)                                  6.6%                     53                   --
             Puerto Rico Subsidiary (c)                           6.2%                     45                   --
           Debentures (d)                                         4.5%                    345                  345
           Cablevision debt                                        --                      --                  152
           Other (e)                                             10.0%                     22                   31
                                                                                -------------         ------------
                                                                                $         757                  528
                                                                                =============         ============
</TABLE>



                                                                     (continued)



                                      162
<PAGE>   164

                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         (a)      Payable by Communications Capital Corp. ("CCC")

                  This revolving credit agreement, as amended, provides for
                  borrowings up to $500 million through August of 2000. Interest
                  on borrowings under the agreement is tied to, at CCC's option,
                  the bank's prime rate or LIBOR plus an applicable margin. The
                  revolving credit agreement provides as security for this
                  indebtedness a portion of Liberty/Ventures Group's TW Exchange
                  Stock. CCC must pay an annual commitment fee of .2% of the
                  unfunded portion of the commitment.

         (b)      Payable by TCI Music, Inc. ("TCI Music")

                  On December 30, 1997 TCI Music entered into a revolving loan
                  agreement (the "TCI Music Revolving Loan Agreement") which
                  provides for borrowings up to $100 million. Interest on
                  borrowings under the agreement is tied to LIBOR plus an
                  applicable margin or at the banks base rate dependent on TCI
                  Music's leverage ratio, as defined, for the preceding quarter.
                  The TCI Music Revolving Loan Agreement matures on June 30,
                  2005 with principal reductions beginning semi-annually on June
                  30, 2000 based on a scheduled percentage of the total
                  commitment. A commitment fee is charged on the unborrowed
                  portion of the TCI Music Revolving Loan Agreement commitment
                  ranging from .25% to .375% based upon the leverage ratio for
                  the preceding quarter.

         (c)      Payable by Puerto Rico Subsidiary

                  TINTA's Puerto Rico subsidiary (the "Puerto Rico Subsidiary")
                  entered into a reducing revolving bank facility which is
                  unsecured and provides for maximum borrowing commitments of
                  $100 million (the "Puerto Rico Bank Facility"). The
                  availability of such commitments for borrowing is subject to
                  the Puerto Rico Subsidiary's compliance with applicable
                  financial covenants and other customary conditions. Commencing
                  March 31, 2000, the maximum commitments will be reduced
                  quarterly through March 31, 2006. Borrowings under the Puerto
                  Rico Bank Facility bear interest at variable rates. In
                  addition, the Puerto Rico Subsidiary is required to pay a
                  commitment fee equal to 0.375% on the average daily unused
                  portion of the maximum borrowing commitments, payable
                  quarterly in arrears and at maturity. The Puerto Rico Bank
                  Facility contains restrictive covenants which require, among
                  other things, the maintenance of certain financial ratios
                  (primarily the ratios of cash flow to total debt and cash flow
                  to debt service, as defined), and includes certain limitations
                  on indebtedness, investments, guarantees, acquisitions,
                  dispositions, dividends, liens and encumbrances, and
                  transactions with affiliates. If TCI's ownership interest in
                  TINTA were to fall below 50.1%, borrowings under the Puerto
                  Rico Bank Facility would be secured by the assets of the
                  Puerto Rico Subsidiary and the variable interest rates on such
                  borrowings would be increased.


                                                                     (continued)





                                      163
<PAGE>   165

                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         (d)      Debentures

                  On February 8, 1996, TINTA received net cash proceeds of
                  approximately $336 million from the issuance of 4-1/2%
                  Convertible Subordinated Debentures (the "TINTA Debentures")
                  due 2006 having an aggregate principal amount of $345 million.
                  The TINTA Debentures are convertible into shares of TINTA
                  Series A common stock at a price of $27.30 per share of TINTA
                  Series A common stock, subject to anti-dilution adjustments.
                  Interest on the TINTA Debentures is payable on February 15 and
                  August 15 of each year, commencing August 15, 1996. The TINTA
                  Debentures may be redeemed by TINTA in whole or in part, at
                  any time on or after February 15, 1999. Pending its use by
                  TINTA, the net proceeds from the sale of the TINTA Debentures
                  were loaned to TCI pursuant to an unsecured promissory note.
                  See note 11.

         (e)      Other

                  On July 7, 1997, Encore Media Group LLC ("Encore Media Group")
                  obtained a new $625 million senior, secured facility (the "EMG
                  Senior Facility") in the form of a $225 million reducing
                  revolving line of credit and a $400 million, 364-day revolving
                  credit facility convertible to a term loan. Interest on the
                  EMG Senior Facility is tied to, at Encore Media Group's
                  option, the bank's prime rate plus an applicable margin or the
                  LIBOR rate plus an applicable margin. Encore Media Group is
                  required to pay a commitment fee which varies based on a
                  leverage ratio. The credit agreement for the EMG Senior
                  Facility contains certain provisions which limit Encore Media
                  Group as to additional indebtedness, sale of assets, liens,
                  guarantees, and distributions. Additionally, Encore Media
                  Group must maintain certain specified financial ratios. The
                  EMG Senior Facility serves to replace the Encore Media
                  Corporation ("EMC") bank credit facility which was terminated.
                  No borrowings were outstanding at December 31, 1997.

         The U.S. dollar equivalent of the annual maturities of Liberty/Ventures
         Group's debt for each of the next five years are as follows: 1998: $22
         million; 1999: $0; 2000: $294 million; 2001: $5 million and 2002: $9
         million.

         With the exception of the TINTA Debentures, which had a fair value of
         $295 million at December 31, 1997, Liberty/Ventures Group believes that
         the carrying value of Liberty/Ventures Group's debt approximated its
         fair value at December 31, 1997.

                                                                     (continued)



                                      164
<PAGE>   166
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



(9)      Income Taxes

         TCI files a consolidated federal income tax return with all of its 80%
         or more owned subsidiaries. Consolidated subsidiaries in which TCI owns
         less than 80% each file a separate tax return. TCI and such
         subsidiaries calculate their respective tax liabilities on a separate
         return basis. Income tax expense for Liberty/Ventures Group is based
         upon those items in the consolidated tax calculations of TCI applicable
         to Liberty/Ventures Group. Intergroup tax allocation represents an
         apportionment of tax expense or benefit (other than deferred taxes) and
         alternative minimum taxes to Liberty/Ventures Group in relation to its
         amount of taxable earnings or losses. Such amounts are reflected as
         borrowings from or loans to related parties.

         A tax sharing agreement (the "Old Tax Sharing Agreement") among TCI and
         certain subsidiaries of TCI was implemented effective July 1, 1995. The
         Old Tax Sharing Agreement formalized certain of the elements of a
         pre-existing tax sharing arrangement and contains additional provisions
         regarding the allocation of certain consolidated income tax attributes
         and the settlement procedures with respect to the intercompany
         allocation of current tax attributes. Under the Old Tax Sharing
         Agreement, Old Liberty/Ventures Group and TCI Ventures Group were
         responsible to TCI for their share of consolidated income tax
         liabilities (computed as if TCI were not liable for the alternative
         minimum tax) determined in accordance with the Old Tax Sharing
         Agreement, and TCI was responsible to Old Liberty/Ventures Group and
         TCI Ventures Group to the extent that the income tax attributes
         generated by Old Liberty/Ventures Group and TCI Ventures Group and
         their attributed subsidiaries were utilized by TCI to reduce its
         consolidated income tax liabilities (computed as if TCI were not liable
         for the alternative minimum tax). In the combined financial statements
         of Liberty/Ventures Group, the tax liabilities and benefits of such
         entities so determined are charged or credited to an intercompany
         account between TCI and Liberty/Ventures Group. Such intercompany
         account was required to be settled only upon the date that an entity
         ceases to be a member of TCI's consolidated group for federal income
         tax purposes. Under the Old Tax Sharing Agreement, TCI retains the
         burden of any alternative minimum tax and has the right to receive the
         tax benefits from an alternative minimum tax credit attributable to any
         tax period beginning on or after July 1, 1995 and ending on or before
         October 1, 1997.

                                                                     (continued)


                                      165
<PAGE>   167
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         Effective October 1, 1997, (the "Effective Date"), the Old Tax Sharing
         Agreement was replaced by a new tax sharing agreement, as amended by
         the First Amendment thereto (the "New Tax Sharing Agreement"), which
         governs the allocation and sharing of income taxes by TCI Group, Old
         Liberty/Ventures Group and TCI Ventures Group. Effective for periods on
         and after the Effective Date, federal income taxes will be computed
         based upon the type of tax paid by TCI (on a regular tax or alternative
         minimum tax basis) on a separate basis for each Group. Based upon these
         separate calculations, an allocation of tax liabilities and benefits
         will be made such that each Group will be required to make cash
         payments to TCI based on its allocable share of TCI's consolidated
         federal income tax liabilities (on a regular tax or alternative minimum
         tax basis, as applicable) attributable to such Group and actually used
         by TCI in reducing its consolidated federal income tax liability. Tax
         attributes and tax basis in assets would be inventoried and tracked for
         ultimate credit to or charge against each Group. Similarly, in each
         taxable period that TCI pays alternative minimum tax, the federal
         income tax benefits of each Group, computed as if such Group were
         subject to regular tax, would be inventoried and tracked for payment to
         or payment by each Group in years that TCI utilizes the alternative
         minimum tax credit associated with such taxable period. The Group
         generating the utilized tax benefits would receive a cash payment only
         if, and when, the unutilized taxable losses of the other Group are
         actually utilized. If the unutilized taxable losses expire without ever
         being utilized, the Group generating the unutilized tax benefits will
         never receive payment for such benefits. Pursuant to the New Tax
         Sharing Agreement, state and local income taxes are calculated on a
         separate return basis for each Group (applying provisions of state and
         local tax law and related regulations as if the Group were a separate
         unitary or combined group for tax purposes), and TCI's combined or
         unitary tax liability is allocated among the Groups based upon such
         separate calculation.

         Notwithstanding the foregoing, items of income, gain, loss, deduction
         or credit resulting from certain specified transactions that are
         consummated after the Effective Date pursuant to a letter of intent or
         agreement that was entered into prior to the Effective Date will be
         shared and allocated pursuant to the terms of the Old Tax Sharing
         Agreement as amended.

                                                                     (continued)



                                      166
<PAGE>   168
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         Income tax benefit (expense) consists of:

<TABLE>
<CAPTION>
                                                                          Current        Deferred         Total
                                                                      ------------     -------------    ----------
                                                                                     amounts in millions
<S>                                                                   <C>              <C>              <C>
         Year ended December 31, 1997:
           State and local income tax expense, including intergroup
               tax allocation                                         $         (3)              (32)          (35)
           Federal income tax benefit, including intergroup tax
               allocation                                                      159                11           170
           Foreign tax (expense) benefit                                        (9)                4            (5)
                                                                      ------------     -------------    ----------
                                                                      $        147               (17)          130
                                                                      ============     =============    ==========
         Year ended December 31, 1996:
           State and local income tax expense, including intergroup
               tax allocation                                         $         (3)              (92)          (95)
           Federal income tax benefit (expense), including
               intergroup tax allocation                                        29              (371)         (342)
           Foreign income tax expense                                          (12)               (8)          (20)
                                                                      ------------     -------------    ----------
                                                                      $         14              (471)         (457)
                                                                      ============     =============    ==========
         Year ended December 31, 1995:
           State and local income tax benefit (expense), including
               intergroup tax allocation                              $         (2)                6             4
           Federal benefit, including intergroup tax allocation                 59                17            76
           Foreign income tax expense                                           (9)              (15)          (24)
                                                                      ------------     -------------    ----------
                                                                      $         48                 8            56
                                                                      ============     =============    ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                              Years ended December 31,
                                                                     ------------------------------------------
                                                                        1997            1996            1995
                                                                     ----------      ----------      ----------
                                                                                  amounts in millions
<S>                                                                  <C>             <C>             <C>
         Computed expected tax benefit (expense)                     $      189            (439)             18
         Dividends excluded for income tax purposes                           8               2               1
         Minority interest of attributed subsidiaries                         3              --               5
         Amortization not deductible for income tax purposes                (10)            (10)            (11)
         State and local income taxes, net of federal income tax
           benefit                                                          (23)            (60)             --
         Recognition of difference in income tax basis of
           investments in attributed subsidiaries                           (10)             67              --
         Effect of foreign tax rate differential on earnings of
           attributed foreign subsidiary                                      1               1               5
         Increase in valuation allowance                                    (26)            (24)             (8)
         Gain on sale of attributed subsidiary's stock                       21              --              43
         Effect of deconsolidations on deferred tax expenses                (11)             --              --
         Other, net                                                         (12)              6               3
                                                                     ----------      ----------      ----------
                                                                     $      130            (457)             56
                                                                     ==========      ==========      ==========
</TABLE>

                                                                     (continued)



                                      167
<PAGE>   169
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements

         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                       -----------------------------
                                                                           1997             1996
                                                                       ------------     ------------
                                                                             amounts in millions
<S>                                                                    <C>              <C>
         Deferred tax assets:
           Net operating and capital loss carryforwards                $        237              108
           Future deductible amount attributable to accrued stock
              compensation and deferred compensation                             58                9
           Intangible assets due principally to increase in tax
              basis upon consummation of merger of attributed
              subsidiary                                                         16               --
           Other future deductible amounts due principally to
              non-deductible accruals                                            10               15
                                                                       ------------     ------------

           Deferred tax assets                                                  321              132
                                                                       ------------     ------------

              Less valuation allowance                                           95               62
                                                                       ------------     ------------
           Net deferred tax assets                                              226               70
                                                                       ------------     ------------

         Deferred tax liabilities:
           Property and equipment, due principally to differences
              in depreciation                                                    17               86
           Lease obligations, capitalized for income tax purposes                 4               17
           Franchise costs, not deductible for income tax purposes                6              189
           Foreign currency translation adjustments included in
              combined equity but not recognized for income tax
              purposes                                                            3               13
           Unrecognized gain on sale of assets                                   --               14
           Investments in affiliates, due principally to losses
              of affiliates recognized for income tax purposes in
              excess of losses recognized for financial statement
              purposes                                                        1,153              553
                                                                       ------------     ------------

           Deferred tax liabilities                                           1,183              872
                                                                       ------------     ------------

         Net deferred tax liabilities                                  $        957              802
                                                                       ============     ============
</TABLE>

         The valuation allowance relates principally to deferred tax assets
         arising from net operating loss carryforwards of @ Home.

         At December 31, 1997, Liberty/Ventures Group had net operating and
         capital loss carryforwards for income tax purposes aggregating
         approximately $597 million which, if not utilized to reduce taxable
         income in future periods, will begin to expire at various dates
         beginning in the year 2003.

                                                                     (continued)




                                      168
<PAGE>   170

                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Certain subsidiaries of Liberty/Ventures Group had additional net
         operating loss carryforwards for income tax purposes aggregating $113
         million and these net operating losses are subject to certain rules
         limiting their usage.

         For purposes of these combined financial statements, Liberty/Ventures
         Group has already received benefit for approximately $75 million of the
         net operating loss carryforwards disclosed above. Liberty/Ventures
         Group is responsible to TCI to the extent this amount of net operating
         loss carryforwards is utilized by TCI in future periods.

(10)     At Home Corporation

         In April 1997, @Home, a subsidiary of TCI which is attributed to
         Liberty/Ventures Group, issued 240,000 shares of convertible preferred
         stock, resulting in cash proceeds of $48 million, less issuance costs.
         On July 11, 1997, @Home completed its initial public offering (the
         "@Home IPO"), in which 10.4 million shares of @Home common stock were
         sold for net cash proceeds of approximately $100 million. As a result
         of the @Home IPO, Liberty/Ventures Group's economic interest in @Home
         decreased from 43% to 39% which economic interest represents an
         approximate 72% voting interest. In connection with the associated
         dilution of Liberty/Ventures Group's ownership interest of @Home,
         Liberty/Ventures Group recognized a non-cash gain of $60 million.

         @Home has entered into exclusive distribution agreements with certain
         cable operators. In connection with the distribution agreements, @Home
         has issued warrants to such cable operators to purchase 10.9 million
         shares of @Home's Series A common stock. Of these warrants, warrants to
         purchase 10.2 million shares were exercisable as of March 4, 1998.
         @Home may issue additional stock, or warrants in connection with its
         efforts to expand its distribution of the @Home service to other cable
         operators. The exercise of warrants or stock issued by @Home will
         reduce Liberty/Ventures Group's equity interest and voting power in
         @Home. See note 14.

(11)     Combined Equity

         General

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


                                                                     (continued)



                                      169
<PAGE>   171

                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         Stock Repurchases and Issuances

         On January 12, 1998, TCI purchased 12.4 million shares of United Video
         Satellite Group, Inc.'s ("UVSG") Series A common stock held by Lawrence
         Flinn, Jr., UVSG's Chairman Emeritus, in exchange for 12.7 million
         shares of TCI Ventures Group Series A Stock and 7.3 million shares of
         Liberty Group Series A Stock. As a result of such transaction
         Liberty/Ventures Group increased its ownership in the equity of UVSG to
         approximately 73% and approximately 93% of the total voting power of
         UVSG.

         During the year ended December 31, 1997, pursuant to a stock repurchase
         program approved by the Board, Liberty/Ventures Group repurchased
         916,500 shares of Liberty Group Series A Stock in open market
         transactions and 219,937 shares of Liberty Group Series A Stock from
         the spouse of an officer and director of TCI at an aggregate cost of
         $18 million. During 1997, pursuant to a stock repurchase program
         approved by the Board, TCI purchased 338,196 shares of TCI Ventures
         Group Stock in open market transactions at a cost to Liberty/Ventures
         Group of $4 million.

         Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a
         wholly-owned TCI subsidiary attributed to TCI Group. TCI exchanged 47.2
         million shares of TCI Group Series A Stock for shares of Kearns-Tribune
         Corporation which held 17.9 million shares of TCI Group Stock and 10.1
         million shares of Liberty Group Stock. Liberty/Ventures Group purchased
         from TCI Group the 10.1 million shares of Liberty Group Stock that were
         acquired in such transaction for $168 million.

         During the third quarter of 1997, Liberty/Ventures Group commenced a
         tender offer (the "Liberty Tender Offer") to purchase up to an
         aggregate of 22.5 million shares of Liberty Group Stock at a price of
         $20 per share through October 3, 1997. During the fourth quarter of
         1997, Liberty/Ventures Group repurchased 21.7 million shares of Liberty
         Group Series A Stock and 82,074 shares of Liberty Group Series B Stock
         at an aggregate cost of approximately $435 million pursuant to the
         Liberty Tender Offer. All of the above described purchases are
         reflected as a reduction of combined equity in the accompanying
         combined financial statements.


                                                                     (continued)




                                      170
<PAGE>   172

                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         During the fourth quarter of 1997, TCI entered into a Total Return
         Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the
         Equity Swap Facility, TCI has the right to direct the counterparty (the
         "Counterparty") to use the Equity Swap Facility to purchase shares
         ("Equity Swap Shares") of TCI Group Series A Stock and TCI Ventures
         Group Series A Stock with an aggregate purchase price of up to $300
         million. TCI has the right, but not the obligation, to purchase Equity
         Swap Shares through the September 30, 2000 termination date of the
         Equity Swap Facility. During such period, TCI is to settle periodically
         any increase or decrease in the market value of the Equity Swap Shares.
         If the market value of the Equity Swap Shares exceeds the
         Counterparty's cost, Equity Swap Shares with a fair value equal to the
         difference between the market value and cost will be segregated from
         the other Equity Swap Shares. If the market value of Equity Swap Shares
         is less than the Counterparty's cost, TCI, at its option, will settle
         such difference with shares of TCI Group Series A Stock or TCI Ventures
         Group Series A Stock or, subject to certain conditions, with cash or
         letters of credit. In addition, TCI is required to periodically pay the
         Counterparty a fee equal to a LIBOR-based rate on the Counterparty's
         cost to acquire the Equity Swap Shares. Due to TCI's ability to issue
         shares to settle periodic price fluctuation and fees under the Equity
         Swap Facility, TCI records all amounts received or paid under this
         arrangement as increases or decreases, respectively, to equity. As of
         December 31, 1997, the Equity Swap Facility has acquired 345,000 shares
         of TCI Group Series A Stock and 380,000 shares of TCI Ventures Group
         Series A Stock at an aggregate cost that was approximately $3 million
         less than the fair value of such Equity Swap Shares at December 31,
         1997. The costs and benefits associated with the TCI Ventures Group
         Series A Stock held in the Equity Swap Facility are attributed to
         Liberty/Ventures Group.

         Stock Options and Stock Appreciation Rights

         Liberty/Ventures Group records stock compensation expense relating to
         restricted stock awards, options and/or stock appreciation rights on
         certain TCI common stock (collectively, "Awards") granted by TCI to
         certain TCI employees and/or directors who are involved with
         Liberty/Ventures Group. Estimated compensation relating to stock
         appreciation rights ("SARs") has been recorded through December 31,
         1997, and is subject to future adjustment based upon vesting and market
         value, and ultimately, on the final determination of market value when
         such rights are exercised. As allowed by Statement of Financial
         Accounting Standards No. 123, Accounting for Stock-Based Compensation
         ("Statement 123"), Liberty/Ventures Group continues to account for
         stock based compensation pursuant to Accounting Principles Board
         Opinion No. 25, which Liberty/Ventures Group estimates that
         compensation expense would not be materially different under Statement
         123. The estimated compensation adjustment with respect to TCI SARs
         resulted in increases (decreases) to Liberty/Ventures Group's share of
         TCI's stock compensation liability of $235 million, $(9 million) and
         $14 million for the years ended December 31, 1997, 1996 and 1995,
         respectively. In addition, for the years ended December 31, 1997, 1996
         and 1995, respectively, Liberty/Ventures Group made cash payments
         relating to its share of TCI's stock compensation obligations of $64
         million, less than $1 million and $3 million, respectively. The payable
         or receivable arising from the compensation related to the Awards is
         included in the amount due to related parties.

                                                                     (continued)



                                      171
<PAGE>   173
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements




         Transactions with Officers and Directors

         On January 5, 1998, TCI announced that a settlement (the "Magness
         Settlement") had been reached in the litigation brought against it and
         other parties in connection with the administration of the Estate of
         Bob Magness (the "Magness Estate"), the late founder and former
         Chairman of the Board of TCI.

         On February 9, 1998, in connection with the Magness Settlement, TCI
         entered into a call agreement (the "Malone Call Agreement") with Dr.
         John C. Malone, TCI's Chairman and Chief Executive Officer, and Dr.
         Malone's wife (together with Dr. Malone, the "Malones"), under which
         the Malones granted to TCI the right to acquire any shares of TCI stock
         which are entitled to cast more than one vote per share (the
         "High-Voting Shares") owned by the Malones, which currently consist of
         an aggregate of approximately 60 million High-Voting shares upon Dr.
         Malone's death or upon a contemplated sale of the High-Voting Shares
         (other than a minimal amount) to third persons. In either such event,
         TCI has the right to acquire the shares at a maximum price equal to the
         then relevant market price of shares of Series A Stock plus a ten
         percent premium. The Malones also agreed that if TCI were ever to be
         sold to another entity, then the maximum premium that the Malones would
         receive on their High-Voting Shares would be no greater than a ten
         percent premium over the price paid for the relevant shares of Series A
         Stock. TCI paid $150 million to the Malones in consideration of them
         entering into the Malone Call Agreement.

         Also on February 9, 1998, in connection with the Magness Settlement,
         certain members of the Magness family, individually and in certain
         cases, on behalf of the Estate of Betsy Magness (the first wife of Bob
         Magness) and the Magness Estate (collectively, the "Magness Family")
         also entered into a call agreement with TCI (with substantially the
         same terms as the one entered into by the Malones, including a call on
         the shares owned by the Magness Family upon Dr. Malone's death) (the
         "Magness Call Agreement") on the Magness Family's aggregate of
         approximately 49 million High-Voting Shares. The Magness Family was
         paid $124 million by TCI in consideration of them entering into the
         Magness Call Agreement. Additionally, on February 9, 1998, the Magness
         Family entered into a shareholders' agreement with the Malones and TCI
         under which (i) the Magness Family and the Malones agreed to consult
         with each other in connection with matters to be brought to the vote of
         TCI's shareholders, subject to the proviso that if they cannot mutually
         agree on how to vote the shares, Dr. Malone has an irrevocable proxy to
         vote the High-Voting Shares owned by the Magness Family, (ii) the
         Magness Family may designate a nominee for TCI's Board of Directors and
         Dr. Malone has agreed to vote his High Voting Shares for such nominee
         and (iii) certain "tag along rights" have been created in favor of the
         Magness Family and certain "drag along rights" have been created in
         favor of the Malones.

         The aggregate amount paid by TCI pursuant to the Malone Call Agreement
         and Magness Call Agreement (collectively, the "Call Payments") was
         allocated to each of the Groups. Liberty/Ventures Group's share of the
         Call Payments of $140 million was paid during the first quarter of 1998
         and will be reflected as a reduction of combined equity.


                                                                     (continued)


                                      172
<PAGE>   174

                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         Transactions with TCI and Other Related Parties

         Prior to July 1997, Liberty/Ventures Group's other investments included
         a 49.9% partnership interest in QE+ Ltd. ("QE+"), a limited partnership
         which distributed "STARZ!," a first-run movie premium programming
         service launched in 1994. Entities attributed to TCI Group held the
         remaining 50.1% partnership interest.

         During July 1997, Liberty/Ventures Group, TCI Group, and the 10%
         minority holder of EMC, an attributed subsidiary of Liberty/Ventures
         Group, entered into a series of transactions pursuant to which the
         businesses of "Encore," a movie premium programming service, and STARZ!
         were contributed to Encore Media Group. Upon completion of the
         transaction, Liberty/Ventures Group owned 80% of Encore Media Group and
         TCI Group owned the remaining 20%. In connection with these
         transactions, the 10% minority interest in EMC was exchanged for
         approximately 2.4 million shares of Liberty Group Series A Stock, which
         was accounted for as an acquisition of a minority interest.

         Liberty/Ventures Group received its 80% ownership interest in Encore
         Media Group in exchange for (i) the contribution of its 49.9% interest
         in QE+, (ii) the contribution of EMC, (iii) the issuance of a $307
         million note payable to TCI Group (the "EMG Promissory Note"), (iv) the
         cancellation and forgiveness of amounts due for certain services
         provided to QE+ equal to 4% of the gross revenue of QE+ ("STARZ Content
         Fees") and (v) the termination of an option to increase
         Liberty/Ventures Group's ownership interest in QE+.

         TCI Group received the remaining 20% interest in Encore Media Group and
         the aforementioned consideration from Liberty/Ventures Group in
         exchange for the contribution of TCI Group's 50.1% ownership interest
         in QE+ and certain capital contributions made by TCI Group to QE+. In
         addition, TCI Group entered into a 25 year affiliation agreement with
         Encore Media Group (the "EMG Affiliation Agreement") pursuant to which
         TCI Group will pay monthly fixed amounts in exchange for unlimited
         access to all of the existing Encore and STARZ! services.

         Upon formation of Encore Media Group, the operations of STARZ! are
         included in the combined financial results of Liberty/Ventures Group.
         The EMG Promissory Note is included in amounts due to related parties.
         Prior to the formation of Encore Media Group, STARZ Content Fees were
         included in revenue from related parties.

         Effective December 31, 1997, Liberty/Ventures Group and TCI Group
         agreed to amend the above transactions. Pursuant to the amendment, the
         above described series of transactions were rescinded, retroactive to
         July 1, 1997. Such rescission was given effect as of December 31, 1997
         for financial reporting purposes. Simultaneously, Liberty/Ventures
         Group and TCI Group entered into a new agreement whereby the EMG
         Affiliation Agreement was amended to permanently reduce the monthly
         fixed amounts for the life of the contract. TCI Group's 20% ownership
         interest in Encore Media Group was eliminated and the EMG Promissory
         Note was reduced by $32 million. The amounts to be paid to Encore Media
         Group pursuant to the EMG Affiliation Agreement were reduced to amounts
         which reflect current market prices.

                                                                     (continued)



                                      173
<PAGE>   175
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements




         Due to the related party nature of the above-described transactions,
         the $133 million excess of the consideration paid over the carryover
         basis of the assets transferred (including a deferred tax asset of $98
         million) was reflected as a decrease to combined equity. Subsequent to
         the amendment, 100% of the operations of Encore Media Group are
         included in the combined financial results of Liberty/Ventures Group.

         Effective July 11, 1997, pursuant to an Agreement and Plan of Merger,
         dated as of February 6, 1997, as amended (the "DMX Merger Agreement"),
         by and among TCI, TCI Music, a wholly-owned subsidiary of TCI, a
         wholly-owned subsidiary of TCI Music ("DMX Merger Sub") and DMX, Inc.
         ("DMX"), Merger Sub was merged with and into DMX, with DMX as the
         surviving corporation (the "DMX Merger"). As a result of the DMX
         Merger, stockholders of DMX became stockholders of TCI Music.

         In connection with the DMX Merger, TCI and TCI Music entered into an
         agreement pursuant to the which, effective as of the closing of the DMX
         Merger: (i) TCI Music issued to TCI (as designee of certain of its
         indirect subsidiaries), 62.5 million shares of Series B Common Stock,
         $.01 par value per share, of TCI Music ("TCI Music Series B Common
         Stock") and a promissory note in the amount of $40 million (the "TCI
         Music Note"), (ii) until December 31, 2006, certain subsidiaries of TCI
         transferred to TCI Music the right to receive all revenue from sales of
         DMX music services to their residential and commercial subscribers, net
         of an amount equal to 10% of revenue from such sales to residential
         subscribers and net of the revenue otherwise payable to DMX as license
         fees for DMX music services under affiliation agreements currently in
         effect, (iii) TCI contributed to TCI Music certain commercial digital
         DMX tuners that are not in service as of the effective date of the DMX
         Merger, and (iv) TCI granted to each stockholder who became a
         stockholder of TCI Music pursuant to the DMX Merger, one right (a
         "Right") with respect to each whole share of Series A Common Stock,
         $.01 par value per share, of TCI Music ("TCI Music Series A Common
         Stock" and together with the TCI Music Series B Common Stock, the "TCI
         Music Common Stock") acquired by such stockholder in the DMX Merger
         pursuant to the terms of a Rights Agreement among TCI, TCI Music and
         the rights agent (the "Rights Agreement"). Upon consummation of the DMX
         Merger, each outstanding share of DMX Common Stock was converted into
         the right to receive (i) one-quarter of a share of TCI Music Series A
         Common Stock, (ii) one Right with respect to each whole share of TCI
         Music Series A Common Stock and (iii) cash in lieu of the issuance of
         fractional shares of TCI Music Series A Common Stock and Rights. Each
         Right entitles the holder to require TCI to purchase from such holder
         one share of TCI Music Series A Common Stock for $8.00 per share,
         subject to reduction by the aggregate amount per share of any dividend
         and certain other distributions, if any, made by TCI Music to its
         stockholders, and, payable at the election of TCI, in cash, a number of
         shares of TCI Group Series A Stock, having an equivalent value or a
         combination thereof, if during the one-year period beginning on the
         effective date of the DMX Merger, the price of TCI Music Series A
         Common Stock does not equal or exceed $8.00 per share for a period of
         at least 20 consecutive trading days.


                                                                     (continued)



                                      174
<PAGE>   176
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements




         Subsequently, TCI Music and TCI entered into an Amended and Restated
         Contribution Agreement to be effective as of July 11, 1997 which
         provides, among other things, for TCI to deliver, or cause certain of
         its subsidiaries to deliver to TCI Music fixed monthly payments
         (subject to inflation and other adjustments) through 2017.

         Effective with the DMX Merger, TCI beneficially owned approximately
         45.7% of the outstanding shares of TCI Music Series A Common stock and
         100% of the outstanding shares of TCI Music Series B Common Stock,
         which represented 89.6% of the equity and 98.7% of the voting power of
         TCI Music. Simultaneously with the DMX Merger, Liberty/Ventures Group
         acquired the TCI-owned TCI Music Common Stock by agreeing to reimburse
         TCI for any amounts required to be paid by TCI pursuant to TCI's
         contingent obligation under the Rights Agreement and issuing an $80
         million promissory note (the "Music Note") to TCI. The Music Note may
         be reduced by the payment of cash or the issuance by TCI of shares of
         Liberty/Ventures Group Stock for the benefit of entities attributed to
         TCI Group. Additionally, Liberty/Ventures Group may elect to pay $50
         million of the Music Note by delivery of a Stock Appreciation Rights
         Agreement that will give TCI Group the right to receive 20% of the
         appreciation in value of Liberty/Ventures Group's investment in TCI
         Music, to be determined at July 11, 2002. TCI Music was included in the
         combined financial results of Liberty/Ventures Group as of the date of
         the DMX Merger. Due to the related party nature of the transaction, the
         $86 million excess of the consideration paid over the carryover basis
         of the TCI Music Common Stock acquired by Liberty/Ventures Group from
         TCI was reflected as a decrease in combined equity. The Music Note is
         included in amounts due to related parties.

         The estimated aggregate fair value of the consideration issued to
         entities not controlled by TCI (the "Unaffiliated Stockholders") in the
         DMX Merger and the carryover basis of the consideration issued to
         entities controlled by TCI has been allocated to excess cost as the net
         book values of DMX's assets and liabilities approximate their
         respective fair values. The number of shares and Rights issued is based
         upon DMX Common Stock ownership as of June 30, 1997. The estimated fair
         value of the consideration issued to Unaffiliated Stockholders in the
         DMX Merger is being accreted to the value of $8.00 per share, subject
         to reduction by the aggregate amount per share of any dividend and
         certain other distributions, if any, made by TCI Music to its
         stockholders during the one-year period beginning on the effective date
         of the DMX Merger. Such accretion is reflected as an increase in excess
         cost with a corresponding increase to minority interest.


                                                                     (continued)



                                      175
<PAGE>   177
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements




         In December 1997, TCI Music issued convertible preferred stock and
         common stock in connection with two acquisitions. After giving effect
         to such issuances and assuming the conversion of the TCI Music
         convertible preferred stock, Liberty/Ventures Group, at December 31,
         1997, owned TCI Music securities representing 78% of TCI Music's common
         stock and 97% of the voting power attributable to such TCI Music common
         stock. In connection with the issuance of such common shares,
         Liberty/Ventures Group recorded a $19 million increase to combined
         equity. No gain was recognized in the statements of operations due
         primarily to Liberty/Ventures Group's contingent obligation under the
         Rights Agreement.

         Certain TCI corporate general and administrative costs are charged to
         Liberty/Ventures Group at rates set at the beginning of the year based
         on projected utilization for that year. During the years ended December
         31, 1997, 1996 and 1995 Liberty/Ventures Group was allocated $13
         million, $11 million and $7 million, respectively, in corporate general
         and administrative costs by TCI Group.

         During 1997, entities attributed to Liberty/Ventures Group made
         marketing support payments to entities attributed to TCI Group. Charges
         by TCI Group for such arrangements for the year ended December 31, 1997
         aggregated $19 million.

         Certain subsidiaries attributed to Liberty/Ventures Group produce
         and/or distribute sports and other programming and other services to
         cable television operators (including TCI Group) and others. Charges to
         TCI Group are based upon customary rates charged to others.

         HSN pays a commission to TCI Group for merchandise sales to customers
         who are customers of TCI Group's cable systems. Aggregate commissions
         and charges paid to TCI Group were $7 million and $6 million for the
         years ended December 31, 1996 and 1995, respectively.

         A subsidiary of TCI that is a member of Liberty/Ventures Group, leases
         certain digital boxes under a capital lease. During 1997, such digital
         boxes were subleased to TCI Group under an operating lease.
         Liberty/Ventures Group recognized revenue of $15 million from TCI Group
         during the year ending December 31, 1997 in connection with such lease.
         In January 1998, Liberty/Ventures Group's interest in such attributed
         subsidiary was transferred to TCI Group. In connection therewith, TCI
         Group assumed the capital lease obligations totaling $176 million and
         paid $7 million in cash to Liberty/Ventures Group. Such transfer will
         be accounted for at historical cost due to the related party nature of
         the transaction.

         The Puerto Rico Subsidiary purchases programming services from TCI
         Group. The charges, which approximate TCI Group's cost and are based on
         the aggregate number of subscribers served by the Puerto Rico
         Subsidiary, aggregated $6 million, $4 million and $3 million during the
         years ended December 31, 1997, 1996 and 1995, respectively.


                                                                     (continued)



                                      176
<PAGE>   178
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements




         During the third quarter of 1997, Liberty/Ventures Group sold certain
         assets (the "SUMMITrak Assets") to CSG Systems, Inc. ("CSG") for cash
         consideration of $106 million, plus five-year warrants to purchase up
         to 1.5 million shares of CSG common stock at $24 per share (the "CSG
         Warrants") and $12 million in cash, once certain numbers of TCI
         affiliated customers are being processed on a CSG billing system. Under
         certain circumstances, TCI may also be eligible to receive certain
         other contingent royalties. In connection with the sale of the
         SUMMITrak Assets, TCI Group committed to purchase billing services from
         CSG through 2012. In light of such commitment, Liberty/Ventures Group
         has reflected the $30 million excess (after deducting deferred income
         taxes of $17 million) of the cash received over the book value of the
         SUMMITrak Assets as an increase to combined equity.

         During the fourth quarter of 1997, Liberty/Ventures Group's remaining
         assets in TCI SUMMITrak of Texas, Inc. and TCI SUMMITrak L.L.C. were
         transferred to TCI Group in exchange for a $19 million reduction of the
         intercompany amount owed by Liberty/Ventures Group to TCI Group. Such
         transfer was accounted for at historical cost due to the related party
         nature of the transaction.

         Due to Related Parties

         The components of "Due to related parties" are as follows:

<TABLE>
<CAPTION>
                                                                           December 31,          December 31,
                                                                               1997                  1996
                                                                         ----------------       --------------
                                                                                  amounts in millions
<S>                                                                      <C>                    <C>  
         Note receivable from TCI Group                                  $            (88)                (176)
         Notes payable to TCI Group, including accrued interest                       378                   --
         Intercompany account                                                         240                   42
                                                                         ----------------       --------------
                                                                         $            530                 (134)
                                                                         ================       ==============
</TABLE>


         Amounts outstanding under the note receivable from TCI Group bear
         interest at variable rates based on TCI's weighted average cost of bank
         borrowings of similar maturities (6.7% at December 31, 1997). Principal
         and interest is due and payable as mutually agreed from time to time by
         TCI and Liberty/Ventures Group.

         Amounts outstanding under the notes payable to TCI Group bear interest
         at varying rates from 6.5% to 12.5%. Principal maturities are as
         follows: 1998 - $375 million and 1999 - $1 million.


                                                                     (continued)


                                      177
<PAGE>   179
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         The non-interest bearing intercompany account includes certain income
         tax and stock compensation allocations that are to be settled at some
         future date. All other amounts included in the intercompany account are
         to be settled within thirty days following notification.

         TCI Group has provided a revolving loan facility (the "Ventures
         Intergroup Credit Facility") to Liberty/Ventures Group for a five-year
         period commencing on September 10, 1997. Such facility permits
         aggregate borrowings at any one time outstanding of up to $500 million
         (subject to reduction as provided below), which borrowings bear
         interest at a rate per annum equal to The Bank of New York's prime rate
         (as in effect from time to time) plus 1% per annum, payable quarterly.
         A commitment fee equal to 3/8% per annum of the average unborrowed
         availability under the Ventures Intergroup Credit Facility is payable
         by Liberty/Ventures Group to TCI Group on a quarterly basis. The
         maximum amount of borrowings permitted under the Ventures Intergroup
         Credit Facility will be reduced on a dollar-for-dollar basis by up to
         $300 million if and to the extent that the aggregate amount of any
         additional capital that Liberty/Ventures Group is required to
         contribute to Sprint PCS Partnerships subsequent to September 10, 1997
         is less than $300 million. No borrowings were outstanding pursuant to
         the Ventures Intergroup Credit Facility at December 31, 1997. In March
         1998, Liberty/Ventures Group entered into a bank credit facility with a
         term of one year which provides for aggregate borrowings of up to $400
         million.

(12)     Acquisitions and Dispositions

         On January 25, 1996, the stockholders of UVSG adopted the Agreement and
         Plan of Merger dated as of July 10, 1995, as amended, among UVSG, TCI
         and TCI Merger Sub, Inc. ("UVSG Merger Sub"), pursuant to which UVSG
         Merger Sub was merged into UVSG, with UVSG as the surviving corporation
         (the "UVSG Merger"). Liberty/Ventures Group acquired 12.4 million
         shares of UVSG Class B common stock and 2.1 million shares of UVSG
         Class A common stock, together representing approximately 39% of the
         issued and outstanding common stock of UVSG and approximately 85% of
         the total voting power of UVSG common stock immediately after the UVSG
         Merger, resulting in UVSG becoming a majority-controlled attributed
         entity of Liberty/Ventures Group. The UVSG Merger has been accounted
         for by the purchase method. Accordingly, the results of operations of
         UVSG have been combined with those of Liberty/Ventures Group since
         January 25, 1996 and Liberty/Ventures Group recorded UVSG's assets and
         liabilities at fair value.

         On October 1, 1996, Cablevision acquired 99.99% of the issued and
         outstanding capital stock of Oeste Cable Color S.A. ("OCC"), a cable
         television operation, for a purchase price of $112 million (the "OCC
         Acquisition"). Cash consideration of $44 million was paid at closing
         and an additional cash payment of $22 million was paid on December 1,
         1996. The remaining purchase price was satisfied by Cablevision's
         issuance of $46 million principal amount of secured negotiable
         promissory notes (the "OCC Notes"). The OCC Notes were repaid in their
         entirety during the second quarter of 1997. The OCC Acquisition has
         been accounted for by the purchase method. Accordingly, the results of
         operations of OCC have been consolidated with those of Cablevision
         since the date of acquisition and Cablevision recorded OCC's assets and
         liabilities at fair value.

                                                                     (continued)



                                      178
<PAGE>   180
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         On October 17, 1995, IVS Cable Holdings Limited ("IVS"), a consolidated
         subsidiary of Flextech, completed the sale of a group of cable
         television subsidiaries to an unaffiliated third party for aggregate
         cash proceeds of (pound)63 million ($99 million using the applicable
         exchange rate) (the "IVS Subsidiary Sale"). Flextech, which, at the
         time, indirectly owned 91.7% of IVS, received (pound)59 million ($94
         million using the applicable exchange rate) of the cash proceeds from
         the IVS Subsidiary Sale.

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

(13)     Commitments and Contingencies

         Encore Media Group is obligated to pay fees for the rights to exhibit
         certain films that are released by various producers through 2017 (the
         "Film Licensing Obligations"). Based on subscriber levels at December
         31, 1997, these agreements require minimum payments aggregating
         approximately $695 million. The aggregate amount of the Film Licensing
         Obligations under these license agreements is not currently estimable
         because such amount is dependent upon the number of qualifying films
         released theatrically by certain motion picture studios as well as the
         domestic theatrical exhibition receipts upon the release of such
         qualifying films. Nevertheless, required aggregate payments under the
         Film Licensing Obligations could prove to be significant.

         TINTA has guaranteed the obligation of an affiliate ("The Premium Movie
         Partnership") to pay fees for the license to exhibit certain films
         through 2000. Although the aggregate amount of The Premium Movie
         Partnership's license fee obligations is not currently estimable, TINTA
         believes that the aggregate payments pursuant to such obligations could
         be significant. If TINTA were to fail to fulfill its obligations under
         the guarantee, the beneficiaries have the right to demand an aggregate
         payment from TINTA of approximately $46 million. Although TINTA has not
         had to perform under such guarantee to date, TINTA cannot be certain
         that it will not be required to perform under such guarantee in the
         future.

         Liberty/Ventures Group leases business offices, has entered into pole
         rental and transponder lease agreements and uses certain equipment
         under lease arrangements. Rental expense under such arrangements
         amounted to $84 million, $102 million and $89 million for the years
         ended December 31, 1997, 1996 and 1995, respectively.



                                                                     (continued)



                                      179
<PAGE>   181
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements



         A summary of future minimum lease payments under noncancellable
         operating and capital leases as of December 31, 1997 follows:

<TABLE>
<CAPTION>
                   Years ending December 31:                         Operating            Capital
                                                                  --------------     ----------------
                                                                           amounts in millions
<S>                                                               <C>                 <C>
                      1998                                        $           67                  71
                      1999                                                    66                  70
                      2000                                                    52                  65
                      2001                                                    36                  59
                      2002                                                    34                  58
                      Thereafter                                              88                 206
                                                                                      --------------
                                                                                                 529
                      Less amounts representing interest                                         142
                                                                                      --------------
                      Capital lease obligations                                       $          387
                                                                                      ==============
</TABLE>

         It is expected that in the normal course of business, leases that
         expire generally will be renewed or replaced by leases on other
         properties; thus, it is anticipated that future minimum lease
         commitments will not be less than the amount shown for 1998.

         Effective as of December 16, 1997, NDTC, on behalf of TCI
         Communications, Inc. and other cable operators that may be designated
         from time to time by NDTC ("Approved Purchasers"), entered into an
         agreement (the "Digital Terminal Purchase Agreement") with General
         Instrument Corporation ("GI") to purchase advanced digital set-top
         devices. The hardware and software incorporated into these devices will
         be designed and manufactured to be compatible and interoperable with
         the OpenCable(TM) architecture specifications adopted by CableLabs, the
         cable television industry's research and development consortium, in
         November 1997. NDTC has agreed that Approved Purchasers will purchase,
         in the aggregate, a minimum of 6.5 million set-top devices during the
         calendar years 1998, 1999 and 2000 at an average price of $318 per
         set-top device. GI agreed to provide NDTC and its Approved Purchasers
         the most favorable prices, terms and conditions made available by GI to
         any customer purchasing advanced digital set-top devices. In connection
         with NDTC's purchase commitment, GI agreed to grant warrants to
         purchase its common stock proportional to the number of devices ordered
         by each organization, which as of the effective date of the Digital
         Terminal Purchase Agreement, would have represented at least a 10%
         equity interest in GI (on a fully diluted basis). It is anticipated
         that the value associated with such equity interest would be attributed
         to TCI Group upon purchase and deployment of the digital set-top
         devices. NDTC has the right to terminate the Digital Terminal Purchase
         Agreement if, among other reasons GI fails to meet a material milestone
         designated in the Digital Terminal Purchase Agreement with respect to
         the development, testing and delivery of advanced digital set-top
         devices.


                                                                     (continued)



                                      180
<PAGE>   182
                            "LIBERTY/VENTURES GROUP"
             (a combination of certain assets, as defined in note 1)

                     Notes to Combined Financial Statements


         Also in December 1997, NDTC entered into a memorandum of understanding
         with GI which contemplates the sale to GI of certain of the assets of
         NDTC's set-top authorization business, the license of certain related
         technology to GI, and an additional cash payment in exchange for
         approximately 21.4 million shares of stock of GI. In connection
         therewith, NDTC would also enter into a service agreement pursuant to
         which it will provide certain services to GI's set-top authorization
         business.

         During 1997, TCI began an enterprise-wide comprehensive review of its
         computer systems and related software to ensure systems properly
         recognize the year 2000 and continue to process business information.
         The systems being evaluated include all internal use software and
         devices and those systems and devices that manage the distribution of
         Liberty/Ventures Group, as well as third parties' products.
         Additionally, Liberty/Ventures Group has initiated a program of
         communications with its significant suppliers, customers and affiliated
         companies to determine the readiness of third parties' and the impact
         on Liberty/Ventures Group if those third parties fail to remediate
         their own year 2000 issues.

         Over the last year, Liberty/Ventures Group converted its financial
         applications to commercial products which are anticipated to be year
         2000 ready, or outsourced portions of its financial applications to
         third party vendors who are expected to be year 2000 ready.
         Notwithstanding such efforts, Liberty/Ventures Group is in the process
         of finalizing its assessment of the impact of year 2000.
         Liberty/Ventures Group is utilizing both internal and external
         resources to identify, correct or reprogram, and test systems for year
         2000 readiness. Confirmations have been received from certain primary
         suppliers indicating that they are either year 2000 ready or have plans
         in place to ensure readiness. As part of Liberty/Ventures Group's
         assessment of its year 2000 issue, it is evaluating the level of
         validation it will require of third parties to ensure their year 2000
         readiness. Liberty/Ventures Group's manual assessment of the impact of
         the year 2000 date change should be complete by mid-1998.

         Management of Liberty/Ventures Group has not yet determined the cost
         associated with its year 2000 readiness efforts and the related
         potential impact on Liberty/Ventures Group's results of operations.
         Amounts expended to date have not been material, although there can be
         no assurance that costs ultimately required to be paid to ensure
         Liberty/Ventures Group's year 2000 readiness will not have an adverse
         effect on Liberty/Ventures Group's financial position. Additionally,
         there can be no assurance that the systems of other companies on which
         Liberty/Ventures Group relies will be converted in time or that any
         such failure to convert by another company will not have an adverse
         effect on Liberty/Ventures Group's financial condition or position.

  (14)   Restatement Associated with Costs of Distribution Agreements.

         Liberty/Ventures Group has restated its combined financial statements
         to record non-cash costs of certain distribution agreements as assets
         to be amortized over the exclusivity periods set forth in the 
         respective distribution agreements. Such non-cash costs had originally
         been expensed in the period that the underlying warrants had become
         exercisable.  This restatement resulted in a $164 million increase to
         other assets and a $99 million increase to minority interests in
         attributed subsidiaries at December 31, 1997.  In addition, the
         restatement resulted in a $65 million decrease to net loss for the year
         ended December 31, 1997.  See note 10.



                                      181
<PAGE>   183


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

                  Nine months ended September 30, 1998 and 1997

         Tele-Communications, Inc. ("TCI" or the "Company") is currently traded
through six separate series of common stock which represent three targeted
groups of assets. "TCI Group", which is traded through Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share ("TCI Group Series A
Stock"), and Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share ("TCI Group Series B Stock", and together with the TCI
Group Series A Stock, the "TCI Group Stock") is intended to reflect the separate
performance of TCI's domestic cable and communications business. "Liberty Media
Group", which is traded through Tele-Communications, Inc. Series A Liberty Media
Group Common Stock, par value $1.00 per share ("Liberty Group Series A Stock")
and Tele-Communications, Inc. Series B Liberty Media Group Common Stock, par
value $1.00 per share ("Liberty Group Series B Stock", and together with the
Liberty Group Series A Stock, the "Liberty Group Stock"), is intended to reflect
the separate performance of TCI's assets which produce and distribute
programming services. "TCI Ventures Group", which is traded through
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock, par value
$1.00 per share ("TCI Ventures Group Series A Stock") and Tele-Communications,
Inc. Series B TCI Ventures Group Common Stock, par value $1.00 per share ("TCI
Ventures Group Series B Stock", and together with the TCI Ventures Group Series
A Stock, the "TCI Ventures Group Stock"), is intended to reflect the separate
performance of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming assets. For additional
information concerning targeted stock, see note 1 to the accompanying
consolidated financial statements of TCI.

         On June 24, 1998, the Board of Directors of TCI (the "Board") announced
its intention, subject to shareholder approval, to combine Liberty Media Group
and TCI Ventures Group (collectively, "Liberty/Ventures Group"). Under the terms
of the proposed combination (the "Liberty/Ventures Combination"), each
outstanding share of TCI Ventures Group Series A Stock will be reclassified as
 .52 of a share of Liberty Group Series A Stock (following the Liberty/Ventures
Combination, the "Liberty/Ventures Group Series A Stock") and each outstanding
share of TCI Ventures Group Series B Stock will be reclassified as .52 of a
share of Liberty Group Series B Stock (following the Liberty/Ventures
Combination, the "Liberty/Ventures Group Series B Stock").

         Following the Liberty/Ventures Combination the Liberty/Ventures Group
Series A Stock and the Liberty/Ventures Group Series B Stock (and collectively,
the "Liberty/Ventures Group Stock") will represent one hundred percent of the
equity value attributable to Liberty/Ventures Group. The Liberty/Ventures
Combination will not result in any transfer of assets or liabilities of TCI or
any of its subsidiaries or affect the rights of creditors of TCI or of holders
of TCI's or any of its subsidiaries' debt.





                                      182
<PAGE>   184
\



         The following discussion and analysis has been prepared in conjunction
with the solicitation of shareholder approval of the proposed Liberty/Ventures
Combination, and accordingly, includes references to the proposed
Liberty/Ventures Group and analysis of the financial condition and results of
operations of the proposed Liberty/Ventures Group. Liberty Media Group and TCI
Ventures Group will continue to exist until such time as the Liberty/Ventures
Combination or another shareholder approved transaction is consummated. The
following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and financial statements included in Part II of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. The following
discussion focuses on material trends, risks and uncertainties affecting the
results of operations and financial condition of the Company, TCI Group and
Liberty/Ventures Group.

         Certain statements herein constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. In
particular, some of the statements contained under this caption 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 the Company (or entities in which the
Company has interests), 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 industry trends; the
regulatory and competitive environment of the industries in which the Company,
and the entities in which the Company has interests, operate; uncertainties
inherent in new business strategies, uncertainties inherent in the changeover to
the year 2000, including the Company's projected state of readiness, the
projected cost of remediation, the expected date of completion of each program
or phase, the projected worst case scenarios, and the expected contingency plans
associated with such worst case scenarios; new product launches and development
plans; rapid technological changes; the acquisition, development and/or
financing of telecommunications networks and services; the development and
provision of programming for new television and telecommunications technologies;
future financial performance, including availability, terms and deployment of
capital; the ability of vendors to deliver required equipment, software and
services; availability of qualified personnel; changes in, or failure or
inability to comply with, government regulations, including, without limitation,
regulations of the Federal Communications Commission ("FCC"), and adverse
outcomes from regulatory proceedings; changes in the nature of key strategic
relationships with partners and joint venturers; competitor responses to the
Company's products and services, and the products and services of the entities
in which the Company has interests, and the overall market acceptance of such
products and services; and other factors. These forward-looking statements (and
such risks, uncertainties and other factors) speak only as of the date of this
Report, and the Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein, to reflect any change in the Company's expectations with regard thereto,
or any other change in events, conditions or circumstances on which any such
statement is based. Any statements contained herein related to year 2000 are
hereby denominated as "Year 2000 Statements" within the meaning of the Year 2000
Information and Readiness Disclosure Act.




                                      183
<PAGE>   185



         Proposed Merger

         TCI and AT&T Corp. ("AT&T") have agreed to a merger (the "AT&T/TCI
Merger") pursuant to, and subject to the terms and conditions set forth in the
Agreement and Plan of Restructuring and Merger, dated as of June 23, 1998 (the
"Merger Agreement"), among TCI, AT&T and an indirect wholly-owned subsidiary of
AT&T. In the Merger, TCI will become a wholly-owned subsidiary of AT&T and each
share of TCI Group Series A Stock will be converted into .7757 of a share of
common stock, par value $1.00 per share, of AT&T ("AT&T Common Stock") and each
share of TCI Group Series B Stock will be converted into .8533 of a share of
AT&T Common Stock. The Liberty/Ventures Combination is not conditioned upon the
AT&T/TCI Merger. Upon closing of the AT&T/TCI Merger, the shareholders of
Liberty/Ventures Group will be issued separate shares of a new targeted stock of
AT&T in exchange for the shares of Liberty/Ventures Group Stock held. If the
Liberty/Ventures Combination and reclassification of TCI Ventures Group Stock
does not occur prior to the AT&T/TCI Merger, then in the AT&T/TCI Merger, each
share of TCI Ventures Group Series A Stock and TCI Ventures Group Series B Stock
will be converted into .52 of a share of the new targeted stock of AT&T into
which the Liberty Group Series A Stock will be exchanged ("New Liberty Media
Group Series A Tracking Stock") and the Liberty Group Series B Stock will be
exchanged ("New Liberty Media Group Series B Tracking Stock" and together with
the New Liberty Media Group Series A Tracking Stock "New Liberty Media Group
Tracking Stock"), respectively. In general, the holders of shares of New Liberty
Media Group Class A Tracking Stock and the holders of shares of New Liberty
Media Group Class B Tracking Stock will vote together as a single class with the
holders of shares of AT&T Common Stock on all matters presented to such
stockholders, with the holders being entitled to one-tenth (1/10th) of a vote
for each share of New Liberty Media Group Class A Tracking Stock held, one vote
per share of New Liberty Media Group Class B Tracking Stock held, and one vote
per share of AT&T Common Stock held.

         In the Merger, (i) TCI's Class B 6% Cumulative Redeemable Exchangeable
Junior Preferred Stock will remain outstanding, (ii) TCI's Convertible Preferred
Stock, Series C-TCI Group will be converted into a number of shares of AT&T
Common Stock equal to .7757 times the current conversion rate of such preferred
stock (132.86 shares per preferred share), (iii) TCI's Convertible Preferred
Stock Series C-Liberty Media Group will be converted into a number of shares of
New Liberty Media Group Class A Tracking Stock equal to the current conversion
rate of such preferred stock (56.25 shares per preferred share), (iv) TCI's
Redeemable Convertible TCI Group Preferred Stock, Series G will be converted
into a number of shares of AT&T Common Stock equal to .7757 times the current
conversion rate of such preferred stock (1.19 shares per preferred share) and
(v) TCI's Redeemable Convertible Liberty Media Group Preferred Stock, Series H
will be converted into a number of shares of New Liberty Media Group Class A
Tracking Stock equal to the current conversion rate of such preferred stock
(0.590625 of a share per preferred share).




                                      184
<PAGE>   186



         The shares of New Liberty Media Group Tracking Stock to be issued in
the AT&T/TCI Merger will be a newly authorized class of common stock of AT&T
which will be intended to reflect the separate performance of the businesses and
assets attributed to Liberty/Ventures Group. Pursuant to the Merger Agreement,
immediately prior to the AT&T/TCI Merger, certain assets attributed to
Liberty/Ventures Group (including, among others, the shares of AT&T Common Stock
received in the merger of AT&T and Teleport Communications Group, Inc. ("TCG"),
the stock of At Home Corporation ("@Home") attributed to Liberty/Ventures Group,
the assets and business of the National Digital Television Center, Inc. ("NDTC")
and Liberty/Ventures Group's equity interest in Western Tele-Communications,
Inc. ("WTCI") will be transferred to TCI Group in exchange for approximately
$5.5 billion in cash. Also, upon consummation of the AT&T/TCI Merger, through a
new tax sharing agreement between Liberty/Ventures Group and AT&T,
Liberty/Ventures Group will become entitled to the benefit of all of the net
operating loss carryforwards available to the entities included in TCI's
consolidated income tax return as of the date of the AT&T/TCI Merger.
Additionally, certain warrants currently attributed to TCI Group will be
transferred to Liberty/Ventures Group in exchange for up to $176 million in
cash. Certain agreements to be entered into at the time of the AT&T/TCI Merger
as contemplated by the Merger Agreement will, among other things, provide
preferred vendor status to Liberty/Ventures Group for digital basic distribution
on AT&T's systems of new programming services created by Liberty/Ventures Group
and its affiliates, provide for a renewal of existing affiliation agreements and
provide for the business of Liberty/Ventures Group to continue to be managed
following the AT&T/TCI Merger by certain members of TCI's management who manage
the businesses of Liberty/Ventures Group.

         If TCI terminates the Merger Agreement due to (i) the failure of AT&T's
stockholders to approve the AT&T/TCI Merger prior to March 31, 1999, (ii) the
withdrawal or modification by the AT&T Board of Directors of its approval of the
transaction, or (iii) the failure to obtain necessary governmental and
regulatory approvals by September 30, 1999, which failure occurs as a result of
the announcement by AT&T of a significant transaction which delays receipt of
such governmental approvals, AT&T will pay to TCI the sum of $1.75 billion in
cash. If AT&T terminates the Merger Agreement, under certain circumstances,
including the failure of TCI stockholders to approve the transaction prior to
March 31, 1999 or the withdrawal or modification by the Board of its approval of
the Merger, TCI will pay to AT&T the sum of $1.75 billion in cash.

         Consummation of the AT&T/TCI Merger is subject to the satisfaction or
waiver of customary conditions to closing, including but not limited to, the
separate approvals of the stockholders of AT&T and TCI, receipt of all necessary
governmental consents and approvals, and effectiveness of the registration
statement registering the AT&T Common Stock and New Liberty Media Group Tracking
Stock to be issued to TCI stockholders in the AT&T/TCI Merger. As a result,
there can be no assurance that the AT&T/TCI Merger will be consummated or, if
the AT&T/TCI Merger is consummated, as to the date of such consummation.




                                      185
<PAGE>   187



         Magness Settlement

         On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the Estate
of Bob Magness (the "Magness Estate"), the late founder and former Chairman of
the Board of TCI in exchange (the "Exchange") for an equal number of shares of
TCI Group Series B Stock (which shares are entitled to ten votes per share)
owned by the Magness Estate, (b) the Magness Estate sold (the "Sale") the shares
of TCI Group Series A Stock received in the Exchange, together with
approximately 1.5 million shares of TCI Group Series A Stock that the Magness
Estate previously owned (collectively, the "Option Shares"), to two investment
banking firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment Bankers
whereby TCI has the option, but not the obligation, to purchase the Option
Shares at any time on or before June 16, 1999 (the "Option Period"). The
preceding transactions are referred to collectively as the "June 16 Stock
Transaction". During the Option Period, the Company and the Investment Bankers
are to settle quarterly any increase or decrease in the market value of the
Option Shares. If the market value of the Option Shares exceeds the Investment
Bankers' cost, Option Shares with a fair value equal to the difference between
the market value and cost will be segregated from the other Option Shares. If
the market value of the Option Shares is less than the Investment Bankers' cost,
the Company, at its option, will settle such difference with shares of TCI Group
Series A Stock or TCI Ventures Group Series A Stock or, subject to certain
conditions, with cash or letters of credit. In addition, the Company is required
to pay the Investment Bankers a quarterly fee equal to the London Interbank
Offered Rate ("LIBOR") plus 1% on the Sale Price, as adjusted for payments made
by the Company pursuant to any quarterly settlement with the Investment Bankers.
Due to the Company's ability to settle quarterly price fluctuations and fees
with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock,
the Company records all amounts received or paid under this arrangement as
increases or decreases, respectively, to equity. During the fourth quarter of
1997, the Company repurchased 4 million shares of TCI Group Series A Stock from
one of the Investment Bankers for an aggregate cash purchase price of $66
million. Additionally, as a result of the September 10, 1997 exchange of shares
of TCI Ventures Group Stock for TCI Group Stock and certain open market
transactions, the Investment Bankers disposed of 4,210,308 shares of TCI Group
Series A Stock and acquired 23,407,118 shares of TCI Ventures Group Series A
Stock during the last half of 1997. As a result of the foregoing transactions
and certain transactions related to the January 5, 1998 settlement of litigation
involving the Magness Estate, as described below, the Option Shares were
comprised of 6,201,042 shares of TCI Group Series A Stock and 11,740,610 shares
of TCI Ventures Group Series A Stock at September 30, 1998. At September 30,
1998, the market value of the Option Shares exceeded the Investment Bankers'
cost by $254 million. The costs and benefits associated with the Option Shares
are attributed to TCI Group. Pursuant to a certain Letter Agreement, dated June
16, 1997, between Dr. Malone, TCI's Chairman and Chief Executive Officer, and
the Magness Estate, Dr. Malone agreed to waive certain rights of first refusal
with respect to shares of Series B TCI Group Stock beneficially owned by the
Magness Estate. Such rights of first refusal arise from a letter agreement,
dated June 17, 1988, among Bob Magness, Kearns-Tribune Corporation and Dr.
Malone, pursuant to which Dr. Malone was granted a right of first refusal to
acquire any shares of TCI Group Series B Stock which the other parties proposed
to sell. As a result of Dr. Malone's rights under such June 17, 1988 letter
agreement, such waiver was necessary in order for the Magness Estate to
consummate the Exchange and the Sale.





                                      186
<PAGE>   188

         In consideration for such waiver, TCI granted Dr. Malone the right (the
"Malone Right") to acquire from time to time until June 30, 1999, from TCI up to
30,545,864 shares of the Series B TCI Group Stock acquired by TCI from the
Magness Estate pursuant to the Exchange. Such acquisition may be made in
exchange for either, or any combination of, shares of Series A TCI Group Stock
owned by Dr. Malone (exchanged on a one for one basis), or cash in an amount
equal to the average closing sale price of the Series B TCI Group Stock for the
five trading days preceding the acquisition.

         In connection with certain legal procedings relative to the probate of
the Magness Estate, one or more of Gary Magness and Kim Magness, Bob Magness'
sons, Sharon Magness, Bob Magness' surviving second wife and the original
personal representatives of the Magness Estate advanced various claims, causes
of action, demands, complaints and requests against one or more of the others.
In addition, Kim Magness and Gary Magness, in a Complaint And Request To Void
Sale Of TCI Stock, And For Damages And Surcharge, filed on October 29, 1997 (the
"Voiding Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI, Dr. Malone and the original personal representatives of
the Magness Estate. Among other matters, the Voiding Action challenged the June
16 Stock Transaction on various fiduciary bases and requested recision of such
transaction and damages.

         Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI, Gary Magness, Kim Magness, Sharon Magness, the
Magness Estate, the Estate of Betsy Magness (the first wife of Bob Magness) and
Dr. Malone agreed to settle their respective claims against each other relating
to the Magness Estate and the June 16 Stock Transaction, in each case without
any of those parties admitting any of the claims or allegations against that
party (the "Magness Settlement").

         In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that 10,201,041 shares of TCI Group Series A Stock and
11,666,506 shares of TCI Ventures Group Series A Stock were returned to TCI as
authorized but unissued shares, and the Magness Estate paid $11 million to TCI
representing a reimbursement of the Exchange fees incurred by TCI from June 16,
1997 through February 9, 1998 with respect to such returned shares. TCI then
issued to the Magness Estate 10,017,145 shares of TCI Group Series B Stock and
12,034,298 shares of TCI Ventures Series B Stock.

         On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr. Malone and
Dr. Malone's wife (together with Dr. Malone, the "Malones"), under which the
Malones granted to TCI the right to acquire any shares of TCI stock which are
entitled to cast more than one vote per share (the "High-Voting Shares") owned
by the Malones, which currently consist of an aggregate of approximately 60
million High-Voting Shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third persons. In
either such event, TCI has the right to acquire the shares at a maximum price
equal to the then relevant market price of shares of "low-voting" Series A Stock
plus a ten percent premium. The Malones also agreed that if TCI were ever to be
sold to another entity, then the maximum premium that the Malones would receive
on their High-Voting Shares would be no greater than a ten percent premium over
the price paid for the relevant shares of Series A Stock. TCI paid $150 million
to the Malones in consideration of them entering into the Malone Call Agreement.





                                      187
<PAGE>   189

         Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain cases, on
behalf of the Estate of Betsy Magness and the Magness Estate (collectively, the
"Magness Family") also entered into a call agreement with TCI (with
substantially the same terms as the one entered into by the Malones, including a
call on the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of approximately 49
million High-Voting Shares. The Magness Family was paid $124 million by TCI in
consideration of them entering into the Magness Call Agreement.

         The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was reflected as
a $274 million reduction of additional paid-in capital. The Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, $134 million and $140
million of the Call Payments were allocated to TCI Group and Liberty/Ventures
Group, respectively.

         Additionally, on February 9, 1998, the Magness Family entered into a
stockholders' agreement (the "Stockholders' Agreement") with the Malones and TCI
under which (i) the Magness Family and the Malones agree to consult with each
other in connection with matters to be brought to the vote of TCI's
shareholders, subject to the proviso that if they cannot mutually agree on how
to vote the shares, Dr. Malone has an irrevocable proxy to vote the High-Voting
Shares owned by the Magness Family, (ii) the Magness Family may designate a
nominee for the Board and Dr. Malone has agreed to vote his High Voting Shares
for such nominee and (iii) certain "tag along rights" have been created in favor
of the Magness Family and certain "drag along rights" have been created in favor
of the Malones. In addition, the Malone Right granted by TCI to Dr. Malone to
acquire 30,545,864 shares of TCI Group Series B Stock was reduced to an option
to acquire 14,511,570 shares of TCI Group Series B Stock. Pursuant to the terms
of the Stockholders' Agreement, the Magness Family has the right to participate
in the reduced Malone Right on a proportionate basis with respect to 12,406,238
shares of the 14,511,570 shares subject to the Malone Right. On June 24, 1998,
Dr. Malone delivered notice to TCI Group exercising his right to purchase up to
14,511,570 shares of TCI Group Series B Stock at a per share price of $35.5875
pursuant to the Malone Right. In addition, a representative of the Magness
Family advised Dr. Malone that the Magness Family would participate in such
purchase up to the Magness Family's proportionate right. On October 14, 1998,
8,718,770 shares of TCI Group Series B Stock were issued to Dr. Malone upon
payment of cash consideration totaling $310 million. On October 16, 1998,
5,792,800 shares of TCI Group Series B Stock were issued to the Magness Family
upon payment of cash consideration totaling $206 million. In connection with the
acquisition of the TCI Group Series B Stock by Dr. Malone, TCI executed certain
waivers to the Stockholders' Agreement and TCI and the Magness Family executed a
waiver to the Malone Call Agreement to, among other things, permit the pledge of
TCI Group Series B Stock owned by Dr. Malone as collateral to the lenders who
provided the proceeds for the purchase of the shares of TCI Group Series B
Stock.





                                      188
<PAGE>   190

         Year 2000

         During the three months ended September 30, 1998, the Company continued
its enterprise-wide, comprehensive efforts to assess and remediate its computer
systems and related software and equipment to ensure such systems, software and
equipment recognize, process and store information in the year 2000 and
thereafter. The Company's year 2000 remediation efforts include an assessment of
its most critical systems, such as customer service and billing systems,
headends and other cable plant, systems that support the Company's programming
services, business support operations, and other equipment and facilities. The
Company also continued its efforts to verify the year 2000 readiness of its
significant suppliers and vendors and continued to communicate with significant
business partners and affiliates to assess such partners and affiliates' year
2000 status.

         The Company formed a year 2000 Program Management Office (the "PMO") to
organize and manage its year 2000 remediation efforts. The PMO is responsible
for overseeing, coordinating and reporting on the Company's year 2000
remediation efforts. It is comprised of a 90 member full-time staff and is
accountable to executive management of the Company.

         The PMO has defined a four-phase approach to determining the year 2000
readiness of the Company's systems, software and equipment. Such approach is
intended to provide a detailed method for tracking the evaluation, repair and
testing of the Company's systems, software and equipment. Phase 1, Assessment,
involves the inventory of all systems, software and equipment and the
identification of any year 2000 issues. Phase 1 also includes the preparation of
the workplans needed for remediation. Phase 2, Remediation, involves repairing,
upgrading and/or replacing any non-compliant equipment and systems. Phase 3,
Testing, involves testing the Company's systems, software, and equipment for
year 2000 readiness, or in certain cases, relying on test results provided to
the Company. Phase 4, Implementation, involves placing compliant systems,
software and equipment into production or service.

         At September 30, 1998, the Company's overall progress by phase was as
follows:

<TABLE>
<CAPTION>
                                                   Percentage of all
                                                   Equipment/Systems                    Expected
                Phase                                 In Phase *                    Completion Date
               -------                             ------------------               ---------------
<S>                                                     <C>                         <C> 
Phase 1-Assessment                                      92%                           April 1999
Phase 2-Remediation                                     54%                           July 1999
Phase 3-Testing                                         10%                           July 1999
Phase 4-Implementation                                   5%                           July 1999
</TABLE>

- ---------------------
         *The percentages set forth above do not total 100% because many
projects have elements in more than one phase. For purposes of this table, such
projects have been attributed to each applicable phase. In addition, the
percentages set forth above are based on the number of projects in each phase
compared to the total number of year 2000 projects.

         The completion dates set forth above are based on the Company's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurances can be given as to whether such projects will be
completed on such dates.

         The Company is completing an inventory of its important systems with
embedded technologies and is currently determining the correct remediation
approach. The embedded technologies assessments are expected to be complete by
December of 1998.



                                      189
<PAGE>   191

         During the three months ended September 30, 1998, the Company continued
its survey of significant third-party vendors and suppliers whose systems,
services or products are important to the Company's operations (e.g., suppliers
of addressable controllers and set-top boxes, and the provider of the Company's
billing services). The year 2000 readiness of such providers is critical to
continued provision of the Company's cable service. The Company has received
information that the most critical systems, services or products supplied to the
Company by third parties are either year 2000 ready or are expected to be year
2000 ready by mid-1999. The Company is currently developing contingency plans
for systems provided by vendors who have not responded to the Company's surveys.

         In addition to the survey process described above, management of the
Company has identified its most critical supplier/vendor relationships and has
instituted a verification process to determine the vendor's year 2000 readiness.
Such verification includes, as deemed necessary, reviewing vendors' test and
other data and engaging in regular conferences with vendors' year 2000 teams.
The Company is also requiring testing to validate the year 2000 compliance of
certain critical products and services and is contracting with independent
consultants to conduct such testing.

         Significant market value is associated with the Company's investments
in certain public and private corporations, partnerships and other businesses.
Accordingly, the Company is monitoring the public disclosure of such
publicly-held business entities to determine their year 2000 readiness,
including Cablevision Systems Corporation ("CSC"), Time Warner, Inc. ("Time
Warner"), and AT&T. In addition, the Company has surveyed and monitored the year
2000 status of certain privately-held business entities in which the Company has
significant investments.

         The Company was informed by CSC that, at September 30, 1998, the
remediation and testing of CSC's critical systems was underway and a target date
of June 1999 had been established for completion of all remediation and testing
of year 2000 compliance of all such systems. The Company was informed by AT&T
that, at September 30, 1998, AT&T had completed 99% of its assessments and was
remediating its noncompliant systems. The Company has been informed that AT&T
has set a target date of December 1998 for completion of the assessment,
remedation and testing of all customer-affecting systems. A target date of
mid-year 1999 has been established for enterprise-wide year 2000 compliance. For
updated information related to CSC, Time Warner, and AT&T's year 2000 programs,
please refer to CSC, Time Warner, and AT&T's most recent periodic filings with
the Securities and Exchange Commission.

         Year 2000 expenses and capital expenditures incurred in the three
months ended September 30, 1998 were $4 million and less than $1 million,
respectively. Expenses and capital expenditures incurred in the nine months
ended September 30, 1998 were $6 million and less than $1 million, respectively.
Management of the Company currently estimates the remaining costs to be not less
than $71 million, bringing the total estimated cost associated with the
Company's year 2000 remediation efforts to be not less than $77 million
(including $32 million for replacement of noncompliant IT Systems). Also
included in this estimate is $9 million in future payments to be made pursuant
to unfulfilled executory contracts or commitments with vendors for year 2000
remediation services. Although no assurances can be given, management currently
expects that (i) cash flow from operations will fund the costs associated with
year 2000 compliance and (ii) the total projected cost associated with the
Company's year 2000 program will not be material to the Company's financial
position, results of operations or cash flows.

         The Company is a widely distributed enterprise in which allocation of
certain resources, including IT support is decentralized. Accordingly, the
Company does not consolidate an IT budget. Therefore, total estimated year 2000
costs as a percentage of an IT budget are not available. There are currently no
planned IT projects being deferred due to year 2000 costs.



                                      190
<PAGE>   192



         The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. Management
believes that its year 2000 program will significantly reduce the Company's
risks associated with the changeover to the year 2000 and has implemented
certain contingency plans to minimize the effect of any potential year 2000
related disruptions. The risks and the uncertainties discussed below and the
associated contingency plans relate to systems, software, equipment, and
services that the Company has deemed critical in regard to customer service,
business operations, financial impact or safety.

         The failure of addressable controllers contained in the cable system
headends could disrupt the delivery of premium services to customers and could
necessitate crediting customers for failure to receive such premium services. In
this unlikely event, management expects that it will identify and transmit the
lowest cost programming tier. Unless other contingency plans are developed with
the programmers, premium and adult content channels would not likely be
transmitted until the addressable controller had been repaired.

         Customer service networks and/or automated voice response systems
failure could prevent access to customer account information, hamper
installation scheduling and disable the processing of pay-per-view requests. The
Company plans to have its customer service representatives answer telephone
calls from customers in the event of outages and expects to retrieve needed
customer information manually from the billing service provider.

         A failure of the services provided by billing systems service providers
could result in a loss of customer records which could disrupt the ability to
bill customers for a protracted period. The Company plans to prepare electronic
backup records of its customer billing information prior to the year 2000 to
allow for data recovery. In addition, the Company continues to monitor the year
2000 readiness of its key customer-billing suppliers.

         Advertising revenue could be adversely affected by the failure of
certain equipment which could impede or prevent the insertion of advertising
spots in the Company's programming. The Company anticipates that it can minimize
such effect by manually resetting the dates each day until the equipment is
repaired.

         The Company owns investments in numerous cable programming operators
and other businesses. The market value of the Company's investment in these
entities could be adversely impacted by material failures of such entities to
address year 2000 remediation issues (including supplier and vendor issues)
related to their programming services and businesses. Further, due to tax and
strategic considerations, the Company has a limited ability to dispose of these
investments if year 2000 issues develop. Therefore, as a contingency plan, the
Company has undertaken an extensive effort to verify and in certain cases assist
in the year 2000 remediation efforts of companies in which it has significant
investments.

         Security and fire protection systems failure could leave facilities
vulnerable to intrusion and fire. The Company expects to return such systems to
normal functioning by turning the power off and then on again ("power off/on").
The Company also plans to have additional security staff on site and plans to
implement a backup plan for communicating with local fire and police
departments. Also, certain personal computers interface and control elevators,
escalators, wireless systems, public access systems and certain telephony
systems. In the event such computers cease operating, conducting a power off/on
is expected to resume normal functioning. If a power off/on does not resume
normal functioning, management expects to resolve the problem by resetting the
computer to a pre-designated date which precedes the year 2000.



                                      191
<PAGE>   193



         In the event that the local public utility cannot supply power, the
Company expects to supply power for a limited time to the Company's cable
headends, the NDTC and office sites through backup generators.

         The financial impact of any or all of the above worst-case scenarios
has not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios.

         If critical systems related to the Company's cable TV and programming
services are not successfully remediated, the Company could face claims of
breach of contract from customers of the NDTC, from parties to cable system sale
or exchange agreements, from certain programming providers and from other cable
TV businesses that rely on the Company's programming services. The Company has
not determined the possible losses from any such claims of breach of contract.

         MATERIAL CHANGES IN RESULTS OF OPERATIONS

         GENERAL

         Summarized operating data with respect to TCI is presented below for
the indicated periods:

<TABLE>
<CAPTION>
                                                         Three months ended                   Nine months ended
                                                            September 30,                       September 30,
                                                   ------------------------------      ------------------------------
                                                        1998              1997              1998              1997
                                                   ------------      ------------      ------------      ------------
                                                                           amounts in millions
<S>                                                <C>                <C>               <C>               <C>  
Revenue                                            $      1,825             1,934             5,510             5,637

Operating, selling, general and administrative
    expenses                                              1,147             1,156             3,458             3,405
Year 2000 costs                                               4                --                 6                --
AT&T merger costs                                             1                --                11                --
Stock compensation                                           11               160               423               231
Cost of distribution agreements                              --                --                83                --
Depreciation and amortization                               407               396             1,250             1,177
                                                   ------------      ------------      ------------      ------------

     Operating income                                       255               222               279               824

Interest expense                                           (272)             (300)             (808)             (883)
Share of losses of affiliates, net                         (397)             (253)             (986)             (591)
Minority interests in earnings of consolidated
    subsidiaries, net                                       (39)              (35)              (68)             (129)
Gain on dispositions of assets                            2,680               398             4,018               481
Other, net                                                   21                24                 3                46
                                                   ------------      ------------      ------------      ------------
                                                          1,993              (166)            2,159            (1,076)
                                                   ------------      ------------      ------------      ------------
    Earnings (loss) before income taxes
                                                          2,248                56             2,438              (252)

Income tax benefit (expense)                               (903)              (78)           (1,068)               18
                                                   ------------      ------------      ------------      ------------

     Net earnings (loss)                           $      1,345               (22)            1,370              (234)
                                                   ============      ============      ============      ============
</TABLE>



         The operating results of each of TCI Group and Liberty/Ventures Group
are separately discussed below.




                                      192
<PAGE>   194



         TCI GROUP

         TCI Group operates principally in the domestic cable and communications
industry. The table below sets forth, for the periods presented, the percentage
relationship that certain items bear to revenue. This summary provides trend
data relating to the normal recurring operations of TCI Group. Other items of
significance are discussed under separate captions below.

<TABLE>
<CAPTION>
                                               Three months ended                               Nine months ended
                                                  September 30,                                    September 30,
                                ----------------------------------------------    ----------------------------------------------
                                          1998                     1997                   1998                       1997
                                ---------------------    ---------------------    ---------------------    ---------------------
                                                                 dollar amounts in millions
<S>                               <C>        <C>           <C>        <C>           <C>        <C>           <C>        <C>     
Revenue                              100%    $  1,479         100%    $  1,618         100%    $  4,560         100%    $  4,779

Operating expenses                   (37)        (546)        (36)        (580)        (37)      (1,685)        (37)      (1,792)
Selling, general and
    administrative expenses          (22)        (329)        (20)        (330)        (22)        (986)        (20)        (952)
Year 2000 costs                       --           (3)         --           --          --           (5)         --           --
AT&T merger costs                     --           (1)         --           --          --          (11)         --           --
Stock compensation                    (1)         (13)         (4)         (61)         (4)        (160)         (2)         (99)
Depreciation and amortization
                                     (25)        (362)        (21)        (338)        (24)      (1,111)        (22)      (1,032)
                                --------     --------    --------     --------    --------     --------    --------     --------

      Operating income                15%    $    225          19%    $    309          13%    $    602          19%    $    904
                                ========     ========    ========     ========    ========     ========    ========     ========
</TABLE>

         The operation of TCI Group's cable television systems is regulated at
the federal, state and local levels. The Cable Television Consumer Protection
and Competition Act of 1992 and the Telecommunications Act of 1996 (the "Cable
Acts") established rules under which TCI Group's basic and tier service rates
and its equipment and installation charges ("Regulated Services") are regulated
if a complaint is filed by a customer or if the appropriate franchise authority
is certified by the FCC to regulate rates. At September 30, 1998, approximately
68% of TCI Group's basic customers were served by cable television systems that
were subject to such rate regulation.

         During the nine months ended September 30, 1998, 74% of TCI Group's
revenue was derived from Regulated Services. As noted above, any increases in
rates charged for Regulated Services are regulated by the Cable Acts. Moreover,
competitive factors may limit TCI Group's ability to increase its service rates.



                                      193
<PAGE>   195


         On March 4, 1998, TCI Group contributed to CSC certain of its cable
television systems serving approximately 830,000 customers in exchange for
approximately 48.9 million newly issued CSC Class A common shares (as adjusted
for a two-for-one stock split) (the "CSC Transaction"). In addition, TCI
completed, during the first nine months of 1998, six transactions whereby TCI
Group contributed cable television systems serving in the aggregate
approximately 1,224,000 customers to six separate joint ventures (collectively,
the "1998 Joint Ventures") in exchange for non-controlling ownership interests
in each of the 1998 Joint Ventures, and the assumption and repayment by the 1998
Joint Ventures of debt owed by TCI Group to external parties aggregating $323
million and intercompany debt owed to TCI Group aggregating $1,533 million. The
CSC Transaction and the formation of the 1998 Joint Ventures are collectively
referred to herein as the "1998 Contribution Transactions." Since January 1,
1997, TCI Group has also consummated certain other acquisitions and
dispositions. Such transactions affect the comparability of TCI Group's results
of operations for the three and nine months ended September 30, 1998 and 1997.
For additional information see notes 5 and 7 to the combined financial
statements of TCI Group which are included in the Company's September 30, 1998
Quarterly Report on Form 10-Q.

         TCI Group's revenue decreased $139 million or 9% for the three months
ended September 30, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the 1998 Contribution Transactions and
other dispositions, revenue increased 3%. Revenue from TCI Group's customers
accounted for 3% of such increase in revenue, primarily due to the net effect of
a 5% increase in basic revenue, an increase in revenue from digital products and
an 8% decrease in traditional premium revenue. TCI Group experienced a 3%
increase in its average basic rate, an increase in the number of average basic
customers of 2%, an 8% decrease in its average rate for traditional premium
services and a decrease of less than 1% in the number of average traditional
premium subscriptions. Additionally, the December 31, 1997 termination of an
agreement pursuant to which TCI Group provided fulfillment services to a third
party resulted in a 1% decrease in revenue. Advertising sales and other revenue
accounted for the remaining 1% increase in revenue. A significant portion of the
increase in advertising sales is attributable to arrangements with programming
suppliers that may not continue at current levels in future periods.

         TCI Group's revenue decreased $219 million or 5% for the nine months
ended September 30, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the 1998 Contribution Transactions and
other dispositions, revenue increased 2%. Revenue from TCI Group's customers
accounted for 2% of such increase in revenue, primarily due to the net effect of
a 5% increase in basic revenue, an increase in revenue from digital products and
an 11% decrease in traditional premium revenue. TCI Group experienced a 5%
increase in its average basic rate, an increase in the number of average basic
customers of less than 1%, a 5% decrease in its average rate for traditional
premium services and a 6% decrease in the number of average traditional premium
subscriptions. Additionally, the December 31, 1997 termination of an agreement
pursuant to which TCI Group provided fulfillment services to a third party
resulted in a 1% decrease in revenue. Advertising sales and other revenue
accounted for the remaining 1% increase in revenue. A significant portion of the
increase in advertising sales is attributable to arrangements with programming
suppliers that may not continue at current levels in future periods.




                                      194
<PAGE>   196



         Operating expenses decreased $34 million or 6% and $107 million or 6%
for the three and nine months ended September 30, 1998, respectively, as
compared to the corresponding prior year periods. Exclusive of the effects of
acquisitions, the 1998 Contribution Transactions and other dispositions, such
expenses increased 5% and 1%, respectively. Such increases relate primarily to
higher programming and labor costs, which were partially offset by reductions
attributable to higher capitalized labor and overhead resulting primarily from
increased installation and construction activities. It is anticipated that TCI
Group's programming costs will increase in future periods.

         Selling, general and administrative expenses decreased $1 million or
less than 1% and increased $34 million or 4% for the three and nine months ended
September 30, 1998, respectively, as compared to the corresponding prior year
periods. Exclusive of the effects of acquisitions, the 1998 Contribution
Transactions and other dispositions, such expenses increased 12% and 16%,
respectively. Such increases are due primarily to general increases in expenses
relating to the launch of digital products and other initiatives, and other
individually insignificant increases in general and administrative expenses in
1998, which increases were partially offset by increases in marketing incentives
received from programming suppliers. The majority of such marketing incentives
are associated with the Company's launch of digital services and accordingly may
not continue at current levels in future periods.

         Year 2000 costs include fees and other expenses incurred directly in
connection with TCI's comprehensive efforts to review and correct computer
systems, equipment and related software to ensure readiness for the year 2000.
See detailed discussion above.

         AT&T merger costs were incurred in the second and third quarters of
1998, as a result of a Merger Agreement dated June 23, 1998, between TCI and
AT&T. Such costs include investment advisory, legal and accounting fees, and
other incremental pre-closing costs directly related to the Merger. See note 2
to the combined financial statements of TCI Group, which are included in the
Company's Quarterly Report on Form 10-Q.

         TCI Group records stock compensation relating to restricted stock
awards, options and/or stock appreciation rights granted by TCI to certain TCI
Group employees and directors who are involved with TCI Group. The estimated
compensation liability relating to stock appreciation rights has been recorded
as of September 30, 1998, and is subject to future adjustment based upon vesting
and market values and, ultimately, on the final determination of market values
when such rights are exercised.

         Depreciation and amortization expense increased $24 million or 7% and
$79 million or 8% for the three and nine months ended September 30, 1998,
respectively, as compared to the corresponding prior year periods. Such
increases represent the net effect of (i) increases attributable to
acquisitions, capital expenditures and differences in the composition of TCI
Group's depreciable property and equipment and (ii) decreases attributable to
the 1998 Contribution Transactions and other dispositions.

         Other Income and Expenses

         TCI Group's interest expense decreased $56 million or 19% and $107
million or 13% for the three and nine months ended September 30, 1998,
respectively, as compared to the corresponding prior year periods. Such
decreases are primarily the result of debt reductions attributable to the 1998
Contribution Transactions.




                                      195
<PAGE>   197



         TCI Group's share of CSC's losses, including amortization of the
difference between the recorded value of TCI Group's investment in CSC and TCI
Group's proportionate share of CSC's net deficiency, aggregated $76 million and
$156 million for the three months ended September 30, 1998 and for the period
from March 4, 1998 through September 30, 1998, respectively. TCI Group acquired
an equity interest in CSC on March 4, 1998. See note 5 to the combined financial
statements of TCI Group which are included in the Company's September 30, 1998
Quarterly Report on Form 10-Q.

         TCI Group's investments in affiliates other than CSC are comprised of
limited partnerships and other entities that are primarily engaged in the
domestic cable television business. TCI Group's share of net earnings (losses)
of other affiliates aggregated $(17 million) and $30 million for the three and
nine months ended September 30, 1998, respectively, as compared to $(16 million)
and $(50 million) for the corresponding prior year periods. A significant
portion of the change from the nine months ended September 30, 1997 to the nine
months ended September 30, 1998 is attributable to TCI Group's share of 1998
gains recognized by two affiliates on the sale of certain assets.

         During the nine months ended September 30, 1998 and 1997, TCI Group
purchased notes payable which had aggregate principle balances of $352 million
and $190 million, respectively. In connection with such purchases, TCI Group
recognized losses on early extinguishment of debt of $44 million and $11 million
for the nine months ended September 30, 1998 and 1997, respectively. Such losses
relate to prepayment penalties and the retirement of deferred loan costs.

         Minority interests in earnings of attributed subsidiaries aggregated
$48 million and $143 million for the three and nine months ended September 30,
1998, respectively, as compared to $42 million and $125 million for the
corresponding prior year periods. The majority of such amounts represent the
accrual of dividends on the Trust Preferred Securities issued in 1997 and 1996
and the accrual of dividends on certain preferred securities issued in 1996 by a
TCI subsidiary that is attributed to TCI Group. See note 10 to the combined
financial statements of TCI Group which are included in the Company's September
30, 1998 Quarterly Report on Form 10-Q.

         Gain on disposition of assets of $842 million for the nine months ended
September 30, 1998 relates primarily to the March 4, 1998 contribution of cable
television systems by TCI Group to CSC and certain of the 1998 Joint Ventures.
See notes 5 and 7 to the combined financial statements of TCI Group, which are
included in the Company's September 30, 1998 Quarterly Report on Form 10-Q.

         Net Earnings

         As a result of the above-described fluctuations in TCI Group's results
of operations, (i) TCI Group's net earnings (before preferred stock dividend
requirements) of $52 million for the three months ended September 30, 1998
changed by $110 million, as compared to TCI Group's net loss (before loss of TCI
Ventures Group and preferred stock dividend requirements) of $58 million for the
three months ended September 30, 1997, and (ii) TCI Group's net earnings (before
preferred stock dividend requirements) of $148 million for the nine months ended
September 30, 1998 changed by $251 million, as compared to TCI Group's net loss
(before loss of TCI Ventures Group and preferred stock dividend requirements) of
$103 million for the nine months ended September 30, 1997.





                                      196
<PAGE>   198



         LIBERTY/VENTURES GROUP

         Liberty/Ventures Group consists principally of the following assets and
their related liabilities: (i) TCI's businesses which provide programming
services including production, acquisition and distribution through all
available formats and media of branded entertainment, educational and
informational programming and software, including multimedia products, (ii)
TCI's businesses engaged in electronic retailing, direct marketing, advertising
sales relating to programming services, infomercials and transaction processing,
(iii) TCI's businesses engaged in international cable, telephony and programming
businesses (iv) TCI's principal interests in the telephony business consisting
primarily of TCI's investment in a series of partnerships formed to engage in
the business of providing wireless communications services, using the radio
spectrum for broadband personal communications services ("PCS"), to residential
and business customers nationwide under the Sprint(R) brand (a registered
trademark of Sprint Communications Company, L.P.) (the "PCS Ventures"), TCI's
equity interest in AT&T and WTCI, a wholly-owned subsidiary of TCI that provides
long distance transport of video, voice and data traffic and other
telecommunications services to interexchange carriers on a wholesale basis using
primarily a digital broadband microwave network located throughout a 12 state
region, (v) TCI's businesses engaged in high speed multimedia Internet services,
and (vi) other assets, including NDTC, which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets. A significant portion of Liberty/Ventures Group's operations are
conducted through corporations and partnerships in which Liberty/Ventures Group
holds a 20%-50% ownership interest. As Liberty/Ventures Group generally accounts
for such ownership interests using the equity method of accounting, the
financial condition and results of operations of such entities are not reflected
on a combined basis within Liberty/Ventures Group's combined financial
statements.

         Liberty/Ventures Group's programming services include production,
acquisition and distribution through all available formats and media of branded
entertainment, educational and informational programming and software, including
multimedia products ("Entertainment and Information Programming Services").
Liberty/Ventures Group's international services include businesses which provide
programming services and operating television, telephone and Internet
distribution networks around the world ("International Services").
Liberty/Ventures Group operates NDTC which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets ("Digital Compression and Authorization Services") and Liberty/Ventures
Group is engaged in the business of providing high speed multimedia Internet
services ("Internet Services"). To enhance the reader's understanding, separate
financial data has been provided below for Entertainment and Information
Programming Services, International Services, Digital Compression and
Authorization Services and Internet Services. Liberty/Ventures Group holds
significant equity investments, the results of which are not a component of
operating income, but are discussed below under "Other Income and Expense".
Other items of significance are discussed separately below.



                                      197
<PAGE>   199




<TABLE>
<CAPTION>
                                                             Nine months ended September 30,
                                                  ---------------------------------------------------
                                                            1998                         1997
                                                  -----------------------     -----------------------
                                                                 dollar amounts in millions
<S>                                               <C>             <C>         <C>              <C>
Revenue:
    Entertainment and Information Programming
       Services                                   $    1,004           88%    $      686           71%
    International Services                                44            4            206           21
    Digital Compression and Authorization
       Services                                           76            7             70            7
    Internet Services                                     29            2              4           --
    Corporate and other                                  (16)          (1)             6            1
                                                  ----------     --------     ----------     --------
                                                  $    1,137          100%    $      972          100%
                                                  ==========     ========     ==========     ========

Operating, selling, general and administrative:
    Entertainment and Information Programming
       Services                                   $     (833)          85%    $     (558)          72%
    International Services                               (34)           3           (132)          17
    Digital Compression and Authorization
       Services                                          (54)           6            (42)           5
    Internet Services                                    (54)           6            (35)           5
    Corporate and other                                    1           --             (8)           1
                                                  ----------     --------     ----------     --------
                                                  $     (974)         100%    $     (775)         100%
                                                  ==========     ========     ==========     ========

Depreciation, amortization, other non-cash
    charges, stock compensation and year 2000
    costs:
    Entertainment and Information Programming
       Services                                   $      (93)          19%    $      (50)          18%
    International Services                               (21)           4            (57)          21
    Digital Compression and Authorization
       Services                                          (29)           6            (23)           8
    Internet Services                                    (94)          20             (6)           2
    Corporate and other                                 (244)          51           (141)          51
                                                  ----------     --------     ----------     --------
                                                  $     (481)         100%    $     (277)         100%
                                                  ==========     ========     ==========     ========


Operating income (loss):
    Entertainment and Information Programming
       Services                                   $       78                  $       78  
    International Services                               (11)                         17  
    Digital Compression and Authorization                                               
       Services                                           (7)                          5  
    Internet Services                                   (119)                        (37) 
    Corporate and other                                 (259)                       (143) 
                                                  ----------                  ----------
                                                  $     (318)                 $      (80)
                                                  ==========                  ==========
</TABLE>



                                      198
<PAGE>   200



         Entertainment and Information Programming Services

         On June 24, 1997 Liberty/Ventures Group granted Time Warner an option
to acquire Southern Satellite Systems, Inc. and certain of its subsidiaries (the
"Southern Business") through a purchase of assets (the "Southern Option").
Liberty/Ventures Group received 6.4 million shares of a separate series of Time
Warner common stock (the "TW Exchange Stock") valued at $306 million in
consideration for the grant. In September 1997, Time Warner exercised the
Southern Option. Pursuant to the Southern Option, Time Warner acquired the
Southern Business, effective January 1, 1998, for $213 million, which was paid
in cash, together with the assumption of certain liabilities on January 2, 1998.
Effective January 1, 1998, the Southern Business is no longer included in the
combined financial statements of Liberty/Ventures Group.

         Subsequent to June 30, 1997, Liberty/Ventures Group and TCI Group
entered into a series of transactions pursuant to which the businesses of
"Encore", a movie premium programming service, and "STARZ!", a first run movie
premium programming service, were contributed to Encore Media Group LLC ("Encore
Media Group"), a subsidiary of TCI that is attributed to Liberty/ Ventures
Group. Upon the July 1997 formation of Encore Media Group, the operations of
STARZ! are included in the combined financial results of Liberty/Ventures Group.

         Simultaneously with the July 1997 merger of TCI Music, Inc. ("TCI
Music") and DMX, Inc. ("DMX") (the "DMX Merger"), TCI's controlling ownership
interest in TCI Music was transferred to Liberty/Ventures Group in exchange for
an $80 million promissory note (the "Music Note") and an agreement to reimburse
TCI for any amounts required to be paid by TCI pursuant to TCI's contingent
obligation under a Rights Agreement to purchase certain shares of TCI Music's
common stock (the "Rights Agreement") (see note 10 to the accompanying combined
financial statements of Liberty/Ventures Group). Accordingly, TCI Music has been
included in the combined financial statements of Liberty/Ventures Group since
the date of the DMX Merger.

         Effective February 1, 1998, Turner-Vision, Inc. ("Turner-Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("SNG") in exchange for an
approximate 20% interest in SNG. As a result of this transaction,
Turner-Vision's results of operations have been included in the combined
financial results of Liberty/Ventures Group as of February 1, 1998.

         Excluding the effect of the acquisitions and dispositions described
above, revenue from Entertainment and Information Programming Services increased
8% or $51 million during the nine months ended September 30, 1998, as compared
to the nine months ended September 30, 1997. The increase is primarily
attributable to higher revenue from the distribution of Encore services to cable
operators, including TCI Group and higher revenue from United Video Satellite
Group, Inc. ("UVSG"). Additionally, Netlink International ("Netlink") had
increased revenue during the first nine months of 1998 compared to the same
period in 1997 of approximately $5 million, primarily due to increased rates as
a result of increased copyright fees.





                                      199
<PAGE>   201



         Operating, selling, general and administrative expenses from
Entertainment and Information Programming Services, as adjusted for the effect
of the above acquisitions and dispositions, decreased 1% or $3 million for the
nine months ended September 30, 1998 compared to the same period of 1997. ETC
w/tci, Inc. had an $11 million decrease in its operating, selling, general and
administrative expenses during the nine months ended September 30, 1998 compared
to the same period in 1997. Decreased operating, selling, general and
administrative expenses related to UVSG were offset by increased first run
program license fees of $16 million and increased music rights cost and
marketing support costs of $3 million each for the Encore services and increased
operating, selling, general and administrative expenses of $7 million at Netlink
primarily due to increased copyright fees for the nine months ended September
30, 1998 compared to 1997. Additionally, Liberty/Ventures Group incurred start
up costs of approximately $2 million during the nine months ended September 30,
1998 for a new package of Spanish language channels.

         The increase in stock compensation of Entertainment and Information
Programming Services for the nine months ended September 30, 1998 as compared to
the corresponding period in 1997 is due to increases in stock compensation for
Encore Media Group and UVSG.

         Revenue from TCI Music contributed $63 million to revenue from
Entertainment and Information Programming Services for the nine months ended
September 30, 1998. Additionally, revenue from STARZ! contributed $218 million
and Turner-Vision contributed $63 million to revenue for the nine months ended
September 30, 1998. As discussed above, operations for TCI Music, STARZ! and
Turner-Vision were not included in the combined financial results of
Liberty/Ventures Group for the entire nine months ended September 30, 1997.
Operating, selling, general and administrative expenses for Entertainment and
Information Programming Services for the nine months ended September 30, 1998
included $59 million from the operations of TCI Music, $208 million from the
operations of STARZ! and $56 million from the operations of Turner-Vision.

         International Services

         This information reflects the results of operations of
Tele-Communications International, Inc. ("TINTA"). Effective October 1, 1997,
TINTA ceased to consolidate Cablevision S.A. ("Cablevision") and began to
account for Cablevision using the equity method of accounting. Accordingly,
effective October 1, 1997, the results of operations of Cablevision were no
longer included in the combined financial results of Liberty/Ventures Group. The
following table sets forth summary information with respect to the operating
results of Cablevision that were included in International Services for the nine
months ended September 30, 1997 (amounts in millions):

<TABLE>
<S>                             <C>       
Revenue                         $      174
Operating costs and expenses          (106)
Depreciation and amortization          (41)
                                ----------

Operating income                $       27
                                ==========
</TABLE>

         Revenue from International Services decreased by $162 million or 79%
during the nine months ended September 30, 1998 as compared to the nine months
ended September 30, 1997. Operating, selling, general and administrative
expenses for the International Services decreased $98 million or 74% for the
nine months ended September 30, 1998, compared to the corresponding prior year
period. Such decreases in revenue and expense are primarily attributable to the
deconsolidation of Cablevision in 1997. The $36 million or 63% decrease in
depreciation and amortization expense during the nine month period ended
September 30, 1998 as compared to the corresponding prior year period is
primarily the result of the effect of the deconsolidation of Cablevision.



                                      200
<PAGE>   202



         On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including TINTA's Puerto
Rico subsidiary's (the "Puerto Rico Subsidiary") cable television systems. The
Puerto Rico Subsidiary's cable television systems represent $36 million of
Liberty/Ventures Group's revenue for the nine months ended September 30, 1998.
The Puerto Rico Subsidiary has property and business interruption insurance
aggregating $15 million that is subject to a deductible of $1 million. The
Puerto Rico Subsidiary has submitted a property damage claim to its insurance
carrier for approximately $12 million which represents the estimated replacement
cost of its damaged property. As a result of the damage caused by Hurricane
Georges, the Puerto Rico Subsidiary, at September 30, 1998, recorded an
impairment by reducing the net book value of the damaged property and equipment
by $8 million and recorded a receivable in the same amount for a portion of the
estimated proceeds under its property insurance coverage. Subsequent to
September 30, 1998, the Puerto Rico Subsidiary received a $2 million advance on
its insurance coverage from the insurance carrier. Liberty/Ventures Group has
applied $1 million of such advance to property losses and $1 million to business
interruption losses.
The balance of the receivable is deemed probable of collection.

         Although there can be no assurance, the Puerto Rico Subsidiary
currently estimates that 85% of its cable distribution systems and related
support equipment will be restored by the end of 1998 and fully restored by the
end of the first quarter of 1999. In addition to property damage caused by
Hurricane Georges, the Puerto Rico Subsidiary will also suffer a loss in revenue
from its pre-hurricane customers. As of September 30, 1998, approximately 23% of
the Puerto Rico Subsidiary's pre-hurricane basic customers were receiving cable
television services. Although there can be no assurance, the Puerto Rico
Subsidiary estimates that it will regain 80% and 100% of its pre-hurricane
customer base by December 31, 1998 and June 30, 1999, respectively. The loss of
revenue from September 21, 1998 through December 31, 1998 has been preliminarily
estimated at $7 million, of which $1 million relates to the period from
September 21, 1998 through September 30, 1998. In addition, the estimated loss
of revenue for the first quarter of 1999 is approximately $3 million. The Puerto
Rico Subsidiary's business interruption insurance will cover the first $3
million in lost revenue. The Puerto Rico Subsidiary currently estimates that
lost revenue of approximately $7 million will not be covered under its business
interruption insurance. However, no assurance can be given that the Puerto Rico
Subsidiary will not incur losses in excess of current estimates. In addition,
all insurance claims are subject to approval by the Puerto Rico Subsidiary's
insurance carrier. Accordingly, no assurance can be given that amounts claimed
under the Puerto Rico Subsidiary's insurance coverage will be paid in their
entirety.

         Digital Compression and Authorization Services

         This information reflects the results of NDTC. Revenue from Digital
Compression and Authorization Services increased $6 million or 9% during the
nine months ended September 30, 1998 compared to the corresponding period of
1997. Operating, selling, general and administrative expenses from Digital
Compression and Authorization Services increased $12 million or 29% during the
nine months ended September 30, 1998 compared to the corresponding prior year
period. A significant number of NDTC's major customers are affiliates of TCI
including entities attributed to Liberty/Ventures Group, and NDTC derives a
substantial portion of its revenue from such affiliated companies. For the nine
months ended September 30, 1998 and 1997, revenue from services provided to TCI
and its consolidated subsidiaries accounted for 35% and 38%, respectively, of
NDTC's total revenue.




                                      201
<PAGE>   203



         Internet Services

         This information reflects the results of operations of @Home. Revenue
from Internet Services increased $25 million during the nine months ended
September 30, 1998 compared to the corresponding period of the previous year.
Operating, selling, general and administrative expenses increased $19 million
during the nine months ended September 30, 1998 compared to the corresponding
period of 1997.

         During the first quarter of 1998, @Home recorded a non-cash charge of
$83 million to operations based on the fair value of 2.7 million shares of
@Home's Series A common stock which were underlying certain exercisable warrants
which became exercisable during the period. See note 9 to the accompanying
combined financial statements of Liberty/Ventures Group.

         Corporate and Other

         This information includes general corporate expenses, Liberty/Ventures
Group's intercompany eliminations and the results of operations of WTCI.

         Stock compensation for corporate and other was $232 million and $112
million during the nine months ended September 30, 1998 and 1997, respectively.
Liberty/Ventures Group records stock compensation expense relating to restricted
stock awards, options and/or stock appreciation rights granted by TCI to certain
TCI employees and/or directors who are involved with Liberty/Ventures Group.
Estimated compensation relating to stock appreciation rights has been recorded
through September 30, 1998 pursuant to APB Opinion No. 25. Such estimate is
subject to future adjustment based upon vesting and market value, and
ultimately, on the final determination of market value when such rights are
exercised.

         Other Income and Expense

         Interest expense increased $31 million for the nine months ended
September 30, 1998 compared to the corresponding period in 1997. Such increase
is attributable to the increase in Liberty/Ventures Group's outstanding debt.

         Dividend and interest income was $66 million and $43 million during the
nine months ended September 30, 1998 and 1997, respectively. Dividends received
on Liberty/Ventures Group's investment in AT&T Common Stock contributed $16
million to the increase in Liberty/Ventures Group's dividend and interest
income. Also included in Liberty/Ventures Group's dividend and interest income
are dividends received on the TW Exchange Stock and a 30 year non-convertible 9%
preferred stock of Fox Kids Worldwide, Inc. ("FKW") with a stated value of $345
million (the "FKW Preferred Stock").

         Liberty/Ventures Group's share of losses of affiliates was $861 million
for the nine months ended September 30, 1998 compared to $545 million for the
corresponding period in 1997.




                                      202
<PAGE>   204



         Liberty/Ventures Group's share of losses from its investment in the PCS
Ventures increased $206 million during the nine month period ended September 30,
1998 as compared to the corresponding prior year period. The increase in the
share of losses is attributed primarily to increases in (i) selling, general and
administrative costs associated with Sprint Spectrum Holding Company L.P.'s
("Sprint Spectrum") efforts to increase its customer base, (ii) depreciation
expense resulting from capital expenditures made to expand its PCS network and
(iii) interest expense associated with higher amounts of outstanding debt. It is
expected that Sprint Spectrum and MinorCo, L.P. (collectively "Sprint PCS") will
continue to incur significant operating losses and significant negative cash
flow from operating activities during the next several years while it continues
to expand its PCS network and build its customer base. Sprint PCS's operating
profitability will depend upon many factors, including, among others, its
ability to (i) market its products and services successfully, (ii) achieve its
projected market penetration, (iii) manage customer turnover rates effectively
and (iv) price its products and services competitively. There can be no
assurance that Sprint PCS will achieve or sustain operating profitability or
positive cash flow from operating activities in the future. If Sprint PCS does
not achieve and maintain operating profitability and positive cash flow from
operating activities on a timely basis, it may not be able to meet its debt
service requirements.

         Liberty/Ventures Group's share of Telewest Communications plc's
("Telewest") net losses decreased $21 million during the nine months ended
September 30, 1998, compared to the corresponding period of 1997. Such change is
primarily attributable to the net effects of (i) changes in foreign currency
transaction losses, (ii) an increase in operating cash flow resulting from
revenue growth and (iii) an increase in interest expense. In connection with a
previous merger transaction, Telewest issued debentures (the "Telewest
Debentures"). Changes in the exchange rate used to translate the Telewest
Debentures into U.K. pounds sterling and the adjustment of a foreign currency
option contract to market value caused Telewest to experience foreign currency
transaction gains of $19 million during the nine months ended September 30, 1998
and foreign currency transaction losses of $55 million during the nine months
ended September 30, 1997. It is anticipated that Telewest will continue to
experience realized and unrealized foreign currency transaction gains and losses
throughout the term of the Telewest Debentures, which mature in 2006 and 2007,
if not redeemed earlier.

         As described above, effective October 1, 1997, TINTA ceased to
consolidate Cablevision and began to account for Cablevision using the equity
method of accounting. Consequently, Liberty/Ventures Group's share of losses
from Cablevision accounted for an increase of $14 million for the nine month
period ended September 30, 1998.

         Liberty/Ventures Group's share of losses of affiliates attributable to
its interest in Discovery Communications, Inc. ("Discovery") increased $23
million during the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997. While Discovery's revenue increased by 27%
during the first nine months of 1998, its earnings before interest, taxes,
depreciation and amortization decreased by 44%, principally because of costs
associated with launching new digital services, continuing investments in the
retail business as well as new joint ventures including joint ventures with the
British Broadcasting Corporation. Interest expense for Discovery was 113% higher
in the first nine months of 1998 compared to the same period in 1997 mainly due
to increased debt caused by significant cash payments made to distributors in
support of the launch of "Animal Planet" and its new digital services.




                                      203
<PAGE>   205



         The share of losses of Fox/Liberty Networks LLC ("Fox Sports") was
responsible for approximately $76 million of the increase in share of losses of
affiliates for the first nine months of 1998 compared to the same period of
1997. Prior to the first quarter of 1998, Liberty/Ventures Group had no
obligation, nor intention, to fund Fox Sports. During 1998, Liberty/Ventures
Group made the determination to provide funding to Fox Sports based on specific
transactions consummated by Fox Sports. Consequently, Liberty/Ventures Group's
share of losses of Fox Sports for the nine months ended September 30, 1998
includes previously unrecognized losses of Fox Sports of approximately $64
million. Losses for Fox Sports were not recognized in prior periods due to the
fact that Liberty/Ventures Group's investment in Fox Sports was less than zero.

         The minority interests' share of net losses increased $69 million
during the nine month period ended September 30, 1998 as compared to the
corresponding prior year period. Such increase is primarily attributable to
increases in net losses for @Home and TINTA.

         On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T
was consummated. As a result of such merger, Liberty/Ventures Group received in
exchange for its 26% interest in TCG, approximately 47 million shares of AT&T
Common Stock. Liberty/Ventures Group recognized a gain of $2.3 billion
(excluding related tax expense of $883 million) on such transaction based on the
difference between the carrying value of Liberty/Ventures Group's interest in
TCG and the fair value of the AT&T Common Stock received.

         Pursuant to the Southern Option, Time Warner acquired the Southern
Business, effective January 1, 1998 for $213 million in cash. Liberty/Ventures
Group recognized a $515 million pre-tax gain in connection with these
transactions in the first quarter of 1998. See note 5 to the accompanying
combined financial statements of Liberty/Ventures Group.

         Liberty/Ventures Group recognized a gain of $38 million from the
increase in SNG's equity, net of the dilution of its interest in SNG, that
resulted from the above described transaction with Turner-Vision. See note 8 to
the accompanying combined financial statements of Liberty/Ventures Group.

         On April 22, 1998, TCG completed a merger transaction with ACC Corp.
("ACC") in which ACC shares were exchanged with shares of TCG. As a result of
such merger transaction, Liberty/Ventures Group's interest in TCG was reduced to
approximately 26%. In connection with the increase in TCG's equity, net of the
dilution of Liberty/Ventures Group's interest in TCG, that resulted from such
merger, Liberty/Ventures Group recorded a non-cash gain of $201 million (before
deducting deferred income taxes of $71 million). See note 6 to the accompanying
combined financial statements of Liberty/Ventures Group.

         During the third quarter of 1998, @Home completed a public offering
(the "@Home Offering") in which 2.9 million shares of @Home common stock were
sold for net cash proceeds of approximately $125 million. In connection with the
@Home Offering, Liberty/Ventures Group paid $37 million to purchase 800,000
shares of @Home common stock and Liberty/Ventures Group's economic interest in
@Home decreased to 38.8%. In connection with the associated increase in @Home's
equity, net of the dilution of Liberty/Ventures Group's ownership interest in
@Home, Liberty/Ventures Group recognized a gain of $17 million during the third
quarter of 1998.




                                      204
<PAGE>   206



         Effective September 1, 1998, Telewest and General Cable PLC ("General
Cable") consummated a merger (the "General Cable Merger") in which holders of
General Cable received Telewest shares and cash for each share of General Cable
held. As a result of the General Cable Merger, Liberty/Ventures Group's
ownership interest in Telewest decreased to 22%. In connection with the increase
in Telewest's equity, net of the dilution of Liberty/Ventures Group's interest
in Telewest, Liberty/Ventures Group recognized a non-cash gain of $58 million
(excluding related tax expense of $20 million) during the third quarter of 1998.

         In April 1997, @Home issued 240,000 shares of convertible preferred
stock, resulting in cash proceeds of $48 million, less issuance costs. On July
11, 1997, @Home completed its initial public offering (the "@Home IPO"), in
which 10.4 million shares of @Home common stock were sold for net cash proceeds
of approximately $100 million. As a result of the @Home IPO, Liberty/Ventures
Group's economic interest in @Home decreased from 43% to 39%, which economic
interest represents an approximate 72% voting interest. In connection with the
associated increase in @Home's equity, net of the dilution of Liberty/Ventures
Group's ownership interest in @Home, Liberty/Ventures Group recognized a gain of
$60 million during the third quarter of 1997.

         On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of
Liberty/Ventures Group, which held non-voting Class C common stock of
International Family Entertainment, Inc. ("IFE") ("Class C Stock") and $23
million of IFE 6% convertible secured notes due 2004, convertible into Class C
Stock, ("Convertible Notes"), contributed its Class C Stock and Convertible
Notes to FKW in exchange for the FKW Preferred Stock. As a result of the
exchange, Liberty Media Group recognized a pre-tax gain of approximately $304
million during the third quarter of 1997.

         During 1997, TCG issued 4.9 million shares of its Class A common stock
for certain acquisitions. The total consideration paid by TCG through the
issuance of common stock was approximately $93 million. As a result of such
share issuances, Liberty/Ventures Group's ownership interest in TCG was reduced
to approximately 30%. As a result of the increase in TCG's equity, net of the
dilution of Liberty/Ventures Group's interest in TCG, Liberty/Ventures Group
recognized a gain of $21 million (excluding related tax expense of $8 million).

         Net Losses

         Liberty/Ventures Group's net earnings of $1,221 million during the nine
month period ended September 30, 1998 represents an increase in earnings of
$1,351 million as compared to Liberty/Ventures Group's net loss of $130 million
for the nine month period ended September 30, 1997. Included in such amounts was
the recognition of certain non-operating gains aggregating $3,176 million and
$490 million during the nine months ended September 30, 1998 and 1997,
respectively. Many of the entities included in Liberty/Ventures Group's combined
financial statements generally have sustained losses since their respective
inception dates. Any improvements in such entities' results of operations are
largely dependent upon the ability of such entities to increase their respective
customer bases while maintaining pricing structures and controlling costs. There
can be no assurance that any such improvements will occur.





                                      205
<PAGE>   207

         MATERIAL CHANGES IN FINANCIAL CONDITION

         TCI GROUP

         On March 4, 1998, TCI Group contributed to CSC certain of its cable
television systems in the CSC Transaction. CSC also assumed and repaid
approximately $574 million of debt owed by TCI Group to external parties and $95
million of debt owed to TCI Group. TCI Group has also entered into letters of
intent with CSC which provide for TCI Group to acquire a cable system in
Michigan and an additional 3% of CSC's Class A common shares and for CSC to (i)
acquire cable systems serving approximately 250,000 customers in Connecticut and
(ii) assume $110 million of TCI Group's debt. The ability of TCI Group to sell
or increase its investment in CSC is subject to certain restrictions and
limitations set forth in a stockholders agreement with CSC. For additional
information concerning the CSC Transaction, see note 5 to the combined financial
statements of TCI Group, which are included in the Company's September 30, 1998
Quarterly Report on Form 10-Q.

         In addition to the CSC Transaction, TCI also completed, during the
first nine months of 1998, the 1998 Joint Ventures in exchange for
non-controlling ownership interests in each of the 1998 Joint Ventures, and the
assumption and repayment by the 1998 Joint Ventures of debt owed by TCI Group to
external parties aggregating $323 million and intercompany debt owed to TCI
Group aggregating $1,533 million. TCI Group has agreed to take certain steps to
support compliance by certain of the 1998 Joint Ventures with their payment
obligations under certain debt instruments, up to an aggregate contingent
commitment of $980 million. In light of such contingent commitments, TCI Group
has deferred any gains on the formation of such 1998 Joint Ventures.
Accordingly, TCI Group has recorded deferred gains aggregating $163 million and
recognized net gains aggregating $263 million in connection with the formation
of the 1998 Joint Ventures. The deferred gains will not be recognized until such
time as TCI Group's contingent commitments are eliminated. TCI Group uses the
equity method of accounting to account for its investments in CSC and the 1998
Joint Ventures.

         Including the 1998 Contribution Transactions, TCI Group, as of
September 30, 1998, has, since January 1, 1997, contributed, or signed
agreements or letters of intent to contribute within the next twelve months,
certain cable television systems (the "Contributed Cable Systems") serving
approximately 3.9 million basic customers to joint ventures in which TCI Group
will retain non-controlling ownership interests (the "Contribution
Transactions"). Following the completion of the Contribution Transactions, the
Contributed Cable Systems will no longer be included in TCI Group's combined
financial statements. Accordingly it is anticipated that the completion of the
Contribution Transactions, as currently contemplated, will result in an
aggregate estimated reduction (based on actual amounts with respect to the 1998
Contribution Transactions and currently contemplated amounts with respect to the
pending Contribution Transactions) to TCI Group's debt of $4.8 billion and
aggregate estimated reductions (based on 1997 amounts) to TCI Group's annual
revenue and annual operating income before depreciation, amortization, other
non-cash items and stock compensation of $1.8 billion and $815 million,
respectively. No assurance can be given that any of the pending Contribution
Transactions will be consummated.

         During the nine months ended September 30, 1998, pursuant to a stock
repurchase program approved by the Board, TCI Group repurchased 66,041 shares of
TCI Group Series A Stock at an aggregate cost of $2 million.




                                      206
<PAGE>   208



         In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, TCI Group paid $134
million during the first quarter of 1998 for its allocated share of the Call
Payments. For additional information see note 13 to the combined financial
statements of TCI Group, which are included in the Company's September 30, 1998
Quarterly Report on Form 10-Q.

         During the fourth quarter of 1997, TCI Group entered into a Total
Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the Equity
Swap Facility, TCI Group has the right to direct the counterparty (the
"Counterparty") to use the Equity Swap Facility to purchase shares ("Equity Swap
Shares") of TCI Group Series A Stock and TCI Ventures Group Series A Stock with
an aggregate purchase price of up to $300 million. TCI Group has the right, but
not the obligation, to purchase Equity Swap Shares through the September 30,
2000 termination date of the Equity Swap Facility. During such period, TCI Group
is to settle periodically any increase or decrease in the market value of the
Equity Swap Shares. If the market value of the Equity Swap Shares exceeds the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost will be segregated from the other
Equity Swap Shares. If the market value of the Equity Swap Shares is less than
the Counterparty's cost, TCI Group, at its option, will settle such difference
with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or,
subject to certain conditions, with cash or letters of credit. In addition, TCI
Group is required to periodically pay the Counterparty a fee equal to a
LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap Shares.
Due to TCI Group's ability to issue shares to settle periodic price fluctuations
and fees under the Equity Swap Facility, TCI Group records all amounts received
or paid under this arrangement as increases or decreases, respectively, to
equity. As of September 30, 1998, the Equity Swap Facility had acquired
4,935,780 shares of TCI Group Series A Stock and 1,171,800 shares of TCI
Ventures Group Series A Stock at an aggregate cost that was approximately $49
million less than the fair value of such Equity Swap Shares at September 30,
1998. The costs and benefits associated with the TCI Group Series A Stock held
by the Equity Swap Facility are attributed to TCI Group.

         TCI Group's fixed annual commitments pursuant to a 25 year affiliation
agreement between Encore Media Group and TCI Group (the "EMG Affiliation
Agreement") increase annually from $220 million in 1998 to $315 million in 2003,
and will increase with inflation thereafter through 2022.

         In 1996, a subsidiary attributed to Liberty/Ventures Group (i) issued
preferred stock in connection with a previous acquisition, which is convertible
at the option of the holders into 1,084,056 of TCI Group Series A Common Stock
beginning in April 1999 or sooner in the event of a change in control of TCI and
(ii) acquired an option contract from TCI Group in exchange for a $14 million
increase in the intercompany amount due to TCI Group. Such option contract
provided Liberty/Ventures Group with the right to acquire 1,084,056 shares of
TCI Group Series A Stock at a price equivalent to the fair value at the time of
exercise less $14.625 per share. During September 1998, TCI Group assigned its
obligation under the option contract to Liberty/Ventures Group. As a result of
such assignment, TCI Group recorded a $16 million reduction in due from related
parties and a corresponding adjustment of combined equity (deficit).




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<PAGE>   209



         On July 11, 1997, TCI Music merged with DMX. Simultaneously with the
DMX Merger, substantially all of TCI's controlling ownership interest in TCI
Music was transferred from TCI Group to Liberty/Ventures Group in exchange for
an $80 million promissory note and an agreement to reimburse TCI for any amounts
required to be paid by TCI pursuant to its contingent obligation under the
Rights Agreement to purchase up to 14,896,648 shares (6,812,393 of which were
owned by subsidiaries of TCI) of TCI Music common stock at a price of $8.00 per
share. Prior to the July 1998 expiration of the rights under the Rights
Agreement, TCI was notified of the tender of 4,892,077 shares and associated
rights. On August 27, 1998, Liberty/Ventures Group paid $39 million to satisfy
TCI's obligation to purchase such tendered shares. The Music Note may be reduced
by the payment of cash or the issuance by TCI of shares of Liberty/Ventures
Group Stock (or Liberty Group Stock if prior to the Liberty/Ventures
Combination) for the benefit of entities attributed to TCI Group. Additionally,
Liberty/Ventures Group may elect to pay $50 million of the Music Note by
delivery of a Stock Appreciation Rights Agreement that will give TCI Group the
right to receive 20% of the appreciation in value of Liberty/Ventures Group's
investment in TCI Music, to be determined at July 11, 2002.

         A subsidiary of TCI that was attributed to Liberty/Ventures Group
leases certain equipment under a capital lease. During 1997, such equipment was
subleased to TCI Group under an operating lease. In January 1998, TCI Group paid
$7 million to Liberty/Ventures Group in exchange for Liberty/Ventures Group's
assignment of its ownership interest in such subsidiary to TCI Group. Due to the
related party nature of the transaction, the $50 million total of the cash
payment and the historical cost of the net liabilities assumed by TCI Group
(including capital lease obligations aggregating $176 million) has been
reflected as an increase to TCI Group's combined deficit.

         At September 30, 1998, TCI Group had approximately $2.1 billion of
availability in unused lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although TCI
Group was in compliance with the restrictive covenants contained in its credit
facilities at said date, additional borrowings under the credit facilities are
subject to TCI Group's continuing compliance with the restrictive covenants
after giving effect to such additional borrowings. Such restrictive covenants
require, among other things, the maintenance of certain earnings, specified cash
flow and financial ratios (primarily the ratios of cash flow to total debt and
cash flow to debt service, as defined), and include certain limitations on
indebtedness, investments, guarantees, dispositions, stock repurchases and/or
dividend payments. See note 8 to the combined financial statements of TCI Group,
which are included in the Company's September 30, 1998 Quarterly Report on Form
10-Q, for additional information regarding TCI Group's debt.




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<PAGE>   210



         One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of "Operating Cash
Flow" (operating income before depreciation, amortization, other non-cash items,
year 2000 costs, AT&T merger costs and stock compensation) ($1,889 million and
$2,035 million during the nine months ended September 30, 1998 and 1997,
respectively) to interest expense ($736 million and $843 million during the nine
months ended September 30, 1998 and 1997, respectively), is determined by
reference to the combined statements of operations. TCI Group's interest
coverage ratio was 257% and 241% during the nine months ended September 30, 1998
and 1997, respectively. Management of TCI Group believes that the foregoing
interest coverage ratio is adequate in light of the relative predictability of
its cable television operations and interest expense. However, TCI Group's
current intent is to continue to reduce its outstanding indebtedness such that
its interest coverage ratio could be increased. There is no assurance that TCI
Group will be able to achieve such objective. In the event TCI Group is unable
to achieve such objective, management believes that net cash provided by
operating activities, the ability of TCI Group to obtain additional financing
(including the available lines of credit and access to public debt markets),
issuances and sales of TCI's equity or equity of its subsidiaries, attributable
to TCI Group, and proceeds from disposition of assets will provide adequate
sources of short-term and long-term liquidity in the future. See TCI Group's
combined statements of cash flows included in TCI Group 's combined financial
statements, which are included in the Company's September 30, 1998 Quarterly
Report on Form 10-Q.

         Operating Cash Flow is a measure of value and borrowing capacity within
the cable television industry and is not intended to be a substitute for cash
flows provided by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.

         Another measure of liquidity is net cash provided by operating
activities, as reflected in TCI Group's combined statements of cash flows. Net
cash provided by operating activities ($793 million and $1,047 million during
the nine months ended September 30, 1998 and 1997, respectively) generally
reflects net cash from the operations of TCI Group available for TCI Group's
liquidity needs after taking into consideration the aforementioned additional
substantial costs of doing business not reflected in Operating Cash Flow.

         The amount of capital expended by TCI Group for property and equipment
was $1,017 million, $273 million and $538 million during the nine months ended
September 30, 1998 and 1997, and the year ended December 31, 1997, respectively.
In light of TCI Group's plans to upgrade the capacity of its cable distribution
systems, and its plans to increase the number of customers who subscribe to
digital video services, TCI Group anticipates that its annual capital
expenditures during the next several years will significantly exceed the amount
expended during 1997. In this regard, TCI Group estimates that it will expend
approximately $1.7 billion to $1.9 billion over the next three years to expand
the capacity of its cable distribution systems. TCI Group expects that the
actual amount of capital that will be required in connection with its plans to
increase the number of digital video service customers will be significant.
However, TCI Group cannot reasonably estimate such actual capital requirement
since such actual capital requirement is dependent upon the extent of any
customer increases and the average installed per-unit cost of digital set-top
devices. As described below, TCI is obligated to purchase a significant number
of digital set-top devices over the next three years.

         TCI Group's restricted cash is primarily comprised of proceeds received
in connection with certain asset dispositions. Such proceeds, which aggregated
$353 million and $34 million at September 30, 1998 and December 31, 1997,
respectively, are designated to be reinvested in certain identified assets for
income tax purposes.



                                      209
<PAGE>   211



         TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $191
million at September 30, 1998. With respect to TCI Group's guarantees of $166
million of such obligations, TCI Group has been indemnified for any loss, claim
or liability that TCI Group may incur, by reason of such guarantees. As
described in note 7 to the combined financial statements of TCI Group, which are
included in the Company's September 30, 1998 Quarterly Report on Form 10-Q, TCI
Group also has provided certain credit enhancements with respect to the 1998
Joint Ventures. TCI Group also has guaranteed the performance of certain
affiliates and other parties with respect to such parties' contractual and other
obligations. Although there can be no assurance, management of TCI Group
believes that it will not be required to meet its obligations under such
guarantees, or if it is required to meet any of such obligations, that they will
not be material to TCI Group.

         TCI Group has provided a revolving loan facility to Liberty/Ventures
Group for a five-year period commencing on September 10, 1997 (the "Ventures
Intergroup Credit Facility"). Such facility permits aggregate outstanding
borrowings at any one time of up to $500 million (subject to reduction as
provided below), which borrowings bear interest at a rate per annum equal to The
Bank of New York's prime rate (as in effect from time to time) plus 1% per
annum, payable quarterly. A commitment fee equal to 3/8% per annum of the
average unborrowed availability under the Ventures Intergroup Credit Facility is
payable by Liberty/Ventures Group to TCI Group on a quarterly basis. Such
commitment fee was $1 million for the nine months ended September 30, 1998.
Borrowings outstanding pursuant to the Ventures Intergroup Credit Facility were
$37 million at September 30, 1998.

         TCI Group is a party to affiliation agreements with programming
suppliers. Pursuant to certain of such agreements, TCI Group is committed to
carry such suppliers' programming on its cable 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 specific number of customers.

         TCI Group is committed to purchase billing services pursuant to three
successive five year agreements. Pursuant to such arrangement, TCI Group is
obligated at September 30, 1998 to make minimum payments aggregating
approximately $1.6 billion through 2012. Such minimum payments are subject to
inflation and other adjustments pursuant to the terms of the underlying
agreements.

         Pursuant to certain agreements between TCI and TCI Music, TCI Group is
obligated at September 30, 1998 to make minimum revenue payments through 2017
and minimum license fee payments through 2007 aggregating approximately $412
million to TCI Music. Such minimum payments are subject to inflation and other
adjustments pursuant to the terms of the underlying agreements.

         TCI Group is a direct obligor or guarantor of the payment of certain
amounts that may be due pursuant to motion picture output, distribution and
license agreements. As of September 30, 1998, the amount of such obligations or
guarantees was approximately $273 million. The future obligations of TCI Group
with respect to these agreements is not currently determinable because such
amount is dependent upon the number of qualifying films released theatrically by
certain motion picture studios as well as the domestic theatrical exhibition
receipts upon the release of such qualifying films.




                                      210
<PAGE>   212



         Effective as of December 16, 1997, NDTC, on behalf of TCI Group and
other cable operators that may be designated from time to time by NDTC
("Approved Purchasers"), entered into an agreement (the "Digital Terminal
Purchase Agreement") with General Instrument Corporation ("GI") to purchase
advanced digital set-top devices. The hardware and software incorporated into
these devices will be designed and manufactured to be compatible and
interoperable with the OpenCable(TM) architecture specifications adopted by
CableLabs, the cable television industry's research and development consortium,
in November 1997. NDTC has agreed that Approved Purchasers will purchase, in the
aggregate, a minimum of 6.5 million set-top devices during calendar years 1998,
1999 and 2000 at an average price of $318 per set-top device. Through September
30, 1998, approximately 1 million set-top devices had been purchased pursuant to
this commitment. GI agreed to provide NDTC and its Approved Purchasers the most
favorable prices, terms and conditions made available by GI to any customer
purchasing advanced digital set-top devices. In connection with NDTC's purchase
commitment, GI agreed to grant warrants to purchase its common stock
proportional to the number of devices ordered by each organization, which as of
the effective date of the Digital Terminal Purchase Agreement, would have
represented at least a 10% equity interest in GI (on a fully diluted basis).
Such warrants vest as annual purchase commitments are met. The value associated
with such equity interest will be attributed to TCI Group upon purchase and
deployment of the digital set-top devices. See note 2 to the combined financial
statements of TCI Group, which are included in the Company's September 30, 1998
Quarterly Report on Form 10-Q. NDTC has the right to terminate the Digital
Terminal Purchase Agreement if, among other reasons, GI fails to meet a material
milestone designated in the Digital Terminal Purchase Agreement with respect to
the development, testing and delivery of advanced digital set-top devices.

         On June 30, 1998, TCI Group entered into an Operating Lease Agreement
(the "Lease") with an unaffiliated third party (the "Lessor"). Under the Lease,
TCI Group agreed to sell to, and lease back from, the Lessor advanced digital
set-top devices with an initial aggregate net cost of up to $200 million. The
initial term of the Lease is two years, and it provides for renewal, at TCI
Group's option, for up to five additional consecutive one-year terms. Rent under
the lease is payable quarterly. At the end of the originally scheduled or
renewed lease term, TCI Group is required to either (i) purchase the equipment
at the Termination Value (as defined in the Lease), or (ii) arrange for the sale
of the leased equipment to a third party and pay the Lessor the difference
between the sale price and a predetermined guaranteed value, which in all cases
is less than the Termination Value. As of September 30, 1998, TCI Group has sold
and leased back advanced digital set-top devices under the Lease with an
aggregate cost of $109 million. Current annual lease payments with respect to
such leased equipment are $16 million. TCI Group has treated the Lease as an
operating lease in the combined financial statements of TCI Group, which are
included in the Company's September 30, 1998 Quarterly Report on Form 10-Q.

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


                                      211
<PAGE>   213



         In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group may enter into variable and fixed rate exchange
agreements ("Interest Rate Swaps") pursuant to which it (i) pays fixed interest
rates (the "Fixed Rate Agreements") and receives variable interest rates and
(ii) pays variable interest rates (the "Variable Rate Agreements") and receives
fixed interest rates. During the nine months ended September 30, 1998 and 1997,
TCI Group's net payments pursuant to the Fixed Rate Agreements were less than $1
million for each period; and TCI Group's net receipts pursuant to the Variable
Rate Agreements were $8 million and $1 million, respectively. At September 30,
1998, all of TCI Group's Fixed Rate Agreements had expired. At September 30,
1998, TCI Group would be entitled to receive $78 million upon termination of the
Variable Rate Agreements.

         In addition to the Variable Rate Agreements, TCI Group entered into
Interest Rate Swaps pursuant to which it pays a variable rate based on LIBOR
(5.8% at September 30, 1998) and receives a variable rate based on Constant
Maturity Treasury Index ("CMT") (4.7% at September 30, 1998) on a notional
amount of $400 million through September 2000; and pays a variable rate based on
LIBOR (5.7% at September 30, 1998) and receives a variable rate based on CMT
(4.8% at September 30, 1998) on notional amounts of $95 million through February
2000. During the nine months ended September 30, 1998, TCI Group's net payments
pursuant to such agreements were $1 million. At September 30, 1998, TCI Group
would be required to pay an estimated $4 million to terminate such Interest Rate
Swaps.

         TCI Group is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of nonperformance by the
other parties to the agreements. However, TCI Group does not anticipate that it
will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, as of September 30, 1998, TCI
Group does not anticipate material near-term losses in future earnings, fair
values or cash flows resulting from derivative financial instruments. See note 8
to the combined financial statements of TCI Group, which are included in the
Company's September 30, 1998 Quarterly Report on Form 10-Q, for additional
information regarding Interest Rate Swaps.

         At September 30, 1998, after considering the net effect of the
aforementioned Interest Rate Swaps, TCI Group had $7,081 million (or 58%) of
fixed rate debt and $5,169 million (or 42%) of variable-rate debt. Accordingly,
in an environment of rising interest rates, TCI Group expects that it would
experience an increase in interest expense.

         LIBERTY/VENTURES GROUP

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





                                      212
<PAGE>   214



         The Liberty/Ventures Combination is not conditioned upon the AT&T/TCI
Merger. Upon closing of the AT&T/TCI Merger, the shareholders of
Liberty/Ventures Group will be issued separate shares of a new targeted stock of
AT&T in exchange for the shares of Liberty/Ventures Group Stock held. If the
Liberty/Ventures Combination and reclassification of TCI Ventures Group Stock
does not occur prior to the AT&T/TCI Merger, then in the AT&T/TCI Merger, each
share of TCI Ventures Group Stock will be converted into .52 of a share of New
Liberty Media Group Tracking Stock.

         Pursuant to the Merger Agreement, immediately prior to the AT&T/TCI
Merger, certain assets attributed to Liberty/Ventures Group (including, the
shares of AT&T Common Stock received in the merger of AT&T and TCG, the stock of
@Home held by Liberty/Ventures Group, the assets and business of the NDTC and
WTCI) will be transferred to TCI Group in exchange for approximately $5.5
billion in cash. Also, upon consummation of the AT&T/TCI Merger, through a new
tax sharing agreement between Liberty/Ventures Group and AT&T, Liberty/Ventures
Group will become entitled to the benefit of all of the net operating loss
carryforwards available to the entities included in TCI's consolidated income
tax return as of the date of the AT&T/TCI Merger. Additionally, certain warrants
currently attributed to TCI Group will be transferred to Liberty/Ventures Group
in exchange for up to $176 million in cash. Certain agreements to be entered
into at the time of the AT&T/TCI Merger as contemplated by the Merger Agreement
will, among other things, provide preferred vendor status to Liberty/Ventures
Group for digital basic distribution on AT&T's systems of new programming
services created by Liberty/Ventures Group and its affiliates and provide for a
renewal of existing affiliation agreements. See note 2 to the accompanying
combined financial statements of Liberty/Ventures Group.

         Liberty/Ventures Group's combined operating activities provided cash of
$3 million during the nine months ended September 30, 1998 and provided cash of
$219 million during the nine months ended September 30, 1997. As discussed
above, effective October 1, 1997, Cablevision's cash flows are no longer
included in Liberty/Ventures Group's combined statements of cash flows.
Cablevision's operating activities provided cash of $40 million during the nine
months ended September 30, 1997. Additionally, cash used by operating activities
of TCI Music is not included in Liberty/Ventures Group's combined statement of
cash flows during the 1997 period. Cash used by operating activities of TCI
Music was $3 million during the nine months ended September 30, 1998. At
September 30, 1998, @Home and UVSG held cash and cash equivalents of $204
million and $105 million, respectively. The cash balances of such entities are
generally intended to be applied towards the respective liquidity requirements
of such entities. It is not presently anticipated that any significant portion
of such cash balances will be distributed or otherwise made available to other
members of Liberty/Ventures Group.

         During the nine months ended September 30, 1998 and 1997, cash used by
Liberty/Ventures Group's investing activities aggregated $1,097 million and $332
million, respectively. The 1998 and 1997 amounts include cash proceeds of $343
million and $201 million, respectively, received upon the disposition of assets.
Additionally, the 1998 and 1997 amounts include $1,263 million and $398 million,
respectively, that were used by Liberty/Ventures Group to fund investments in,
and loans to, affiliates.

         During the nine months ended September 30, 1998 and 1997, cash provided
by Liberty/Ventures Group's financing activities aggregated $1,273 million and
$224 million, respectively. The 1998 and 1997 amounts include borrowings of debt
aggregating $2,061 million and $254 million, respectively. Outstanding debt on
Liberty/Ventures Group's combined balance sheets increased primarily due to the
addition of new credit facilities as well as increases on existing credit
facilities. See note 10 to the accompanying combined financial statements of
Liberty/Ventures Group.




                                      213
<PAGE>   215



         The Music Note may be reduced by the payment of cash or the issuance by
TCI of shares of Liberty/Ventures Group Stock for the benefit of entities
included within the TCI Group. During the second quarter of 1998, TCI issued
153,183 shares of Liberty Group Series B Stock valued at $5 million to an
individual who is an officer and director of TCI for the benefit of entities
included within the TCI Group. Accordingly, the Music Note was reduced by such
amount. Additionally, Liberty/Ventures Group may elect to pay $50 million of the
Music Note by delivery of a Stock Appreciation Rights Agreement that would give
TCI Group the right to receive 20% of the appreciation in value of
Liberty/Ventures Group's investment in TCI Music, to be determined at July 11,
2002.

         In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, Liberty/Ventures Group
paid $140 million during the first quarter of 1998 for its allocated share of
the Call Payments. See note 11 to the accompanying combined financial statements
of Liberty/Ventures Group.

         During the nine months ended September 30, 1998, pursuant to the stock
repurchase program, 239,450 shares of TCI Ventures Group Stock and 766,783
shares of Liberty Group Stock were repurchased at an aggregate cost of
approximately $30 million. Such amount is reflected as a decrease to combined
equity in the accompanying combined financial statements.

         On July 13, 1998, Liberty/Ventures Group announced that it had made a
proposal to TINTA concerning the acquisition by Liberty/Ventures Group of all of
the outstanding shares of common stock of TINTA not beneficially owned by
Liberty/Ventures Group. Under the proposal, Liberty/Ventures Group would
exchange, in a merger transaction, 0.58 of a share of Liberty/Ventures Group
Series A Stock, or Liberty Group Series A Stock if prior to the Liberty/Ventures
Combination, for each share of Tele-Communications International, Inc. Series A
Common Stock acquired by Liberty/Ventures Group in the merger. Liberty/Ventures
Group's proposal, and a proposed merger agreement, has been approved by TINTA's
board of directors. The merger agreement provides that if the .58 exchange ratio
would yield a value to TINTA stockholders of less than $22.00 per TINTA share,
then TCI would be required to either increase the exchange ratio to an amount
that would yield a value of $22.00 per share or terminate the merger agreement.
Consummation of the merger is expected to occur in November 1998.




                                      214
<PAGE>   216



         During the fourth quarter of 1997, TCI entered into the Equity Swap
Facility. Pursuant to the Equity Swap Facility, TCI has the right to direct the
Counterparty to use the Equity Swap Facility to purchase Equity Swap Shares of
TCI Group Series A Stock and TCI Ventures Group Series A Stock with an aggregate
purchase price of up to $300 million. TCI has the right, but not the obligation,
to purchase Equity Swap Shares through the September 30, 2000 termination date
of the Equity Swap Facility. During such period, TCI is to settle periodically
any increase or decrease in the market value of the Equity Swap Shares. If the
market value of the Equity Swap Shares exceeds the Counterparty's cost, Equity
Swap Shares with a fair value equal to the difference between the market value
and cost will be segregated from the other Equity Swap Shares. If the market or
value of Equity Swap Shares is less than the Counterparty's cost, TCI, at its
option, will settle such difference with shares of TCI Group Series A Stock or
TCI Ventures Group Series A Stock or, subject to certain conditions, with cash
or letters of credit. In addition, TCI is required to periodically pay the
Counterparty a fee equal to a LIBOR-based rate on the Counterparty's cost to
acquire the Equity Swap Shares. Due to TCI's ability to issue shares to settle
periodic price fluctuation and fees under the Equity Swap Facility, TCI records
all amounts received or paid under this arrangement as increases or decreases to
equity. As of September 30, 1998, the Equity Swap Facility has acquired 4.9
million shares of TCI Group Series A Stock and 1.2 million shares of TCI
Ventures Group Series A Stock at an aggregate cost that was approximately $49
million less than the fair value of such Equity Swap Shares at September 30,
1998. The costs and benefits associated with the TCI Ventures Group Series A
Stock held by the Equity Swap Facility are attributed to Liberty/Ventures Group.

         In 1996, a subsidiary attributed to Liberty/Ventures Group (i) issued
preferred stock in connection with a previous acquisition, which is convertible
at the option of the holders into 1,084,056 of TCI Group Series A Stock
beginning in April 1999 or sooner in the event of a change in control of TCI and
(ii) acquired an option contract from TCI Group in exchange for a $14 million
increase in the intercompany amount due to TCI Group. Such option contract
provided Liberty/Ventures Group with the right to acquire 1,084,056 shares of
TCI Group Series A Stock at a price equivalent to the fair value at the time of
exercise less $14.625 per share. During September 1998, TCI Group assigned its
obligations under the option contract to Liberty/Ventures Group. As a result of
such assignment, Liberty/Ventures Group recorded a $16 million reduction to the
intercompany amount due to TCI Group and a corresponding increase to combined
equity. In July 1998, Liberty/Ventures Group entered into an equity swap
transaction with a commercial bank, which provides Liberty/Ventures Group with
the right but not the obligation to acquire 1,084,056 shares of TCI Group Series
A Stock for approximately $45 million on or before April 19, 1999. In the event
Liberty/Ventures Group does not exercise its right to acquire such shares, any
difference between the counterparty's cost and the market value of the shares on
the settlement date will be settled in cash or shares of Liberty/Ventures Group
Series A Stock, or TCI Ventures Group Series A Stock if prior to the
Liberty/Ventures Combination, at Liberty/Ventures Group's option. Such shares
may be used to satisfy the exchange requirements of the aforementioned preferred
stock.

         The board of directors of UVSG has authorized UVSG to repurchase from
time to time up to an aggregate of 2 million shares of UVSG's Class A common
stock. During the nine months ended September 30, 1998, UVSG repurchased
approximately 900,000 shares of stock for a total of $15 million.




                                      215
<PAGE>   217



         On January 12, 1998, TCI acquired from a minority shareholder of UVSG
24.8 million shares of UVSG Class A common stock (as adjusted for a two-for-one
stock split) in exchange for 12.7 million shares of TCI Ventures Group Series A
Stock and 7.3 million shares of Liberty Group Series A Stock. The aggregate
value assigned to the shares issued by TCI was based upon the market value of
such shares at the time the transaction was announced. As a result of such
transaction TCI increased its ownership in the equity of UVSG to approximately
73% and its voting power increased to 93%. In connection with such transaction,
during the first quarter of 1998, Liberty/Ventures Group recorded a $346 million
increase to combined equity.

         Many of the entities the ownership of which, or the investment in
which, has been attributed to the Liberty/Ventures Group will require
significant additional capital in order to develop their respective businesses
and assets, to fund future operating losses and to fund future growth. In
certain cases, Liberty/Ventures Group has contractual commitments pursuant to
which (subject to certain conditions) it may be required to make significant
additional capital contributions to the entities in which it has investments.
TINTA and its consolidated subsidiaries also have commitments under various
partnership and other funding agreements to contribute capital or loan money to
fund capital expenditures and other capital requirements of certain affiliates.
There can be no assurance that any of Liberty/Ventures Group's entities will be
successful in generating sufficient cash flow from operating activities or
raising debt or equity capital in sufficient amounts or on terms acceptable to
them to be able to meet their respective capital requirements. There is also no
assurance that the anticipated capital requirements of Liberty/Ventures Group's
entities and/or affiliates will not significantly increase due to changing
circumstances, such as unanticipated opportunities, technological or marketing
hurdles, unanticipated expenses, and the like. The failure to generate
sufficient cash flow from operating activities or to raise sufficient funds may
require such entity to delay or abandon some or all of its development and
expansion plans or in certain instances, could result in the failure to meet
certain regulatory requirements, any and all of which could have a material
adverse effect on such entity's growth, its ability to compete in its industry
and its ability to service its debt.

         The ability of one of Liberty/Ventures Group entities to fund the cash
flow deficits of other Liberty/Ventures Group entities is limited not only by
the structural separation of such businesses in separate corporations and
partnerships, but also by the presence of other investors, both debt and equity,
in many of Liberty/Ventures Group entities. In addition, TINTA and certain of
the other Liberty/Ventures Group entities, such as Sprint PCS, are holding
companies, the assets of which consist solely or primarily of investments in
their subsidiaries and affiliates. As such, the ability of such holding
companies to meet their respective financial obligations and their funding and
other commitments to their respective subsidiaries and affiliates, is dependent
upon external financing and/or of dividends, loans or other payments from their
respective subsidiaries and affiliates, or repayment of loans and advances from
such holding companies. Accordingly, such holding companies' ability to meet
their respective liquidity requirements, including debt service, is limited as a
result of their dependence upon external financing and funds received from their
respective subsidiaries and affiliates. The payment of dividends or the making
of loans or advances to such holding companies by their respective subsidiaries
and affiliates may be subject, among other things, to statutory, regulatory or
contractual restrictions, are contingent upon the earnings of those subsidiaries
and affiliates, and are subject to various business considerations.




                                      216
<PAGE>   218



         From inception through September 1998, the Sprint PCS partners have
contributed $4.6 billion to Sprint PCS (of which Liberty/Ventures Group
contributed an aggregate of $1.4 billion). Sprint PCS's business plan will
require additional capital financing prior to the end of 1998. Sources of
funding for Sprint PCS's capital requirements may include vendor financing,
public offerings or private placements of equity and/or debt securities,
commercial bank loans and/or capital contributions from the Sprint PCS Partners.
However, there can be no assurance that any additional financing can be obtained
on a timely basis, on terms acceptable to Sprint PCS or the Sprint PCS Partners
and within the limitations contained in the agreements governing Sprint PCS's
existing debt.

         Additionally, the proposed budget for 1998 has not yet been approved by
the Sprint PCS partnership board, although the board has authorized management
to operate Sprint PCS in accordance with such budget. The Sprint PCS partners
may mutually agree to make additional capital contributions. However, the Sprint
PCS partners have no such obligation in the absence of an approved budget, and
there can be no assurance the Sprint PCS partners will reach such an agreement
or approve the 1998 proposed budget. In addition, the failure by the Sprint PCS
partners to approve a business plan may impair the ability of Sprint PCS to
obtain required financing. Failure to obtain any such additional financing or
capital contributions from the Sprint PCS partners could result in the delay or
abandonment of Sprint PCS's development and expansion plans and expenditures,
the failure to meet regulatory requirements or other potential adverse
consequences.

         Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership board has
resulted in the occurrence of a "Deadlock Event" under the Sprint PCS
partnership agreement as of January 1, 1998. Under the Sprint PCS partnership
agreement, if one of the Sprint PCS partners refers the budget issue to the
chief executive officers of the corporate parents of the Sprint PCS partners for
resolution pursuant to specified procedures and the issue remains unresolved,
buy/sell provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS partners of the interests of the other Sprint PCS
partners, or, in certain circumstances, liquidation of Sprint PCS.

         In May 1998 the Sprint PCS partners entered into a series of agreements
pursuant to which Liberty/Ventures Group, Comcast Corporation ("Comcast") and
Cox Communications, Inc. ("Cox") would exchange their respective interests in
Sprint PCS and PhillieCo Partnership I, L.P. ("PhillieCo") for shares of a new
class of tracking stock of Sprint which would track the performance of Sprint's
newly created "PCS Group" (which would initially consist of Sprint PCS,
PhillieCo and certain PCS licenses which are separately owned by Sprint). The
consummation of such transactions is subject to a number of conditions,
including the approval of such transactions by the stockholders of Sprint. If
such transactions are consummated, Liberty/Ventures Group will initially hold
shares of Sprint PCS Group stock (as well as certain additional securities of
Sprint exercisable for or convertible into such securities) representing
approximately 24% of the equity value of Sprint attributable to the PCS Group,
subject to further dilution as a result of additional expected issuances of
shares of Sprint PCS stock (including in connection with a proposed initial
public offering of shares of Sprint PCS stock that may be consummated in
connection with such transactions). In connection with the execution of such
agreements, the Sprint PCS partners agreed to make up to $400 million in
additional capital contributions (of which Liberty/Ventures Group's share is
$120 million) to Sprint PCS pending the closing of such transactions. As of
September 30, 1998, all of such additional capital contributions had been made
to Sprint PCS. If the above-described transactions are consummated,
Liberty/Ventures Group would begin to account for its investment in the Sprint
PCS stock as an available-for-sale security. No assurance can be given that the
above-described transactions will be consummated.




                                      217
<PAGE>   219



         On June 30, 1998, Liberty/Ventures Group contributed $300 million in
cash to USANi LLC in exchange for an aggregate of 15 million equity shares of
USANi LLC (the "LLC Shares"). Liberty/Ventures Group's cash purchase price was
increased at an annual interest rate of 7.5% beginning from the date of the
closing of certain transactions with Universal Studios, Inc. (the "Universal
Transaction") through the date of Liberty/Ventures Group's purchase of such
securities. See note 4 to the accompanying combined financial statements of
Liberty/Ventures Group. Subject to certain restrictions, each LLC Share issued
or to be issued to Liberty/Ventures Group is exchangeable for one share of USA
Networks, Inc.'s ("USAI") common stock.

         In connection with the Universal Transaction, each of Universal
Studios, Inc. and Liberty/Ventures Group was granted a preemptive right with
respect to future issuances of USAI's capital stock, subject to certain
limitations, to maintain their respective percentage ownership interests in USAI
that they had immediately prior to such issuances. On June 24, 1998,
Liberty/Ventures Group purchased approximately 4.7 million USAI shares of common
stock pursuant to a preemptive right of $20 per share in cash. In addition, on
July 27, 1998, Liberty/Ventures Group purchased 7.9 million LLC Shares at $20
per share as a result of the issuance of common stock by USAI in a transaction
to acquire the remaining stock of Ticketmaster Group, Inc.
which it previously did not own through a tax-free merger.

         In January 1998, Liberty/Ventures Group's interest in a subsidiary of
TCI, attributed to Liberty/Ventures Group, which leases certain equipment under
a capital lease, was assigned to TCI Group. In connection therewith the TCI
Group assumed the attributed subsidiary's capital lease obligations totaling
$176 million and paid $7 million in cash to Liberty/Ventures Group.

         As of September 30, 1998, Liberty/Ventures Group holds approximately 57
million shares of the TW Exchange Stock. During the nine months ended September
30, 1998, the unrealized appreciation, net of taxes, of the fair value of such
shares of TW Exchange Stock was $882 million based upon the market value of the
common stock into which the TW Exchange Stock is convertible. Holders of TW
Exchange Stock are entitled to receive dividends ratably with Time Warner common
stock. Liberty/Ventures Group received approximately $15 million and $14 million
in cash dividends for the first nine months of 1998 and 1997, respectively. It
is anticipated that Time Warner will continue to pay dividends on its common
stock and consequently that Liberty/Ventures Group will receive dividends on the
TW Exchange Stock it holds. However, there can be no assurance that such
dividends will continue to be paid.

         Liberty/Ventures Group received approximately $23 million and $5
million in cash dividends on the FKW Preferred Stock during the nine months
ended September 30, 1998 and 1997, respectively. During the third quarter of
1998, Liberty/Ventures Group recognized dividend income of $16 million on its
AT&T Common Stock. No assurance can be given that such dividends on AT&T Common
Stock will continue to be paid.

         Effective September 1, 1998, Telewest and General Cable PLC ("General
Cable") consummated a merger (the "General Cable Merger") in which holders of
General Cable received 1.243 new Telewest shares and (pound)0.65 ($1.11) in cash
for each share of General Cable. In addition, holders of American Depository
shares of General Cable ("General Cable ADS") (each representing five General
Cable shares) received 6.215 new Telewest shares and (pound)3.25 ($5.53) in cash
for each share of General Cable ADS. Based upon Telewest's closing share price
of (pound)0.89 ($1.51) on April 14, 1998, the General Cable Merger was valued at
approximately (pound)649 million ($1.1 billion).




                                      218
<PAGE>   220



         The cash portion of the General Cable Merger was financed through an
offer to qualifying Telewest shareholders for the purchase of 261 million new
Telewest shares at a price of (pound)0.925 ($1.57) per share (the "Telewest
Offer"). Liberty/Ventures Group subscribed to 85 million Telewest ordinary
shares at an aggregate cost of (pound)78 million ($133 million) in connection
with the Telewest Offer. Immediately following the Telewest Offer,
Liberty/Ventures Group owned 28% of the issued and outstanding Telewest ordinary
shares.

         In connection with the General Cable Merger, Liberty/Ventures Group
also converted its entire holdings of Telewest convertible preference shares
(133 million shares) into Telewest ordinary shares. As a result of the General
Cable Merger, Liberty/Ventures Group's ownership interest in Telewest decreased
to 22%. In connection with such dilution, Liberty/Ventures Group recognized a
non-cash gain of $58 million (excluding related tax expense of $20 million)
during the third quarter of 1998.

         On August 21, 1998, Liberty/Ventures Group purchased 100% of the issued
and outstanding common stock of Pramer S.A., an Argentine programming company,
for $32 million in cash and the issuance of notes payable in the amount of $65
million (the "Pramer Notes"). Liberty/Ventures Group made an $11 million payment
on the Pramer Notes on October 1, 1998 and the remainder is due in 20 equal
monthly installments beginning October 15, 1998.

         During the third quarter of 1998, 2.9 million shares of @Home common
stock were sold for net cash proceeds of approximately $125 million in the @Home
Offering.

         On June 11, 1998, UVSG and The News Corporation Limited ("News Corp.")
announced the signing of a definitive agreement whereby News Corp.'s TV Guide
properties will be combined with UVSG to create a platform for offering
television guide services to consumers and advertising. As part of this
combination, a unit of News Corp. will receive consideration consisting of $800
million in cash and 60 million shares of UVSG's stock (as adjusted for a
two-for-one stock split), including 22.5 million shares of its Class A common
stock and 37.5 million shares of its Class B common stock (as adjusted for a
two-for-one stock split). As a result of the transaction, and certain other
pending transactions, News Corp., Liberty/Ventures Group and UVSG's public
stockholders will own on an economic basis approximately 40%, 44% and 16%,
respectively, of UVSG. Following the transaction, News Corp. and
Liberty/Ventures Group will each have approximately 48% of the voting power of
UVSG's outstanding stock. Upon consummation of such transaction, the results of
operations, cash flows and financial position of UVSG will no longer be included
in Liberty/Ventures Group's combined financial statements. UVSG had revenue of
$443 million and operating income of $48 million for the nine months ended
September 30, 1998. No assurance can be given that such transaction will be
consummated or consummated on the terms contemplated by the parties.




                                      219
<PAGE>   221



         Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
cable operators that may be designated from time to time by NDTC, entered into
an agreement with GI to purchase advanced digital set-top devices. The hardware
and software incorporated into these devices will be designed and manufactured
to be compatible and interoperable with the OpenCable(TM) architecture
specifications adopted by CableLabs, the cable television industry's research
and development consortium, in November 1997. NDTC has agreed that Approved
Purchasers will purchase, in the aggregate, a minimum of 6.5 million set-top
devices over the next three years at an average price of $318 per set-top
device. Through September 30, 1998, approximately 1 million set-top devices had
been purchased pursuant to this commitment. GI agreed to provide NDTC and its
Approved Purchasers the most favorable prices, terms and conditions made
available by GI to any customer purchasing advanced digital set-top devices. In
connection with NDTC's purchase commitment, GI agreed to grant warrants to
purchase its common stock proportional to the number of devices ordered by each
organization, which as of the effective date of the Digital Terminal Purchase
Agreement, would have represented at least a 10% equity interest in GI (on a
fully diluted basis). Such warrants vest as annual purchase commitments are met.
The value associated with such equity interest will be attributed to TCI Group
upon purchase and deployment of the digital set-top devices. See note 2 to the
accompanying combined financial statements of Liberty/Ventures Group. NDTC has
the right to terminate the Digital Terminal Purchase Agreement if, among other
reasons, GI fails to meet a material milestone designated in the Digital
Terminal Purchase Agreement with respect to the development, testing and
delivery of advanced digital set-top devices.

         On July 17, 1998, Liberty/Ventures Group acquired 21.4 million shares
of restricted stock of GI in exchange for (i) certain of the assets of NDTC's
set-top authorization business, (ii) the license of certain related software to
GI, (iii) a $50 million promissory note from Liberty/Ventures Group to GI and
(iv) a nine year revenue guarantee from Liberty/Ventures Group in favor of GI.
In connection therewith, NDTC also entered into a service agreement pursuant to
which it will provide certain postcontract services to GI's set-top
authorization business. See note 12 to the accompanying combined financial
statements of Liberty/Ventures Group.

         @Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home has
issued warrants to purchase 17.9 million shares of @Home's Series A common
stock. Of these warrants 10.6 million of such shares were exercisable as of
September 30, 1998.




                                      220
<PAGE>   222



         During the period in which each of TCI, Cox, Comcast and CSC have
agreed (subject to certain exceptions and limitations) to use @Home as its
exclusive provider of high speed residential consumer Internet access services,
a stockholders agreement among such parties and @Home provides that in the event
the number of exclusive homes passed attributable to TCI decreases below 80% of
the number of homes passed of TCI and its controlled affiliates as of June 1996,
then Liberty/Ventures Group will be required to offer to sell a proportionate
amount of its equity in @Home to certain other stockholders of @Home at fair
market value. Since June 1996, TCI has sold or transferred certain cable systems
that reduce TCI's number of base homes passed. In addition, TCI has announced
the proposed sale or transfer of additional cable systems that would further
reduce TCI's number of base homes passed. In the event that such cable systems
continue to be exclusive to @Home, such cable systems and their homes passed
would continue to be included in TCI's homes passed for purposes of determining
whether or not Liberty/Ventures Group is obligated to offer a portion of its
equity interest in @Home to Cox, Comcast and CSC, even though such cable systems
are no longer owned or controlled by TCI. If TCI does not require that such
cable systems remain exclusive to @Home, Liberty/Ventures Group could be
required to sell shares to Cox, Comcast, CSC and certain other stockholders of
@Home, at fair market value. There can be no assurance that, if Liberty/Ventures
Group is required to sell shares of @Home, the price paid to Liberty/Ventures
Group would represent adequate consideration to Liberty/Ventures Group because
such fair market value may not adequately reflect Liberty/Ventures Group's
expectation of the long term value of such investments in @Home. In addition to
the exceptions to the general exclusivity obligations, Cox and Comcast have the
right to terminate the exclusivity provisions with respect to TCI, Cox, Comcast
and CSC in the event TCI does not attain certain customer penetration levels for
the @Home service relative to the customer penetration levels of Cox and
Comcast, as of June 4, 1999, and each anniversary thereafter until 2002. Such
termination could have a material adverse effect on @Home and the value of
Liberty/Ventures Group's interest in @Home.

         In addition, although TCI, Cox, Comcast and CSC are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are subject to a number
of exceptions which allow them to compete with @Home in certain circumstances.

         Because TINTA generally views its foreign operating subsidiaries and
affiliates as long-term investments, TINTA generally does not attempt to hedge
existing investments in its foreign affiliates and subsidiaries. Although TINTA
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, TINTA believes that, given
the nature of its business, it is not possible or practical to eliminate TINTA's
exposure to unfavorable fluctuations in foreign currency exchange rates. As of
September 30, 1998, Liberty/Ventures Group was not exposed to material near-term
losses in future earnings, fair values or cash flows resulting from derivative
financial instruments.

         Liberty/Ventures Group has guaranteed notes payable and other
obligations (the "Guaranteed Obligations") of certain affiliates. At September
30, 1998, the U.S. dollar equivalent of the amounts borrowed pursuant to the
Guaranteed Obligations aggregated approximately $123 million.



                                      221
<PAGE>   223



         TINTA has guaranteed the obligation of an affiliate ("The Premium Movie
Partnership") to pay fees for the license to exhibit certain films through 2000.
Although the aggregate amount of The Premium Movie Partnership's license fee
obligations is not currently estimable, TINTA believes that the aggregate
payments pursuant to such obligations could be significant. If TINTA were to
fail to fulfill its obligations under the guarantee, the beneficiaries have the
right to demand an aggregate payment from TINTA of approximately $32 million.
Although TINTA has not had to perform under such guarantee to date, TINTA cannot
be certain that it will not be required to perform under such guarantee in the
future.

         Flextech has undertaken to finance the working capital requirements of
a joint venture, (the "Principal Joint Venture") formed with BBC Worldwide
Limited ("BBC Worldwide") and is obligated to provide the Principal Joint
Venture with a primary credit facility of (pound)88 million ($150 million) and
subject to certain restrictions, a standby credit facility of (pound)30 million
($51 million). As of September 30, 1998, the Principal Joint Venture had
borrowed (pound)13.6 million ($23 million) under the primary credit facility. If
Flextech defaults in its funding obligation to the Principal Joint Venture and
fails to cure within 42 days after receipt of notice from BBC Worldwide, BBC
Worldwide is entitled, within the following 90 days, to require that TINTA
assume all of Flextech's funding obligations to the Principal Joint Venture.

         TINTA has formed strategic partnerships with News Corp., Organizacoes
Globo and Group Televisa S.A. to develop and operate a direct-to-home satellite
service for Latin America, Mexico, and various Central and South American
countries (collectively, the "DTH Ventures"). As of September 30, 1998, TINTA
had guaranteed approximately $174 million of the DTH Ventures' financial
obligations.

         Liberty/Ventures Group intends to continue to develop its entertainment
and information programming services and has made certain financial commitments
related to the acquisition of programming. As of September 30, 1998, Encore
Media Group's future minimum obligation related to certain film licensing
agreements was $703 million. The amount of the total obligation is not currently
estimable because such amount is dependent upon the number of qualifying films
released theatrically by certain motion picture studios as well as the domestic
theatrical exhibition receipts upon the release of such qualifying films.
Continued development may require additional financing and it cannot be
predicted whether Liberty/Ventures Group will obtain such financing. If
additional financing cannot be obtained, Liberty/Ventures Group could attempt to
sell assets but there can be no assurance that asset sales, if any, can be
consummated at a price and on terms acceptable to Liberty/Ventures Group.
Further, Liberty/Ventures Group and/or TCI could attempt to sell equity
securities but, again, there can be no certainty that such a sale could be
accomplished on acceptable terms.

         On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including the Puerto Rico
Subsidiary's cable television systems. The Puerto Rico Subsidiary has submitted
a claim to its insurance carrier for its damaged property and loss of revenue.
The Puerto Rico Subsidiary anticipates that its estimated loss of revenue will
exceed its business interruption insurance. Such uncovered losses could cause
the Puerto Rico Subsidiary to be in violation of certain financial covenants of
the Puerto Rico Bank Facility in the fourth quarter of 1998 and the first
quarter of 1999. Violations of certain financial covenants will prevent the
Puerto Rico Subsidiary from borrowing any unused borrowing commitments and could
result in the acceleration of amounts due under the Puerto Rico Bank Facility.
The Puerto Rico Subsidiary is in discussions with the lenders of the Puerto Rico
Bank Facility regarding possible remedies of any potential violations of
financial covenants.




                                      222
<PAGE>   224



         On November 9, 1998, Cablevision and the lenders under its $1.1 billion
loan facility agreed to an extension of $950 million of outstanding borrowings
under the facility until December 15, 1998. At that time, outstanding borrowings
are to be refinanced through (i) $550 million of indebtedness, which is expected
to be issued under Cablevision's medium term note program, and (ii) $400 million
of support from Cablevision's shareholder's, including TINTA. TINTA's portion of
such support aggregates approximately $84.8 million, and will be made through
(i) a $42.4 million capital contribution to Cablevision and (ii) the guarantee
of senior indebtedness of Cablevision and/or subordinated loans from TINTA to
Cablevision in the aggregate amount of $42.4 million.

         During the fourth quarter of 1998, one of the Cablevision shareholders
exercised a put right that, under certain circumstances, could require TINTA to
purchase a portion of such shareholder's ownership interest for cash
consideration of up to $36 million, one-third of which would be paid on December
15, 1998 and the remaining amount would be paid in four semi-annual
installments. Additionally, the Cablevision shareholders' agreement contains a
buy-sell provision that, under certain circumstances, could require TINTA to
purchase other shareholders' ownership interests.

         At September 30, 1998, availability under Liberty/Ventures Group's
credit facilities (excluding the Ventures Intergroup Credit Facility) aggregated
$3,065 million. Borrowings on such credit facilities at September 30, 1998
aggregated $2,001 million. If the available borrowings under Liberty/Ventures
Group's credit facilities are not sufficient to fund Liberty/Ventures Group's
capital requirements, no assurance can be given that Liberty/Ventures Group will
be able to obtain any required additional financing on terms acceptable to it,
or at all. Additional capital could be raised for Liberty/Ventures Group by,
among other things, engaging in public offerings or private placements of
Liberty/Ventures Group Stock or through issuance of debt securities or preferred
equity securities attributed to Liberty/Ventures Group. If Liberty/Ventures
Group is unable to obtain sufficient financing from outside sources,
Liberty/Ventures Group may be dependent upon funding from TCI Group.
Liberty/Ventures Group's failure to meet its contractual and other capital
requirements could have significant adverse consequences to a particular
operating company or affiliate and Liberty/Ventures Group.


                                      223
<PAGE>   225


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets
                                  (unaudited)

<TABLE>
<CAPTION>

                                                                    September 30,   December 31,
                                                                      1998              1997
                                                                    -------------   -----------
Assets                                                                   amounts in millions
<S>                                                                 <C>             <C>
Cash and cash equivalents                                           $   320             244

Restricted cash (note 4)                                                375              40

Trade and other receivables, net                                        664             529

Prepaid program rights                                                  128             104

Committed program rights                                                108             115

Investments in affiliates, accounted for under the equity 
    method, and related receivables (note 5)                          4,547           3,063

Investment in Time Warner, Inc. ("Time Warner") (note 6)              5,021           3,555

Investment in AT&T Corp. ("AT&T") (note 7)                            2,744              --

Property and equipment, at cost:
    Land                                                                 67              96
    Distribution systems                                             10,014          10,784
    Support equipment and buildings                                   1,750           1,558
                                                                    -------         -------
                                                                     11,831          12,438
    Less accumulated depreciation                                     4,839           4,759
                                                                    -------         -------
                                                                      6,992           7,679
                                                                    -------         -------

Franchise costs                                                      15,327          17,910
    Less accumulated amortization                                     2,622           2,763
                                                                    -------         -------
                                                                     12,705          15,147
                                                                    -------         -------

Other assets, net of accumulated amortization                         2,761           1,837
                                                                    -------         -------

                                                                    $36,365          32,313
                                                                    =======         =======
</TABLE>


                                                                    (continued)
                                      224

<PAGE>   226


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                     Consolidated Balance Sheets, continued
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                   September 30,   December 31,
                                                                                      1998            1997
                                                                                   ------------    -----------
Liabilities and Stockholders' Equity                                                amounts in millions

<S>                                                                                <C>             <C>
Accounts payable                                                                   $    149             169

Accrued interest                                                                        161             258

Accrued programming expense                                                             412             399

Other accrued expenses                                                                1,019             997

Deferred option premium (note 6)                                                         --             306

Debt (note 9)                                                                        14,895          15,250

Deferred income taxes                                                                 7,871           6,104

Other liabilities (note 15)                                                           1,369             664
                                                                                   --------        --------
    Total liabilities                                                                25,876          24,147
                                                                                   --------        --------
Minority interests in equity of consolidated subsidiaries                             1,428           1,565

Redeemable securities:
    Preferred stock (note 10)                                                           299             655
    Common stock                                                                         28               5

Company-obligated mandatorily redeemable preferred securities 
    of subsidiary trusts ("Trust Preferred Securities") holding 
    solely subordinated debt securities of TCI Communications, Inc. 
    ("TCIC")(note 11)                                                                 1,500           1,500

Stockholders' equity (note 12):
    Series Preferred Stock, $.01 par value                                               --              --
    Class B 6% Cumulative Redeemable Exchangeable Junior Preferred
       Stock, $.01 par value                                                             --              --
    Common stock, $1 par value:
       Series A TCI Group. Authorized 1,750,000,000 shares; issued
          610,507,868 shares in 1998 and 605,616,143 shares in 1997                     610             606
       Series B TCI Group. Authorized 150,000,000 shares; issued
          73,929,229 shares in 1998 and 78,203,044 shares in 1997                        74              78
       Series A Liberty Media Group.  Authorized 750,000,000 
          shares; issued 357,722,948 shares in 1998 and 344,962,521 
          shares in 1997                                                                358             345
       Series B Liberty Media Group.  Authorized 75,000,000 
          shares; issued 35,198,836 shares in 1998 and 35,180,385 
          shares in 1997                                                                 35              35
       Series A TCI Ventures Group. Authorized 750,000,000 shares;
          issued 377,126,966 shares in 1998 and 377,386,032 
          shares in 1997                                                                377             377
       Series B TCI Ventures Group. Authorized 75,000,000 shares;
          issued 45,766,218 shares in 1998 and 32,532,800 
          shares in 1997                                                                 46              33
    Additional paid-in capital                                                        5,275           5,063
    Accumulated other comprehensive earnings, net of taxes (note 1)                   1,715             772
    Retained earnings (accumulated deficit)                                             490            (877)
                                                                                   --------        --------
                                                                                      8,980           6,432
    Treasury stock and common stock held by subsidiaries, 
          at cost (note 12)                                                          (1,746)         (1,991)
                                                                                   --------        --------
          Total stockholders' equity                                                  7,234           4,441
                                                                                   --------        --------
Commitments and contingencies (notes 2, 5, 8, 15 and 16)
                                                                                   $ 36,365          32,313
                                                                                   ========        ========

</TABLE>

See accompanying notes to consolidated financial statements.

                                      225
<PAGE>   227
 
                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
                                        
                     Consolidated Statements of Operations
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                   Three months ended     Nine months ended
                                                                                      September 30,         September 30,
                                                                                   ------------------     -----------------
                                                                                     1998       1997       1998       1997
                                                                                   -------    -------    -------    -------
                                                                                          amounts in millions,
                                                                                         except per share amounts
<S>                                                                                <C>        <C>        <C>        <C>  
Revenue                                                                            $ 1,825      1,934      5,510      5,637

Operating costs and expenses:
   Operating                                                                           709        738      2,157      2,192
   Selling, general and administrative                                                 438        418      1,301      1,213
   Year 2000 costs (note 16)                                                             4         --          6         --
   AT&T merger costs (note 2)                                                            1         --         11         --
   Stock compensation                                                                   11        160        423        231
   Cost of distribution agreements (note 14)                                            --         --         83         --
   Depreciation and amortization                                                       407        396      1,250      1,177
                                                                                   -------    -------    -------    -------
                                                                                     1,570      1,712      5,231      4,813
                                                                                   -------    -------    -------    -------

         Operating income                                                              255        222        279        824

Other income (expense):
   Interest expense                                                                   (272)      (300)      (808)      (883)
   Interest and dividend income                                                         33         25         72         64
   Share of losses of affiliates, net (note 5)                                        (397)      (253)      (986)      (591)
   Loss on early extinguishment of debt (note 9)                                        (6)        --        (44)       (11)
   Minority interests in earnings of consolidated
      subsidiaries, net note 11)                                                       (39)       (35)       (68)      (129)
   Gain on issuance of equity interests by subsidiaries 
      (notes 8 and 14)                                                                  17         60         55         60
   Gain on issuance of stock by equity investees (note 5)                               58         --        259         21
   Gain on disposition of assets (notes 6, 7 and 8)                                  2,605        338      3,704        400
   Other, net                                                                           (6)        (1)       (25)        (7)
                                                                                   -------    -------    -------    -------
                                                                                     1,993       (166)     2,159     (1,076)
                                                                                   -------    -------    -------    -------

      Earnings (loss) before income taxes                                            2,248         56      2,438       (252)

Income tax benefit (expense)                                                          (903)       (78)    (1,068)        18
                                                                                   -------    -------    -------    -------

      Net earnings (loss)                                                            1,345        (22)     1,370       (234)

Dividend requirements on preferred stocks                                               (5)       (10)       (18)       (31)
                                                                                   -------    -------    -------    -------

      Net earnings (loss) attributable to common stockholders                      $ 1,340        (32)     1,352       (265)
                                                                                   =======    =======    =======    =======

Net earnings (loss) attributable to common stockholders:
   TCI Group Series A and Series B common stock                                    $    47       (224)       130       (479)
   Liberty Media Group Series A and Series B common stock                              (11)       162        227        184
   TCI Ventures Group Series A and Series B common stock                             1,304         30        995         30
                                                                                   -------    -------    -------    -------

                                                                                   $ 1,340        (32)     1,352       (265)
                                                                                   =======    =======    =======    =======
Basic earnings (loss) attributable to common stockholders 
   per common share (note 3):
      TCI Group Series A and Series B common stock                                 $   .09       (.34)       .25       (.71)
                                                                                   =======    =======    =======    =======
      Liberty Media Group Series A and Series B common stock                       $  (.03)       .44        .64        .50
                                                                                   =======    =======    =======    =======
      TCI Ventures Group Series A and Series B common stock                        $  3.08        .07       2.36        .07
                                                                                   =======    =======    =======    =======

Diluted earnings (loss) attributable to common stockholders
   per common and potential common share (note 3):
      TCI Group Series A and Series B common stock                                 $   .08       (.34)       .22       (.71)
                                                                                   =======    =======    =======    =======
      Liberty Media Group Series A and Series B common stock                       $  (.03)       .40        .58        .45
                                                                                   =======    =======    =======    =======
      TCI Ventures Group Series A and Series B common stock                        $  2.89        .07       2.20        .07
                                                                                   =======    =======    =======    =======

Comprehensive earnings (loss) (note 1)                                             $ 1,430        (38)     2,313       (248)
                                                                                   =======    =======    =======    =======
</TABLE>


See accompanying notes to consolidated financial statements.

                                      226
<PAGE>   228
                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                 Consolidated Statement of Stockholders' Equity
                                        
                      Nine months ended September 30, 1998
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                          Common Stock  
                                                               -------------------------------------------------------------------
                                                     Class B         TCI Group           Liberty Media Group    TCI Ventures Group
                                                    Preferred  --------------------    ----------------------  --------------------
                                                      Stock    Series A    Series B    Series A     Series B   Series A   Series B
                                                   ----------  ----------  --------    ---------    ---------  ---------  ---------
                                                                                   amounts in millions

<S>                                                <C>         <C>         <C>         <C>          <C>        <C>        <C>
Balance at January 1, 1998                         $     --        606          78         345         35        377          33

    Net earnings                                         --         --          --          --         --         --          -- 
    Exchange of common stock in connection with
      the Magness Settlement (note 13)                   --         --          11          --         --         --          13
    Issuance of common stock in connection with
      settlement of litigation                           --          1           1          --         --         --          -- 
    Reclassification to redeemable securities
      of redemption amount of common stock
      subject to put obligation                          --         --          --          --         --         --          -- 
    Premium received in connection with put
      obligation                                         --         --          --          --         --         --          -- 
    Issuance of common stock for acquisitions
      (note 8)                                           --          1          --           7         --         13          -- 
    Repurchase of common stock to be held in
      treasury (note 12)                                 --         --          --          --         --         --          -- 
    Repurchase and retirement of common stock
      (note 12)                                          --         --          --          --         --         --          -- 
    Retirement of common stock held in treasury          --        (12)        (16)         --         --        (13)         -- 
    Gain from issuance of equity by subsidiary
      and equity investee, net of taxes (note 5)         --         --          --          --         --         --          -- 
    Issuance of common stock upon conversion of
      notes and preferred stock (notes 9 and 10)         --         14          --           6         --         --          -- 
    Payments for call agreements (note 13)               --         --          --          --         --         --          -- 
    Recognition of fees related to the Equity
      Swap Facility and the Exchange (notes 12
      and 13)                                            --         --          --          --         --         --          -- 
    Reimbursement of fees related to Exchange
      (note 13)                                          --         --          --          --         --         --          -- 
    Recognition of stock compensation related
      to restricted stock awards                         --         --          --          --         --         --          -- 
    Accreted dividends on all classes of
      preferred stock                                    --         --          --          --         --         --          -- 
    Accreted dividends on all classes of
      preferred stock not subject to mandatory
      redemption requirements                            --         --          --          --         --         --          -- 
    Payment of preferred stock dividends                 --         --          --          --         --         --          -- 
    Foreign currency translation adjustment              --         --          --          --         --         --          -- 
    Change in unrealized holding gains for
      available-for-sale securities, net of
      taxes                                              --         --          --          --         --         --          -- 
                                                   --------   --------    --------    --------   --------   --------    --------

Balance at September 30, 1998                      $     --        610          74         358         35        377          46
                                                   ========   ========    ========    ========   ========   ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.




                 Consolidated Statement of Stockholders' Equity

                      Nine months ended September 30, 1998
                                  (unaudited)

<TABLE>
<CAPTION>

                                                                                                   Treasury
                                                                                                  stock and
                                                                   Accumulated                      common
                                                                      other         Retained        stock
                                                    Additional    comprehensive     earnings        held by        Total
                                                     paid-in        earnings,      (accumulated   subsidiaries,  stockholders'
                                                     capital      net of taxes       deficit)        at cost       equity
                                                   -----------    ------------     -----------    -----------    -----------
                                                                           amounts in millions
<S>                                                <C>            <C>              <C>            <C>            <C>  
Balance at January 1, 1998                               5,063            772          (877)        (1,991)         4,441

    Net earnings                                            --             --         1,370             --          1,370
    Exchange of common stock in connection with
      the Magness Settlement (note 13)                     509             --            --           (533)            --
    Issuance of common stock in connection with
      settlement of litigation                              48             --            --             (3)            47
    Reclassification to redeemable securities
      of redemption amount of common stock
      subject to put obligation                            (24)            --            --             --            (24)
    Premium received in connection with put
      obligation                                             3             --            --             --              3
    Issuance of common stock for acquisitions
      (note 8)                                             353             --            --             --            374
    Repurchase of common stock to be held in
      treasury (note 12)                                    --             --            --            (20)           (20)
    Repurchase and retirement of common stock
      (note 12)                                            (11)            --            --             --            (11)
    Retirement of common stock held in treasury           (760)            --            --            801             --
    Gain from issuance of equity by subsidiary
      and equity investee, net of taxes (note 5)            67             --            --             --             67
    Issuance of common stock upon conversion of
      notes and preferred stock (notes 9 and 10)           329             --            --             --            349
    Payments for call agreements (note 13)                (274)            --            --             --           (274)
    Recognition of fees related to the Equity
      Swap Facility and the Exchange (notes 12
      and 13)                                              (25)            --            --             --            (25)
    Reimbursement of fees related to Exchange
      (note 13)                                             11             --            --             --             11
    Recognition of stock compensation related
      to restricted stock awards                            4              --            --             --              4
    Accreted dividends on all classes of
      preferred stock                                      (13)            --            (5)            --            (18)
    Accreted dividends on all classes of
      preferred stock not subject to mandatory
      redemption requirements                                5             --             2             --              7
    Payment of preferred stock dividends                   (10)            --            --             --            (10)
    Foreign currency translation adjustment                 --              6            --             --              6
    Change in unrealized holding gains for
      available-for-sale securities, net of
      taxes                                                 --            937            --             --            937
                                                   -----------    -----------   -----------    -----------    -----------

Balance at September 30, 1998                            5,275          1,715           490         (1,746)         7,234
                                                   ===========    ===========   ===========    ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      227
<PAGE>   229


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows
                                  (unaudited)
<TABLE>
<CAPTION>

                                                                                 Nine months ended
                                                                                   September 30,
                                                                                1998           1997
                                                                            ------------    ------------
                                                                                 amounts in millions
                                                                                    (see note 4)
Cash flows from operating activities:
<S>                                                                         <C>             <C>  
   Net earnings (loss)                                                      $      1,370            (234)
   Adjustments to reconcile net earnings (loss) to net cash provided by
      operating activities:
        Depreciation and amortization                                              1,250           1,177
        Cost of distribution agreements                                               83              --
        Stock compensation                                                           423             231
        Payments of obligation relating to stock compensation                       (161)            (26)
        Share of losses of affiliates, net                                           986             591
        Loss on early extinguishment of debt                                          44              11
        Minority interests in earnings of consolidated subsidiaries, net              68             129
        Gain on issuance of equity interests by subsidiaries                         (55)            (60)
        Gain on issuance of stock by equity investees                               (259)            (21)
        Gain on disposition of assets                                             (3,704)           (400)
        Deferred income tax expense (benefit)                                      1,009            (125)
        Payments of restructuring charges                                             (5)            (21)
        Other noncash charges                                                          2              13
        Changes in operating assets and liabilities, net of the effect of
          acquisitions:
             Change in receivables                                                  (157)            (10)
             Change in prepaids                                                      (17)            (79)
             Change in other accruals and payables                                  (112)             38
                                                                            ------------    ------------
                Net cash provided by operating activities                            765           1,214
                                                                            ------------    ------------
Cash flows from investing activities:
   Cash paid for acquisitions                                                       (211)           (331)
   Capital expended for property and equipment                                    (1,123)           (419)
   Investments in and loans to affiliates                                         (1,346)           (392)
   Collections of loans to affiliates                                              1,658              87
   Proceeds from disposition of assets                                               712             352
   Change in restricted cash                                                        (335)             39
   Cash received in exchanges                                                         45              18
   Other investing activities                                                        (73)            (11)
                                                                            ------------    ------------
               Net cash used in investing activities                                (673)           (657)
                                                                            ------------    ------------
Cash flows from financing activities:
   Borrowings of debt                                                              4,645           3,311
   Repayments of debt                                                             (4,213)         (4,125)
   Prepayment penalties                                                              (39)             (7)
   Repurchase of common stock to be held in treasury                                 (20)            (18)
   Repurchase and retirement of common stock                                         (11)             --
   Repurchase of subsidiary common stock                                             (15)            (42)
   Payment of preferred stock dividends                                              (27)            (37)
   Payment of dividends on subsidiary preferred stock and Trust Preferred
      Securities                                                                    (141)           (130)
   Payments for call agreements                                                     (274)             --
   Proceeds from issuance of subsidiary common stock and preferred stock              91             148
   Proceeds from issuance of Trust Preferred Securities                               --             490
   Other financing activities                                                        (12)              3
                                                                            ------------    ------------
               Net cash used in financing activities                                 (16)           (407)
                                                                            ------------    ------------
               Net increase in cash and cash equivalents                              76             150

               Cash and cash equivalents at beginning of period                      244             405
                                                                            ------------    ------------
               Cash and cash equivalents at end of period                   $        320             555
                                                                            ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      228
<PAGE>   230


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                               September 30, 1998
                                  (unaudited)


(1)      Basis of Presentation

         The accompanying consolidated financial statements include the
         accounts of Tele-Communications, Inc. and those of all majority-owned
         subsidiaries ("TCI" or the "Company"). All significant intercompany
         accounts and transactions have been eliminated in consolidation.

         The accompanying interim consolidated financial statements are
         unaudited but, in the opinion of management, reflect all adjustments
         (consisting of normal recurring accruals) necessary for a fair
         presentation of the results for such periods. The results of
         operations for any interim period are not necessarily indicative of
         results for the full year. These consolidated financial statements
         should be read in conjunction with the consolidated financial
         statements and notes thereto contained in TCI's Annual Report on Form
         10-K for the year ended December 31, 1997.

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

         Effective January 1, 1998, the Company adopted the provisions of
         Statement of Financial Accounting Standards No. 130, Reporting
         Comprehensive Income ("SFAS 130"). The Company has reclassified its
         prior period consolidated balance sheet and consolidated statements of
         operations to conform to the requirements of SFAS 130. SFAS 130
         requires that all items which are components of comprehensive earnings
         or losses be reported in a financial statement in the period in which
         they are recognized. The Company has included cumulative foreign
         currency translation adjustments and unrealized holding gains and
         losses on available-for-sale securities in other comprehensive
         earnings that are recorded directly in stockholders' equity. Pursuant
         to SFAS 130, these items are reflected, net of related tax effects, as
         components of comprehensive earnings in the Company's consolidated
         statements of operations, and are included in accumulated other
         comprehensive earnings in the Company's consolidated balance sheets
         and statement of stockholders' equity.


                                                                    (continued)

                                      229
<PAGE>   231


                  TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

         The Financial Accounting Standards Board recently issued Statement of
         Financial Accounting Standards No. 133, "Accounting for Derivative
         Instruments and Hedging Activities," ("SFAS 133"), which is effective
         for all fiscal years beginning after June 15, 1999. SFAS 133
         establishes accounting and reporting standards for derivative
         instruments and hedging activities by requiring that all derivative
         instruments be reported as assets or liabilities and measured at their
         fair values. Under SFAS 133, changes in the fair values of derivative
         instruments are recognized immediately in earnings unless those
         instruments qualify as hedges of the (1) fair values of existing
         assets, liabilities, or firm commitments, (2) variability of cash
         flows of forecasted transactions, or (3) foreign currency exposures of
         net investments in foreign operations. Although management of the
         Company has not completed its assessment of the impact of SFAS 133 on
         its consolidated results of operations and financial position,
         management estimates that the impact of SFAS 133 will not be material.

         Certain prior period amounts have been reclassified for comparability
         with the 1998 presentation.

         Targeted Stock

         On August 3, 1995, the stockholders of TCI authorized the Board of
         Directors of TCI (the "Board") to issue two new series of stock,
         Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
         par value $1.00 per share ("Liberty Group Series A Stock") and
         Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
         par value $1.00 per share ("Liberty Group Series B Stock," and
         together with the Liberty Group Series A Stock, the "Liberty Group
         Stock"). The Liberty Group Stock is intended to reflect the separate
         performance of TCI's assets which produce and distribute programming
         services ("Liberty Media Group"). Additionally, the stockholders, of
         TCI approved the redesignation of the previously authorized Class A
         and Class B common stock into Tele-Communications, Inc. Series A TCI
         Group Common Stock, par value $1.00 per share (the "TCI Group Series A
         Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock,
         par value $1.00 per share (the "TCI Group Series B Stock", and
         together with the TCI Group Series A Stock, the "TCI Group Stock"),
         respectively. On August 10, 1995, TCI distributed, in the form of a
         dividend, 2.25 shares of Liberty Group Stock for each four shares of
         TCI Group Stock owned (the "Liberty Distribution").

         On August 28, 1997, the stockholders of TCI authorized the Board to
         issue the Tele-Communications, Inc. Series A TCI Ventures Group Common
         Stock, par value $1.00 per share (the "TCI Ventures Group Series A
         Stock") and Tele-Communications, Inc. Series B TCI Ventures Group
         Common Stock, par value $1.00 per share (the "TCI Ventures Group
         Series B Stock," and together with TCI Ventures Group Series A Stock,
         the "TCI Ventures Group Stock"). The TCI Ventures Group Stock is
         intended to reflect the separate performance of the "TCI Ventures
         Group," which is comprised of TCI's principal international assets and
         businesses and substantially all of TCI's non-cable and
         non-programming assets.


                                                                    (continued)

                                      230
<PAGE>   232


                  TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


         In August 1997, TCI commenced offers (the "Exchange Offers") to
         exchange shares of TCI Ventures Group Series A Stock and TCI Ventures
         Group Series B Stock for up to 188,661,300 shares of TCI Group Series
         A Stock and up to 16,266,400 shares of TCI Group Series B Stock,
         respectively. The exchange ratio for the Exchange Offers was two
         shares of the applicable series of TCI Ventures Group Stock for each
         share of the corresponding series of TCI Group Stock properly tendered
         up to the indicated maximum numbers. Upon the September 10, 1997
         consummation of the Exchange Offers, 188,661,300 shares of TCI Group
         Series A Stock and 16,266,400 shares of TCI Group Series B Stock were
         exchanged for 377,322,600 shares of TCI Ventures Group Series A Stock
         and 32,532,800 shares of TCI Ventures Group Series B Stock (the "TCI
         Ventures Exchange").

         The TCI Group Stock is intended to reflect the separate performance of
         TCI and its subsidiaries and assets not attributed to Liberty Media
         Group or TCI Ventures Group. Such subsidiaries and assets are referred
         to as "TCI Group" and are comprised primarily of TCI's domestic cable
         and communications business. Collectively, the TCI Group, the Liberty
         Media Group and the TCI Ventures Group are referred to as the "Groups"
         and individually, may be referred to herein as a "Group." The TCI
         Group Series A Stock, TCI Ventures Group Series A Stock and the
         Liberty Group Series A Stock are sometimes collectively referred to
         herein as the "Series A Stock," and the TCI Group Series B Stock, TCI
         Ventures Group Series B Stock and Liberty Group Series B Stock are
         sometimes collectively referred to herein as the "Series B Stock."

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

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


                                                                    (continued)

                                      231
<PAGE>   233


                  TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


         The common stockholders' equity value of TCI Ventures Group or Liberty
         Media Group that, at any relevant time, is attributed to TCI Group,
         and accordingly not represented by outstanding TCI Ventures Group
         Stock or Liberty Group Stock, respectively, is referred to as
         "Inter-Group Interest." Prior to consummation of the Liberty
         Distribution and TCI Ventures Exchange, TCI Group had a 100%
         Inter-Group Interest in Liberty Media Group and TCI Ventures Group,
         respectively. Following consummation of the Liberty Distribution and
         TCI Ventures Exchange, TCI Group no longer has Inter-Group Interests
         in Liberty Media Group and TCI Ventures Group, respectively. For
         periods in which an Inter-Group Interest exists, TCI Group accounts
         for its Inter-Group Interest in a manner similar to the equity method
         of accounting. Following consummation of the Liberty Distribution and
         the TCI Ventures Exchange, an Inter-Group Interest would be created
         with respect to Liberty Media Group or TCI Ventures Group only if a
         subsequent transfer of cash or other property from TCI Group to
         Liberty Media Group or TCI Ventures Group is specifically designated
         by the Board as being made to create an Inter-Group Interest or if
         outstanding shares of Liberty Group Stock or TCI Ventures Stock,
         respectively, are purchased with funds attributable to TCI Group.
         Management of TCI believes that generally accepted accounting
         principles require that Liberty Media Group or TCI Ventures Group be
         consolidated with TCI Group for all periods in which TCI Group held an
         Inter-Group Interest in Liberty Media Group or TCI Ventures Group,
         respectively.

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

         All debt incurred or preferred stock issued by TCI and its
         subsidiaries is (unless the Board otherwise provides) specifically
         attributed to and reflected in the combined financial statements of
         the Group that includes the entity which incurred the debt or issued
         the preferred stock or, in case the entity incurring the debt or
         issuing the preferred stock is Tele-Communications, Inc., the TCI
         Group. The Board could, however, determine from time to time that debt
         incurred or preferred stock issued by entities included in a Group
         should be specifically attributed to and reflected in the combined
         financial statements of one of the other Groups to the extent that the
         debt is incurred or the preferred stock is issued for the benefit of
         such other Group.

                                                                    (continued)

                                      232
<PAGE>   234


                  TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


         Although it is management's intention that each Group would normally
         arrange for the external financing required to satisfy its respective
         liquidity requirements, the cash needs of one Group may exceed the
         liquidity sources of such Group. In such circumstances, one of the
         other Groups may transfer funds to such Group. Such transfers of funds
         among the Groups will be reflected as borrowings or, if determined by
         the Board, in the case of a transfer from TCI Group to either Liberty
         Media Group or TCI Ventures Group, reflected as the creation of, or
         increase in, TCI Group's Inter-Group Interest in such Group or, in the
         case of a transfer from either Liberty Media Group or TCI Ventures
         Group to TCI Group, reflected as a reduction in TCI Group's
         Inter-Group Interest in such Group. There are no specific criteria for
         determining when a transfer will be reflected as a borrowing or as an
         increase or reduction in an Inter-Group Interest. The Board expects to
         make such determinations, either in specific instances or by setting
         generally applicable policies from time to time, after consideration
         of such factors as it deems relevant, including, without limitation,
         the needs of TCI, the financing needs and objectives of the Groups,
         the investment objectives of the Groups, the availability, cost and
         time associated with alternative financing sources, prevailing
         interest rates and general economic conditions.

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

         The combined balance sheets of a Group reflect its net loans or
         advances to or loans or advances from the other Groups. Similarly, the
         respective combined statements of operations of the Groups reflect
         interest income or expense, as the case may be, associated with such
         loans or advances and the respective combined statements of cash flows
         of the Groups reflect changes in the amounts of loans or advances
         deemed outstanding. In the historical combined financial statements,
         net loans or advances between Groups have been and will continue to be
         included as a component of each respective Group's combined equity.

         Although any increase in TCI Group's Inter-Group Interest in Liberty
         Media Group or TCI Ventures Group resulting from an equity
         contribution by the TCI Group to Liberty Media Group or TCI Ventures
         Group or any decrease in such Inter-Group Interest resulting from a
         transfer of funds from Liberty Media Group or TCI Ventures Group to
         TCI Group would be determined by reference to the market value of the
         Liberty Group Series A Stock, or the TCI Ventures Group Series A
         Stock, respectively, as of the date of such transfer, such an increase
         could occur at a time when such shares could be considered undervalued
         and such a decrease could occur at a time when such shares could be
         considered overvalued.

                                                                    (continued)


                                     233
<PAGE>   235


                  TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


         All financial impacts of issuances and purchases of shares of TCI
         Group Stock, TCI Ventures Group Stock or Liberty Group Stock, which
         are attributed to TCI Group, TCI Ventures Group or Liberty Media
         Group, respectively, will be to such extent reflected in the combined
         financial statements of TCI Group, TCI Ventures Group or Liberty Media
         Group, respectively. All financial impacts of issuances of shares of
         TCI Ventures Group Stock or Liberty Group Stock, the proceeds of which
         are attributed to TCI Group in respect of a reduction in TCI Group's
         Inter-Group Interest in TCI Ventures Group or Liberty Media Group,
         respectively, will be to such extent reflected in the combined
         financial statements of TCI Group. Financial impacts of dividends or
         other distributions on TCI Group Stock, TCI Ventures Group Stock or
         Liberty Group Stock, will be attributed entirely to TCI Group, TCI
         Ventures Group or Liberty Media Group, respectively, except that
         dividends or other distributions on TCI Ventures Group Stock or
         Liberty Group Stock will (if at the time there is an Inter-Group
         Interest in TCI Ventures Group or Liberty Media Group, respectively)
         result in TCI Group being credited, and TCI Ventures Group or Liberty
         Media Group being charged (in addition to the charge for the dividend
         or other distribution paid), with an amount equal to the product of
         the aggregate amount of such dividend or other distribution paid or
         distributed in respect of outstanding shares of TCI Ventures Group
         Stock or Liberty Group Stock and a fraction of the numerator of which
         is TCI Ventures Group or Liberty Media Group "Inter-Group Interest
         Fraction" and the denominator of which is the TCI Ventures Group or
         the Liberty Media Group "Outstanding Interest Fraction" (both as
         defined). Financial impacts of repurchases of TCI Ventures Group Stock
         or Liberty Group Stock, the consideration for which is charged to TCI
         Group, will be to such extent reflected in the combined financial
         statements of TCI Group and will result in an increase in TCI Group's
         Inter-Group Interest in TCI Ventures Group or Liberty Media Group,
         respectively.


                                                                    (continued)

                                     234
<PAGE>   236

                  TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


(2)      Proposed Merger

         TCI and AT&T have agreed to a merger (the "Merger") pursuant to, and
         subject to the terms and conditions set forth in, the Agreement and
         Plan of Restructuring and Merger, dated as of June 23, 1998 (the
         "Merger Agreement"), among TCI, AT&T and an indirect wholly-owned
         subsidiary of AT&T. In the Merger, TCI will become a wholly-owned
         subsidiary of AT&T and (i) each share of TCI Group Series A Stock will
         be converted into .7757 of a share of common stock, par value $1.00
         per share, of AT&T ("AT&T Common Stock"), (ii) each share of TCI Group
         Series B Stock will be converted into .8533 of a share of AT&T Common
         Stock, (iii) each share of Liberty Group Series A Stock will be
         converted into one share of a newly authorized class of AT&T common
         stock to be designated as the Class A Liberty Group Common Stock, par
         value $1.00 per share (the "AT&T Liberty Class A Tracking Stock") and
         (iv) each share of Liberty Group Series B Stock will be converted into
         one share of a newly authorized class of AT&T common stock to be
         designated as the Class B Liberty Group Common Stock, par value $1.00
         per share (the "AT&T Liberty Class B Tracking Stock" and together with
         the AT&T Liberty Class A Tracking Stock, the "AT&T Liberty Tracking
         Stock"). In addition, TCI has announced its intention, subject to
         stockholder approval, to combine the assets and businesses of Liberty
         Media Group and TCI Ventures Group and reclassify each share of TCI
         Ventures Group Series A Stock as .52 of a share of Liberty Group
         Series A Stock and each share of TCI Ventures Group Series B Stock as
         .52 of a share of Liberty Group Series B Stock. If such combination
         and reclassification does not occur prior to the Merger, then in the
         Merger each share of TCI Ventures Group Series A Stock and TCI
         Ventures Group Series B Stock will be converted into .52 of a share of
         the corresponding series of AT&T Liberty Tracking Stock. In general,
         the holders of shares of AT&T Liberty Class A Tracking Stock and the
         holders of shares of AT&T Liberty Class B Tracking Stock will vote
         together as a single class with the holders of shares of AT&T Common
         Stock on all matters presented to such stockholders, with the holders
         being entitled to one-tenth (1/10th) of a vote for each share of AT&T
         Liberty Class A Tracking Stock held, 1 vote per share of AT&T Liberty
         Class B Tracking Stock held, and 1 vote per share of AT&T Common Stock
         held.

         In the Merger, (i) TCI's Class B 6% Cumulative Redeemable Exchangeable
         Junior Preferred Stock will remain outstanding, (ii) TCI's Convertible
         Preferred Stock, Series C-TCI Group will be converted into a number of
         shares of AT&T Common Stock equal to .7757 times the current
         conversion rate of such preferred stock (132.86 shares per preferred
         share), (iii) TCI's Convertible Preferred Stock Series C-Liberty Media
         Group will be converted into a number of shares of AT&T Liberty Class
         A Tracking Stock equal to the current conversion rate of such
         preferred stock (56.25 shares per preferred share), (iv) TCI's
         Redeemable Convertible TCI Group Preferred Stock, Series G will be
         converted into a number of shares of AT&T Common Stock equal to .7757
         times the current conversion rate of such preferred stock (1.19 shares
         per preferred share) and (v) TCI's Redeemable Convertible Liberty
         Media Group Preferred Stock, Series H will be converted into a number
         of shares of AT&T Liberty Class A Tracking Stock equal to the current
         conversion rate of such preferred stock (0.590625 of a share per
         preferred share).


                                                                    (continued)

                                     235
<PAGE>   237


                  TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


         The shares of AT&T Liberty Tracking Stock to be issued in the Merger
         will be a newly authorized class of common stock of AT&T which will be
         intended to reflect the separate performance of the businesses and
         assets attributed to the "Liberty/Ventures Group", which following the
         Merger, will be made up of the businesses and assets which are
         attributed to Liberty Media Group and TCI Ventures Group at the time
         of the Merger. Pursuant to the Merger Agreement, immediately prior to
         the Merger, certain assets currently attributed to TCI Ventures Group
         (including, among others, the shares of AT&T Common Stock received in
         the merger of AT&T and Teleport Communications Group, Inc. ("TCG"),
         the stock of At Home Corporation ("@Home") attributed to TCI Ventures
         Group, the assets and business of the National Digital Television
         Center, Inc. ("NDTC") and TCI Ventures Group's equity interest in
         Western Tele-Communications, Inc.) will be transferred to TCI Group in
         exchange for approximately $5.5 billion in cash. Also, upon
         consummation of the Merger, through a new tax sharing agreement
         between Liberty/Ventures Group and AT&T, Liberty/Ventures Group will
         become entitled to the benefit of all of the net operating loss
         carryforwards available to the entities included in TCI's consolidated
         income tax return as of the date of the Merger. Additionally, certain
         warrants currently attributed to TCI Group will be transferred to
         Liberty/Ventures Group in exchange for up to $176 million in cash.
         Certain agreements to be entered into at the time of the Merger as
         contemplated by the Merger Agreement will, among other things, provide
         preferred vendor status to Liberty/Ventures Group for digital basic
         distribution on AT&T's systems of new programming services created by
         Liberty/Ventures Group, provide for a renewal of existing affiliation
         agreements and provide for the business of the Liberty/Ventures Group
         to continue to be managed following the Merger by certain members of
         TCI's management who currently manage the businesses of Liberty Media
         Group and TCI Ventures Group.

         If TCI terminates the Merger Agreement due to (i) the failure of
         AT&T's stockholders to approve the Merger prior to March 31, 1999,
         (ii) the withdrawal or modification by the AT&T Board of Directors of
         its approval of the transaction, or (iii) the failure to obtain
         necessary governmental and regulatory approvals by September 30, 1999,
         which failure occurs as a result of the announcement by AT&T of a
         significant transaction which delays receipt of such governmental
         approvals, AT&T will pay to TCI the sum of $1.75 billion in cash. If
         AT&T terminates the Merger Agreement, under certain circumstances,
         including the failure of TCI stockholders to approve the transaction
         prior to March 31, 1999 or the withdrawal or modification by the TCI
         Board of Directors of its approval of the Merger, TCI will pay to AT&T
         the sum of $1.75 billion in cash.

         Consummation of the Merger is subject to the satisfaction or waiver of
         customary conditions to closing, including but not limited to, the
         separate approvals of the stockholders of AT&T and TCI, receipt of all
         necessary governmental consents and approvals, and effectiveness of
         the registration statement registering the AT&T Common Stock and AT&T
         Liberty Tracking Stock to be issued to TCI stockholders in the Merger.
         As a result, there can be no assurance that the Merger will be
         consummated or, if the Merger is consummated, as to the date of such
         consummation.

                                                                    (continued)


                                     236
<PAGE>   238


                  TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


(3)      Earnings (Loss) Per Common and Potential Common Share

         Basic earnings per share ("EPS") is measured as the income or loss
         attributable to common stockholders divided by the weighted average
         outstanding common shares for the period. Diluted EPS is similar to
         basic EPS but presents the dilutive effect on a per share basis of
         potential common shares as if they had been converted at the beginning
         of the periods presented. Potential common shares that have an
         anti-dilutive effect are excluded from diluted EPS.

         (a)      TCI Group Stock

                  The basic earnings (loss) attributable to TCI Group common
                  stockholders per common share for the three and nine months
                  ended September 30, 1998 and 1997 was computed by dividing
                  net earnings (loss) attributable to TCI Group common
                  stockholders by the weighted average number of common shares
                  outstanding of TCI Group Stock during the period.

                  The diluted earnings attributable to TCI Group common
                  stockholders per common share for the three and nine months
                  ended September 30, 1998 was computed by dividing net earnings
                  attributable to TCI Group common stockholders, which is
                  adjusted by the addition of preferred stock dividends and
                  interest accrued during the three and nine months ended
                  September 30, 1998 to net earnings, assuming conversion of TCI
                  Group convertible securities as of the beginning of the period
                  to the extent that the assumed conversion of such securities
                  would have been dilutive, by the weighted average number of
                  common shares and dilutive potential common shares outstanding
                  of TCI Group Stock during the period. Shares issuable upon
                  conversion of the Convertible Preferred Stock, Series C-TCI
                  Group ("Series C-TCI Group Preferred Stock"), Convertible
                  Preferred Stock, Series D ("Series D Preferred Stock"), the
                  Redeemable Convertible TCI Group Preferred Stock, Series G
                  ("Series G Preferred Stock"), the Malone Right (as defined in
                  note 13), preferred stock of subsidiaries, convertible notes
                  payable and stock options and other performance awards have
                  been included in the diluted calculation of weighted average
                  shares to the extent that the assumed issuance of such shares
                  would have been dilutive, as illustrated below. All of the
                  outstanding shares of Series D Preferred Stock were redeemed
                  effective April 1, 1998 (see note 10).

                  The diluted loss attributable to TCI Group common
                  stockholders per common share for the three and nine months
                  ended September 30, 1997 was computed by dividing the net
                  loss attributable to TCI Group common stockholders by the
                  weighted average number of common shares outstanding of TCI
                  Group Stock during the period. Potential common shares were
                  not included in the computation of weighted average shares
                  outstanding because their inclusion would be anti-dilutive.
                  

                                                                    (continued)

                                     237
<PAGE>   239


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Except for the issuance of 8,718,770 shares of TCI Group Series B
         Stock on October 14, 1998 and 5,792,800 shares of TCI Group Series B
         Stock on October 16, 1998, pursuant to the exercise of certain rights
         as described in note 13, no material changes in the weighted average
         outstanding shares or potential common shares occurred after September
         30, 1998.

         Information concerning the reconciliation of basic EPS to diluted EPS
         with respect to TCI Group Stock is presented below:

<TABLE>
<CAPTION>

                                       Three months ended         Nine months ended
                                          September 30,             September 30,
                                     -----------------------    -----------------------
                                        1998          1997         1998         1997
                                     ----------   ----------    ----------   ----------
                                       amounts in millions, except per share amounts

<S>                                  <C>          <C>           <C>          <C>  
Basic EPS:
   Earnings (loss) attributable to
       common stockholders           $       47         (224)          130         (479)
                                     ==========   ==========    ==========   ==========
   Weighted average common shares           523          656           521          670
                                     ==========   ==========    ==========   ==========
   Basic earnings (loss) per share
       attributable to common
       stockholders                  $      .09         (.34)          .25         (.71)
                                     ==========   ==========    ==========   ==========

Diluted EPS:
   Earnings (loss) attributable to
       common stockholders           $       47         (224)          130         (479)
   Add preferred dividend
       requirements                          --           --            --           --
   Add interest expense                       1           --             2           --
                                     ----------   ----------    ----------   ----------
   Adjusted earnings (loss)
       attributable to common
       stockholders assuming
       conversion of preferred
       shares and notes payable      $       48         (224)          132         (479)
                                     ==========   ==========    ==========   ==========

   Weighted average common shares           523          656           521          670
                                     ----------   ----------    ----------   ----------
   Add dilutive potential common
       shares:
       Employee and director
         options and other
         performance awards                  12           --            10           --
       Malone Right                           1           --            --           --
       Convertible notes payable             24           --            24           --
       Series C-TCI Group
         Preferred Stock                     --           --            --           --
       Series D Preferred Stock              --           --            --           --
       Series G Preferred Stock              --           --            --           --
       Preferred stock of
         subsidiaries                        45           --            45           --
                                     ----------   ----------    ----------   ----------
       Dilutive potential common
         shares                              82           --            79           --
                                     ----------   ----------    ----------   ----------
   Diluted weighted average common
       shares                               605          656           600          670
                                     ==========   ==========    ==========   ==========
   Diluted earnings (loss) per
       share attributable to
       common stockholders           $      .08         (.34)          .22         (.71)
                                     ==========   ==========    ==========   ==========
</TABLE>

                                                                    (continued)

                                      238
<PAGE>   240


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
                                        
                   Notes to Consolidated Financial Statements


(b)     Liberty Group Stock

        The basic earnings (loss) attributable to Liberty Media Group
        common stockholders per common share for the three and nine
        months ended September 30, 1998 and 1997 was computed by
        dividing net earnings attributable to Liberty Media Group
        common stockholders by the weighted average number of common
        shares outstanding of Liberty Group Stock during the period.

        The diluted earnings attributable to Liberty Media Group
        common stockholders per common and potential common share for
        the nine months ended September 30, 1998 and the three and
        nine months ended September 30, 1997 was computed by dividing
        earnings attributable to Liberty Media Group common
        stockholders by the weighted average number of common and
        dilutive potential common shares outstanding of Liberty Group
        Stock during the period. Shares issuable upon conversion of
        the Convertible Preferred Stock, Series C-Liberty Media Group
        ("Series C-Liberty Media Group Preferred Stock"), the Series
        D Preferred Stock, the Redeemable Convertible Liberty Media
        Group Preferred Stock, Series H (the "Series H Preferred
        Stock"), convertible notes payable and stock options and
        other performance awards have been included in the diluted
        calculation of weighted average shares to the extent that the
        assumed issuance of such shares would have been dilutive, as
        illustrated below. All of the outstanding shares of Series D
        Preferred Stock were redeemed effective April 1, 1998 (see
        note 10). Numerator adjustments for dividends and interest
        associated with the convertible preferred shares and
        convertible notes payable, respectively, were not made to the
        computation of diluted earnings per share as such dividends
        and interest are paid or payable by TCI Group.

        The diluted loss attributable to Liberty Media Group common
        stockholders per common share for the three months ended
        September 30, 1998 was computed by dividing the net loss
        attributable to Liberty Media Group common stockholders by
        the weighted average number of common shares outstanding of
        Liberty Group Stock during the period. Potential common
        shares were not included in the computation of weighted
        average shares outstanding because their inclusion would be
        anti-dilutive.

        No material changes in the weighted average outstanding
        shares or potential common shares occurred after September
        30, 1998.

                                                                    (continued)

                                     239
<PAGE>   241


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Information concerning the reconciliation of basic EPS to diluted EPS
         with respect to Liberty Group Stock is presented below:

<TABLE>
<CAPTION>

                                              Three months ended        Nine months ended
                                                 September 30,            September 30,
                                           ------------------------   -----------------------
                                              1998          1997         1998        1997
                                           ----------    ----------   ----------   ----------
                                              amounts in millions, except per share amounts

<S>                                        <C>          <C>           <C>          <C>
Basic EPS:
   Earnings (loss) attributable to
        common stockholders                $      (11)          162          227          184
                                           ==========    ==========   ==========   ==========
   Weighted average common shares                 357           368          357          371
                                           ==========    ==========   ==========   ==========
   Basic earnings (loss) per share
        attributable to common
        stockholders                       $     (.03)          .44          .64          .50
                                           ==========    ==========   ==========   ==========

Diluted EPS:
   Earnings (loss) attributable to
        common stockholders                $      (11)          162          227          184
                                           ==========    ==========   ==========   ==========
   Weighted average common shares                 357           368          357          371
                                           ----------    ----------   ----------   ----------
   Add dilutive potential common
        shares:
        Employee and director
           options and other
           performance awards                      --             5            8            5
        Convertible notes payable                  --            19           19           19
        Series C-Liberty Media
           Group Preferred Stock                   --             4            4            4
        Series D Preferred Stock                   --             6           --            6
        Series H Preferred Stock                   --             4            4            4
                                           ----------    ----------   ----------   ----------
        Dilutive potential common
           shares                                  --            38           35           38
                                           ----------    ----------   ----------   ----------
   Diluted weighted average common
        shares                                    357           406          392          409
                                           ==========    ==========   ==========   ==========
   Diluted earnings (loss) per
        share attributable to
        common stockholders                $     (.03)          .40          .58          .45
                                           ==========    ==========   ==========   ==========
</TABLE>

         (c)      TCI Ventures Group Stock

                  The basic earnings (loss) attributable to TCI Ventures Group
                  stockholders per common share for the three and nine months
                  ended September 30, 1998 and 1997 was computed by dividing
                  earnings (loss) attributable to TCI Ventures Group
                  stockholders by the weighted average number of common shares
                  outstanding of TCI Ventures Group Stock during the period.


                                                                    (continued)

                                     240
<PAGE>   242


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


                  The diluted earnings attributable to TCI Ventures Group
                  stockholders per common and potential common share for the
                  three and nine months ended September 30, 1998 and 1997 was
                  computed by dividing earnings attributable to TCI Ventures
                  Group stockholders by the weighted average number of common
                  and dilutive potential common shares outstanding of TCI
                  Ventures Group Stock during the period. Shares issuable upon
                  conversion of convertible notes payable and stock options and
                  other performance awards have been included in the diluted
                  calculation of weighted average shares to the extent that the
                  assumed issuance of such shares would have been dilutive, as
                  illustrated below. Numerator adjustments for interest
                  associated with convertible notes payable were not made to
                  the computation of diluted earnings per share as such
                  interest is paid or payable by TCI Group.

                  No material changes in the weighted average outstanding
                  shares or potential common shares occurred after September
                  30, 1998.

                  Information concerning the reconciliation of basic EPS to
                  dilutive EPS with respect to TCI Ventures Group Stock is
                  presented below:

<TABLE>
<CAPTION>

                                             Three months ended          Nine months ended
                                                September 30,              September 30,
                                           -----------------------    -----------------------
                                              1998         1997          1998        1997
                                           ----------   ----------    ----------   ----------
                                             amounts in millions, except per share amounts

<S>                                        <C>          <C>           <C>          <C>  
Basic EPS:
   Net earnings (loss)                     $    1,304         (126)          995         (315)
   Loss through the date of the
        TCI Ventures Exchange
        (note 1)                                   --          156            --          345
                                           ----------   ----------    ----------   ----------
   Earnings attributable to common
        stockholders                       $    1,304           30           995           30
                                           ==========   ==========    ==========   ==========

   Weighted average common shares                 423          410           422          410
                                           ==========   ==========    ==========   ==========
   Basic earnings per share
        attributable to common
        stockholders                       $     3.08          .07          2.36          .07
                                           ==========   ==========    ==========   ==========

Diluted EPS:
   Earnings attributable to common
        stockholders                       $    1,304           30           995           30
                                           ==========   ==========    ==========   ==========

   Weighted average common shares                 423          410           422          410
                                           ----------   ----------    ----------   ----------
   Add dilutive potential common
        shares:
        Employee and director
           options and other
           performance awards                       7            4             9            4
        Convertible notes payable                  21           21            21           21
                                           ----------   ----------    ----------   ----------
        Dilutive potential common
           shares                                  28           25            30           25
                                           ----------   ----------    ----------   ----------
   Diluted weighted average common
        shares                                    451          435           452          435
                                           ==========   ==========    ==========   ==========
   Diluted earnings per share
        attributable to common
        stockholders                       $     2.89          .07          2.20          .07
                                           ==========   ==========    ==========   ==========
</TABLE>

                                                                    (continued)

                                     241
<PAGE>   243


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(4)      Supplemental Disclosures to Consolidated Statements of Cash Flows


         Cash paid for interest was $905 million and $995 million for the nine
         months ended September 30, 1998 and 1997, respectively. Cash paid for
         income taxes was $39 million and $49 million for the nine months ended
         September 30, 1998 and 1997, respectively. In addition, the Company
         received income tax refunds of $76 million during the nine months
         ended September 30, 1998.

         Summary of cash paid for acquisitions and cash received in exchanges
         is as follows:

<TABLE>
<CAPTION>
                                                                       Nine months ended
                                                                         September 30,
                                                                    --------------------------
                                                                       1998           1997
                                                                    -----------    -----------
                                                                        amounts in millions
<S>                                                                 <C>            <C>    
Cash paid for acquisitions:
   Recorded value of assets acquired                                $      (906)        (1,878)
   Net liabilities assumed                                                   79            720
   Deferred tax liability recorded in acquisitions                          105            187
   Change in minority interests in equity of consolidated
      subsidiaries                                                         (215)            64
   Elimination of notes receivable from affiliates                          350             --
   TCI common stock and preferred stock held by acquired
      company                                                                --           (484)
   Common stock and preferred stock issued in acquisitions                  376          1,060
                                                                    -----------    -----------

        Cash paid for acquisitions                                  $      (211)          (331)
                                                                    ===========    ===========
Cash received in exchanges:
   Recorded value of assets acquired                                $       (72)          (392)
   Historical cost of assets exchanged                                       87            399
   Gain recorded on exchange of assets                                       30             11
                                                                    -----------    -----------
        Cash received in exchanges                                  $        45             18
                                                                    ===========    ===========
</TABLE>


         For a description of certain non-cash transactions, see note 8.

         The Company's restricted cash is primarily comprised of proceeds
         received in connection with certain asset dispositions. Such proceeds,
         which aggregated $353 million and $34 million at September 30, 1998
         and December 31, 1997, respectively, are designated to be reinvested
         in certain identified assets for income tax purposes. The Company's
         restricted cash also includes amounts held as collateral for interest
         payment obligations pursuant to certain bank credit facilities. Such
         amounts aggregated $17 million and $5 million at September 30, 1998
         and December 31, 1997, respectively.


                                                                    (continued)

                                     242
<PAGE>   244


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(5)      Investments in Affiliates

         The Company has various investments accounted for under the equity
         method. The following table includes the Company's carrying value of
         the Company's more significant investments:

<TABLE>
<CAPTION>

                                                      September 30,  December 31,
                                                          1998          1997
                                                       -----------    --------
                                                          amounts in millions
<S>                                                    <C>            <C>
USA Networks, Inc. ("USAI") formerly HSN, Inc. 
    ("HSNI") and related investments                   $    1,024          347
Cablevision Systems Corporation ("CSC")                     1,019           15
Telewest Communications plc ("Telewest")                      432          324
Sprint Spectrum Holding Company, L.P., 
     MinorCo, L.P. and PhillieCo, L.P.                        258          607
Flextech p.l.c. ("Flextech")                                  256          261
Various foreign equity investments (other than
    Telewest Communications plc, Flextech p.l.c. and
    Cablevision S.A.)                                         252          251
Cablevision S.A. ("Cablevision")                              225          239
InterMedia Capital Partners IV, L.P. and InterMedia
    Capital Management IV, L.P.                               224          262
Falcon Communications, L.P.                                   210           --
QVC, Inc.                                                     172          134
Parnassos, L.P.                                               121           --
</TABLE>


         Summarized unaudited combined results of operations for the Company's
         affiliates for the periods in which the Company used the equity method
         to account for such affiliates are as follows:

<TABLE>
<CAPTION>

                                     Nine months ended
Combined Operations                     September 30,  
                                --------------------------
                                    1998           1997
                                -----------   ------------
                                   amounts in millions
<S>                             <C>            <C>  
Revenue                         $    11,198          5,482
Operating expenses                  (10,179)        (5,293)
Depreciation and amortization        (2,177)        (1,023)
                                -----------    -----------
  Operating loss                     (1,158)          (834)


Interest expense                     (1,458)          (595)
Other, net                              (33)          (363)
                                -----------    -----------

  Net loss                      $    (2,649)        (1,792)
                                ===========    ===========
</TABLE>



                                                                    (continued)

                                     243
<PAGE>   245


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         On March 4, 1998, the Company contributed to CSC certain of its cable
         television systems serving approximately 830,000 customers in exchange
         for approximately 48.9 million newly issued CSC Class A common shares
         (as adjusted for a two-for-one stock split) (the "CSC Transaction").
         CSC also assumed and repaid approximately $574 million of debt owed by
         the Company to external parties and $95 million of debt owed to the
         Company. As a result of the CSC Transaction, the Company recognized a
         $506 million gain in the accompanying consolidated statement of
         operations for the nine months ended September 30, 1998. Such gain
         represents the excess of the $1,161 million fair value of the CSC
         Class A common shares received over the historical cost of the net
         assets transferred by the Company to CSC. The Company has also entered
         into letters of intent with CSC which provide for the Company to
         acquire a cable system in Michigan and an additional 3% of CSC's Class
         A common shares and for CSC to (i) acquire cable systems serving
         approximately 250,000 customers in Connecticut and (ii) assume $110
         million of the Company's debt. The ability of the Company to sell or
         increase its investment in CSC is subject to certain restrictions and
         limitations set forth in a stockholders agreement with CSC.

         At September 30, 1998, the Company owned 49,982,572 shares of CSC
         Class A common stock (as adjusted for a two-for-one stock split),
         which had a closing market price of $43.19 per share on such date.
         Such shares represented an approximate 33.2% equity interest in CSC's
         total outstanding shares and an approximate 9% voting interest in CSC
         in all matters except for (i) the election of directors, in which case
         the Company effectively has the right to designate two of CSC's
         directors, and (ii) any increase in authorized shares, in which case
         the Company has agreed to vote its interest in proportion with the
         public holders of CSC Class A common shares. During the nine months
         ended September 30, 1998, CSC accounted for $158 million of the
         Company's share of affiliate losses.

         The Company is a partner in a series of partnerships formed to engage
         in the business of providing wireless communications services, using
         the radio spectrum for broadband personal communications services
         ("PCS"), to residential and business customers nationwide, using the
         "Sprint"(R) brand (a registered trademark of Sprint Communications
         Company, L.P.) (the "PCS Ventures"). The PCS Ventures include Sprint
         Spectrum Holding Company, L. P. ("Sprint Spectrum") and MinorCo, L.P.
         (collectively, "Sprint PCS") and PhillieCo, L.P. ("PhillieCo"). The
         partners of Sprint PCS are subsidiaries of Sprint Corporation
         ("Sprint"), Comcast Corporation ("Comcast"), Cox Communications, Inc.
         ("Cox") and the Company. The partners of PhillieCo are subsidiaries of
         Sprint, Cox and the Company. The Company has a 30% partnership
         interest in Sprint PCS and a 35% partnership interest in PhillieCo.
         During the nine months ended September 30, 1998 and 1997, the PCS
         Ventures accounted for $510 million and $304 million, respectively, of
         the Company's share of affiliate losses.


                                                                    (continued)

                                     244
<PAGE>   246


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         From inception through September 1998, the four partners have
         contributed $4.6 billion to Sprint PCS (of which the Company
         contributed an aggregate of $1.4 billion). Sprint PCS's business plan
         will require additional capital financing prior to the end of 1998.
         Sources of funding for Sprint PCS's capital requirements may include
         vendor financing, public offerings or private placements of equity
         and/or debt securities, commercial bank loans and/or capital
         contributions from the Sprint PCS partners. However, there can be no
         assurance that any additional financing can be obtained on a timely
         basis, on terms acceptable to Sprint PCS or the Sprint PCS partners
         and within the limitations contained in the agreements governing
         Sprint PCS's existing debt.

         Additionally, the proposed budget for 1998 has not yet been approved
         by the Sprint PCS partnership board, although the board has authorized
         management to operate Sprint PCS in accordance with such budget. The
         Sprint PCS partners may mutually agree to make additional capital
         contributions. However, the Sprint PCS partners have no such
         obligation in the absence of an approved budget, and there can be no
         assurance the Sprint PCS partners will reach such an agreement or
         approve the 1998 proposed budget. In addition, the failure by the
         Sprint PCS partners to approve a business plan may impair the ability
         of Sprint PCS to obtain required financing. Failure to obtain any such
         additional financing or capital contributions from the Sprint PCS
         partners could result in the delay or abandonment of Sprint PCS's
         development and expansion plans and expenditures, the failure to meet
         regulatory requirements or other potential adverse consequences.

         Furthermore, the fact that the proposed budget for Sprint PCS for
         fiscal 1998 has not yet been approved by the Sprint PCS partnership
         board has resulted in the occurrence of a "Deadlock Event" under the
         Sprint PCS partnership agreement as of January 1, 1998. Under the
         Sprint PCS partnership agreement, if one of the Sprint PCS partners
         refers the budget issue to the chief executive officers of the
         corporate parents of the Sprint PCS partners for resolution pursuant
         to specified procedures and the issue remains unresolved, buy/sell
         provisions would be triggered, which may result in the purchase by one
         or more of the Sprint PCS partners of the interests of the other
         Sprint PCS partners, or, in certain circumstances, liquidation of
         Sprint PCS.


                                                                    (continued)

                                     245
<PAGE>   247


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         In May 1998, the Sprint PCS partners entered into a series of
         agreements pursuant to which the Company, Comcast and Cox would
         exchange their respective interests in Sprint PCS and PhillieCo for
         shares of a new class of tracking stock of Sprint which would track
         the performance of Sprint's newly created PCS Group (which would
         initially consist of Sprint PCS, PhillieCo and certain PCS licenses
         which are separately owned by Sprint). The consummation of such
         transactions is subject to a number of conditions, including the
         approval of such transactions by the stockholders of Sprint. If such
         transactions are consummated, the Company will initially hold shares
         of Sprint PCS Group stock (as well as certain additional securities of
         Sprint exercisable for or convertible into such securities)
         representing approximately 24% of the equity value of Sprint
         attributable to the PCS Group, subject to further dilution as a result
         of additional expected issuances of shares of Sprint PCS stock
         (including in connection with a proposed initial public offering of
         shares of Sprint PCS stock that may be consummated in connection with
         such transactions). In connection with the execution of such
         agreements, the Sprint PCS partners agreed to make up to $400 million
         in additional capital contributions (of which the Company's share is
         $120 million) to Sprint PCS pending the closing of such transactions.
         As of September 30, 1998, all of such additional capital contributions
         had been made to Sprint PCS. If the above-described transactions are
         consummated, the Company would begin to account for its investment in
         the Sprint PCS stock as an available-for-sale security. No assurance
         can be given that the above-described transactions will be
         consummated.

         On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
         was consummated. See note 7. On April 22, 1998, TCG completed a merger
         transaction with ACC Corp. ("ACC") in which ACC shares were exchanged
         with shares of TCG in the ratio of .90909 of a share of TCG stock for
         each share of ACC stock. The transaction was valued at approximately
         $1.1 billion. As a result of ACC's merger with TCG, TCI's interest in
         TCG was reduced to approximately 26%. In connection with the dilution
         of TCI's interest in TCG, TCI recorded a non-cash gain of $201 million
         (before deducting deferred income tax expense of $71 million).

         During the nine months ended September 30, 1997, TCG issued 4,857,083
         shares of its Class A common stock for certain acquisitions. The total
         consideration paid by TCG through the issuance of common stock was
         approximately $93 million. As a result of such share issuances, the
         Company's ownership interest in TCG was reduced to approximately 30%.
         Accordingly, the Company recognized a gain of $21 million (before
         deducting deferred income tax expense of approximately $8 million) as
         a result of such dilution.

                                                                    (continued)

                                     246
<PAGE>   248


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         In February 1998, pursuant to an Investment Agreement among Universal
         Studios, Inc. ("Universal"), HSNI, Home Shopping Network, Inc. ("HSN")
         and Liberty Media Group, dated as of October 1997 and amended and
         restated as of December 1997, HSNI consummated a transaction (the
         "Universal Transaction") through which USA Networks Partners, Inc., a
         subsidiary of Universal, sold its 50% interest in USAI, a New York
         general partnership, to HSNI and Universal contributed the remaining
         50% interest in USAI and its domestic television production and
         distribution operations to HSNI. Subsequent to these transactions,
         HSNI was renamed USAI. In connection with the Universal Transaction,
         Universal, USAI, HSN and Liberty Media Group became parties to a
         number of other agreements relating to, among other things, (i) the
         management of USAI, (ii) the purchase and sale or other transfer of
         voting securities of USAI, including securities convertible or
         exchangeable for voting securities of USAI, and (iii) the voting of
         such securities.

         At the closing of the Universal Transaction, Universal was issued
         approximately 6 million shares of USAI's Class B Common Stock,
         approximately 7 million shares of USAI's Common Stock and
         approximately 109 million common equity shares ("LLC Shares") of USANi
         LLC, a limited liability company formed to hold all of the businesses
         of USAI and its subsidiaries, except for its broadcasting business and
         its equity interest in Ticketmaster Group, Inc. and received a cash
         payment of $1.3 billion. Pursuant to an exchange agreement relating to
         the LLC Shares (the "LLC Exchange Agreement"), approximately 74
         million of the LLC Shares issued to Universal are each exchangeable
         for one share of USAI's Class B Common Stock and the remainder of the
         LLC Shares issued to Universal are each exchangeable for one share of
         USAI's Common Stock.

         At the closing of the Universal Transaction, Liberty Media Group was
         issued approximately 1.2 million shares of USAI's Class B Common
         Stock, representing all of the remaining shares of USAI's Class B
         Common Stock issuable pursuant to Liberty Media Group's contractual
         right to receive shares of Class B common stock of USAI upon the
         occurrence of certain events. Of such shares, 800,000 shares of Class
         B Common Stock were contributed to BDTV IV INC. (collectively with
         BDTV INC., BDTV II INC. and BDTV III INC., "BDTV"), a newly-formed
         entity having substantially the same terms as BDTV INC., BDTV II INC.
         and BDTV III INC. (with the exception of certain transfer
         restrictions) in which Liberty Media Group owns over 99% of the equity
         and none of the voting power (except for protective rights with
         respect to certain fundamental corporate actions) and Barry Diller
         owns less than 1% of the equity and all of the voting power. Liberty
         Media Group accounts for its investment in BDTV under the equity
         method. In addition, Liberty Media Group purchased 10 LLC Shares at
         the closing of the Universal Transaction for an aggregate purchase
         price of $200. 

                                                                    (continued)

                                     247
<PAGE>   249


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         On June 24, 1998, USAI consummated the previously announced agreement
         to acquire the remaining stock of Ticketmaster Group, Inc. which it
         did not previously own through a tax-free merger (the "Ticketmaster
         Transaction"). In connection with the dilution of Liberty Media
         Group's ownership interest that resulted from the issuance of common
         stock by USAI in the Universal Transaction and the Ticketmaster
         Transaction, the Company recorded a $64 million increase to additional
         paid-in capital (after deducting a deferred tax liability of $42
         million) and an increase to investment in affiliates of $106 million.
         No gain was recognized in the consolidated statements of operations
         due primarily to Liberty Media Group's commitment to purchase
         additional equity interests in USAI.

         In connection with the Universal Transaction, each of Universal and
         Liberty Media Group was granted a preemptive right with respect to
         future issuances of USAI's capital stock, subject to certain
         limitations, to maintain their respective percentage ownership
         interests in USAI that they had prior to such issuances. In connection
         with such right, on June 4, 1998, Liberty Media Group purchased
         approximately 4.7 million shares of USAI's capital stock at $20 per
         share as a result of the conversion by USAI of certain convertible
         debentures whereby USAI common stock was issued to retire such
         debentures. Additionally, on June 30 1998, Liberty Media Group
         contributed $300 million in cash to USANi LLC in exchange for an
         aggregate of 15 million LLC Shares. Liberty Media Group's cash
         purchase price was increased at an annual interest rate of 7.5%
         beginning from the date of the closing of the Universal Transaction
         through the date of Liberty Media Group's purchase of such securities.
         In addition, on July 27, 1998, Liberty Media Group purchased
         approximately 7.9 million LLC Shares at $20 per share as a result of
         the issuance of common stock by USAI in the Ticketmaster Transaction.
         Pursuant to the LLC Exchange Agreement, each LLC Share issued or to be
         issued to Liberty Media Group is exchangeable for one share of USAI's
         Common Stock.

         At September 30, 1998, Liberty Media Group held 24.4 million shares of
         USAI's common stock through BDTV and 5.2 million shares of USAI's
         common stock directly. Additionally, Liberty Media Group held 22.9
         million LLC Shares at September 30, 1998 as well as shares of HSN's
         common stock which are exchangeable for 16.6 million shares of USAI's
         common stock. Liberty Media Group's direct ownership of USAI is
         restricted by order of the Federal Communications Commission ("FCC").
         Assuming Liberty Media Group had exchanged its shares in HSN and its
         LLC Shares for USAI common stock, Liberty Media Group would have held
         at September 30, 1998, 69.1 million shares or 21% of USAI, including
         shares held through BDTV. USAI's common stock had a closing market
         value of $19.438 per share on September 30, 1998.

         At September 30, 1998 Tele-Communications International, Inc.
         ("TINTA"), a majority-owned subsidiary of the Company, indirectly
         owned through its 50% ownership interest in TW Holdings, L.L.C.,
         463,438,960 or 22% of the issued and outstanding Telewest ordinary
         shares. The reported closing price on the London Stock Exchange of
         Telewest ordinary shares was (pound)1.35 ($2.30) per share at
         September 30, 1998. Telewest currently operates and constructs cable
         television and telephone systems in the United Kingdom ("UK").
         Telewest accounted for $90 million and $111 million of the Company's
         share of its affiliates' losses during the nine months ended September
         30, 1998 and 1997, respectively.


                                                                    (continued)

                                     248
<PAGE>   250


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Effective September 1, 1998, Telewest and General Cable PLC ("General
         Cable") consummated a merger (the "General Cable Merger") in which
         holders of General Cable received 1.243 new Telewest shares and
         (pound)0.65 ($1.11) in cash for each share of General Cable. In
         addition, holders of American Depository shares of General Cable
         ("General Cable ADS") (each representing five General Cable shares)
         received 6.215 new Telewest shares and (pound)3.25 ($5.53) in cash 
         for each share of General Cable ADS. Based upon Telewest's closing 
         share price of (pound)0.89 ($1.51) on April 14, 1998, the General 
         Cable Merger was valued at approximately (pound)649 million ($1.1 
         billion).

         The cash portion of the General Cable Merger was financed through an
         offer to qualifying Telewest shareholders for the purchase of
         approximately 261 million new Telewest shares at a price of
         (pound)0.925 ($1.57) per share (the "Telewest Offer"). TINTA
         subscribed to 84,688,960 Telewest ordinary shares at an aggregate cost
         of (pound)78 million ($133 million) in connection with the Telewest
         Offer. Immediately following the Telewest Offer, TINTA owned 28% of
         the issued and outstanding Telewest ordinary shares.

         In connection with the General Cable Merger, TINTA also converted its
         entire holdings of Telewest convertible preference shares (132,638,250
         shares) into Telewest ordinary shares. As a result of the General
         Cable Merger, TINTA's ownership interest in Telewest decreased to 22%.
         In connection with such dilution, TINTA recognized a non-cash gain of
         $58 million (excluding related tax expense of $20 million) during the
         third quarter of 1998.

         As a result of Telewest's issuance of U.S. dollar denominated
         debentures (the "Telewest Debentures"), changes in the exchange rate
         used to translate the U.S. dollar into the UK pound sterling will
         cause Telewest to experience realized and unrealized foreign currency
         transaction gains and losses throughout the term of the Telewest
         Debentures, which mature in 2006 and 2007, if not redeemed earlier.
         During the nine months ended September 30, 1998 and 1997, Telewest
         experienced foreign currency transaction gains (losses) of (pound)11
         million ($19 million using the applicable exchange rate) and
         (pound)(33 million) ($55 million using the applicable exchange rate),
         respectively, resulting from the translation of the Telewest
         Debentures into UK pounds sterling and the adjustment of a related
         foreign currency option contract to market value.

         On October 9, 1997, TINTA sold a portion of its 51% interest in
         Cablevision, a company engaged in the multi-channel video distribution
         business in Buenos Aires, Argentina, to unaffiliated third parties
         (the "Buyers") for cash proceeds of $120 million. In addition, on
         October 9, 1997, Cablevision issued 3,541,829 shares of stock in the
         aggregate to the Buyers for $320 million. The above transactions,
         (collectively, the "Cablevision Sale") reduced TINTA's interest in
         Cablevision to 26%. TINTA recognized a gain of $49 million on the
         Cablevision Sale (excluding related tax expense of $17 million). TINTA
         continues to manage Cablevision pursuant to a renewable five-year
         management contract that was entered into in connection with the
         Cablevision Sale, and certain material corporate transactions of
         Cablevision will require TINTA's approval, so long as TINTA maintains
         at least a 16% interest in Cablevision. As a result of the Cablevision
         Sale, effective October 1, 1997, TINTA ceased to consolidate
         Cablevision and began to account for Cablevision using the equity
         method of accounting. Cablevision accounted for $14 million of the
         Company's share of its affiliates' losses during the nine months ended
         September 30, 1998.

         On November 9, 1998, Cablevision and the lenders under its $1.1 billion
         loan facility agreed to an extension of $950 million of outstanding
         borrowings under the facility until December 15, 1998. At that time,
         outstanding borrowings are to be refinanced through (i) $550 million of
         indebtedness, which is expected to be issued under Cablevision's medium
         term note program, and (ii) $400 million of support from Cablevision's
         shareholder's, including TINTA. TINTA's portion of such support
         aggregates approximately $85 million, and will be made through (i) a
         $42 million capital contribution to Cablevision and (ii) the guarantee
         of senior indebtedness of Cablevision and/or subordinated loans from
         TINTA to Cablevision in the aggregate amount of $42 million.

         During the fourth quarter of 1998, one of the Cablevision shareholders
         exercised a put right that, under certain circumstances, could require
         TINTA to purchase a portion of such shareholder's ownership interest
         for cash consideration of up to $36 million, one-third of which would
         be paid on December 15, 1998 and the remaining amount would be paid in
         four semi-annual installments. Additionally, the Cablevision
         shareholders' agreement contains a buy-sell provision that, under
         certain circumstances, could require TINTA to purchase other
         shareholders' ownership interests.

                                                                     (continued)
                                     249
<PAGE>   251


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         In addition to Telewest and Cablevision, the Company has an equity
         method investment in Flextech, an entity engaged in the distribution
         and production of programming for multichannel video distribution
         systems in the UK, and other less significant equity method
         investments in video distribution and programming businesses located
         in the UK, other parts of Europe, Asia, Latin America and certain
         other foreign countries. In the aggregate, such other foreign equity
         method investments accounted for $72 million and $73 million of the
         Company's share of its affiliates' losses during the nine months ended
         September 30, 1998 and 1997, respectively.

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

(6)      Investment in Time Warner

         Liberty Media Group holds 57 million shares of a separate series of
         Time Warner common stock with limited voting rights (the "TW Exchange
         Stock"). Holders of the TW Exchange Stock are entitled to one
         one-hundredth (l/100th) of a vote for each share with respect to the
         election of directors. Holders of the TW Exchange Stock will not have
         any other voting rights, except as required by law or with respect to
         limited matters, including amendments of the terms of the TW Exchange
         Stock adverse to such holders. Subject to the federal communications
         laws, each share of the TW Exchange Stock will be convertible at any
         time at the option of the holder on a one-for-one basis for a share of
         Time Warner common stock. Holders of TW Exchange Stock are entitled to
         receive dividends ratably with the Time Warner common stock and to
         share ratably with the holders of Time Warner common stock in assets
         remaining for common stockholders upon dissolution, liquidation or
         winding up of Time Warner. See note 9.

         On June 24, 1997, Liberty Media Group granted Time Warner an option,
         expiring October 10, 2002, to acquire the business of Southern
         Satellite Systems, Inc. ("Southern") and certain of its subsidiaries
         (together with Southern, the "Southern Business") through a purchase
         of assets (the "Southern Option"). Liberty Media Group received 6.4
         million shares of TW Exchange Stock valued at $306 million in
         consideration for the grant. In September 1997, Time Warner exercised
         the Southern Option. Pursuant to the Southern Option, Time Warner
         acquired the Southern Business, effective January 1, 1998 for $213
         million in cash. The Company recognized a $515 million pre-tax gain in
         connection with such transactions in the first quarter of 1998.

(7)      Investment in AT&T

         On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
         was consummated. As a result of such merger, TCI received in exchange
         for its 26% interest in TCG, approximately 47 million shares of AT&T
         Common Stock. TCI recognized a gain of $2.3 billion (excluding related
         tax expense of $883 million) on such transaction based on the
         difference between the carrying value of TCI's interest in TCG and the
         fair value of the AT&T Common Stock received. See note 5. TCI accounts
         for its ownership interest in AT&T Common Stock as an
         available-for-sale security. See note 2. 

                                                                    (continued)


                                     250
<PAGE>   252


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(8)      Acquisitions and Dispositions

         In addition to the CSC Transaction described in note 5, the Company
         completed, during the first nine months of 1998, six transactions
         whereby the Company contributed cable television systems serving in
         the aggregate approximately 1,224,000 customers to six separate joint
         ventures (collectively, the "1998 Joint Ventures") in exchange for
         non-controlling ownership interests in each of the 1998 Joint
         Ventures, and the assumption and repayment by the 1998 Joint Ventures
         of debt owed by the Company to external parties aggregating $323
         million and intercompany debt owed to the Company aggregating $1,533
         million. The Company has agreed to take certain steps to support
         compliance by certain of the 1998 Joint Ventures with their payment
         obligations under certain debt instruments, up to an aggregate
         contingent commitment of $980 million. In light of such contingent
         commitments, the Company has deferred any gains on the formation of
         such 1998 Joint Ventures. Accordingly, the Company has recorded
         deferred gains aggregating $163 million and recognized net gains
         aggregating $263 million in connection with the formation of the 1998
         Joint Ventures. The deferred gains will not be recognized until such
         time as the Company's contingent commitments are eliminated. The
         Company uses the equity method of accounting to account for its
         investments in the 1998 Joint Ventures. The CSC Transaction (see note
         5) and the formation of the 1998 Joint Ventures are collectively
         referred to herein as the "1998 Contribution Transactions."

         Including the 1998 Contribution Transactions, the Company, as of
         September 30, 1998, has, since January 1, 1997, contributed, or signed
         agreements or letters of intent to contribute within the next twelve
         months, certain cable television systems (the "Contributed Cable
         Systems") serving approximately 3.9 million basic customers to joint
         ventures in which the Company will retain non-controlling ownership
         interests (the "Contribution Transactions"). Following the completion
         of the Contribution Transactions, the Company will no longer
         consolidate the Contributed Cable Systems. Accordingly it is
         anticipated that the completion of the Contribution Transactions, as
         currently contemplated, will result in an aggregate estimated
         reduction (based on actual amounts with respect to the 1998
         Contribution Transactions and currently contemplated amounts with
         respect to the pending Contribution Transactions) to the Company's
         debt of $4.8 billion and aggregate estimated reductions (based on 1997
         amounts) to the Company's annual revenue and annual operating income
         before depreciation, amortization and other non-cash items and stock
         compensation of $1.8 billion and $815 million, respectively. No
         assurance can be given that any of the pending Contribution
         Transactions will be consummated.

         Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
         contributed the assets, obligations and operations of its retail
         C-band satellite business to Superstar/Netlink Group LLC ("SNG") in
         exchange for an approximate 20% interest in SNG. As a result of this
         transaction, the Company's ownership interest in SNG decreased from
         100% to approximately 80% and the Company recognized a gain of $38
         million (before deducting deferred income tax expense of $15 million).
         Turner Vision's contribution to SNG was accounted for as a purchase,
         and the $61 million excess of the purchase price over the fair value
         of the net tangible assets acquired was recorded as an intangible asset
         and is being amortized over five years.


                                                                    (continued)

                                     251
<PAGE>   253


                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         On June 11, 1998, United Video Satellite Group, Inc. ("UVSG") and The
         News Corporation Limited ("News Corp.") announced the signing of a
         definitive agreement whereby News Corp.'s TV Guide properties will be
         combined with UVSG to create a platform for offering television guide
         services to consumers and advertising. As part of this combination, a
         unit of News Corp. will receive consideration consisting of $800
         million in cash and 60 million shares of UVSG's stock (as adjusted for
         a two-for-one stock split), including 22,503,412 shares of its Class A
         common stock and 37,496,588 shares of its Class B common stock (as
         adjusted for a two-for-one stock split). As a result of this
         transaction, and another pending transaction, News Corp., TCI and
         UVSG's public stockholders will own on an economic basis approximately
         40%, 44% (of which 34% will be attributable to TCI Ventures Group and
         10% will be attributable to Liberty Media Group) and 16%, respectively,
         of UVSG. Following the transaction, News Corp. and TCI will each have
         approximately 48% of the voting power of UVSG's outstanding stock. TCI
         will begin to account for its interest in UVSG under the equity method
         of accounting following consummation of this transaction. Consummation
         of this transaction is subject to UVSG shareholder approval and certain
         regulatory approvals. Accordingly, no assurance can be given that this
         transaction will be consummated.

         On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of
         Liberty Media Group, which held non-voting class C common stock of
         International Family Entertainment, Inc. ("IFE") ("Class C Stock") and
         $23 million of IFE 6% convertible secured notes due 2004, convertible
         into Class C Stock, ("Convertible Notes"), contributed its Class C
         Stock and Convertible Notes to Fox Kids Worldwide, Inc. ("FKW") in
         exchange for a new series of 30 year non-convertible 9% preferred
         stock of FKW with a stated value of $345 million (the "FKW Preferred
         Stock"). As a result of the exchange, Liberty Media Group recognized a
         pre-tax gain of approximately $304 million during the third quarter of
         1997.

(9)      Debt

<TABLE>
<CAPTION>

Debt is summarized as follows:
                                                     September 30, December 31,
                                                         1998         1997
                                                     -----------   ------------
                                                         amounts in millions

<S>                                                  <C>           <C>  
Notes payable (a)                                    $     9,474         9,017
Bank credit facilities (b)                                 4,063         5,233
Commercial paper                                             830           533
Convertible notes (c)                                         40            40
Capital lease obligations and other debt                     488           427