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


                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D. C. 20549

   
                                    FORM 10-K/A
                                 (Amendment #1)
    

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997

                                       OR

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

Commission File Number 0-20421


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


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

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

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

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

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

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

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

         The aggregate market value of the voting stock held by nonaffiliates of
Tele-Communications, Inc., computed by reference to the last sales price of such
stock, as of the close of trading on January 30, 1998, was approximately
$21,264,000,000.

         The number of shares outstanding of Tele-Communications, Inc.'s common
stock (net of treasury shares and shares held by subsidiaries), as of January
30, 1998, was:

                 Tele-Communications, Inc. Series A TCI Group common stock -
                 480,386,628 shares,
                  Tele-Communications, Inc. Series B TCI Group common stock - 
                  38,882,055 shares,
             Tele-Communications, Inc. Series A Liberty Media Group common stock
             - 325,033,596 shares, Tele-Communications, Inc. Series B Liberty
             Media Group common stock - 31,681,124 shares,.
           Tele-Communications, Inc. Series A TCI Ventures Group common stock -
              390,013,394 shares, and Tele-Communications, Inc. Series B TCI
              Ventures Group common stock - 32,100,604 shares.

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

      Portions of the Registrant's definitive Proxy Statement to be used in
      ---------------------------------------------------------------------
    connection with the 1998 Annual Meeting of Stockholders are incorporated
    ------------------------------------------------------------------------
                   by reference in Part III of this Form 10-K.
                   -------------------------------------------


<PAGE>   2
   
                                   SIGNATURES

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




                                                   TELE-COMMUNICATIONS, INC.


Date:  January 7, 1999                      By: /s/ Stephen M. Brett
                                               ------------------------------
                                                    Stephen M. Brett
                                                      Executive Vice President,
                                                       General   Counsel   and
                                                         Secretary  
    

<PAGE>   3



                                     PART I.

Item 1.  Business.

         (a)      General Development of Business

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

         On August 3, 1995, TCI issued 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"). For additional information concerning the Liberty Media Group, see
"Narrative Description of Business - Liberty Media Group."

         On August 28, 1997, the stockholders of TCI authorized the Board of
Directors of TCI (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 "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. For additional information concerning the TCI Ventures
Group, see "Narrative Description of Business - TCI Ventures Group."

         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 retroactively restated to reflect the 1998 Liberty Stock Dividend and the
Ventures Stock Dividend.


                                      I-1
<PAGE>   4


         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 Tele-Communications, Inc. Series
A TCI Group Common Stock, par value $1.00 per share (the "TCI Group Series A
Stock") and up to 16,266,400 shares of 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. 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 (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. For
additional information concerning the TCI Group, see "Narrative Description of
Business - TCI 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, 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 did not affect the ownership or the respective legal title
to assets or responsibility for liabilities of TCI or any of its subsidiaries.
TCI and its subsidiaries each continue to be responsible for their respective
liabilities. Holders of TCI Group Stock, 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 issuance of Liberty Group Stock and TCI
Ventures Group Stock did not affect the rights of creditors of TCI.

         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 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.


                                      I-2
<PAGE>   5


   
         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.
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").

         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.
    

                                      I-3
<PAGE>   6

   

         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 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. 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.
    

         In April 1997, At Home Corporation ("@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,
TCI's economic interest in @Home, which is attributed to TCI Ventures Group,
decreased from 43% to 39%, which economic interest represents an approximate 72%
voting interest. In October 1997, @Home entered into an exclusive distribution
arrangement with Cablevision Systems Corporation ("CSC") as described below and
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 are immediately exercisable,
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 it controlled affiliates
to CSC, CSC's parent or their controlled affiliates.


                                      I-4
<PAGE>   7


         On July 11, 1997, TCI Music, Inc. ("TCI Music") merged with DMX, Inc.
("DMX") 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 connection with
such 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. 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.

         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. Liberty Media 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.

         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") ("IFE Class C Stock") and $23 million of IFE
6% convertible secured notes due 2004, convertible into IFE Class C Stock, ("IFE
Convertible Notes"), contributed its IFE Class C Stock and IFE 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.

         Through October 9, 1996, TCI owned shares of Turner Broadcasting
System, Inc. ("TBS") common stock and shares of TBS preferred stock that were
convertible into TBS common stock. On October 10, 1996, Time Warner, Inc. ("Time
Warner") and TBS consummated a merger (the "TBS/Time Warner Merger") whereby TBS
shareholders, including the Company, received Time Warner common shares.

         In connection with the TBS/Time Warner Merger, 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 together with its wholly-owned
subsidiaries, distributed 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. Subsequent to the TBS/Time Warner Merger, Liberty Media
Group and Time Warner revised the structure of the Contract Option. 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 a separate series of Time Warner Common Stock
with limited voting rights designated as Series LMCN-V Common Stock (the "TW
Exchange Stock") valued at $306 million in consideration for such grant. In
September 1997, Time Warner exercised the option. Pursuant to the Southern
Option, effective January 1, 1998, Time Warner purchased the Southern Business
for $213.3 million, which was paid in cash together with the assumption of
certain liabilities on January 2, 1998.


                                      I-5
<PAGE>   8


         On March 4, 1998, the Company contributed to 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 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 basic 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.

         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 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
aggregate estimated reductions (based on 1997 amounts) to the Company'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.

         Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In particular, some of the statements contained
under the captions "Business" and "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations," are forward-looking. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of 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 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.



                                      I-6
<PAGE>   9


         A glossary of selected defined terms used in Item 1 through Item 7 of
this Report is included herein as Appendix A.

         (b)      Financial Information about Industry Segments

         The Company has significant operations principally in two industry
segments: cable and communications services and programming services. The
Company's domestic cable and communications businesses and assets are included
in TCI Group, and the Company's domestic programming businesses 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. No individual
business or asset within TCI Ventures Group constitutes a reportable segment of
the Company as contemplated by Statement of Financial Accounting Standard No.
131, Disclosures about Segments of an Enterprise and Related Information.
Financial information related to the Company's industry segments can be found in
note 17 to the Company's consolidated financial statements found in Part II of
this report.

         (c)      Narrative Description of Business

         TCI GROUP

         Domestic Cable and Communications

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

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

         At December 31, 1997, approximately 59% of TCI Group's cable television
systems had bandwidth capacities ranging from 450 megahertz to 750 megahertz.
The Company's cable television systems generally carry up to 78 analog channels.
Compressed digital video technology converts on average as many as twelve analog
signals (now used to transmit video and voice) into a digital format and
compresses such signals (which is accomplished primarily by eliminating the
redundancies in television imagery) into the space normally occupied by one
analog signal. The digitally compressed signal is uplinked to a satellite, which
retransmits the signal to a customer's satellite dish or to a cable system's
headend to be distributed, via optical fiber and coaxial cable, to the
customer's home. At the home, a set-top video terminal converts the digital
signal into analog channels that can be viewed on a normal television set.


                                      I-7
<PAGE>   10


         TCI Group began offering digital cable television service to selected
markets in 1997. In February 1998, TCI Group initiated broader marketing efforts
that are intended to result in an increase in the number of digital cable
television customers. Such marketing efforts will encompass multi-media, product
enhancements, sales promotions and sales incentives. As of March 17, 1998,
digital video services were available to approximately 9.8 million of TCI
Group's customers. Such amount excludes approximately 860,000 basic customers
who had obtained access to digital cable television from certain cable
television systems prior to the contribution of such cable systems to CSC and
another joint venture during the first quarter of 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 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, 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 digital set-top devices.

         Service Charges. TCI Group offers a limited "basic service"
("Basic-TV") (primarily comprised of local broadcast signals and public,
educational and governmental ("PEG") access channels) and an "expanded tier"
(primarily comprised of specialized programming services, in such areas as
health, family entertainment, religion, news, weather, public affairs,
education, shopping, sports and music). The monthly fee for basic service
generally ranges from $9.00 to $12.00, and the monthly service fee for the
expanded tier generally ranges from $13.00 to $19.00. TCI Group offers "premium
services" (referred to in the cable television industry as "Pay-TV" and
"pay-per-view") to its customers. Such services consist principally of feature
films, as well as live and taped sports events, concerts and other programming.
TCI Group offers Pay-TV services for a monthly fee generally ranging from $9.00
to $15.00 per service, except for certain movie or sports services (such as
various RSNs and certain Pay-TV channels) offered at $1.00 to $8.00 per month,
pay-per-view movies offered separately at $3.00 to $4.00 per movie and certain
pay-per-view events offered separately at $6.00 to $50.00 per event. Charges are
usually discounted when multiple Pay-TV services are ordered. In most markets,
customers may also elect to subscribe to digital video services comprised of up
to 36 video and 10 audio channels featuring additional specialized programming
and premium services at an average incremental monthly charge of $10.

         As further enhancements to their cable services, customers may
generally rent converters or converters with remote control devices for a
monthly charge ranging from $.89 to $4.00 each, as well as purchase a channel
guide for a monthly charge ranging from $1.50 to $2.00. Also a nonrecurring
installation charge (which is limited by rules of the Federal Communications
Commission ("FCC") which regulate hourly service charges for each individual
cable system) ranging from $20.00 to $39.00 is usually charged.


                                      I-8
<PAGE>   11


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

         The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act") and the Telecommunications Act of 1996 (the "1996 Telecom
Act"), together with the 1992 Cable Act (the "Cable Acts"), established rules
under which TCI Group's basic service and expanded tier service rates and
equipment and installation charges are regulated if a complaint is filed or if
the appropriate franchise authority is certified. For additional information see
Regulation and Legislation below.

         Customer Data. TCI Group operates its cable television systems either
through its operating divisions or through certain other subsidiaries of TCI
attributed to TCI Group. Domestic Basic-TV cable customers served by TCI Group
are summarized as follows (amounts in millions):

<TABLE>
<CAPTION>
                                                        Basic-TV customers at December 31,
                                               -------------------------------------------------        
                                                1997       1996       1995      1994       1993
                                               ------     ------     ------    ------     ------ 
<S>                                          <C>        <C>        <C>        <C>        <C>
Managed through TCI Group's operating        
   divisions                                    14.2       13.4       11.9       10.7        9.8
Other non-managed subsidiaries of TCI 
   attributed to TCI Group                       0.2        0.5        0.6        0.5        0.5
                                             -------    -------    -------    -------    -------

                                                14.4       13.9       12.5       11.2       10.3
                                             =======    =======    =======    =======    =======
</TABLE>

         TCI Group operates cable television systems throughout the United
States.

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

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

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


                                      I-9
<PAGE>   12


         In connection with a renewal of a franchise, the franchising authority
may require the cable operator to comply with different and more stringent
conditions than those originally imposed, subject to the provisions of the 1984
Cable Act and other applicable federal, state and local law. The 1984 Cable Act,
as supplemented by the renewal provisions of the 1992 Cable Act, establishes an
orderly process for franchise renewal which protects cable operators against
unfair denials of renewals when the operator's past performance and proposal for
future performance meet the standards established by the 1984 Cable Act. 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.

         Most of TCI Group's present franchises had initial terms of
approximately 10 to 15 years. The duration of TCI Group's outstanding franchises
presently varies from a period of months to an indefinite period of time.
Approximately 1,200 of TCI Group's franchises expire within the next five years.
This represents approximately twenty-five percent of the franchises held by TCI
Group and involves approximately 4.8 million basic customers.

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

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

         DBS. During 1997, TCI Group continued to experience a competitive
impact from medium power and high power direct broadcast satellites ("DBS") that
use high frequencies to transmit signals that can be received by dish antennas
("HSDs") much smaller in size than traditional HSDs. Primestar Partners, L.P.
("Primestar") distributes a multi-channel programming service via a medium power
communications satellite to HSDs of approximately 27 inches to 36 inches in
diameter. Prior to the spin-off of TCI Group's interests in its digital
satellite businesses, TCI Group provided this satellite delivered service.
DirecTv, Inc., United States Satellite Broadcasting Corporation and EchoStar
Communications Corp. ("EchoStar"), transmit from high power satellites and
generally use smaller dishes to receive their signals. 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.

         DBS has advantages as an alternative means of distributing video
signals to the home. Among the advantages are that the capital investment
(although initially high) for the satellite and uplinking segment of a DBS
system is fixed and does not increase with the number of customers receiving
satellite transmissions; that DBS is not currently subject to local regulation
of service and prices or required to pay franchise fees; and that the capital
costs for the ground segment of a DBS system (the reception equipment) are
directly related to, and limited by, the number of service customers.


                                      I-10
<PAGE>   13


         The primary disadvantage of DBS is its inability to provide local
broadcast television stations to customers in their local market. However,
EchoStar and other potential DBS providers have announced their intention to
retransmit local broadcast television stations back into a customer's local
market. Both Congress and the U.S. Copyright Office are currently reviewing
proposals to allow such transmission and it is possible that in the near future,
DBS systems will be retransmitting local television broadcast signals back into
local television markets. Additional DBS disadvantages presently include a
limited ability to tailor the programming package to the interests of different
geographic markets; signal reception being subject to line-of-sight angles; and
technology which requires a customer to rent or own one set-top box (which is
significantly more expensive than a cable converter) for each television on
which they want to view DBS programming.

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

         Telephone Company Entry. The 1996 Telecom Act eliminated the statutory
and regulatory restrictions that prevented local telephone companies from
competing with cable operators for the provision of video services by any means.
See Regulation and Legislation below. The 1996 Telecom Act allows local
telephone companies, including the regional bell operating companies ("RBOCs"),
to compete with cable television operators both inside and outside their
telephone service areas. TCI Group expects that it will face substantial
competition from telephone companies for the provision of video services,
whether it is through wireless cable, or through upgraded telephone networks.
TCI Group assumes that all major telephone companies have already entered or may
enter the business of providing video services. TCI Group is aware that
telephone companies have already built, or are in the process of building,
competing cable system facilities in a number of TCI Group's franchise areas.
Most major telephone companies have greater financial resources than TCI Group,
and the 1992 Cable Act ensures that telephone company providers of video
services will have access to acquiring all of the significant cable television
programming services. The specific manner in which telephone company provision
of video services will be regulated is described under Regulation and
Legislation below.

         Although long distance telephone companies are not prohibited from
providing video services, they have historically not been providers of such
services in competition with cable systems. However, such companies may prove to
be a source of competition in the future. The long distance companies are
expected to expand into local markets with local telephone and other offerings
(including video services) in competition with the RBOCs.

         Utility Company Entry. The 1996 Telecom Act eliminates certain federal
restrictions on utility holding companies and thus frees all utility companies
to provide cable television services. TCI Group expects this could result in
another source of significant competition in the delivery of video services. As
an example, in the Washington, D.C. metropolitan market, the local power utility
has entered into a partnership with an experienced cable television and open
video system company and is proposing to provide video and telecommunications
services throughout the Washington, D.C. metropolitan market.


                                      I-11
<PAGE>   14


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

         Cable System Overbuilds. During 1997, there has been a significant
increase in the number of cities that have constructed their own cable
television systems in a manner similar to city-provided utility services. These
systems typically will compete directly with the existing cable operator without
the burdens of franchise fees or other local regulation. Although the total
number of municipal overbuild cable systems remains relatively small, 1997 would
indicate an increasing trend in cities authorizing such direct municipal
competition with cable operators. Within the cable television industry, cable
operators may compete with other cable operators or others seeking franchises
for competing cable television systems at any time during the terms of existing
franchises or upon expiration of such franchises in expectation that the
existing franchise will not be renewed. The 1992 Cable Act promotes the granting
of competitive franchises.

         Private Cable. TCI Group also competes with Master Antenna Television
("MATV") systems and Satellite MATV ("SMATV") systems, which provide
multi-channel program services directly to hotel, motel, apartment, condominium
and similar multi-unit complexes within a cable television system's franchise
area, generally free of any regulation by state and local governmental
authorities. Further, the FCC in 1997, adopted new rules that restrict the
ability of cable operators to maintain ownership of cable wiring inside
multi-unit buildings, thereby making it less expensive for SMATV competitors to
reach those customers. See Regulation and Legislation below.

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

         TCI Group has no basis upon which to estimate the number of cable
television companies and other entities with which it competes or may
potentially compete. The full extent to which other media or home delivery
services will compete with cable television systems may not be known for some
time and there can be no assurance that existing, proposed or as yet undeveloped
technologies will not become dominant in the future.

                                      I-12
<PAGE>   15


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

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

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

         Although the FCC establishes all cable rate rules, local government
units (commonly referred to as local franchising authorities or "LFAs") are
primarily responsible for administering the regulation of the lowest level of
cable -- the basic service tier ("BST"), which typically contains local
broadcast stations and public, educational and government access channels.
Before an LFA begins BST rate regulation, it must certify to the FCC that it
will follow applicable federal rules, and many LFAs have voluntarily declined to
exercise this authority. LFAs also have primary responsibility for regulating
cable equipment rates. Under federal law, charges for various types of cable
equipment must be unbundled from each other and from monthly charges for
programming services, and priced no higher than the operator's actual cost, plus
an 11.25% rate of return.

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


                                      I-13
<PAGE>   16


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

         The 1996 Telecom Act sunsets FCC regulation of CPST rates for all
systems (regardless of size) on March 31, 1999. However, certain members of
Congress and FCC officials have called for the delay of this regulatory sunset
and further have urged more rigorous rate regulation (including limits on
programming cost pass-throughs to cable customers) until a greater degree of
competition to incumbent cable operators has developed. On February 25, 1998,
legislation was introduced in the Congress which if enacted would repeal the
statutory "sunset" and extend FCC regulation of CPST rates beyond March 31,
1999. The 1996 Telecom Act also relaxes existing uniform rate requirements by
specifying that uniform rate requirements do not apply where the operator faces
effective competition, and by exempting bulk discounts to multiple dwelling
units ("MDUs"), although complaints about predatory pricing in MDUs still may be
made to the FCC.

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

         Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Telecom Act intended to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. In July 1997, the Eighth
Circuit Court of Appeals vacated certain aspects of the FCC's initial
interconnection order, and that decision is now pending before the Supreme
Court. However, the underlying statutory obligation of local telephone companies
to interconnect with competitors remains in place. For more information, see
"TCI Ventures Group - Domestic Telephony - Domestic Wireless Telephony and
Domestic Wireline Telephony," below.


                                      I-14
<PAGE>   17


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

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

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

         Electric Utility Entry Into Telecommunications/Cable Television. The
1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services, information services, and
other services or products subject to the jurisdiction of the FCC,
notwithstanding the Public Utilities Holding Company Act. Electric utilities
must establish separate subsidiaries, known as "exempt telecommunications
companies" and must apply to the FCC for operating authority. Again, because of
their resources, electric utilities could be formidable competitors to
traditional cable systems.


                                      I-15
<PAGE>   18


         Additional Ownership Restrictions. Pursuant to the 1992 Cable Act, the
FCC adopted regulations establishing a 30% limit on the number of homes
nationwide that a cable operator may reach through cable systems in which it
holds an attributable interest with an increase to 35% if the additional cable
systems are minority controlled. The FCC stayed the effectiveness of its
ownership limits pending the appeal of a September 16, 1993 decision by the
United States District Court for the District of Columbia which, among other
things, found unconstitutional the provision of the 1992 Cable Act requiring the
FCC to establish such ownership limits. If the ownership limits are determined
on appeal to be constitutional, they may affect TCI Group's ability to acquire
attributable interests in additional cable systems. The FCC is currently
conducting a reconsideration of its national customer limit rules, and it is
possible the FCC will revise both the national customer reach percentage
limitation and/or the manner in which it attributes ownership to a cable
operator. Either of these revisions, which are expected to be completed in 1998,
could adversely affect various joint ventures, partnerships and equity ownership
arrangements announced by TCI Group in 1997 in TCI Group's effort to reduce the
number of cable systems over which it has control and management responsibility.

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

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


                                      I-16
<PAGE>   19


         Must Carry/Retransmission Consent. The 1992 Cable Act contains
broadcast signal carriage requirements that allow local commercial television
broadcast stations to elect once every three years between requiring a cable
system to carry the station ("must carry") or negotiating for payments for
granting permission to the cable operator to carry the station ("retransmission
consent"). Less popular stations typically elect must carry, and more popular
stations typically elect retransmission consent. Must carry requests can dilute
the appeal of a cable system's programming offerings, and retransmission consent
demands may require substantial payments or other concessions (e.g. a
requirement that the cable system also carry the local broadcaster's affiliated
cable programming service). Either option has a potentially adverse effect on
TCI Group's business. The burden associated with must-carry obligations could
dramatically increase if television broadcast stations proceed with planned
conversions to digital transmissions and if the FCC determines that cable
systems must carry all analog and digital signals transmitted by the television
stations. Additionally, cable systems are required to obtain retransmission
consent for all "distant" commercial television stations (except for certain
commercial satellite-delivered independent "superstations" such as WGN). For
more information see "Liberty Media Group - Regulation - Programming Companies"
and "Regulation of Carriage of Broadcast Stations," below.

         Access Channels. LFAs can include franchise provisions requiring cable
operators to set aside certain channels for PEG access programming. Federal law
also requires a cable system with 36 or more channels to designate a portion of
its activated channel capacity (either 10% or 15%) for commercial leased access
by unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of this
designated channel capacity, but use of commercial leased access channels has
been relatively limited. In February of 1997, the FCC released revised rules
which mandated a modest rate reduction which has made commercial leased access a
more attractive option for third party programmers, particularly for part-time
leased access carriage. Further, a group of commercial leased access users has
challenged the FCC's February 1997 Order as failing to reduce commercial leased
access rates by an appropriate amount. If this pending court challenge is
successful, the FCC will be forced to undertake a further rulemaking which could
result in significantly reduced commercial leased access rates thereby
encouraging a much more significant increase in the use of commercial leased
access channels.

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

         Access to Programming. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes satellite video programmers affiliated with cable
operators from favoring cable operators over competing multichannel video
programming distributors (such as DBS and MMDS distributors). This provision
limits the ability of vertically integrated satellite cable programmers to offer
exclusive programming arrangements to TCI Group. Recently, both Congress and the
FCC have considered proposals that would expand the program access rights of
cable's competitors, including the possibility of subjecting video programmers
who are not affiliated with cable operators to all program access requirements.
For more information see "Liberty Media Group - Regulation of Program
Licensing," below.


                                      I-17
<PAGE>   20


         Inside Wiring. In a 1997 Order, the FCC established rules that require
an incumbent cable operator upon expiration or termination of an MDU service
contract to sell, abandon, or remove "home run" wiring that was installed by the
cable operator in a MDU building. These inside wiring rules will assist building
owners in their attempts to replace existing cable operators with new video
programming providers who are willing to pay the building owner a higher fee.
Additionally, the FCC has proposed abrogating all exclusive MDU contracts held
by cable operators, but at the same time allowing competitors to cable to enter
into exclusive MDU service contracts.

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

         The FCC is currently considering whether cable customers should be
permitted to purchase cable converters from third party vendors. If the FCC
concludes that third party sale of converters is required, and does not make
appropriate allowances for signal piracy concerns, it may become more difficult
for cable operators to combat theft of service.

         Internet Service Regulation. TCI Group began offering high-speed
internet service to customers in 1997. At this time, there is no significant
federal or local regulation of cable system delivery of internet services.
However, as the cable industry's delivery of internet services develops, it is
possible that greater federal and/or local regulation could be imposed. For a
more detailed discussion, see "TCI Ventures Group - Internet Services -
Government Regulation," below.

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


                                      I-18
<PAGE>   21


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

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

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

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

LIBERTY MEDIA GROUP

PROGRAMMING SERVICES

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


                                      I-19
<PAGE>   22


         The following table sets forth Liberty Media Group's attributed
programming interests which are held directly and indirectly through
partnerships, joint ventures, common stock investments and instruments
convertible or exchangeable into common stock. Ownership percentages in the
table are approximate, calculated as of March 13, 1998 and, where applicable (or
except as otherwise noted), assume conversion to common stock by the Company
and, to the extent known by the Company, other holders. In some cases, Liberty
Media Group's interest may be subject to buy/sell procedures, repurchase rights
or, under certain circumstances, dilution.

<TABLE>
<CAPTION>

- ------------------------------------------------------------------------------------------------------------------------
                                                                                                          LIBERTY 
                                                                                                           MEDIA
                                            SUBSCRIBERS AT       SUBSCRIBERS AT                            GROUP 
                                               12/31/97             12/31/96                             ATTRIBUTED
          ENTITY                                (000'S)              (000'S)       YEAR LAUNCHED          INTEREST
- ------------------------------------------------------------------------------------------------------------------------

                                 MOVIE SERVICES
<S>                                               <C>                 <C>               <C>                 <C> 
Encore Media Group                                                                                          100%
     Encore                                       10,429              10,154            1991
     MOVIEplex                                     9,889               1,120            1995
     Love Stories                                  1,307               1,681            1994
     Westerns                                      3,226               3,261            1994
     Mystery                                       2,634               2,708            1994
     Action                                        1,304               1,664            1994
     True Stories                                  1,303               1,660            1994
     WAM! America's Kidz Network                   1,330               1,661            1994
     STARZ!                                        6,654               4,925            1994
     STARZ!2                                       2,796                 537            1996
     BET Movies/STARZ!3                               70                 N/A            1997                 81%

Request TV                                        43,214(1)           39,639(1)         1985                 50%(2)

Viewer's Choice                                   70,463              44,889(1)         1985                 10%

                     ENTERTAINMENT AND INFORMATION SERVICES

Bay TV                                             1,414               1,390            1994                 49%

BET Holdings, Inc. (NYSE-BTV)                                                                                22%(3)
     BET Cable Network                            52,000              47,000            1980
     BET Action Pay-Per-View                      10,000(1)            9,000(1)         1990
     BET on Jazz                                   4,000               2,200            1996
</TABLE>


                                      I-20
<PAGE>   23



<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------

                                                                                                                      
                                                                                                                      
                                           SUBSCRIBERS AT       SUBSCRIBERS AT                          LIBERTY MEDIA
                                              12/31/97             12/31/96              YEAR          GROUP ATTRIBUTED
                ENTITY                        (000'S)               (000'S)            LAUNCHED           INTEREST
- ------------------------------------------------------------------------------------------------------------------------
               ENTERTAINMENT AND INFORMATION SERVICES (CONTINUED)
<S>                                            <C>                <C>                    <C>                 <C>   
Court TV                                       31,043             26,453                 1991                33%(2)

Discovery Communications, Inc.                                                                               49%
     Discovery Channel                         72,645             70,556                 1985
     The Learning Channel                      61,720             53,992                 1980
     The Travel Channel                        18,000                N/A                 1987
     Animal Planet                             31,400             14,900                 1996
     Discovery Science                               (4)                (4)              1996
     Discovery Civilization                          (4)                (4)              1996
     Discovery Travel & Living                       (4)                (4)              1996
     Discovery Kids                                  (4)                (4)              1996
     Discovery Asia                            11,639              4,452                 1994
     Discovery India                            9,000              4,625                 1996
     Discovery Japan                              219                N/A                 1996
     Discovery Europe                          16,339             13,018                 1989
     Discovery Germany                             89       not available                1996
     Discovery Italy/Africa                       343       not available                1996
     Discovery Latin America                    8,331              6,251                 1996
     Discovery Kids-Latin America               4,317              1,200                 1996
     Discovery Turkey                             600               N/A                  1997
     The Travel Channel Latin                   5,200               N/A                  1995
America
     Discovery Channel Online                  Online               N/A                  1995  
     Your Choice TV                                                                                             (5)

E! Entertainment Television                    45,898             41,872                 1990                10%

FiT TV                                          8,064              7,800                 1993                10%

Health TV                                          20               N/A                  1997               100%
     Kaleidoscope                               7,784             11,208                 1995                12%
     Recovery Net                              Online               N/A                  1997                50%

International Channel                           6,916              7,355                 1990                90%

MacNeil/Lehrer Productions                        N/A               N/A                   N/A                67%

Odyssey                                        30,100             26,800                 1998                49%

TCI Music, Inc.                                                                                              78%
     DMX                                        2,401(6)           1,845(6)              1991
     The BOX                                   41,488             23,660                 1985
     THE BOX SET                                    3               N/A                  1997
     SonicNet                                  Online               N/A                  1997
     Addicted to Noise                         Online               N/A                  1997
     Streamland                                Online               N/A                  1997

Time Warner Inc. (NYSE-TWX)                                                                                  10%
     Time Warner/Turner Programming
        Services(7)
</TABLE>


                                      I-21
<PAGE>   24


<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
                                                                                                         LIBERTY 
                                                                                                          MEDIA
                                         SUBSCRIBERS AT        SUBSCRIBERS AT                             GROUP 
                                            12/31/97              12/31/96                              ATTRIBUTED
               ENTITY                        (000'S)              (000'S)          YEAR LAUNCHED          INTEREST
- ------------------------------------------------------------------------------------------------------------------------
                                 SPORTS SERVICES
<S>                                            <C>                <C>                    <C>              <C>
REGIONAL SPORTS NETWORKS(2)

     Fox Sports Arizona                           904                744                 1996                50%
     Fox Sports Bay Area                        2,726              2,700                 1990                35%
     Fox Sports Chicago                         2,952              2,707                 1984                35%
     Fox Sports Cincinnati                      2,171              1,864                 1989                20%
     Fox Sports Detroit                         2,150                N/A                 1984                50%
     Fox Sports Intermountain West                616                617                 1990                50%
     Fox Sports Midwest                         1,336              1,222                 1989                50%
     Fox Sports New England                     2,580              1,512                 1984                20%
     Fox Sports New York                        3,622              3,069                 1982                18%
     Fox Sports Northwest                       2,161              2,416                 1988                50%
     Fox Sports Ohio                            1,913              1,497                 1989                20%
     Fox Sports Pittsburgh                      1,959              1,698                 1985                50%
     Fox Sports Rocky Mountain                  1,883              1,690                 1988                50%
     Fox Sports South                           5,768              5,228                 1990                44%
     Fox Sports Southwest                       4,827              4,751                 1983                50%
     Fox Sports West                            3,979              3,956                 1985                50%
     Fox Sports West 2                          2,040                N/A                 1997                50%
     Home Team Sports                           3,900              3,835                 1984                17%
     MSG Network                                6,600              5,502                 1969                18%
     SportsChannel Florida                      2,688              1,731                 1993                 6%
     Sunshine Network                           3,753              3,706                 1988                27%(2)

NATIONAL SPORTS NETWORKS
     Fox Sports Americas (US)                   1,841              1,682                 1993                25%
     Fox Sports Direct                          5,194              3,731                 1989                50%
     Fox Sports Net                            52,164             25,588                 1996                25%
     Fox Sports World                           1,113                N/A                 1997                50%
     FX                                        31,740             28,673                 1994                50%

INTERNATIONAL SPORTS PROGRAMMING
     Fox Sports Americas                        6,157              2,120                 1995                25%
       (Latin America)
     STAR TV(7)                               220,000(8)         220,000(8)                                 3.75%
     Torneos y Competencias, SA                   N/A                N/A                                    17.5%
     J- Sports                                    N/A                N/A                 1998                34%

                                      OTHER

Madison Square Garden Arena                                                                                  18%
Radio City Music Hall                                                                                        18%
</TABLE>


                                      I-22
<PAGE>   25


<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------

                                                                                                         LIBERTY 
                                                                                                          MEDIA
                                           SUBSCRIBERS AT       SUBSCRIBERS AT                            GROUP 
                                              12/31/97             12/31/96                             ATTRIBUTED
                ENTITY                        (000'S)               (000'S)         YEAR LAUNCHED        INTEREST
- ------------------------------------------------------------------------------------------------------------------------

                                    SATELLITE

<S>                                               <C>                 <C>                <C>                  <C> 
Superstar/Netlink                                 892                 981                 N/A                  40%(9)(10)

Netlink International                           3,425(11)           3,491(11)             N/A                 100%(10)

United Video Satellite Group, Inc.                
(Nasdaq: UVSGA)
     Prevue Guide                              47,500              44,100                 1988                 17%(10)
     Sneak Prevue                              35,400              34,200                 1991

                              ELECTRONIC RETAILING

USA Networks, Inc. (Nasdaq: USAI)                                                                                 (12)
     [Formerly HSN, Inc. (HSNI)]
     HSN                                       71,796(13)          70,694(13)             1985
     America's Store                           10,256(13)          11,116(13)             1986
     HSN-Germany                               12,700               7,000                 1996                  6%
     Shop Channel (Japan)                       1,500                 300                 1996                  6%
     SKTV, Inc.                                28,300(14)          28,300(14)             1986
     SF Broadcasting                            1,800(15)           1,800(15)
     ISN                                       Online              Online                 1995
     SciFi Channel                             46,670              37,358                 1992
     USA Network                               72,356              70,690                 1980

QVC Inc.                                                                                                       43%
     QVC Network                               61,774              57,347                 1986
     Q2                                           N/A              13,111                 1994
     QVC-The Shopping
       Channel (UK)                             6,433               5,700                 1993
     QVC-Germany                                9,401               6,486                 1996
     iQVC                                                          Online                 1995

                                      OTHER

Fox Kids Worldwide, Inc.                                                                                          (16)
</TABLE>

- ---------------
(1)      Number of subscribers to whom service is available.

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

(3)      Liberty Media Group's interest would increase to approximately 35% 
         upon consummation of the merger described below in "Entertainment and 
         Information Services."


                                      I-23
<PAGE>   26


(4)      Digital Services.

(5)      Liberty Media Group owns a 24.5% direct and 25.14% indirect interest in
         Your Choice TV ("YCTV"). TCI Ventures Group owns a 24.5% direct
         interest in YCTV.

(6)      Includes residential and commercial addressable cable and DBS
         subscribers.

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

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

(9)      United Video Satellite Group ("UVSG"), an entity controlled by the TCI
         Ventures Group, owns an additional 40% interest.

(10)     Liberty Media Group has agreed to sell its interest in
         Superstar/Netlink and Netlink International to UVSG for approximately
         6,375,000 shares of UVSG Class A Common Stock. If consummated, this
         transaction would increase Liberty Media Group's ownership interest in
         UVSG to approximately 29%.

(11)     Aggregate number of units. Netlink International uplinks 6 broadcast
         stations. One customer may subscribe to more than one station. Each
         station constitutes a "unit".

(12)     In February, 1998, following consummation of the Universal Transaction
         (described in HSN, Inc., below), HSNI changed its name to USA Networks,
         Inc. As this name change occurred in 1998, this entity will be referred
         to as "HSNI" throughout this document. Liberty Media Group owns direct
         and indirect interests in various HSNI and Home Shopping Network, Inc.
         securities which may be converted or exchanged for HSNI common stock.
         Liberty Media Group has also agreed to acquire for an aggregate
         purchase price of $300 million additional HSNI securities which may be
         exchanged for HSNI common stock. Assuming the conversion or exchange of
         such securities, the conversion or exchange of certain securities owned
         by (or agreed to be acquired by) Universal Studios, Inc. ("Universal")
         and certain of its affiliates for HSNI common stock and the full
         exercise of Liberty Media Group's and Universal's preemptive rights in
         connection with such acquisitions, conversions and exchanges, Liberty
         Media Group would own approximately 20% of HSNI. Liberty Media Group
         currently owns approximately 18.6% of HSNI.

(13)     Includes broadcast households and cable subscribers.

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

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

(16)     $345 million stated value of Fox Kids Worldwide, Inc. 30 year
         non-convertible 9% Preferred Stock.

                                      I-24
<PAGE>   27


         Movie Services. Encore Media Group LLC ("Encore Media Group") produces
and distributes a variety of movie services. Its principal services are "Encore"
and "STARZ!". Encore, launched in 1991, primarily airs hit movies from the
1960s, 1970s and 1980s. As of December 31, 1997, the service was being offered
by cable operators and other distribution technologies to approximately 39
million households, of which approximately 10.4 million subscribed to Encore.
The service is generally offered as a single premium service or in conjunction
with other premium services. In either case, the subscription price paid by the
subscriber for Encore is generally lower than the prices charged for other
premium movie services. During 1994, Encore Media Group launched six thematic
multiplex services: "Love Stories," "Westerns," "Mystery" "Action," "True
Stories," and "WAM! America's Kidz Network." As of December 31, 1997, the
thematic multiplex services were distributed, primarily by DBS services such as
DIRECTV and Primestar, as well as by cable operators and other distribution
technologies, to approximately 8.5 million households. As of December 31, 1997,
these generated subscriptions to approximately 11.1 million units (one household
may subscribe to as many as six multiplex services, which would constitute six
"units"). "MOVIEplex," a cable service which offers theme-by-day movies, was
launched by Encore Media Group in 1995. As of December 31, 1997, MOVIEplex was
being offered by cable operators and other distribution technologies to
approximately 13.5 million households, of which approximately 9.9 million
subscribed to MOVIEplex

         "STARZ!" is a first-run premium movie programming service. As of
December 31, 1997, STARZ! was offered by cable operators and other multi-channel
video distribution technologies to approximately 36 million households, of which
approximately 6.7 million elected to receive STARZ!.

         Cable operators and other distributors pay Encore Media Group a per
subscriber fee for its services. Encore Media Group obtains rights to air movies
on its service by entering into film licensing agreements to provide product for
its Encore service, and studio output agreements to obtain first run movies for
its STARZ! service. The majority of Encore Media Group's library agreements
extend beyond 2002 and several extend beyond 2005. The majority of the first run
output agreements extend through 2003, and the license fees are contingent upon
future production, sales and certain other criteria. In addition to first run
movies, some library product is also shown on STARZ!

         As of December 31, 1997, Encore Media Group's distribution was
approximately 38 million total aggregate units (Encore, thematic multiplex
services, MOVIEplex and STARZ!). As of December 31, 1997, approximately 14.4
million (36.2%) of the subscribers electing to receive Encore Media Group's
services were customers of cable systems which purchase such services pursuant
to an affiliation agreement with Satellite Services, Inc. ("SSI"), a
wholly-owned subsidiary of TCIC. SSI purchases programming services from
programming suppliers and then makes such services available to TCI's
subsidiaries and affiliates. Customers served by cable television systems
eligible to purchase programming services through SSI ("SSI Subscribers")
represented approximately 23.3% of U.S. households which received cable or
satellite delivered programming at December 31, 1997 (based on estimates by Paul
Kagan Associates, Inc. of cable, C-Band, DBS and MMDS subscribers). To the
extent that the ratio of SSI Subscribers to overall subscribers for any
programming service in which the Liberty Media Group has an interest
significantly exceeds 23.3%, such information is provided below.

         In September 1996 Encore Media Group and BET Holdings, Inc. ("BET")
formed BET Movies/STARZ!3, a premium movie service dedicated to the development
and exhibition of Black oriented feature length films.


                                      I-25
<PAGE>   28


         In July 1997, Liberty Media Group, TCI and the 10% minority holder of
Encore Media Corporation ("EMC") entered into a series of transactions pursuant
to which the businesses of Encore and STARZ! were contributed to Encore Media
Group. In connection with these transactions the 10% minority interest was
exchanged for Liberty Group Stock. Upon consummation of the transactions,
Liberty Media Group owned 80% of Encore Media Group and TCI Group owned 20%.
Liberty Media Group received its 80% ownership interest in Encore Media Group in
exchange for the contribution of its interests in QE+, Ltd. ("QE+") and EMC, the
issuance of a $307 million note payable due on or before December 29, 1997 (the
"EMG Promissory Note") to TCI Group, the cancellation and forgiveness of amounts
due for Content Fees and the termination of an option to increase its ownership
interest in QE+. TCI Group received the remaining 20% interest in Encore Media
Group and the aforementioned consideration from Liberty Media Group in exchange
for TCI Group's ownership interest in QE+ and certain special capital
contributions made by TCI Group to QE+. In addition, TCI Group has 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 substantially all of the existing Encore and
STARZ! services. Upon consummation of the aforementioned transactions, the
operations of STARZ! are included in the combined financial results of Liberty
Media Group.

         Effective December 31, 1997, Liberty Media 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.
Simultaneously, Liberty Media 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.

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

         Entertainment and Information Services. "Bay TV" is a local news and
entertainment service located in the San Francisco Bay area. At December 31,
1997, approximately 83.4% of Bay TV's subscribers were SSI Subscribers.

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


                                      I-26
<PAGE>   29


         On September 11, 1997, Liberty Media Group and BET founder, Robert
Johnson ("Johnson") offered to acquire the publicly held shares of BET at a
price of $48 per share. On March 15, 1998, BET, Johnson and Liberty Media Group
entered into a merger agreement pursuant to which holders of BET shares (other
than Johnson and Liberty Media Group) will receive $63 per share of BET common
stock. If the transaction is consummated, Liberty Media Group will increase its
ownership interest in BET from approximately 22% to approximately 35%. It is
anticipated that the cash payment to BET stockholders will be made from
borrowings by BET, as the surviving corporation in the merger. Completion of the
transaction is subject to approval by the holders of a majority of the shares
not held by Liberty Media Group and Johnson, receipt of sufficient financing,
receipt of all necessary governmental and regulatory approvals and consents, and
the absence of litigation, including litigation challenging the proposed
transaction.

         "Court TV" provides live and/or tape delayed coverage and analysis of
selected criminal and civil legal proceedings.

         Discovery Communications, Inc. ("Discovery") operates four business
units. The first of these, Discovery Networks, U.S., consists of four
advertiser-supported basic cable networks: "Discovery Channel," "The Learning
Channel", "Animal Planet", and "The Travel Channel"; and four networks created
in 1996 for the digital platform: "Discovery Science," "Discovery Civilization,"
"Discovery Travel & Living" and "Discovery Kids." Discovery Channel provides
nature, science and technology, history, exploration and adventure programming
and is distributed to customers in virtually all U.S. pay television homes. The
Learning Channel provides a variety of educational and non-fiction programming.
Animal Planet, launched in June 1996, offers a range of animal programming,
including children's programs, game shows, comedies, dramas, feature films,
wildlife documentaries, how-to pet care shows, event reportage and series
featuring television's favorite animal heroes. At December 31, 1997, Animal
Planet was received by approximately 31.4 million subscribers, approximately
32.6% of which were SSI Subscribers. The Travel Channel, acquired by Discovery
in November of 1997, features travel programming that explores the people,
places and cultures of our world. The four digital networks are carried on
TCIC's digital cable service.

         Discovery Networks International distributes various Discovery services
in Latin America, Europe, Asia and Africa. Discovery's international networks
serve more than 56 million customers in 145 countries outside the U.S. Discovery
Enterprises Worldwide includes "Discovery Channel Multimedia", "Discovery
Channel Online", "Discovery Channel Video" and "Discovery Channel Publishing."

         The fourth Discovery business unit, Discovery Retail and Theme,
operates 16 Discovery Channel Stores, 113 stores of The Nature Company and three
Scientific Revolution stores in the U.S. Discovery also operates two locations
of The Nature Company in Canada and two locations in the UK. Discovery purchased
the assets of The Nature Company in June 1996. In addition to the stores, these
assets included distribution facilities and The Nature Company's catalog
business. The Nature Company is a specialty retail chain and mail order business
providing products designed to enhance appreciation of the natural world. In
October 1996, Discovery entered into an agreement with Sony to create in San
Francisco a Discovery Channel Destination flagship store which will feature a
combination of retailing and interactive, hands-on entertainment elements
related to the programming concepts of Discovery. A Discovery flagship store is
also scheduled to open in Washington D.C. in March of 1998.

         Discovery also operates YCTV. YCTV is a development stage business
designed to take advantage of the promise of the digital television platform by
offering increased access to popular television programs. TCI Ventures Group
also owns 24.5% of YCTV.


                                      I-27
<PAGE>   30


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

         TCI Music delivers audio and video music services to residential and
commercial customers via cable television, DBS, the Internet and other methods.

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

         In connection with the DMX Merger, TCI and TCI Music entered into a
"Contribution Agreement." Pursuant to the Contribution Agreement, effective as
of the closing of the DMX Merger: (i) TCI Music issued to TCI (as designee of
certain of its indirect subsidiaries), 62,500,000 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 (the "Contributed Net DMX Revenue"),
(iii) TCI contributed to TCI Music certain commercial digital DMX tuners that
were not in service as of the effective date of the DMX Merger (the "Contributed
Tuners"), 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"). The foregoing transactions are
collectively referred to herein as the "Contribution." 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.

                                      I-28
<PAGE>   31


         Subsequently, TCI Music and TCI entered into an Amended and Restated
Contribution Agreement (the "Amended Contribution Agreement") which provides,
among other things, for TCI to deliver, or cause certain of its subsidiaries to
deliver to TCI Music monthly payments commencing as of July 1, 1997(adjusted
annually for inflation) through June 30, 2017 (the "TCI Payments"). Pursuant to
the Amended Contribution Agreement, the TCI Payments will represent (i) revenue
of certain subsidiaries of TCI that is attributable to the distribution and sale
of the DMX service to cable subscribers who receive the DMX service via C-Band
satellite transmission (rather than digital compression technology) (net of an
amount equal to 10% of such revenue derived from residential customers and
license fees otherwise payable to DMX pursuant to an affiliation agreement) and
(ii) compensation to TCI Music and DMX for various other rights.

         Effective with the DMX Merger, TCI beneficially owned approximately
45.7% of the outstanding shares of the 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 Media Group acquired the TCI Music Series B Common
Stock and 2.6 million shares of the TCI-owned TCI Music Series A Common Stock by
assuming certain of TCI's obligations 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 Media
Group Common Stock for the benefit of entities included within the TCI Group.
Additionally, Liberty Media 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 Media Group's
investment in TCI Music, to be determined at July 11, 2002. Following the
above-described transaction, Liberty Media Group held TCI Music Common Stock,
which when combined with the TCI Music Common Stock received by Liberty Media
Group in the DMX Merger, represented 86.05% of the equity and 98.31% of the
voting power of TCI Music. Therefore, TCI Music is included in the combined
financial results of Liberty Media Group as of the date of the DMX Merger.

         On December 16, 1997, pursuant to an Agreement and Plan of Merger dated
as of August 12, 1997, a wholly-owned subsidiary of TCI Music was merged with
and into The Box Worldwide, Inc. ("The Box Worldwide"), with The Box Worldwide
becoming the surviving corporation, (the "Box Merger") and each outstanding
share of common stock of The Box Worldwide was converted into the right to
receive .07 of a share of TCI Music Preferred Stock ("TCI Music Preferred").
Each share of TCI Music Preferred is convertible at any time into three shares
of TCI Music Series A Common Stock without an associated Right.
Contemporaneously with the Box Merger, TCI Music purchased all of the
outstanding shares of the preferred stock of The Box Worldwide from EMAP PLC, an
English public limited company, and effective as of the consummation of the Box
Merger, The Box Worldwide became a wholly-owned subsidiary of TCI Music.

         Effective December 31, 1997, pursuant to an Agreement and Plan of
Merger dated as of December 8, 1997, Paradigm Music Entertainment Company
("Paradigm") became a wholly-owned subsidiary of TCI Music (the "Paradigm
Merger") and shareholders of Paradigm received 0.61 restricted shares of TCI
Music Series A Common Stock, without an associated Right, for each share of
Paradigm common stock held.

         Giving effect to the Box Merger and the Paradigm Merger, Liberty Media
Group's equity interest in TCI Music is approximately 78% with voting power of
97%.


                                      I-29
<PAGE>   32


         DMX is primarily engaged in programming, distributing and marketing a
premium digital music service, "Digital Music Express" (the "DMX Service"),
which provides continuous 24-hour per day, commercial-free, CD quality music
programming. The DMX Service is delivered, for a monthly per subscriber license
fee, by cable operators and DBS distributors to residential and commercial
subscribers. Both cable and DBS subscribers receive the DMX Service through a
specially designed tuner to their stereo systems.

         The Box Worldwide distributes and markets an interactive music video
television programming service known as "THE BOX". Utilizing local file servers
installed in cable television systems, THE BOX has been upgraded to a digital
distribution system in its US markets. THE BOX allows viewers to call in and
request a video from a menu of up to 300 selections, with the cost billed
directly to the consumer's telephone. THE BOX is currently available throughout
the United States, and in certain countries in Europe, Latin America and the
Pacific Rim. In addition, a multiplex of four themed music channels called "THE
BOX SET" is available on TCI's Headend In The Sky offering.

         Paradigm operates the music web sites "SonicNet" and "Addicted to
Noise", which receive in excess of 2.7 million page views per month and are
leaders in providing both breaking and in-depth music news and live concerts via
the Internet. Paradigm is also active in the distribution of new artists and
catalog releases of established artists through its independent record label
businesses, and in the creation of syndicated radio and on-line music
programming. Paradigm recently announced the launch of "Streamland", the
Internet's first site for full-length music videos on demand, developed in
conjunction with The Box Worldwide.

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

         "International Channel" is a basic cable service providing
multi-lingual programming in the U.S. The International Channel is planning to
launch several single language pay services designed primarily to serve viewers
who use English as their second language. Approximately 26% of International
Channel's subscribers are SSI Subscribers.

         "Odyssey" (f/k/a The Faith & Values Channel), a national basic cable
network, is managed by representatives of the National Interfaith Cable
Coalition, a group of 64 U.S. denominations and faith groups. The channel
provides its viewers with non-denominational religious and values-based
entertainment and informational programming. Approximately 25.3% of Odyssey's
subscribers are SSI Subscribers.

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


                                      I-30
<PAGE>   33


         In connection with the TBS/Time Warner Merger, Time Warner, TBS, TCI
and Liberty Media Group entered into an Agreement Containing Consent Order with
the 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 by it in connection with the TBS/Time Warner Merger for shares of TW
Exchange Stock. Holders of the TW Exchange Stock are entitled to one
one-hundredth (1/100th) of a vote for each share with respect to the election of
directors. Holders of the TW Exchange Stock have no other voting rights, except
as required by law or with respect to limited matters, including amendments of
the terms of the TW Exchange Stock adverse to such holders. Subject to the
federal communications laws, each share of the TW Exchange Stock is convertible
at the option of the holder on a one-for-one basis for a share of Time Warner
common stock. Holders of TW Exchange Stock are entitled to receive dividends
ratably with the Time Warner common stock and to share ratably with the holders
of Time Warner common stock in assets remaining for common stockholders upon
dissolution, liquidation or winding up of Time Warner. In connection with the
TBS/Time Warner Merger, Liberty Media Group received approximately 50.6 million
shares of the TW Exchange Stock in exchange for its TBS holdings.

         In connection with the TBS/Time Warner Merger, Liberty Media Group and
Time Warner entered into, among other agreements, an agreement providing for the
grant to Time Warner of the Contract Option to enter into a contract with
Southern, a wholly-owned subsidiary of Liberty Media Group which distributes the
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. Subsequent to the TBS/Time Warner
merger, Liberty Media Group and Time Warner revised the structure of the
Contract Option. On June 24, 1997, under the new agreement, Liberty Media Group
granted Time Warner the Southern Option to acquire the Southern Business,
through a purchase of assets. Liberty Media Group received 6.4 million shares of
TW Exchange Stock in consideration for the grant. In September 1997, Time Warner
exercised the Southern Option. Pursuant to the Southern Option, effective
January 1, 1998, Time Warner purchased the Southern Business for $213 million,
which was paid in cash together with the assumption of certain liabilities on
January 2, 1998.

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

         On August 1, 1997, Liberty Media Group sold its interest in IFE to FKW
in exchange for a new series of 30 year non-convertible 9% preferred stock of
FKW with stated value of $345 million.


                                      I-31
<PAGE>   34


         Sports Programming Services. As of April 29, 1996, Liberty Media Group,
the News Corporation Limited ("News Corp.") and Tele-Communications
International, Inc. ("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 $350 million in cash.

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

         As of October, 1997, News Corp. exchanged its ownership interest in TYC
for Liberty/TINTA's interest in Premier Sports and All Star Sports. The exchange
of interests was executed at similar values.

         On February 4, 1998, Liberty Media Group entered into an agreement with
Jupiter Programming Co. Ltd. (a 50/50 partnership between TINTA and Sumitomo
Corporation) to form J-Sports Co., Ltd. ("J-Sports"). J-Sports launched a 24
hour Japanese sports network on February 18, 1998. The core programming will be
Japanese soccer, baseball, sumo wrestling and other popular Japanese sporting
events.

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

         On December 18, 1997, Fox Sports, a 50% owned affiliate of Liberty
Media Group, consummated a transaction (the "Rainbow Transaction") with Rainbow
Media Sports Holdings, Inc. ("Rainbow"), an indirect subsidiary of CSC, pursuant
to which Fox Sports acquired a 40% interest in Regional Programming Partners
("RPP"), which holds interests in eight regional sports networks ("RSNs") (the
"Rainbow RSNs"), the Madison Square Garden entertainment complex, Radio City
Productions LLC, the New York Rangers, a professional hockey team, and the New
York Knicks, a professional basketball team, RPP has a controlling interest in
seven of the eight Rainbow RSNs, two of which were partially owned by Fox Sports
prior to the Rainbow Transaction. Fox Sports contributed $850 million cash to
RPP in consideration for the 40% interest in RPP.

         As part of the Rainbow Transaction, Fox Sports and Rainbow established
National Sports Partners (the "National Sports Partnership"), a 50%-50%
partnership, to operate Fox Sports Net ("FSN"). FSN provides its affiliated
RSNs, 24 hours per day, with national sports programming to supplement their
regional sports offerings. FSN features live and replay sporting events, as well
as other original sports programming, including a national sports news program,
"Fox Sports News."


                                      I-32
<PAGE>   35


         Fox Sports and Rainbow also established a national advertising
representative firm, National Advertising Partners (the "National Advertising
Partnership"), a 50%-50% partnership, to sell advertising time during both the
regional affiliates' local programming and national network programming carried
by RSNs. Fox Sports manages both the National Sports Partnership and the
National Advertising Partnership. Through its affiliations with RSNs across the
United States, FSN is able to access three advertising markets at once: network,
national spot and local.

         Regional Sports Networks. After giving effect to the consummation of
the Rainbow Transaction, Fox Sports owns interests in, or is affiliated with, 26
RSNs and its network programming covers each of the top 14 designated market
areas ("DMAs") and 22 of the top 25 DMAs in the United States. These RSNs have
rights to telecast live games of 69 professional sports teams in the National
Basketball Association ("NBA"), the National Hockey League ("NHL"), and Major
League Baseball ("MLB") (out of a total of 75 such teams in the United States)
and numerous collegiate sports teams to approximately 55 million households.

         The following table lists the RSNs, such RSNs primary designated
marketing areas ("DMAs") and the major professional and collegiate sports teams
with which each RSN has programming rights agreements.

<TABLE>
<CAPTION>
RSN                              PRIMARY DMA                             TEAMS (LEAGUES)
- ---                              -----------                             ---------------  
<S>                              <C>                          <C>
Fox Sports Arizona               Phoenix                      Arizona Diamondbacks (MLB)
                                                              Phoenix Coyotes (NHL)
                                                              Arizona State University

Fox Sports Bay Area              San Francisco/               Golden State Warriors (NBA)
                                 Oakland/San Jose;            Oakland A's (MLB)
                                 Sacramento/                  San Francisco Giants (MLB)
                                 Stockton/Modesto             San Jose Sharks (NHL)
                                                              Stanford University
                                                              University of Cal-Berkeley

Fox Sports Chicago               Chicago                      Chicago Bulls (NBA)
                                                              Chicago Blackhawks (NHL)
                                                              Chicago White Sox (MLB)
                                                              DePaul University

Fox Sports Detroit               Cincinnati/Detroit           Cincinnati Reds (MLB)
                                                              Detroit Red Wings (NHL)
                                                              Detroit Pistons (NBA)
                                                              Detroit Tigers (MLB)


Fox Sports Midwest               St. Louis;                   Indiana Pacers (NBA)
                                 Indianapolis                 St. Louis Cardinals (MLB)
                                                              St. Louis Blues (NHL)

Fox Sports New England           Boston;                      Boston Celtics (NBA)
                                 Providence;
                                 Hartford

Fox Sports New York              New York City                New York Mets (MLB)
                                                              New Jersey Nets (NBA)
                                                              New York Islanders (NHL)
                                                              New Jersey Devils (NHL)
</TABLE>


                                      I-33
<PAGE>   36





<TABLE>
<CAPTION>
                              
RSN                             PRIMARY DMA                 TEAMS (LEAGUES)
- ---                             -----------                 ---------------   
<S>                             <C>                          <C>
Fox Sports Northwest            Seattle/Tacoma;              Seattle Mariners (MLB)
                                Portland                     Seattle Supersonics (NBA)
                                                             Oregon State University
                                                             University of Oregon
                                                             Washington State University
                                                             University of Washington

Fox Sports Ohio                 Cleveland;                   Cleveland Indians (MLB)
                                Columbus                     Cleveland Cavaliers (NBA)

Fox Sports Pittsburgh           Pittsburgh                   Pittsburgh Pirates (MLB)
                                                             Pittsburgh Penguins (NHL)
                                                             Pennsylvania State University
                                                             University of Pittsburgh

Fox Sports Rocky Mountain       Denver;                      Denver Nuggets (NBA)
                                Kansas City                  Colorado Avalanche (NHL)
                                Salt Lake City               Colorado Rockies (MLB)
                                                             Kansas City Royals (MLB)
                                                             Utah Jazz (NBA)

Fox Sports South                Atlanta; Charlotte           Atlanta Braves (MLB)
                                                             Atlanta Hawks (NBA)
                                                             Charlotte Hornets (NBA)
                                                             Carolina Hurricanes (NHL)


Fox Sports Southwest            Dallas/                      Dallas Mavericks (NBA)
                                Ft. Worth;                   Houston Astros (MLB)
                                Houston                      Houston Rockets (NBA)
                                San Antonio                  Dallas Stars (NHL)
                                                             Texas Rangers (MLB)
                                                             San Antonio Spurs (NBA)

Fox Sports West                 Los Angeles;                 Los Angeles Lakers (NBA)
                                San Diego                    Los Angeles Kings (NHL)
                                                             Anaheim Angels (MLB)

Fox Sports West 2               Los Angeles;                 Anaheim Mighty Ducks (NHL)
                                San Diego                    Los Angeles Dodgers (MLB)
                                                             Los Angeles Clippers (NBA)
                                                             University of Southern California
                                                             UCLA

Home Team Sports                Washington D.C.;             Baltimore Orioles (MLB)
                                Baltimore                    Washington Wizards (NBA)
                                                             Washington Capitals (NHL)

MSG Network                     New York City                New York Yankees (MLB)
                                                             New York Knicks (NBA)
                                                             New York Rangers (NHL)

SportsChannel Florida           Tampa/                       Florida Marlins (MLB)
                                St. Petersburg/Sarasota      Florida Panthers (NHL)
                                Miami/Ft. Lauderdale;        Tampa Bay Devil Rays (MLB)
                                Orlando

Sunshine Network                Tampa/                       Orlando Magic (NBA)
                                St. Petersburg/              Tampa Bay Lightning (NHL)
                                Sarasota; Miami/             Miami Heat (NBA)
                                Ft. Lauderdale;              Florida State University
                                Orlando                      University of Florida
</TABLE>



                                      I-34
<PAGE>   37



         National Sports Programming Services. FSN is a national service,
distributing to the RSN's network programming which complements regional sports
programs with a synchronized schedule of quality national programming, anchored
by Fox Sports News. Fox Sports News provides comprehensive coverage of all
sports news nationwide presenting a consistent brand image with high quality
on-air graphics. FSN also provides other sports programming events, including
nationally televised MLB games, NCAA college football and basketball, boxing,
PGA golf, classic sports, auto racing, tennis, and other outdoor programming
events. In addition to providing national programming, FSN also supplies
corporate, marketing and technical operations to the RSNs, helping to create one
cohesive network. After giving effect to the Rainbow Transaction, FSN has
distribution in each of the top 14 DMAs and 22 of the top 25 DMAs thereby
enabling the creation of greater advertising opportunities for national
advertisers.

         FSN has entered into affiliation agreements with the RSNs and, in
certain regions where Fox Sports does not hold interests in RSNs, with
third-party owned RSNs. These agreements allow the RSNs to carry certain
programming and promotions in exchange for a per subscriber fee or other
arrangement. Also, pursuant to separate and representation agreements, the
National Advertising Partnership is permitted to sell advertising time for the
RSN during a portion of the RSN's regional sports programming. The affiliation
agreements also permit the National Advertising Partnership to market and sell
advertising time during the national portions of the RSN's programming schedule.

         "FX" is a general entertainment channel that features the syndicated
series of NYPD Blue, X-Files, Picket Fences along with a number of other
high-quality series. In addition, FX has cable sports programming with coverage
of MLB, college football and basketball, World League of American Football and
the World Cup of Hockey. Approximately 38.2% of the subscribers to FX are SSI
Subscribers.

         Rights Agreements. The RSNs typically enter into rights contracts with
one or more professional sports teams in their regions and acquire rights to
collegiate sporting events through arrangements with regional conferences,
individual schools and programming syndicators. The duration of the rights
agreements with the professional teams ranges from one to fourteen years. The
rights contracts for collegiate sporting events typically range from two to five
years. The Fox Sports' strategy has been to avoid having multiple rights in any
given region expire in the same year, thereby reducing the risk that a
competitor could secure all relevant rights in that region. Pursuant to the
professional sports rights agreements, the RSNs usually acquire the exclusive
right to distribute via cable and other forms of pay television, in their
respective regions, a specified number of games that are not subject to national
cable or broadcast contracts. In some cases, the contract requires the network
to exhibit a minimum number of games and permits exhibition of additional games,
up to a fixed maximum number. The arrangements with respect to collegiate sports
usually provide exclusive regional cable distribution rights (other than via
free over-the-air broadcast television) to a specified number of events. Both
professional and collegiate rights granted under such agreements are generally
subordinate to rights granted under league or conference national broadcast and
national cable contracts. The fee arrangements for the rights granted to the
RSNs under the professional and collegiate sports agreements also vary from
contract to contract. In most cases, the contract provides for a charge per game
or event, or a fixed aggregate fee, subject to limited increases over the term
of the contract, with a minimum annual exhibition requirement. In certain cases
an RSN has also acquired broadcast rights to professional teams or collegiate
events and has sub-licensed such rights to a local broadcaster. Certain factors
such as player strikes, bankruptcy of leagues or individual teams, or team
relocations may have an adverse effect on the revenue of the RSNs.


                                      I-35
<PAGE>   38


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

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

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

         Advertising. FSN and the RSNs derive significant revenues from selling
a fixed supply of advertising inventory, comprised of advertising time slots
("units") shown during national and regional programming. The inventory is
divided among national network, national spot and local advertising. Regional
professional sports events such as basketball, hockey, and baseball, as well as
other local sports programming, currently carry both national spot and local
advertising. Upon consummation of the Rainbow Transaction, Fox Sports commenced
sales of national network advertising during local team programming. Network
programming such as Fox Sports News, nationally televised MLB games and PGA golf
carries national network, national spot and local advertising. Following
consummation of the Rainbow Transaction, Fox Sport's RSNs and other FSN
affiliates have approximately 55 million subscribers.

         Local advertising is sold at the RSN level, and national network and
national spot units are sold at the national level by the National Advertising
Partnership. The National Advertising Partnership centralizes control over
pricing and allocation of demand across the national network, national spot and
local advertising categories of inventory.

         As the RSNs are regional in nature, to the extent that TCI is the
predominant cable provider in a specific region, the percentage of SSI
subscribers to certain of the RSNs may significantly exceed 23.3%.

         Satellite. Netlink International uplinks the signals of six broadcast
television station to C-Band packagers in the U.S. and Canada and to cable
systems in the U.S. The C-Band packagers and cable companies pay Netlink
International a fee for the right to sell these services to their customers.
Netlink International leases six satellite transponders on an "unprotected" or
"transponder unprotected" basis on a communications satellite. Netlink
International has "seniority status" on such satellite transponders which
results in Netlink International having favorable ranking should transponders be
required to restore a "protected" service. See "Satellite Transponder
Agreements" below.


                                      I-36
<PAGE>   39


         Superstar/Netlink was formed in April, 1996 as a joint venture owned
50% by Liberty Media Group and 50% by UVSG, an entity controlled by TCI Ventures
Group. Effective February 1, 1998, Turner-Vision contributed the assets,
obligations and operations of its retail C-Band HSD business to
Superstar/Netlink (the "Turner-Vision Acquisition"). As a result of the
Turner-Vision Acquisition, Superstar/Netlink is currently owned approximately
40% each by Liberty Media Group and UVSG and 20% by Turner-Vision.

         Superstar/Netlink is the nation's largest provider of programming to
C-Band customers with approximately 57% of the C-Band market. This includes
approximately 330,000 subscribers added through the Turner-Vision Acquisition.
Superstar/Netlink acquires rights to market various satellite-transmitted
programming, including services such as HBO, STARZ!, ESPN and USA, to C-Band HSD
households. Superstar/Netlink offers HSD owners various packages of programming
for monthly, quarterly, semi-annual and annual subscription periods. Once a
subscriber has ordered service by telephone or through a C-Band HSD retailer,
Superstar/Netlink transmits an authorization code to the customer's descrambler,
allowing the customer to receive the programming.

         UVSG provides satellite-delivered video, audio, data and program
promotion services to cable television systems, DTH satellite dish users, radio
stations and private network users primarily throughout North America, and
software development and systems integration services to commercial entities,
the federal government and defense related agencies in locations throughout the
United States. (See "TCI Ventures Group - Diversified Satellite Communications"
for a detailed description of UVSG.

         In January 1998, TCI acquired an additional 12,373,294 shares of the
Class A Common Stock of UVSG from Lawrence Flinn, Jr., the founder of UVSG, in
exchange for 7,336,745 shares of Liberty Group Series A Stock and 12,688,812
shares of TCI Ventures Group Series A Stock. Of the UVSG shares so acquired,
6,186,647 were attributed to the Liberty Media Group. As a result of such
transaction, TCI's total equity interest in UVSG increased to 73% of which
approximately 17% was attributable to Liberty Media Group.

         On February 17, 1998, UVSG announced that it had agreed to acquire
Liberty Media Group's 40% interest in Superstar/Netlink and its 100% interest in
Netlink International. In exchange for these assets, UVSG will issue to TCI
approximately 6,375,000 shares of Class A Common Stock of UVSG, all of which
shares will be attributed to the Liberty Media Group. If the proposed
transaction is consummated, TCI's aggregate equity and voting interest in UVSG
will increase to approximately 77% of which, approximately 29% will be
attributed to Liberty Media Group. Consummation of the transaction is subject to
several conditions, including negotiation of definitive agreements, regulatory
approvals and approval of UVSG's stockholders. There can be no assurance that
such transaction will be consummated.

         WTBS. During 1997 Southern and its wholly-owned subsidiary, Royal
Communications, Inc. ("Royal"), transmitted the signal of WTBS, a 24-hour
independent UHF television station originated by TBS, from the uplinking
facilities of LMC Satcom, Inc. ("LMC SatCom"). Southern made the WTBS signal
available to cable television system operators and operators of other
non-broadcast distribution media and to C-Band HSD owners through program
packagers. No payment to TBS was required for the transmission by Southern of
the WTBS signal.



                                      I-37
<PAGE>   40


         In connection with the TBS/Time Warner Merger, Liberty Media Group and
Time Warner entered into an agreement providing for the grant to Time Warner of
the Southern Option to purchase the Southern Business. Effective January 1,
1998, Time Warner purchased such assets pursuant to the Southern Option. For a
more detailed description of this transaction, see the description of the
TBS/Time Warner Merger in "Entertainment and Information" above.

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

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

         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 (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 the Company
in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC
Order").


                                      I-38
<PAGE>   41


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

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


                                      I-39
<PAGE>   42


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

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

         In July 1997, pursuant to a Stock Exchange Agreement, dated as of May
1997, by and between Paul G. Allen and HSNI (the "Stock Exchange Agreement"),
HSNI acquired 12,283,014 shares of the common stock ("Ticketmaster Common
Stock") of Ticketmaster Group, Inc. ("Ticketmaster") in exchange for the
issuance to Mr. Allen of 7,238,507 shares of HSNI's Common Stock, subject to the
issuance of up to an additional 3,257,238 shares of HSNI's Common Stock to be
reserved for contingent issuance in July 1998 if the average market price of HSN
Common Stock over a specified period prior to such date is below $29 per share.
In July 1997, HSNI acquired, in open market purchases, 70,000 and 42,000 shares,
respectively, of Ticketmaster Common Stock for $16 per share, or an aggregate
purchase price of $1,792,000 (excluding commissions). Under the Stock Exchange
Agreement, Mr. Allen was required to use all reasonable efforts to cause
Ticketmaster to take such action so that, effective upon the closing under the
Stock Exchange Agreement, the Board of Directors of Ticketmaster would consist
of up to a majority of persons designated by HSNI (the precise number of which
was to be determined by HSNI). Under this provision, Barry Diller, Chairman and
Chief Executive Officer of HSNI, and James Held, President and Chief Executive
Officer of HSN and Vice Chairman of HSNI, joined the Ticketmaster Board of
directors as of the closing under the Stock Exchange Agreement. Based upon
24,739,715 shares of Ticketmaster Common Stock outstanding as of May 20, 1997,
the shares of Ticketmaster Common Stock held by HSNI represent approximately
50.1% of the total number of shares of Ticketmaster Common Stock outstanding.


                                      I-40
<PAGE>   43


         As a consequence of the issuance of shares of HSNI Common Stock to Mr.
Allen pursuant to the Stock Exchange Agreement, under applicable FCC regulations
and interpretations (including the FCC Order), Liberty Media Group was permitted
to hold an indirect equity interest in a greater number of shares of HSNI than
it held immediately prior to the issuance of such shares. In accordance with the
terms of the Contingent Right held by Liberty Media Group, 2,002,591 shares of
HSNI Common Stock were issued to Liberty Media Group immediately following the
issuance of shares of HSNI Common Stock to Mr. Allen. The Contingent Rights
Shares issued to Liberty HSN were contributed to BDTV III INC. ("BDTV-III"), a
newly formed entity with substantially the same terms as BDTV-I and BDTV-II
(with the exception of certain transfer restrictions).

         In October 1997, HSNI delivered a letter to the Board of Directors of
Ticketmaster proposing a transaction pursuant to which HSNI would acquire all
publicly held shares of Ticketmaster's Common Stock.

         In February 1998, pursuant to an Investment Agreement among 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.


                                      I-41
<PAGE>   44


         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.

         Pursuant to agreements entered into in connection with the Universal
Transaction, Universal is permitted initially to designate four persons,
reasonably satisfactory to HSNI, to HSNI's Board of Directors, of whom no more
than one can be a non-affiliate of Universal, and generally will have the right
to designate one member of HSNI's Board of Directors for each 10% ownership the
equity of HSNI (including LLC Shares) up to a maximum of four directors.
Universal currently has four designees serving on HSNI's Board of Directors. In
addition, provided that Liberty Media Group's ownership of HSNI stock remains at
certain levels and subject to applicable law, Liberty Media Group will have the
right to designate up to two directors of HSNI at such time as Liberty Media
Group is no longer prohibited from having representation on HSNI's Board of
Directors. Pursuant to law and FCC regulations, Liberty Media Group is not
currently permitted to have a designee on HSNI's Board of directors. HSNI has
also agreed in the LLC Agreement that, subject to the same ownership thresholds,
Liberty Media Group will be permitted to designate, depending on its ownership
level, up to two directors to the Board of Directors of the LLC, to the extent
that Liberty Media Group is not permitted to designate directors of HSNI. The
two Liberty Media Group designees serving as directors of the LLC since the
closing of the Universal Transaction are Robert R. Bennett and Leo J. Hindery,
Jr.

         In connection with the Universal Transaction, HSNI changed its name to
USA Networks, Inc.

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


                                      I-42
<PAGE>   45


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

         Each USA Station, through the applicable HSNI subsidiary, has entered
into an affiliation agreement with HSN pursuant to which such USA Station
broadcasts HSN's electronic retail sales programming for 164 hours per week.
HSNI is continuing to evaluate the status of these affiliation agreements
following the HSN Merger. HSNI plans to determine on a market by market basis
whether the USA Stations will continue to air HSN, or whether HSNI will instead
disaffiliate HSN and the USA Stations and develop and broadcast programming
independently of HSN. In addition to analyzing such a disaffiliation, HSNI may
consider a number of other options with respect to the USA Stations. These
options include selling the USA Stations or entering into partnership
arrangements with broadcasters and/or cable operators. HSNI has made no final
decision as to how it will utilize the USA Stations. HSNI plans to disaffiliate
and independently program its Miami station. HSNI intends over time to program
all of these stations on a local basis, either by itself or with partners. If
USA Broadcasting elects to develop programming independently of HSN, substantial
expenditures would be required to develop USA Broadcasting programming and
promotions, requiring significant capital expenditures, which, during this
developmental and transitional stage, will not be offset by sufficient revenues.

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

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

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

                                      I-43
<PAGE>   46


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

         In addition to the electronic retailing and broadcasting businesses,
HSNI's subsidiaries are involved in Internet shopping and other businesses
complementary to electronic retailing.

         During 1996 and in 1997, HSNI entered into two international ventures
as a minority participant. HSN owns a 29% interest in Home Order Television
("HOT"), a venture based in Germany. HOT is carried via cable and satellite to
several million households in Germany and Austria. HSN also owns a 30% interest
in "Shop Channel," a venture based in Japan. Shop Channel currently is carried
by cable affiliates to approximately one-half million Japanese households.

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

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

         Competition-Programming Companies. The business of distributing
programming for cable television is highly competitive. The number of analog
channels available to the average customer of a domestic cable television system
is 60 or less. The various sports, entertainment and information Programming
Companies described above in which Liberty Media Group has interests (the
"Programming Companies") directly compete with other programming services for
distribution on a limited number of cable television channels and on other
distribution media and, when distribution is obtained, the programming offered
by the Programming Companies competes, in varying degrees, for viewers and
advertisers with other cable programming services and off-air broadcast
television, radio, print media, motion picture theaters, video cassettes,
internet services and other sources of information and entertainment. Important
competitive factors are the prices charged for programming, the quantity,
quality and variety of the programming offered and effectiveness of marketing
efforts. With the advent of new compression technologies, which are intended to
increase channel capacity, competition for channel capacity may substantially
decrease, although additional competitors may enter the marketplace thereby
increasing competition for subscriber fees and advertising revenue.

                                      I-44
<PAGE>   47


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

         Superstar/Netlink competes with other C-Band program packagers, some of
which are affiliated with well-known, large programmers and cable television
system operators. Because a significant portion of sales are generated through
C-Band HSD dealers, Superstar/Netlink also competes for dealer relationships on
the basis of commission rates and quality of service offered to the dealer and
its customers. In addition, the C-Band market faces competition from cable
television as well as technologies such as DBS services, which were launched in
1994. DBS uses higher power Ku-Band frequencies that can be received by
significantly smaller and less expensive HSDs than HSDs that receive C-Band
frequencies. Because of the smaller dish size, DBS is more widely accepted than
C-Band systems in urban markets. The Company believes that the entry of DBS will
serve to decrease the size of the C-Band market in the short and long term.
During 1997, the C-Band industry decreased 7% to 2.1 million subscribers.

         Netlink International faces competition from multiple satellite
carriers which uplink other superstation and network signals, using C-Band and
Ku-Band frequencies. There are no specific statutory or regulatory restrictions
that would prevent another satellite carrier from retransmitting the
superstation and network signals transmitted by Netlink International so long as
that carrier meets the requirements of the Copyright Act and any applicable
requirements of the Communications Act of 1934, as amended (the "Communications
Act"). Further, Netlink International has no control over the programming on
such stations. Netlink International's business could be adversely affected by
changes in the type, mix or quality of the programming on the stations it
transmits that result in such services becoming less desirable to subscribers.

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


                                      I-45
<PAGE>   48


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

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

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

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


                                      I-46
<PAGE>   49


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

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

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

         Regulation of Program Licensing. The 1992 Cable Act directed the FCC to
promulgate regulations regarding the sale and acquisition of cable programming
between multichannel video programming distributors (including cable operators)
and satellite-delivered programming services in which a cable operator has an
attributable interest. The legislation and the implementing regulations adopted
by the FCC preclude virtually all exclusive programming contracts between cable
operators and satellite programmers affiliated with any cable operator (unless
the FCC first determines the contract serves the public interest) and generally
prohibit a cable operator which has an attributable interest in a satellite
programmer from improperly influencing the terms and conditions of sale to
unaffiliated multichannel video distributors. Further, the 1992 Cable Act
requires that such affiliated programmers make their programming services
available to cable operators and competing multichannel video programming
distributors such as MMDS and DBS distributors on terms and conditions that do
not unfairly discriminate among such distributors. The 1996 Telecom Act has
extended this requirement to programming services in which telephone companies
and other common carriers have attributable ownership interests. On December 18,
1997, the FCC initiated a proposed rulemaking to consider, among other things,
whether it should award damages to prevailing complainants in proceedings
alleging violations of the FCC's program access rules. Certain members of
Congress and FCC officials recently have considered proposals that would further
expand such program access rights, including the possible extension of access
and nondiscrimination requirements to video programming offered by programmers
which are unaffiliated with cable operators.


                                      I-47
<PAGE>   50


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

         Regulation of Cable Service Rates. Cable systems are subject to
extensive rate regulation as summarized above in "TCI Group - Domestic Cable and
Communication Services - Regulation and Legislation - Cable Rate Regulation".
Such comprehensive regulations include provisions controlling rate increases for
changes in costs, including programming costs, and for additional channels. The
1996 Telecom Act eliminates rate regulation of CPSTs (i.e., the tiers of
programming above the BST) in all cable systems as of March 31, 1999. However,
certain members of Congress and FCC officials have called for an extension of
such rate regulation and also have urged more rigorous rate regulation
(including the imposition of limits on pass-throughs of programming cost
increases).

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

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

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


                                      I-48
<PAGE>   51


         The 1992 Cable Act also imposed obligations to carry "local" broadcast
stations for such stations which chose a "must carry" right, as distinguished
from the "retransmission consent" right described above. The rules adopted by
the FCC generally provided for mandatory carriage by cable systems of all local
full-power commercial television broadcast signals selecting must carry and,
depending on a cable system's channel capacity, non-commercial television
broadcast signals. In July 1993, the FCC ruled that stations predominantly used
for the transmission of sales presentations or program-length commercials
operate in the public interest and are entitled to choose "must carry" status.
HSNI's full-time broadcast affiliates have all requested "must carry" status in
lieu of a retransmission fee. A petition for reconsideration of the FCC's ruling
currently remains pending before the FCC, which petition has been opposed by
HSNI. On March 31, 1997, the United States Supreme Court upheld the
constitutionality of the must carry regulations. Such statutorily mandated
carriage of broadcast stations coupled with the provisions of the 1984 Cable
Act, which require cable television systems with 36 or more "activated" channels
to reserve a percentage of such channels for commercial use by unaffiliated
third parties ("Leased Commercial Access") and permit franchise authorities to
require the cable operator to provide channel capacity, equipment and facilities
for public, educational and governmental access, could adversely affect some or
substantially all of the Programming Companies by limiting the carriage of such
services in cable systems with limited channel capacity. The channel capacity
devoted to must carry could increase dramatically if television broadcast
stations proceed with planned conversions to digital transmission and the FCC
determines that cable systems must carry all analog and digital signals
transmitted by television stations. However, as a result of "must carry," HSNI
has experienced increased cable distribution of its programming due to an
increase in the number of cable systems that carry HSNI programming.

         Leased Commercial Access. On February 4, 1997, the FCC released revised
rules for calculating the maximum rate for leased commercial access to tiered
channels. The revised formula yields a lower maximum rate than that calculated
under the prior rule such that the use of leased access may be expected to
increase, thereby further restricting the channel capacity available for
carriage of the Programming Companies. Users of commercial leased access have
sought judicial review of the FCC's February 1997 Order, claiming that the FCC
did not appropriately limit commercial leased access rates. If this challenge
were successful, the FCC would be required to initiate a further rulemaking
which could result in additional reductions of commercial leased access rates
and increased use of leased access channels.

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


                                      I-49
<PAGE>   52


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

         Closed Captioning Regulation. The 1996 Telecom Act also required the
FCC to establish rules and an implementation schedule to ensure that video
programming is fully accessible to the hearing impaired through closed
captioning. On 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 exemptions. As a result, Liberty Media Group's programming
interests are expected to incur significant additional costs for closed
captioning. A number of parties have petitioned the FCC to reconsider various
provisions of these rules, and such petitions remain pending.

         Voluntary Parental Television Guidelines. On January 17, 1997, the
National Association of Broadcasters, the National Cable Television Association,
and the Motion Picture Association of America submitted a joint proposal to the
FCC proposing a voluntary ratings system for video programming which they
supplemented on August 1, 1997. After consulting with public interest groups and
interested persons from the private sector, the Commission found on March 12,
1998 that the voluntary industry guidelines for rating video programming are
consistent with the requirements of the 1996 Telecom Act.

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


                                      I-50
<PAGE>   53


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

         Under regulations adopted by the Copyright Office, satellite carriers
such as Netlink International are not "cable systems" within the meaning of the
Copyright Act. Accordingly, Netlink International is not permitted to provide
superstation or network station broadcast signals to C-Band HSD owners under the
separate compulsory license extended to cable systems. Pursuant to the Satellite
Home Viewer Act of 1994 (the "SHV Act"), Congress granted a compulsory copyright
license to satellite carriers retransmitting the broadcast signals of
"superstations," such as KWGN, and network stations to the public for private
home viewing. In 1994, Congress extended this license until December 31, 1999.
If the license granted under the SHV Act is not further extended, satellite
carriers will be required to negotiate private licenses for the retransmission
of copyrighted material to C-Band HSD owners after 1999. Netlink International
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 under the SHV Act. Netlink International has
entered into an agreement with representatives of the National Association of
Broadcasters and its television network affiliate members to identify by zip
code those geographic areas which are "unserved" by network affiliated stations.
Depending upon implementation of the agreement and such identification, Netlink
International may be required, after the expiration of a transition period, to
disconnect a substantial number of existing subscribers which would have a
material adverse effect upon the operations of Netlink International.


                                      I-51
<PAGE>   54


         On October 28, 1997, the Librarian of Congress (the "Librarian")
announced final rules increasing the monthly copyright royalty fee for the
secondary transmission of superstations and network stations by satellite
carriers, such as Netlink International, to 27 cents per subscriber for distant
superstations and network stations. Those monthly fees had been 17.5 cents for
superstations and 6 cents for network stations. The Librarian adopted the
royalty fees which had been recommended by the Copyright Arbitration Royalty
Panel (the "Panel") in a report submitted to the Librarian. Although the Panel
had recommended that the new fees be effective as of July 1, 1997, the Librarian
determined that the fees became effective on January 1, 1998. Consequently, the
copyright fees paid by Netlink International for the retransmission of broadcast
signals to HSD owners will increase significantly. The resulting increases in
retail prices to subscribers may cause a substantial decrease in the number of
subscribers to Netlink International services. On October 30, 1997, the
Satellite Broadcasting & Communications Association, of which Netlink
International is a member, filed a Petition for Review of the Librarian's
decision with the United States Court of Appeals for the District of Columbia
Circuit, which remains pending. The Court of Appeals refused to grant an interim
stay of the increase. 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.

         Syndicated Exclusivity. The FCC's syndicated exclusivity rules, which
became effective January 1, 1990, require cable systems with more than 1,000
subscribers to delete programming from distant broadcast signals if exclusive
local broadcast rights to such programming have been purchased by a television
station which broadcasts in the locale of the cable system and such station
requests the cable system to "black out" such programming. These rules could
have an adverse effect on Netlink's business if the stations it transmits were
to carry a material amount of programming subject to deletion.

         FCC Licensing. Satellite carriers, including carriers like Netlink
International that lease transponders from others rather than owning a
satellite, may provide their services as a private carrier and/or as a common
carrier. Private carriers, such as Netlink International, are subject to a
lesser degree of regulation by the FCC. The Copyright Act exempts a carrier from
liability for copyright infringement in delivering television broadcast signals
to cable television systems if it meets the passive carrier requirements of the
Copyright Act.

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


                                      I-52
<PAGE>   55


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

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


                                      I-53
<PAGE>   56


         TCI VENTURES GROUP

         TCI Ventures Group includes TCI's principal international assets and
substantially all of TCI's non-cable and non-programming domestic assets.
Specifically, the assets that are attributed to the TCI Ventures Group are
comprised principally of (i) TCI's interest in TINTA, which is the Company's
primary vehicle for the conduct of its international cable, telephony and
programming businesses (other than those international programming businesses
attributed to the Liberty Media Group), (ii) TCI's principal interests in the
domestic wireless and wireline telephony businesses, consisting primarily of the
Company'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) and Sprint PCSsm brands
(trademarks of Sprint Communications Company L.P.) (the "PCS Ventures"), the
Company's interest in Teleport Communications Group Inc. ("TCG"), a competitive
local exchange carrier, and the Company's wholly-owned subsidiary Western
Tele-Communications, Inc. ("WTCI"), which provides long distance transport of
video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) a
portion of TCI's interest in UVSG, which provides satellite-delivered video,
audio, data and program promotion services to cable television systems,
satellite dish owners, radio stations and private network users, primarily
throughout North America (a portion of TCI's interest in UVSG is also attributed
to the Liberty Media Group), (iv) TCI's interest in @Home, a provider of high
speed multimedia Internet services, and the Company's interest in other
Internet-related assets, and (v) other assets, including National Digital
Television Center, Inc. ("NDTC"), a wholly-owned subsidiary of the Company that
provides digital compression and authorization services to programming suppliers
and to video distribution outlets and ETC w/tci, Inc. ("ETC"), a wholly-owned
subsidiary of the Company that develops and distributes for-profit education,
training and communications services and products. The stocks of TINTA, TCG,
UVSG and @Home are traded on the National Market tier of The Nasdaq Stock Market
under the symbol "TINTA", "TCGI", "UVSGA" and "ATHM" respectively.

         On January 8, 1998, TCG announced it had entered into certain
agreements pursuant to which it agreed to merge with a subsidiary of AT&T
Corporation ("AT&T"). As a result of the merger, TCG would become a wholly-owned
subsidiary of AT&T and the former stockholders of TCG would receive common stock
of AT&T, with TCI receiving for its interest in TCG, approximately 46.95 million
shares of AT&T common stock. Such shares would be attributed to the TCI Ventures
Group. The transaction is subject to a number of regulatory and other conditions
and there can be no assurance that such transaction will be consummated on the
terms contemplated by the parties, or at all.

         Agreements governing the TCI Ventures Group's investment in certain of
the entities in which the TCI Ventures Group has interests contain (i) buy-sell
and other exit arrangements whereby the TCI Ventures Group could be required to
purchase another investor's ownership interest, (ii) performance guarantees
whereby the TCI Ventures Group and/or other subsidiaries of TCI have guaranteed
the performance of the TCI Ventures Group subsidiary that directly holds the TCI
Ventures Group's investment, (iii) restrictions on TCI Ventures Group's ability
to sell or otherwise transfer certain of its investments and (iv) provisions
restricting TCI's ability to compete with certain entities in which it has an
investment.



                                      I-54
<PAGE>   57


         The following table lists the entities the Company's interest in which
has been attributed to the TCI Ventures Group and sets forth, as of December 31,
1997, the TCI Ventures Group's direct or indirect equity interest in such
entities (rounded to the nearest whole number) and the businesses currently
conducted by such entities. The table excludes certain direct and indirect
wholly-owned subsidiaries of TCI, the sole assets of which consist of interests
in the listed entities. With respect to listed entities that are partnerships or
the interest in which is held through a partnership or similar structure, the
Company's voting rights and rights to participate in the earnings of affiliates
may differ from the equity interests indicated in the table below.

<TABLE>
<CAPTION>

                                                 TCI VENTURES GROUP'S
                                                 --------------------
                                                  DIRECT OR INDIRECT
                                                  ------------------   
COMPANY                                              INTEREST(1)              BUSINESS
- -------                                              -----------              --------  
<S>                                                    <C>                    <C>
International Cable, Telephony and Programming
- ----------------------------------------------
Tele-Communications International, Inc.                85% equity             International cable, telephony and
                                                       92% voting             programming interests and operations


Domestic Telephony
- ------------------

Sprint Spectrum Holding Company, L.P.                  30%                    PCS under the "Sprint" brand name
PhillieCo, L.P.                                        35%                    PCS under the "Sprint" brand name

Teleport Communications                                28% equity (2)         Competitive local exchange carrier
Group, Inc.                                            41% voting

Kansas City Fiber Network, L.P.                        50% (3)                Competitive local exchange carrier
                                                                              serving the Kansas City metropolitan
                                                                              area

NHT Partnership                                        40% (4)                Competitive local exchange carrier
                                                                              serving the Buffalo metropolitan area

New Jersey Fiber Technologies, L.P.                    79% (4)                Competitive local exchange carrier
                                                                              serving the Morristown and New
                                                                              Brunswick, NJ metropolitan area

Louisville Lightwave                                   50% (4)                Competitive local exchange carrier
                                                                              serving the Louisville and
                                                                              Lexington, KY metropolitan area
</TABLE>


                                      I-55
<PAGE>   58



                              
                         
<TABLE>
<CAPTION>                                 
                                            TCI VENTURES GROUP'S  
                                            -------------------- 
                                             DIRECT OR INDIRECT 
                                             ------------------
COMPANY                                          INTEREST (1)                 BUSINESS
- -------                                          ------------                 --------  
<S>                                                   <C>                     <C>

Domestic Telephony (continued)
- ------------------------------
Western Tele-Communications, Inc.                     100%                    Provider of microwave and wireline
                                                                              transport of telecommunications
                                                                              services

Diversified Satellite Communications
- ------------------------------------

United Video Satellite Group, Inc.                     39% equity (5)         Satellite distribution of video,
                                                       85% voting             audio, data and program promotion
                                                                              services

Internet Services
- -----------------

At Home Corporation                                    39% equity             High-speed multimedia Internet
                                                       72% voting             services

Sportsline USA, Inc.                                    5%                    Internet provider of branded
                                                                              interactive sports information,
                                                                              programming and merchandise

iVillage, Inc.                                          6%                    Developer of, and Internet and
                                                                              on-line provider of, branded
                                                                              communities and information services
                                                                              pertaining to parenting, careers and

                                                                              personal health
Interzine Productions, Inc.                           15%(6)                  Internet provider of interactive
                                                                              sports communities and information
                                                                              services

KPCB Java Fund, L.P.                                    7%                    Investor in Java application
                                                                              development
</TABLE>


                                      I-56
<PAGE>   59

<TABLE>
<CAPTION>

                                             TCI VENTURES GROUP'S
                                             --------------------- 
                                               DIRECT OR INDIRECT
                                               ------------------
COMPANY                                           INTEREST (1)                  BUSINESS
- -------                                           ------------                  -------- 
<S>                                                    <C>                      <C>
Other Assets
- ------------
National Digital Television Center, Inc.                 100%                   Television production and provider
                                                                                of digital compression and
                                                                                transmission and authorization
                                                                                services to programmers, cable
                                                                                systems and other video distributors

ETC w/tci, Inc.(7)                                       100%                   Developer and distributor of
                                                                                for-profit education, training and
                                                                                communication services and products

CareerTrack, Inc.(7) (8)                                  95%                   Provider of business and
                                                                                educational seminars and related
                                                                                publications
National School Conference                                80%                   Provider of conference and
Institute, Inc.(7)(8)                                                           satellite-delivered staff
                                                                                development programming for
                                                                                educators

IngeniusTM7 (8) (9)                                      100%                   Developer of educational software
                                                                                products designed to facilitate
                                                                                classroom learning

The Lightspan Partnership, Inc.(7) (8)                     8%                   Developer of educational
                                                                                programming

Academic Systems Corporation(7) (8)                        5%                   Provider of higher education
                                                                                multimedia instruction materials

DigiVentures, LLC(10)                                     99%                   Lessor of digital set-top box
                                                                                equipment

Acclaim Entertainment, Inc.(11)                            9%                   Publisher of entertainment software

Antec Corporation(12)                                     16%                   Manufacturer of products for
                                                                                hybrid fiber/coaxial broadband
                                                                                networks

Intessera, Inc.                                          100%                   Provider of database management
                                                                                software
</TABLE>




                                      I-57
<PAGE>   60


<TABLE>
<CAPTION>

                                             TCI VENTURES GROUP'S
                                             --------------------
                                              DIRECT OR INDIRECT 
                                              ------------------     
COMPANY                                            INTEREST(1)                BUSINESS
- -------                                            -----------                --------  
<S>                                                    <C>                    <C>
Other Assets (continued)

TCI-TVGOS, Inc.                                        100%                   Holds an undivided interest in
                                                                              certain intellectual property rights
                                                                              of TV Guide on Screen, a joint
                                                                              venture which has been dissolved

Your Choice TV (13)                                     25%                   Provider of programming service
                                                                              offering recently aired first-run
                                                                              television programming on a time
                                                                              shifted basis
MCNS Holdings, L.P.                                     25%                   Developer of multimedia
                                                                              communications network and
                                                                              associated technologies

Kitty Hawk Capital Limited Partnership, II               3%                   Venture capital fund

New Enterprise Associates IV, L.P.                       1%                   Venture capital fund

Venture First II, L.P.                                   1%                   Venture capital fund

TVSM, Inc.                                              10%                   Publishing company of various cable
                                                                              television programming guides
</TABLE>

- ------------------------
         (1)      For indirect equity and voting interests, the percentage in
                  the table is calculated by multiplying TCI's percentage
                  interest in the holding company by the holding company's
                  percentage interest in the listed company.

         (2)      TCG has entered into an agreement to acquire ACC Corp. in a
                  stock for stock merger. If such transaction is consummated,
                  the Company's equity and voting interest in TCG would be
                  reduced. In addition, as described above, in January 1998, TCG
                  agreed to be acquired by AT&T in a stock for stock merger.
                  Both of such transactions are subject to a number of
                  regulatory and other conditions and there can be no assurance
                  that either of such transactions will be consummated on the
                  terms contemplated by the parties, or at all.


                                      I-58
<PAGE>   61



         (3)      The other 50% interest in Kansas City Fiber Network, L.P. ("KC
                  Fiber") is owned by Kansas City Cable Partners, a partnership
                  that owns and operates cable systems in the Kansas City area,
                  in which the TCI Group holds a 50% interest. TCI and the other
                  partner of KC Fiber have signed an agreement to sell the
                  assets of KC Fiber to TCG for cash proceeds of approximately
                  $55 million. Such transaction is subject to certain regulatory
                  and other conditions, and there can be no assurance that it
                  will be consummated. If consummated, 50% of the proceeds will
                  be attributed to the TCI Ventures Group and the remaining
                  proceeds will be attributed to Kansas City Cable Partners. TCG
                  has also agreed to make an additional cash payment for fiber
                  leased to KC Fiber by TCI affiliates which payment would be
                  attributed to the TCI Group.

         (4)      On February 12, 1998, TCI sold its interests in NHT
                  Partnership, Louisville Lightwave and New Jersey Fiber
                  Technologies, L.P. to Hyperion Telecommunications, Inc.
                  ("Hyperion") for cash proceeds of $62.1 million. $44.3 million
                  of such purchase price has been attributed to the TCI Ventures
                  Group and the remainder of such proceeds has been attributed
                  to the TCI Group as payments by Hyperion for fiber leased to
                  such entities by TCI affiliates.

         (5)      In January 1998, TCI acquired an additional 12,373,294 shares
                  of the Class A Common Stock of UVSG from Lawrence Flinn, Jr.,
                  the founder of UVSG, in exchange for 7,336,745 shares of
                  Liberty Group Series A Stock and 12,688,812 shares of TCI
                  Ventures Group Series A Stock. 6,186,647 of the USVG shares so
                  acquired were attributed to the TCI Ventures Group and
                  6,186,647 of such shares were attributed to the Liberty Media
                  Group. As a result of such transaction, TCI's total equity
                  interest in UVSG increased to 73% and its voting interest
                  increased to 93%, with the TCI Ventures Group's equity
                  interest increasing to 56% and its voting interest increasing
                  to 89%. On February 17, 1998, UVSG announced that it had
                  agreed to acquire Liberty's 40% interest in Superstar/Netlink
                  and its 100% interest in Netlink International which delivers
                  various distant broadcast signal services commonly known as
                  the "Denver 6" and certain other programming interests to
                  multichannel video service providers. In exchange for these
                  assets, UVSG will issue to TCI approximately 6,375,000 shares
                  of Class A Common Stock of UVSG, all of which shares will be
                  attributed to the Liberty Media Group. If the proposed
                  transaction is consummated, TCI's aggregate equity and voting
                  interest in UVSG will increase to approximately 77% and 94%,
                  respectively, and TCI Ventures Group's equity and voting
                  interest will decline to 48% and 85%, respectively, as a
                  result of such transaction. Consummation of the transaction is
                  subject to several conditions, including negotiation of
                  definitive agreements, regulatory approvals and approval of
                  UVSG's stockholders; there can be no assurance that such
                  transaction will be consummated.

         (6)      On February 26, 1998, Interzine Productions, Inc.
                  ("Interzine") sold all of its assets to a third party for $5
                  million. TCI expects that its share of the proceeds remaining
                  to be distributed to equity holders after the payment of
                  Interzine's creditors will be nominal.

                                      I-59
<PAGE>   62


         (7)      On September 23, 1997, the Company announced that it and ETC
                  entered into a letter of intent with Knowledge Universe,
                  L.L.C. ("Knowledge Universe"). The letter of intent
                  contemplates that TCI, through ETC, would become a partner of
                  Knowledge Universe in a new venture. Knowledge Universe would
                  make a substantial investment in the new venture, and ETC
                  would contribute a significant portion of its assets to the
                  new venture. As a result, Knowledge Universe would be the
                  majority owner of the new venture, with ETC retaining a
                  significant minority interest. Although the letter of intent
                  has expired, the parties continue to discuss the transactions
                  contemplated by it. There can be no assurance that a
                  definitive agreement for the proposed transaction with
                  Knowledge Universe will be entered into or that the terms
                  thereof will not be substantially different from those
                  described above or that the proposed transaction will
                  ultimately be consummated.

         (8)      Held through ETC.

         (9)      Ingenius(TM) is in the process of winding down most of its
                  lines of business and is offering for sale substantially all
                  of its remaining assets, which consist primarily of
                  intellectual property.

         (10)     In January 1998, the TCI Ventures Group's interest in
                  DigiVentures, LLC was assigned to TCIC, a member of the TCI
                  Group, in return for $7 million in cash. In connection
                  therewith, TCIC also assumed the capital lease obligations of
                  DigiVentures, LLC, totaling $176 million.

         (11)     The Company sold its interest in Acclaim Entertainment, Inc.
                  in February 1998 for cash proceeds of approximately $17
                  million.

         (12)     This interest was previously represented by TCI's interest in
                  TSX Corporation which merged with Antec Corporation in
                  February 1997.

         (13)     Liberty Media Group also owns a 24.5% interest in Your Choice
                  TV. Discovery owns the remaining 51% interest.

         The principal assets attributed to the TCI Ventures Group are described
in greater detail below.

         International Cable, Telephony and Programming.

         The TCI Ventures Group's international cable, telephony and programming
assets consist primarily of the Company's interests in TINTA. TINTA, through its
subsidiaries and affiliates, operates multi-channel video and telecommunications
distribution networks in, and provides diversified programming services to,
selected markets outside the United States ("U.S.").

         TINTA's activities are concentrated in Europe, Latin America and The
Caribbean, and Asia and Australia, with particular focus at present on the
United Kingdom ("U.K."), Argentina and Japan. TINTA has ownership interests in
companies operating broadband networks that, at December 31, 1997, provided
cable television service to an aggregate of approximately 3.9 million basic
customers and provided telephone service over approximately 1.2 million
telephone lines (primarily in the U.K.) (a customer may have multiple telephone
lines). As of December 31, 1997, TINTA also had ownership interests in or
managed 48 cable and satellite programming services which were received by
customers in various countries outside the U.S.


                                      I-60
<PAGE>   63


         Included among TINTA's cable and telephony distribution assets are an
indirect 27% interest in Telewest Communications plc ("Telewest") and a 40%
interest in Jupiter Telecommunications Co., Ltd. ("Jupiter"). Telewest and
Jupiter provide cable television and residential and business cable telephony in
the United Kingdom and Japan, respectively. TINTA's interest in Telewest is held
through a joint venture with US WEST, Inc. Telewest is a leading provider of
cable television and cable telephony services in the United Kingdom. Telewest
provides cable television services over a broadband (i.e., high capacity)
network and uses such network, together with twisted-pair copper wire
connections for final delivery to the customer premises, to provide telephony
services to its customers. The broadband network enables Telewest to deliver a
variety of both television and telephony services to it customers and will
enable Telewest to provide customers with a range of interactive and integrated
entertainment, telecommunications and information services as they become
available in the future. As of December 31, 1997, Telewest was offering home
access to the Internet in all of its franchises.

         Telewest is in the process of constructing its cable networks. As of
December 31, 1997, construction had been completed of broadband cable networks
which "passed" (i.e., could be connected to) approximately 75% of the homes in
Telewest's owned and operated franchises and 89.5% of the homes in the seven
franchises in which Telewest has a minority interest. Telewest is also
developing a broadband inter-franchise network to carry voice, data and video
traffic between its franchises which is expected to reduce interfranchise
connection charges. As of December 31, 1997, the inter-franchise network was
operational with full completion expected by the middle of 1998.

         At December 31, 1997, Telewest's franchises (including franchises in
which it owns a minority interest) covered approximately 5.1 million homes and
 .29 million businesses and within such franchises Telewest provided, on an
equity basis, cable television service to approximately 687,000 basic customers
and telephony service to approximately 929,000 residential and business
customers. "On an equity basis" means the total number of customers served
multiplied by Telewest's indirect percentage equity interest in the franchise.
Telewest believes that its franchises (including the franchises in which it owns
a minority interest) included more than 25.7% of the U.K. homes in areas covered
by cable licenses at December 31, 1997. Telewest's ordinary shares trade on the
London Stock Exchange and are represented by American Depositary Receipts in the
United States, where they trade on the National Market tier of The Nasdaq Stock
Market.

         Jupiter, the first multiple system operator ("MSO") in Japan, was
formed by TINTA and Sumitomo Corporation ("Sumitomo") in 1995. At December 31,
1997, Jupiter had ownership interests in 23 companies, of which it manages 20,
that own cable franchises clustered in three main areas: Tokyo, Osaka and
Kyushu. The cable plant of each of Jupiter's cable systems, other than the
Suginami system, consists primarily of coaxial cable. The architecture of the
Suginami system, which includes a fiber optic backbone or "trunk," has been
designed to be state-of-the-art, with the specific goal of being telephone
capable. To the extent economically feasible, Jupiter intends to expand its
cable networks and rebuild its existing cable systems with the same network
architecture as that which currently exists in its Suginami system. At December
31, 1997, Jupiter's franchises covered approximately 3,542,000 franchise homes,
its cable plant passed approximately 1,704,000 homes, and it served
approximately 194,000 basic cable customers. Jupiter began providing telephony
services over its cable system on a commercial basis on July 1, 1997 in its
Suginami franchise.


                                      I-61
<PAGE>   64


         TINTA also has a 26% ownership interest in Cablevision S.A.
("Cablevision") which provides cable television service in and around Buenos
Aires, Argentina. TINTA reduced its interest in Cablevision from 51% to 26% in
October 1997; however, TINTA will continue to have the right to manage
Cablevision (pursuant to a renewable five-year management contract), and all
material corporate transactions of Cablevision will require TINTA's approval, so
long as TINTA maintains at least a 16% interest in Cablevision. The purchasers
of TINTA's interest in Cablevision also purchased an additional 39% interest in
Cablevision that TINTA had the right to acquire. Cablevision has been
continually expanding its customer position through acquisitions and internal
growth. In the fourth quarter, Cablevision acquired a 50% interest in Video
Cable Comunicaciones S.A. and a 50% interest in United International Holdings
Inc.'s cable systems in Argentina. Cablevision also acquired 100% of Mandeville
Cable Partners Argentina II in January 1998. As a result of these acquisitions,
Cablevision added, on an equity basis, approximately 850,000 customers. At
February 1, 1998, Cablevision provided, on an equity basis, cable television
service to an aggregate of approximately 1.5 million subscribers.

         TINTA's programming interests include a 37% equity interest
(representing a 50% voting interest) in Flextech p.l.c. ("Flextech"), a 33%
interest in MultiThematiques, S.A. ("MultiThematiques") and a 50% interest in
Jupiter Programming Co., Ltd. ("JPC"). Through its subsidiaries and affiliates,
Flextech creates, packages and markets entertainment and information programming
for distribution on cable television and direct-to-home ("DTH") satellite
providers throughout the United Kingdom and, to a lesser extent, parts of
continental Europe. Flextech also owns an interest in a terrestrial broadcast
network. By acquiring interests in and establishing alliances among providers of
a variety of entertainment programming, Flextech has been able to achieve
significant economies of scale and establish itself as a major low-cost provider
of television programming. At December 31, 1997, Flextech had interests in 15
cable and satellite channels of which 14 are distributed in the U.K. market.
Flextech's ordinary shares trade on the London Stock Exchange.

         In April 1997, Flextech and BBC Worldwide Limited formed two separate
joint ventures (the "BBC Joint Ventures") and entered into certain related
transactions. One of the joint ventures will operate and launch a number of new
subscription television channels for distribution in the U.K. and Ireland; the
other joint venture will operate and develop U.K. Gold Television Limited, the
producers of U.K. Gold. As a result of the creation of the BBC Joint Ventures
and certain related transactions, TINTA's equity interest in Flextech declined
from 46% to 36%. TINTA's voting power would have fallen below 50% as a result of
these transactions; however, upon consummation of the BBC Joint Ventures, one of
TINTA's Flextech shares was redesignated as a "special voting share" which
enabled TINTA to maintain its voting power at 50%. The weighted voting rights
attached to the special voting share, which does not participate in dividends
and has only a nominal liquidation preference, will terminate upon the
occurrence of the earliest of (i) April 14, 2000, (ii) any transfer of Flextech
shares by TINTA outside a specified affiliated group or (iii) TINTA's interest
in Flextech falling below 30%. In light of TINTA's decreased voting interest in
Flextech, TINTA, effective January 1, 1997, ceased to consolidate Flextech and
began to account for Flextech using the equity method of accounting. In July
1997 and September 1997, TINTA purchased Flextech shares in transactions which
increased its equity ownership of Flextech to 37%.


                                      I-62
<PAGE>   65


         MultiThematiques and JPC provide multi-channel programming to cable
television and DTH satellite providers in continental Europe and Japan,
respectively. As of December 31, 1997, MultiThematiques offered sixteen
programming services which are distributed throughout France (five channels),
Spain (two channels), Germany (three channels), Italy (five channels) and Poland
(one channel) by cable television operators and DTH satellite providers.
MultiThematiques has also secured carriage on DTH satellite platforms in
Scandinavia. Programming developed by MultiThematiques may be used to support
TINTA's distribution interests in other regions, particularly Japan and Latin
America; for example, MultiThematiques has signed an agreement with JPC to
create two thematic channels for cable and satellite distribution in Japan. JPC
was formed in February 1996 by TINTA and Sumitomo and is Japan's first
multi-channel programming company. JPC has ownership interests in and management
control of six channels, two of which were launched in 1997 and one of which was
launched in February 1998. Of these six channels, JPC has management control of
four, shared management control of another, and, with respect to the sixth
channel, JPC has the right to veto certain material transactions. JPC also has
acquired distribution rights for all of Japan's premier soccer league matches.

         Through certain other joint ventures with strategic partners, TINTA has
cable and telephony distribution and/or programming interests in Puerto Rico,
Chile, Poland, Ireland, Malta, Israel, France, and Australia. TINTA has also
formed (i) a strategic partnership with News Corp. and two of Latin America's
leading media companies, Globo Comunicacoes e Participacoes ltda. and Grupo
Televisa, S.A., for the development and operation of a DTH satellite service for
Brazil, Mexico, and various other Latin American countries and (ii) Fox Sports
International, a joint venture with Liberty Media Group and News Corp. to
operate currently existing sports services in Latin America and Australia and a
variety of new sports services throughout the world, excluding the United States
and certain other defined geographic areas. Fox Sports International is more
fully described under "Liberty Media Group--Programming Services--Sports
Programming Services." TINTA sold (i) its indirect 13% interest in Sky Network
Television New Zealand, Ltd. in September 1997, for cash proceeds of
approximately $54 million, (ii) its 49% interest in Asia Business News
(Singapore) Private ("ABN"), a financial business news channel distributed in
Asia, in December 1997, in exchange for a subordinated promissory note of ABN in
the principal amount of $25 million and (iii) its 49% interest in TeleCable
Nacional, CXA, a cable operator in the Dominican Republic, in January 1998, for
cash proceeds of $10 million.

         Agreements governing TINTA's investment in certain of the entities in
which TINTA has interests contain (i) buy-sell and other exit arrangements
whereby TINTA could be required to purchase another investor's ownership
interest, (ii) performance guarantees whereby TINTA and/or other subsidiaries of
TCI have guaranteed the performance of the TINTA subsidiary that directly holds
the TINTA investment, (iii) restrictions on TINTA's ability to sell or otherwise
transfer its investment in an entity and (iv) provisions restricting TINTA's
(and in certain circumstances TCI's) ability to compete with the entity in which
it has an investment.


                                      I-63
<PAGE>   66



         Competition

         International Cable and other Multi-Channel Television. The various
cable operators in which TINTA has interests directly compete for customers and
advertisers in local markets with other providers of entertainment, news and
information, including broadcast television and radio, newspapers, magazines and
other printed material, motion picture theaters and video cassette rental
stores. Such cable operators also compete with companies who use alternative
methods of distributing the same or similar video programming offered by cable
television systems such as terrestrial (over the air) broadcast stations, MMDS,
DTH satellite services, SMATV and in some instances, digital terrestrial
services and certain narrowband providers. The most significant competition for
cable operators, including Telewest, in the U.K. multi-channel television market
currently comes from providers of DTH satellite television services and, in
particular, British Sky Broadcast Group plc ("BSkyB"). DTH satellite services
are widely available in the U.K. In those countries where, by regulation or
policy, cable operators do not have an exclusive franchise, TINTA's cable
operators compete with other cable operators, and if permitted by regulation or
policy, with telephone companies providing video services in their franchises.
The extent of competition with the services provided by TINTA's cable
subsidiaries or affiliates in any particular market depends, among other
factors, on price (including up-front and service costs), the amount and quality
of the programming offered, customer satisfaction and quality of the system
network. The full extent to which other media or home delivery services will
compete with cable television systems may not be known for some time and there
can be no assurance that existing, proposed or as yet undeveloped technologies
will not become dominant in the future. TINTA also competes with similar
operators of broadband distribution networks for franchises, the acquisition of
existing cable operators and financing.

         Cable television has a limited operating history in many regions of the
world outside the United States. Although TINTA operates cable systems in
markets where it believes there is consumer demand for multi-channel television
services, TINTA is unable to predict with certainty how consumer demand for the
services provided by its cable television subsidiaries and affiliates will
develop over time.


                                      I-64
<PAGE>   67


         International Cable Telephony. The Company believes that it is
preferable for TINTA's cable subsidiaries and affiliates to offer a wide range
of cable services, including telephony services where permitted under the
applicable statutory and regulatory framework and where business conditions
permit. Currently, the U.K. and Japan are the only countries in which TINTA is
providing both television and telephony services to customers. Although no
assurances can be given, TINTA anticipates that legal restrictions on the
provision of telephony services by its cable subsidiaries and affiliates in
certain other countries will be relaxed or eliminated over the next few years.
In markets in which TINTA is allowed to offer cable telephony services, the
primary competitor is the national public telephone company. TINTA believes that
the established public telephone operators generally benefit from their
long-standing relationships with customers, substantial technical and financial
resources and established ubiquitous networks. The success of the telephony
operations of a cable operator is dependent upon its ability to convince
long-time customers of the national public telephone providers to switch to its
telephony network. Telewest and Jupiter are both relatively new entrants to the
telephony business, and have sought to compete with the more well established
telephone operators by pricing cable telephony call charges below those of the
established telephone operators. In both the U.K. and Japan, the ability of the
established public telephone operators to respond to such price competition has
been restricted by their license obligation not to show undue preference to or
unduly discriminate against different classes of customers and to offer uniform
rates nationally. There can be no assurance that either Telewest or Jupiter will
be able to continue to price its telephony services below those charged by the
national public telephone providers, or that future price reductions will not
adversely impact the profitability of its telephony operations. The ability to
provide viable cable telephony services is also dependent on the ability of
TINTA's cable subsidiaries and affiliates to interconnect with the local
telephone network of the public telephone company in order to complete calls
that originate from a customer on the cable network of such subsidiary or
affiliate but terminate off its network, or that originate from a caller off its
cable network and terminate on its network. Regulations in the U.K. provide a
means by which disputes over pricing and other terms of interconnection can be
determined by a government representative. In Japan, under interim rules the
national public telephone provider currently is required to enter into
interconnection agreements.

         International Programming. The business of distributing programming for
cable and satellite television is highly competitive. TINTA's programming
subsidiaries and affiliates (the "TINTA Programming Companies") directly compete
with other programming services for distribution on a limited number of
television channels and, when distribution is obtained, the programming offered
by the TINTA Programming Companies competes, in varying degrees, for viewers and
advertisers with other programming services, as well as with other entertainment
media. The Company believes that important competitive factors include the
prices charged for programming, the quantity, quality and variety of the
programming offered and effectiveness of marketing efforts. With the advent of
new compression technologies, which are intended to increase channel capacity,
competition for channel capacity may substantially decrease, although additional
competitors may have the opportunity to enter the marketplace. In addition to
competition for cable and satellite distributors, viewers and advertisers, the
TINTA Programming Companies also compete, to varying degrees, for product with
other programming companies that distribute similar types of programs.



                                      I-65
<PAGE>   68


         Government Regulation. Substantially every country in which TINTA has,
or proposes to make, an investment regulates, in varying degrees, (i) the
granting of cable and telephony franchises, the construction of cable and
telephony systems and the operations of cable, other multi-channel television
operators and telephony operators and service providers as well as the
acquisition of, and foreign investments in, such operators and service providers
and (ii) the broadcast and content of programming and Internet services and
foreign investment in programming companies. Regulations or laws may cover
wireline and wireless telephony, satellite and cable communications and Internet
services, among others. Regulations or laws that exist at the time TINTA makes
an investment in a subsidiary or affiliate may thereafter change, and there can
be no assurance that material and adverse changes in the regulation of the
services provided by TINTA's subsidiaries and affiliates will not occur in the
future. Regulation can take the form of price controls, service requirements and
programming and other content restrictions, among others. Moreover, some
countries do not issue exclusive licenses to provide multi-channel television
services within a geographic area, and in those instances TINTA may be adversely
affected by an overbuild by a competing cable operator. In certain countries
where multi-channel television is less developed, there is minimal regulation of
cable television, and hence the protections of the cable operator's investment
available in the United States and other countries (such as rights to renewal of
franchises and utility pole attachment) may not be available in these countries.

         Domestic Telephony.

         General. The TCI Ventures Group's telephony assets consist primarily of
(a) TCI's investments, held through TCI Telephony Holdings, Inc., a Delaware
corporation and an indirect wholly-owned subsidiary of TCI, in the PCS Ventures,
a series of partnerships formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband PCS, to
residential and business customers nationwide under the Sprint(R) and Sprint
PCSsm brands (trademarks of Sprint Communications Company L.P.), and its
investment in TCG, which is a competitive local exchange carrier ("CLEC"), and
(b) the Company's wholly-owned subsidiary WTCI, which provides long distance
transport of video, voice and data traffic and other telecommunications services
to telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region. The PCS
Ventures include Sprint Spectrum Holding Company, L.P. and MinorCo, L.P.
(collectively, "Sprint PCS" or the "Sprint PCS Partnerships"), and PhillieCo
Partners I, L.P. ("PhillieCo"). The partners of each of the Sprint PCS
Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast, Cox
Communications, Inc. ("Cox") and TCI (collectively, the "Sprint PCS Partners").
The partners of PhillieCo are subsidiaries of Sprint, Cox and TCI. TCI has a 30%
interest as a partner in each of the Sprint PCS Partnerships and an approximate
35% interest as a partner in PhillieCo. As of December 31, 1997, TCI had a 28%
equity interest (which represented a 41% voting interest) in the outstanding
common stock of TCG. In January 1998, TCG entered into certain agreements
pursuant to which it agreed to be acquired by AT&T in a stock for stock merger
as more fully described above. As used herein, the terms "Sprint PCS" and
"Sprint PCS Partnerships" include the consolidated subsidiaries of Sprint
Spectrum Holding Company, L.P. ("Sprint Spectrum").

         Domestic Wireless Telephony. Sprint PCS is a leading provider of
wireless communications products and services in the United States. Sprint PCS
believes that it is the largest broadband wireless PCS company in the United
States in terms of total license coverage of "Pops." The term "Pops" refers to
the population of a geographic area covered by a license or group of licenses
and, as used here, is based on the Donnelley Marketing Service estimate of the
December 31, 1995 population of a geographic area. At December 31, 1997, Sprint
PCS owned 30 MHz PCS licenses for 30 markets covering 152 million Pops
including, among others, the New York, San Francisco, Detroit, Dallas/Fort Worth
and Boston/Providence Major Trading Areas ("MTAs").


                                      I-66
<PAGE>   69



         To increase its network Pop coverage, Sprint PCS has affiliated, and
expects to continue to affiliate with, other PCS providers, including those in
which Sprint PCS or affiliates of the Sprint PCS Partners have an interest.
Pursuant to affiliation agreements, each affiliated PCS service provider will be
included in the Sprint PCS national network and will use the Sprint(R) and
Sprint PCSSM brand names (trademarks of Sprint Communications Company L.P.).
Sprint PCS, together with other PCS licensees that have affiliated, or are
expected to affiliate with Sprint PCS, will have licenses to provide service to
the entire United States population (excluding certain United States
territories).

         Sprint PCS has entered into affiliation agreements with American PCS,
L.P. ("APC"), which operates a broadband PCS system in the Washington
D.C./Baltimore MTA covering 8.3 million Pops, the nation's first commercially
operational PCS system, and Cox Communications PCS, L.P. ("Cox PCS"), which
operates a broadband PCS system in the Los Angeles/San Diego MTA covering 21.5
million Pops. As of December 31, 1997, Sprint PCS had a 49% limited partnership
interest in Cox PCS and a 58% interest in APC. Effective January 1, 1998, Sprint
PCS acquired the remaining 42% interest in APC which it did not already own and
on February 3, 1998, Cox Pioneer Partnership notified Sprint PCS that it was
exercising its put rights and would transfer 10.2% of the interest in Cox PCS to
Sprint PCS, subject to FCC approval, which would give Sprint PCS a controlling
interest in Cox PCS. Sprint PCS also expects to enter into an affiliation
agreement with PhillieCo, which owns a PCS license for the Philadelphia MTA
covering 9.1 million Pops. (PhillieCo currently markets its products and
services as Sprint PCS.) However, no assurance can be given that PhillieCo and
Sprint PCS will enter into such an agreement.

         SprintCom, Inc. ("SprintCom"), an affiliate of Sprint, participated in
the FCC's D and E Block PCS auctions for additional 10 MHz Basic Trading Area
("BTA") PCS licenses, and was awarded in April 1997 licenses for 139 BTAs
covering approximately 70 million additional Pops, all of which are geographic
areas not covered by Sprint PCS's PCS licenses or licenses owned by APC, Cox PCS
and PhillieCo. SprintCom has indicated that it intends to market products and
services as Sprint PCS when it offers commercial services. In accordance with
certain agreements among the Sprint PCS Partners, SprintCom is required to offer
to enter into an affiliation agreement with Sprint PCS with respect to such BTA
licenses pursuant to which SprintCom's PCS systems in such areas would be
included in Sprint PCS's national PCS network, although a final agreement has
not yet been reached. In the interim, Sprint PCS has been providing buildout
services in certain BTA markets where SprintCom was awarded PCS licenses and is
being reimbursed by SprintCom for such services.

         Sprint PCS commenced initial commercial PCS operations late in the
fourth quarter of 1996 and emerged from the development stage during the third
quarter of 1997. As of February 15, 1998, Sprint PCS had launched service in 32
MTAs covering 133 metropolitan markets. Sprint PCS and its affiliates have more
than one million customers. During 1997, Sprint PCS's emphasis and focus shifted
from an initial network buildout process to network operations.


                                      I-67
<PAGE>   70


         Currently Sprint PCS uses a variety of distribution channels, including
third-party retailers, Sprint PCS-owned retail stores, direct sales force and
telemarketing. One of Sprint PCS's third party retailers, Radio Shack, accounted
for more than 10% of Sprint PCS's operating revenues in 1997. Sprint PCS will
continue to review and implement new distribution channels in the future as it
determines the most effective combination of options.

         Sprint PCS's broadband PCS systems differ from traditional analog
cellular telephone service principally in that PCS systems operate at a higher
frequency band (1850-1900 MHz radio spectrum), have more spectrum allotted and
have different license areas. Sprint PCS is implementing what it believes to be
a state-of-the-art PCS network using a frequency management technology or
"protocol" called Code Division Multiple Access ("CDMA"). The FCC has not
mandated a universal digital protocol for PCS systems. Currently, various
vendors have proposed three principal competing, incompatible protocols for use
in PCS systems: CDMA, GSM and TDMA (IS-136). The GSM protocol is an updated,
up-banded version of the TDMA-based protocol now in use in Europe. APC's PCS
system uses the GSM protocol; however, APC expects to launch CDMA services on a
commercial basis before the end of the first quarter of 1998. TDMA (IS-136) is
an up-banded version of the TDMA-based digital cellular protocol now used by
cellular operators in the U.S. CDMA is a first-generation technology that was
commercially deployed in the United States in 1996. Sprint PCS selected the CDMA
technology rather than the other technologies because it believes it will have
increased subscriber capacity, higher quality of transmission and lower
infrastructure and ongoing support costs.

         Handsets used for CDMA-based PCS systems are not automatically
compatible with analog cellular systems or other digital systems (cellular or
PCS) which utilize a different protocol (i.e., a non-CDMA protocol), and vice
versa. However, Sprint PCS offers dual-mode, dual-band telephones, which enable
Sprint PCS's customers with such handsets to make and receive calls on analog
cellular systems in areas where Sprint PCS does not offer service. The FCC
requires that all cellular, PCS, and enhanced specialized mobile radio
licensees, including Sprint PCS, permit customers in good standing of other such
providers with handsets technically compatible with the subject licensee's base
stations to manually roam (i.e., make and receive calls after providing separate
billing information to the service provider) on the subject licensee's network.
In addition, subject to Sprint PCS entering into and implementing contracts with
analog cellular providers and other CDMA PCS providers ("Roaming Partners"),
Sprint PCS is able to offer automatic roaming (the ability to make and receive
calls without providing separate billing information) to its own customers and
to customers of its Roaming Partners who are traveling in or through Sprint
PCS's service area. Customers typically pay higher rates while roaming outside
of their home market.

         Sprint PCS has entered into roaming agreements with various analog
cellular providers throughout the United States and Canada. Additionally, Sprint
PCS has negotiated roaming arrangements with other CDMA PCS carriers who provide
service in geographic areas not currently covered by the CDMA network of Sprint
PCS and its affiliates. As a result, Sprint PCS customers who have dual-mode
handsets capable of transmitting over cellular and CDMA PCS frequencies have the
ability to roam automatically in areas where Sprint PCS service is not available
and where there are roaming agreements.

                                      I-68
<PAGE>   71


         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.

         Domestic Wireline Telephony. The TCI Ventures Group's wireline
telephony investments currently consist primarily of its interest in TCG. TCG,
the largest CLEC in the United States as measured by route miles, offers
comprehensive telecommunications services in major metropolitan markets
nationwide. TCG competes with incumbent local exchange carriers ("ILECs") as
"The Other Local Phone Company"(R) (a registered service mark of TCG) by
providing high quality, integrated telecommunications services, primarily over
fiber optic digital networks, to meet the voice, data, and video transmission
needs of its customers. TCG's customers are principally
telecommunications-intensive businesses, healthcare and educational
institutions, governmental agencies, long distance carriers and resellers,
Internet service providers, disaster recovery service providers, wireless
communications companies and financial services companies. TCG believes that it
offers these customers technologically advanced telecommunications services, as
well as superior customer service, flexible pricing and vendor and route
diversity. As of December 31, 1997, TCG operated high-capacity state-of-the-art
digital networks in 65 metropolitan markets, including 19 of the 20 largest
metropolitan areas. As of December 31, 1997, TCG's fiber optic networks spanned
over 9,470 route miles, contained over 491,090 fiber miles and served
approximately 13,510 buildings. As described above, TCG has entered into an
agreement to be acquired by AT&T in a stock for stock merger.



                                      I-69
<PAGE>   72


         TCG introduced a general long distance service offering packaged with
its existing local services in 22 metropolitan areas in September 1997. The
service is being provided primarily through the resale of other carriers'
services, although TCG provides long distance services over its own facilities
wherever possible.

         TCG provides its customers with a comprehensive array of local and long
distance telecommunications services, including basic local exchange telephone
services, enhanced switched services, Internet services, national and
international toll services, 800 services, dedicated services, high-speed
switched data services, disaster avoidance services and video channel
transmission services. Switched voice services offered by TCG primarily use
high-capacity digital switches to route voice transmission anywhere on the
public switched telephone network. TCG's dedicated services, which include
private line and special access services, use high-capacity digital circuits to
carry voice, data and video transmission from point-to-point in multiple
configurations. TCG provides its media industry customers with point-to-point,
broadcast-quality video channels for video transmission between two or more
locations, including video link services to major television networks as well as
to other programmers. TCG also provides private network management and systems
integration services for businesses that require combinations of various
dedicated and switched telecommunications services.

         TCG believes that it has historically benefited from its relationships
with the corporate parents of the holders of its supervoting Class B Common
Stock, TCI, Cox, Comcast, and, for periods prior to November 13, 1997, MediaOne
of Delaware, Inc. (formerly Continental Cablevision, Inc.) (collectively, the
"TCG Cable Stockholders"). TCG has the indefeasible right to use certain fiber
optic and cable transmission facilities of each of the TCG Cable Stockholders
for compensation based on the cost of construction of such facilities. Such
arrangement was entered into between TCG and each of the TCG Cable Stockholders
prior to TCG's initial public offering in June 1996. In connection with the
execution of the merger agreement between AT&T and TCG, the TCG Cable
Stockholders entered into certain amendments to such arrangements which provide,
among other things, that, subject to certain exceptions, TCI (or the applicable
other TCG Cable Stockholders) will be obligated to construct, or permit certain
approved contractors to construct, additional fiber optic facilities for use by
TCG on similar terms at TCG's request during a period ending on January 8, 2008.
In addition, such arrangements, as so amended, place certain restrictions on the
ability of TCI and the other TCG Cable Stockholders to transfer cable systems
without causing the applicable owner of such cable systems following such
transfer to remain subject to such obligation to construct, or permit certain
approved contractors to construct, such additional fiber optic facilities.

         In February 1997, TCG acquired CERFnet Services Inc. ("CERFnet"), a
dial-up and dedicated Internet access, World Wide Web hosting and co-location
services, and Internet training), in exchange for approximately 2.1 million
shares of TCG's Class A Common Stock. CERFnet operates an advanced nationwide
backbone network, maintains state-of-the-art Internet server facilities and has
established and maintains direct peering relationships with other Internet
service providers. TCG has accelerated the expansion of CERFnet's services on a
nationwide basis and has packaged CERFnet's Internet services with TCG's
telecommunications services. As of December 31, 1997, TCG offered a variety of
Internet services in 22 metropolitan areas.


                                      I-70
<PAGE>   73


         Effective as of March 1, 1997, TCG acquired Eastern TeleLogic
Corporation ("Eastern") for approximately 2.8 million shares of TCG's Class A
Common Stock. TCG also assumed $53 million in debt and loaned $115 million to
Eastern, the proceeds of which were used by Eastern to redeem the stock held by
certain minority shareholders. The acquisition of Eastern provided TCG with
access to the Philadelphia market, the nation's fifth largest market, and
allowed TCG to establish a contiguous network between Boston and Washington,
D.C.

         In April 1997, TCG entered into a master communications services
agreement with @Home to provide targeted co-location facilities and local
telephone circuits for infrastructure and subscriber connectivity at promotional
and standard pricing over a five-year term. The agreement provides @Home with
the option to co-locate certain of its equipment in TCG premises in which event
@Home will incur certain obligations to use TCG's services. The Internet
services being or to be offered by @Home may compete with those being or to be
offered by TCG through CERFnet.

         In October 1997, TCG acquired the remaining 50.1% equity interest in
BizTel Communications, Inc. ("BizTel") not owned by TCG in exchange for the
issuance of approximately 1.7 million shares of TCG's Class A Common Stock. TCG
had previously acquired a 49.9% interest in BizTel in February 1996. BizTel
holds FCC licenses to provide telecommunications services utilizing 38 GHz
digital milliwave transmission in over 200 geographic areas, which include more
than 95 of the 100 largest metropolitan markets and all markets where TCG
operates. BizTel's 38 GHz milliwave services can be used by TCG to economically
connect customers to TCG's fiber optic networks, to provide network redundancy,
diverse routing or quick temporary installations and to provide stand-alone
facilities where TCG does not have fiber optic networks.

         On November 26, 1997, TCG entered into an agreement to acquire ACC
Corp. ("ACC"), a switch-based provider of telecommunications services to
businesses, residential customers and educational institutions in the United
States, Canada and the U.K., in a stock for stock merger. The total aggregate
amount of consideration to be received by the ACC stockholders is expected to be
approximately $1 billion, subject to adjustments to the merger exchange ratio in
certain circumstances. The merger is subject to approval of the ACC stockholders
and to a number of regulatory and other conditions and there can be no assurance
that such transaction will be consummated on the terms contemplated by the
parties, or at all.

         TCG has substantial business relationships with a few large customers,
including major long distance carriers. During 1997, TCG's top 10 customers
accounted for approximately 40% of TCG's total revenues. No customer accounted
for more than 10% of such revenue during that period.

         In addition to TCG, the TCI Ventures Group's wireline telephony
investments include a 50% partnership interest in KC Fiber, a CLEC serving the
metropolitan area of Kansas City, Missouri. The other 50% interest in KC Fiber
is owned by Kansas City Cable Partners, a partnership that owns and operates
cable systems in the Kansas City area, in which the TCI Group holds a 50%
interest. As described in more detail above, TCI and the other partner of KC
Fiber have signed an agreement to sell the assets of KC Fiber to TCG for a
purchase price of approximately $55 million (TCG will also be required to assume
certain obligations). If consummated, TCI Ventures Group's share of such 
purchase price will be $20 million.
 

                                      I-71
<PAGE>   74


         The TCI Ventures Group also includes TCI's wholly-owned subsidiary,
WTCI, a regional carrier of long-haul telecommunications services, providing
primarily high-speed point-to-point private line and frame relay communications
services on a wholesale basis capable of offering audio, video and data
transmission to customers in a 12 state area in the northwestern region of the
United States. WTCI has the capability to expand its service to include two
additional states with minimal capital expenditures should its customer base
dictate the need. WTCI's customers are principally long distance carriers and
other telecommunications companies for whom WTCI primarily supplies digital
point-to-point private line, frame relay and data transport services. WTCI's
customers also include over 56 cable companies (including TCI) for whom WTCI
provides primarily video analog transmission services. WTCI uses a diversified
high-speed telecommunications network infrastructure, consisting primarily of
its 16,000 route mile owned and operated digital microwave network, together
with fiber transmission capacity leased by WTCI from other carriers. For the
year ended December 31, 1997, WTCI's six largest customers accounted in the
aggregate for approximately 55% of WTCI's consolidated gross revenue. WTCI's six
largest customers' master service contracts all contain many service orders (in
some cases in excess of 100 service orders) with remaining terms varying from 1
month to approximately 10 months.

         Competition.

         Domestic Wireless Telephony. There is substantial competition in the
domestic wireless telecommunications industry, and Sprint PCS has stated its
expectation that such competition will intensify as a result of the entrance of
new competitors and the increasing pace of development of new technologies,
products and services. Each of the markets in which Sprint PCS competes is
served by other two-way wireless service providers, including cellular and PCS
operators and resellers. Many of these competitors have been operating for a
number of years, currently serve a substantial subscriber base and have
significantly greater financial and technical resources than those available to
Sprint PCS. Certain of Sprint PCS's competitors are operating, or planning to
operate, through joint ventures and affiliation arrangements, wireless
telecommunications systems that encompass most of the United States. Sprint PCS
also expects that existing analog wireless service providers will upgrade their
systems and provide expanded and digital services to compete with Sprint PCS's
PCS system. In addition, Sprint PCS will face competition from other current or
developing technologies, such as paging, enhanced specialized mobile radio and
satellite networks.

         Continuing technological advances in telecommunications and policies of
the FCC that encourage the development of new spectrum-based technologies make
it impossible to predict the extent of future competition. The Omnibus Budget
Reconciliation Act of 1993 requires, among other things, the allocation to
commercial use of a portion of 200 MHz of the spectrum previously reserved for
government use. It is possible that some portion of the spectrum that is
reallocated or other available spectrum will be used to create new land-mobile
services or to expand existing land-mobile services that may compete with Sprint
PCS's service offerings.

         The Company anticipates that market prices for two-way wireless
services generally will decline in the future based upon increased competition.
Sprint PCS competes to attract and retain customers principally on the basis of
services and features, the size and location of its service areas and pricing.
Sprint PCS's ability to compete successfully also depends, in part, on its
ability to anticipate and respond to various competitive factors affecting the
industry, including new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors, which could adversely affect Sprint PCS's operating
margins.


                                      I-72
<PAGE>   75


         The cost to Sprint PCS of PCS handsets is not currently comparable with
the cost to analog operators of analog cellular handsets. While Sprint PCS
believes that its PCS handsets are competitively priced as compared to digital
cellular handsets of comparable size, weight and features, cellular operators
may frequently subsidize the sale of analog handset units at prices below those
with which Sprint PCS can compete through its handset subsidies.

         Domestic Wireline Telephony. TCG operates in an increasingly
competitive environment. Services substantially similar to those offered by TCG
are also offered by the ILECs and other CLECs serving the metropolitan markets
currently served or intended to be served by TCG. TCG believes that ILECs
generally benefit from their long-standing relationships with their customers,
substantial financial and technical resources, established ubiquitous networks
and federal and state regulations that could provide them with increased pricing
flexibility as competition increases. In addition, in most of the metropolitan
areas in which TCG currently operates, at least one, and sometimes several,
other CLECs offer substantially similar services at substantially similar prices
to those of TCG. Other CLECs or ILECs entering new geographic markets, cable
television companies, electric utilities, long distance carriers, microwave
carriers, wireless telephone system operators and private networks built by
large end users may offer services similar to those offered by TCG. In addition,
the current trend of business combinations and alliances in the
telecommunications industry, including mergers between ILECs, between
interexchange carriers ("IXCs") and international carriers and between CLECs and
IXCs, also may create significant new competitors or may increase the
competitiveness of TCG's existing competitors.

         To the extent TCG interconnects with and uses the ILECs' networks to
service TCG's customers, TCG is dependent upon the technology and capabilities
of the ILECs to meet certain telecommunications needs of TCG's customers and to
maintain its service standards. Although the 1996 Telecom Act imposes
interconnection obligations on ILECs as described below, there can be no
assurances that TCG will be able to obtain the services it requires at rates,
and on terms and conditions that permit TCG to offer its services at rates that
are both profitable and competitive.

         The 1996 Telecom Act is intended to increase competition in the local
telecommunications business. The 1996 Telecom Act requires all local exchange
providers, including TCG and new entrants, to interconnect with other carriers,
and to offer their services for resale. In addition, ILECs are required to offer
their retail services at wholesale rates for resale by competitors and to
provide other carriers with access to their network facilities on an unbundled
basis at any technically feasible point on rates, terms and conditions that are
just, reasonable and nondiscriminatory. These requirements may facilitate entry
by new competitors without substantial capital risk or investment. However,
there can be no assurance that any rates or facilities offered by ILECs to TCG
or other CLECs will be economically attractive or technically viable. While the
FCC in 1996 established national rules governing the rates and other terms and
conditions for the provision of facilities and services by the ILECs to TCG and
other would-be competitors, many of the FCC's rules, including those governing
rates, were overturned on appeal by the U.S. Court of Appeals for the Eighth
Circuit. In January 1998, the Supreme Court agreed to review the Court of
Appeals' rulings.


                                      I-73
<PAGE>   76


         TCG believes that the 1996 Telecom Act will provide it with increased
business opportunities and potentially better margins by opening all local
markets in urban areas to competition and by requiring ILECs to provide improved
direct interconnection at lower cost. However, under certain circumstances, the
FCC and state regulatory authorities permit the ILECs to lower selectively the
price of certain services within the areas in which TCG operates. In addition,
as a result of the FCC's access charge reform initiatives, ILECs are likely to
obtain additional pricing flexibility with regard to services that compete with
those offered by TCG. Further, some new entrants in the local market may price
certain services to a particular customer or for a particular route below the
prices charged by TCG for services to that customer or for that route, just as
TCG may itself underprice those new entrants.

         In addition, under the 1996 Telecom Act, ILECs formerly subject to
restrictions on the provision of cable television service and interLATA long
distance services are no longer restricted from entry into these businesses,
subject to certain requirements in the 1996 Telecom Act and rules and policies
to be implemented by the FCC and the states. "InterLATA services" are
telecommunications which originate in one and terminate in another local access
and transport area. The 1996 Telecom Act requires RBOCs to comply with certain
requirements, designed to open local markets to competition, as a precondition
to the RBOCs' receipt of authority to provide interLATA long distance services
within its home region. Legislation has been introduced in the Senate which if
enacted would allow the RBOCs, beginning one year after the date of enactment,
to provide interLATA services within their respective regions, irrespective of
whether they have satisfied the entry requirements established in the 1996
Telecom Act. Moreover, while none of the RBOCs has as yet received the
regulatory approval required under current law, several RBOCs (including SBC
Communications and BellSouth) have filed appeals, which are currently pending
before the U.S. Court of Appeals (D.C. Circuit), challenging the validity of
decisions by the FCC denying the RBOCs' applications for authority to provide
interLATA services in particular states within their respective regions. In
addition, on December 31, 1997, the U.S. District Court for the Northern
District of Texas issued a ruling which found the provisions of the 1996 Telecom
Act which impose restrictions and conditions on RBOC provision of in-region
interLATA services to be unconstitutional. On February 11, 1998, the District
Court granted a temporary stay of its decision pending the resolution of appeals
of the court's ruling filed by the government and various industry groups. Three
of the RBOCs, Bell Atlantic, Ameritech and US West, have asked the FCC to grant
relief, pursuant to Section 706 of the 1996 Telecom Act, which would allow them
to construct and operate high-speed, packet-switched, broadband data networks,
within as well as outside their home regions, without regard to present LATA
boundaries and free from otherwise applicable access, unbundling and resale
obligations and certain other regulatory requirements. Other RBOCs are expected
to seek similar relief. An RBOC's receipt of authority to provide in-region
interLATA services, as a result of the District Court's decision or through
other judicial, legislative, or regulatory action, will enable the RBOCs to
offer customers a full range of local and long distance telephone services.
Given the market power the RBOCs currently possess in the local exchange market,
the ability to provide both local and long distance services could further
strengthen the RBOCs' already strong competitive positions.

         Similar competitive factors to those described above as affecting TCG
affect KC Fiber.



                                      I-74
<PAGE>   77


         WTCI. WTCI faces growing competition from long distance carriers using
fiber optic cable. Historically, the area served by WTCI was remote and sparsely
populated and consequently fiber optic cable has only recently been laid in the
region. However, during the last two to three years, the network has been twice
overbuilt with fiber by other interexchange carriers. Additional overbuilds by
various IXCs are currently underway and/or planned for the near term. Such fiber
optic networks are expected to compete directly with WTCI's network for many of
the same customers along a significant portion of the same routes. The recurring
operating costs associated with maintaining WTCI's microwave network facilities
are greater than those associated with a fiber optic network. Although WTCI has
taken certain actions in response to such competition, such as developing more
cost effective methods of conducting its business and new uses for its microwave
facilities, there can be no assurance that such efforts will be successful.

         Government Regulation.

         Domestic Wireless Telephony. The FCC regulates the licensing,
construction, operation, acquisition, resale and interconnection arrangements of
domestic wireless telecommunications systems. The activities of wireless service
providers are subject to regulation in varying degrees, depending on the
jurisdiction, by state and local regulatory agencies as well. The FCC, in
conjunction with the Federal Aviation Administration (the "FAA"), also regulates
tower marking and lighting, and FCC environmental rules may cause certain PCS
network facilities to become subject to regulation under the National
Environment Policy Act. Pursuant to the 1996 Telecom Act and the FCC's
implementing regulations, all telecommunications carriers that provide
interstate telecommunications service, including PCS, are required to contribute
to the support of federal universal service programs. Sprint PCS is currently
challenging the authority of the states to collect universal service
contributions from PCS providers. In addition, the 1996 Telecom Act requires
telecommunications services to be accessible to and usable by persons with
disabilities, subject to certain exceptions. The FCC also has established rules
regarding the provision of enhanced emergency (E-911) services and number
portability by providers of wireless services, including PCS. Sprint PCS is
currently evaluating potential technical solutions to provide enhanced 911
capabilities. If cost-effective solutions are not identified and implemented by
the FCC's scheduled implementation date, Sprint PCS and other affected service
providers may be subject to penalties imposed by the FCC.

         Under the 1996 Telecom Act, both the FCC and state public utility
commissions regulate the terms of interconnection between broadband PCS networks
and the networks of local exchange carriers. Pursuant to Section 332(c)(3) of
the Communications Act, state and local governments generally are not permitted
to regulate the entry and rates charged by any commercial mobile service,
including PCS. States are not prohibited from regulating other terms and
conditions for PCS and other commercial mobile services, so long as such
regulations are consistent with the provisions of the Communications Act. In
particular, state and local governments can manage public rights of way and
require compensation for the use of such rights of way by telecommunications
carriers, including PCS providers, so long as the compensation is fair and
reasonable, imposed on a competitively neutral and non-discriminatory basis, and
publicly disclosed by the governmental entity. Under the 1996 Telecom Act,
states and localities cannot regulate the placement of wireless facilities so as
to prohibit the provision of wireless services or to discriminate among
providers of such services. In addition, so long as a wireless system complies
with the FCC's rules, the 1996 Telecom Act bars states and localities from using
environmental effects as a basis to regulate the placement, construction or
operation of wireless facilities. The FCC is considering numerous requests for
preemption of local actions affecting wireless facilities siting.



                                      I-75
<PAGE>   78


         The Communications Assistance for Law Enforcement Act of 1994 ("CALEA")
requires all telecommunications carriers, including wireless carriers, as of
October 25, 1998, to ensure that their equipment is capable of permitting the
government, pursuant to a court order or other lawful authorization, to
intercept any wire and electronic communications carried by the carrier to or
from its subscribers and to access certain call-identifying information.
Legislation is currently pending in Congress which if enacted would extend the
date by which carriers must comply with the "capability requirements" of CALEA
until October 1, 2000. Telecommunications industry standard-setting
organizations recently agreed to a joint standard to implement CALEA's
capability requirements. CALEA provides that in the absence of an FCC-prescribed
standard, a telecommunications carrier meeting publicly announced technical
requirements or standards adopted by an industry association or standard-setting
organization shall be considered to be in compliance with the capability
requirements of CALEA. Although Sprint PCS is able to offer traditional
electronic surveillance capabilities to law enforcement, Sprint PCS has
indicated that it will not be able to meet the requirements of the joint
standard by October 25, 1998. In addition, the United States Department of
Justice has objected that the industry joint standard is not sufficient to meet
CALEA's capability requirements and has requested the inclusion of a so-called
"punch list" of additional electronic surveillance capabilities. Government and
industry representatives currently are engaged in an effort to resolve
outstanding disputes with respect to the nature and scope of the obligations
imposed on carriers under CALEA. Should a court determine that Sprint PCS has
failed to meet its obligations under CALEA, Sprint PCS could be assessed a civil
penalty of up to $10,000 per day for each day it remains in violation after
issuance of an enforcement order or after such date as the court may specify.

         FCC licenses to provide PCS services are subject to renewal and
revocation. Sprint PCS's existing PCS licenses will expire in 2005, but Sprint
PCS has indicated that it expects that such licenses will be renewed by the FCC.
Under the FCC's rules, third parties may oppose renewal applications and/or file
competing applications. If one or more competing applications are received, a
renewal application will be subject to a comparative renewal proceeding. In such
proceedings, the applicant licensee will receive the benefit of a "renewal
expectancy" if it has provided "substantial" service and substantially complied
with all requirements of the Communications Act,as amended by the 1996 Telecom
Act, and other applicable FCC rules and policies. FCC rules require all A and B
Block PCS licensees to meet certain requirements including, without limitation,
coverage to one-third of the population of their service area(s) within the
first five years and to two-thirds of the population within the first ten years
of the award of a license. Violations of applicable Communications Act
requirements or FCC rules could result in revocation, non-renewal, fines or
forfeiture of Sprint PCS's licenses. As of December 31, 1997, Sprint PCS had
already exceeded the FCC's 5-year coverage requirements in 85% of its licensed
services areas.



                                      I-76
<PAGE>   79


         The Communications Act restricts foreign investment in and ownership of
certain FCC radio licensees, including PCS licensees. Non-United States citizens
or their representatives, foreign governments or their representatives, or
corporations organized under the laws of a foreign country may not own more than
20% of a common carrier licensee directly or more than 25% of the parent of a
common carrier licensee. The FCC has the authority to permit the parent of a
licensee to exceed the 25% benchmark for indirect foreign investment, but lacks
the authority to permit a licensee itself to exceed the 20% statutory limit on
direct foreign ownership. In November 1997, as a result of a multi-lateral
agreement negotiated under the auspices of the World Trade Organization ("WTO"),
the FCC adopted an order establishing new rules and policies implementing U.S.
commitments to allow up to 100% indirect foreign ownership of common carrier
licensees in appropriate circumstances. Under the new rules, licensees seeking
to accept indirect foreign investment above the 25% benchmark from WTO member
countries will no longer be required to demonstrate that the investor's home
market offers effective competitive opportunities to U.S. firms. If an entity
fails to comply with the foreign ownership requirements, the FCC may order the
entity to divest alien ownership to bring the entity into compliance with the
Communications Act. Other potential sanctions include fines, a denial of
renewal, or revocation of the license. As an affiliate of Sprint Corporation,
Sprint PCS is permitted, pursuant to a 1996 FCC decision, to have a foreign
ownership level of up to 35%. On March 13, 1997, the Sprint PCS Partners filed a
petition with the FCC seeking clarification regarding the application of the
foreign ownership restrictions to Sprint PCS and PhillieCo.

         Media reports have suggested that radio frequency ("RF") emissions from
wireless telephones or facilities might be linked to certain forms of cancer or
other health problems. Concerns over the potential health effects of RF
emissions may have the effect of discouraging the use of wireless telephones and
other wireless communications services, including PCS, and could lead to the
imposition of additional governmental regulations on PCS. In August 1996, the
FCC adopted revised guidelines and methods for evaluating the environmental
effects of RF transmitters, including cellular and PCS antennas and telephones.
The new rules generally are more stringent than the requirements in effect for
cellular operations and for PCS prior to the FCC's action. The owners of
wireless facilities and manufacturers of wireless telephones are responsible for
compliance with the new requirements.

         PCS licensees may use common carrier point-to-point microwave and
traditional landline facilities to connect cell sites and to link them to their
respective main switching offices. The FCC separately licenses these microwave
facilities, as well as the microwave transmission facilities of WTCI, and
regulates the technical parameters and service requirements of these facilities.
For a description of other regulatory issues applicable to WTCI, see "-Domestic
Wireline Telephony" below.

         Domestic Wireline Telephony. TCG and KC Fiber are subject to extensive
regulation at the federal, state, and local level. In most states, TCG is
subject to certification and tariff filing requirements with respect to
intrastate services. Under the 1996 Telecom Act, states retain authority to
impose on TCG and other telecommunications carriers requirements to preserve
universal service, protect public safety, ensure quality of service and protect
consumers. In addition, state and local governments are permitted to manage
public rights of way and to require fair and reasonable compensation from
telecommunications providers, on a competitively neutral and non-discriminatory
basis, so long as the compensation required is publicly disclosed by the
governmental entity. States also are responsible under the 1996 Telecom Act for
mediating and arbitrating interconnection arrangements between CLECs and ILECs
if the carriers fail to agree on such arrangements.


                                      I-77
<PAGE>   80


         TCG and KC Fiber are permitted, but not required, to file tariffs for
interstate access services with the FCC pursuant to streamlined tariff rules
that are less restrictive than those imposed on ILECs offering similar services.
TCG and KC Fiber currently are required to file tariffs for any domestic
interstate inter-exchange service which they provide. Tariffs filed with the FCC
must contain the rates, terms and conditions under which service is generally
available from TCG. An October 1996 FCC ruling would have eliminated the federal
tariff requirement for domestic interstate, interexchange services as of
September 22, 1997, but such order has been temporarily stayed pending judicial
review, and a number of parties have filed petitions with the FCC seeking
reconsideration of the FCC's decision. On June 19, 1997, the FCC adopted an
Order that permits CLECs to voluntarily withdraw their FCC tariffs for
interstate access services. TCG has not decided whether to withdraw its
interstate access tariffs. The FCC is currently considering whether to require
that competitive local exchange carriers like TCG withdraw such tariffs. While
TCG cannot predict what decision the FCC will reach in this further inquiry,
were the FCC to require the withdrawal of TCG's tariffs and replacement of those
tariffs with contractual arrangements, TCG could incur substantial legal and
administrative expense. TCG must offer its interstate services on a
nondiscriminatory basis, at just and reasonable rates and subject to the
complaint provisions of the Communications Act. TCG is not subject to rate of
return or price cap regulation by the FCC and may install and operate digital
facilities for the transmission of interstate communications without prior FCC
authorization.

         Under the 1996 Telecom Act, TCG is subject to certain federal statutory
and regulatory obligations when it provides local exchange service in a market.
All local exchange carriers, including CLECs, must interconnect with other
carriers, make their services available for resale by other carriers, provide
non-discriminatory access to rights-of-way, offer reciprocal compensation for
termination of traffic and provide dialing parity and telephone number
portability. Pursuant to orders issued by the FCC, all ILECs and CLECs are
required to begin phased deployment of a long-term service provider portability
method in the 100 largest MTAs no later than October 1, 1997, and to complete
deployment in those MTAs by December 31, 1998 for all MTAs in which another
carrier has made a specific request for the provision of portability. After
December 31, 1998, each ILEC and CLEC must make number portability available
within specific time frames after receiving a specific request by another
telecommunications carrier. The FCC is currently considering several requests
for extension of the current implementation deadlines. Until long-term service
portability is available, ILECs and CLECs must provide interim versions of
number portability as soon as reasonably possible after a specific request from
another carrier. TCG believes that implementation of the FCC's orders should
enhance the ability of TCG to offer service in competition with the ILECs, but
it is uncertain how effective the rules and policies adopted by the FCC will be
in promoting number portability. In particular, the FCC's orders do not address
how the costs of implementing long-term service portability, which could be
substantial, will be recovered.

         The 1996 Telecom Act also requires all telecommunications carriers to
ensure that their services are accessible to and usable by persons with
disabilities, and TCG and other CLECs are required to contribute to the support
of the significantly expanded universal service programs provided for in the
1996 Telecom Act. In addition, the 1996 Telecom Act allows states to adopt
universal service rules, so long as they are not inconsistent with the federal
program. TCG may also be able to receive funds from universal service programs
if TCG provides services to schools and libraries. Several parties have filed
appeals challenging the FCC's universal service rules.



                                      I-78
<PAGE>   81


         Under the 1996 Telecom Act, ILECs have certain additional duties,
including the duty to (i) interconnect at any technically feasible point and
provide service equal in quality to that provided to their customers or the ILEC
itself, (ii) provide unbundled access to network elements at any technically
feasible point, and (iii) offer retail services at wholesale prices for resale
by competitors. In August 1996, the FCC released several orders (the
"Interconnection Orders") establishing new policies and rules implementing the
local interconnection and access provisions of the 1996 Telecom Act. However,
the U.S. Court of Appeals for the Eighth Circuit subsequently overturned a
number of the rules adopted by the FCC, including the pricing rules and "pick
and choose" rule established in one of the FCC's orders, which would have
allowed CLECs to receive the benefit of the most favorable provisions contained
in an ILEC's agreements with other carriers. While certain FCC rules applicable
to commercial mobile radio service remain unaffected by the Court of Appeals'
decision, the court's order substantially limits the FCC's role in implementing
and enforcing the interconnection and access provisions of the 1996 Telecom Act
with respect to wireline carriers such as TCG. As a result of the Court of
Appeals' ruling, a number of significant issues affecting the terms and
conditions under which TCG and other CLECs obtain interconnection and access to
ILEC facilities and services will be resolved on a state-by-state basis by state
public utility commissions, whose decisions may then be subject to review by
federal and/or state courts. In January 1998, the Supreme Court agreed to review
the Court of Appeals' rulings. In addition, orders issued by the FCC in December
1996 and May 1997 grant increased pricing flexibility to ILECs competing with
TCG and other new entrants in the provision of interstate access, and
contemplate further flexibility as access competition continues to develop. The
FCC's May 1997 access charge order is the subject of appeals which are currently
pending before the U.S. Court of Appeals for the Eighth Circuit.

         Various ILECs have urged the FCC to require Internet service providers
to pay the same rates that interexchange carriers pay for access to public
switched telephone exchanges. Although this position was rejected by the FCC in
its May 7, 1997 access charge order, certain ILECs have also taken the position
that they will not pay the reciprocal compensation normally associated with a
local call to CLECs with respect to telephone services from the ILEC's customer
to an Internet service provider served by a CLEC, on the grounds that such calls
are exchange access calls rather than local calls. TCG believes these positions
are contrary to the 1996 Telecom Act and every state commission which has so far
considered the issue has declared that ILECs should pay CLECs reciprocal
compensation for the Internet traffic. However, no prediction can be made as to
whether the ILECs ultimately will be successful in asserting their positions. If
state commissions, the FCC or courts were to reach final decisions which found
in favor of the ILECs, such decisions could result in a material adverse effect
on TCG, both as an Internet service provider itself and as a provider of TCG
local exchange services to other Internet service providers.



                                      I-79
<PAGE>   82


         The 1996 Telecom Act contains other provisions potentially affecting
TCG's business that may be subject to FCC rulemaking and judicial
interpretation, including a provision that limits the ability of a cable
television operator and its affiliates to acquire more than a 10% financial
interest or any management interest in a local exchange carrier which provides
telephone exchange service in such cable operator's franchise area. This
provision does not affect acquisitions made prior to enactment of the 1996
Telecom Act. TCG and TCI's other wireline activities also will be subject to
certain requirements of CALEA described above under "-Domestic Wireless
Telephony."

         In providing interstate transmission services to its non-carrier
customers, WTCI is subject to the streamlined tariffing and other requirements
applicable to "nondominant carriers" under the current federal regulatory
regime. WTCI's provision of intrastate transmission services may also be subject
to regulatory requirements at the state level, similar to those described above
with respect to TCG. In addition, WTCI's placement of facilities is subject to
applicable state and local laws and regulations.

         Diversified Satellite Communications.

         UVSG provides satellite-delivered video, audio, data and program
promotion services to cable television systems, DTH satellite dish users, radio
stations and private network users primarily throughout North America, and
software development and systems integration services to commercial entities,
the federal government and defense related agencies in locations throughout the
United States. UVSG operates the following related satellite transmission
businesses: (i) Prevue Networks, Inc., a wholly-owned subsidiary that develops
and distributes on-screen television program promotion and guide services,
including Prevue Channel, the leading electronic programming guide in the North
American market, (ii) Superstar Satellite Entertainment, a division that markets
and distributes programming to C-Band DTH satellite dish owners in North America
through Superstar/Netlink (as more fully described under "Liberty Media
Group--Programming Services--Broadcasting and Satellite"); (iii) UVTV, a
division that markets and distributes three superstations, including WGN,
primarily to cable operators and to packagers and marketers of programs to the
home satellite dish industry, including Superstar/Netlink and (iv) SpaceCom
Systems, Inc., a wholly-owned subsidiary that provides audio and data satellite
transmission services to the paging industry and others. UVSG also has a 70%
interest in SSDS, Inc., which provides information technology consulting,
integration and software development services to large organizations with
complex computer needs. In January 1998, UVSG and Gemstar International Group
Limited announced plans to form Interactive Prevue Guide Inc. ("IPG"), a joint
venture that would be majority owned by UVSG and the focus of which would be the
marketing of a portfolio of intellectual property, technology and data services
for interactive program guides to multichannel video service providers. In
addition, as described in more detail above, in February 1998, UVSG announced
that it had agreed to acquire Liberty Media Group's 40% interest in
Superstar/Netlink, subject to the negotiation of definitive agreements and the
satisfaction of other conditions.

         The TCI Group has agreements with UVSG for the carriage of UVSG's
Prevue Networks and superstation programming on certain of the cable systems
attributed to the TCI Group and for UVSG's subscriber management services, and
UVSG purchases programming from companies attributed to the Liberty Media Group.
Many of these contracts were entered into prior to the Company's acquisition of
an equity interest in UVSG. In addition, if and when IPG is formed, the TCI
Group is expected to enter into a 10-year affiliation agreement with IPG for the
deployment of interactive program guides in its digital cable customers' homes.



                                      I-80
<PAGE>   83


         Competition. Each of the businesses in which UVSG operates is highly
competitive. In general, UVSG faces competition from numerous other companies
offering video, audio, data, and program promotion and guide services, as well
as from companies offering alternative products and services that perform
similar functions. UVSG's Prevue products compete with printed program guides
and other on-screen program guides. UVSG anticipates that its Prevue Networks
subsidiary and IPG (if and when it is formed) will face competition from a
number of other companies that are attempting to develop viable interactive
television technologies which may be accessed through cable television systems
or otherwise. UVSG's UVTV division, which markets and distributes superstations
WGN, WPIX and KTLA, as well as other services, faces competition from over 100
cable network suppliers, including other superstations, for limited channel
capacity on cable television systems. For a description of the competition faced
by UVSG's Superstar Satellite Entertainment division, operating through
Superstar/Netlink, see "Liberty Media Group--Programming
Services--Competition--Programming Companies" above.

         Government Regulation. As described previously, the satellite
transmission, cable and telecommunications industries are subject to federal
regulation, including FCC licensing and tariff requirements, and the cable and
telecommunications industries are also subject to extensive regulation by local
and/or state authorities. While most cable and telecommunications industry
regulations do not apply directly to UVSG, they have a significant effect on
programming distributors, the primary customers for UVSG's products and
services.

         Under the "cable compulsory license" provisions of the Copyright Act,
programming distributors are required to pay copyright fees that arise from
their reception and retransmission of satellite-transmitted television
broadcasts such as WGN and other superstations. These provisions also grant an
exemption which allows UVTV and other "passive carriers" to transmit and market
superstations without agreements with, or copyright payments to, the broadcast
station transmitted.

         The SHV Act provides for a "home satellite dish compulsory copyright
license" for the retransmission of network and superstation signals and
programming directly to subscribers with a home satellite dish. The SHV Act
extended the home satellite dish compulsory license through the end of 1999.
Under the terms of the SHV Act, satellite carriers, such as UVTV, are
responsible for paying compulsory copyright fees to the Copyright Office for the
sale of superstation signals. The Librarian of Congress recently approved a
significant increase in such fees, effective January 1, 1998. Several bills have
been introduced in Congress which, if enacted, would suspend application of the
rate increase pending a review by the FCC of its effect on the ability of
satellite carriers to compete in the multichannel video market. The rate
increase is also the subject of an appeal which is currently pending before the
U.S. Court of Appeals for the D.C. Circuit. See "Liberty Media
Group--Programming Services--Regulation-Programming Companies-Copyright
Regulations."

         Legislation has been introduced from time to time to repeal the cable
compulsory license provision, although no such legislation has been passed by
Congress. Legislation is currently pending in Congress to reform the satellite
compulsory license. At Congress' request, the Copyright Office conducted a
review of compulsory licensing for both the cable and satellite industries and
issued its report and legislative proposals to Congress on August 1, 1997. Among
other things, the Copyright Office's report suggests that Congress further study
whether the passive carrier exemption should continue to apply to satellite
carriers, such as UVTV, in cases where the carrier is retransmitting a signal on
which national advertising has been substituted by the broadcaster for the local
advertising on the over-the-air signal.



                                      I-81
<PAGE>   84


         The 1992 Cable Act, which established substantial rate regulation for
certain services and equipment provided by most cable television systems in the
United States, includes provisions which may impair UVSG's ability to offer
competitive rates and volume discounts on certain of its products and services
and may affect the rates charged by UVSG to home satellite dish programming
packagers and other programming distributors. For example, the FCC's "program
access" rules prohibit certain satellite programmers which are "affiliated"
(under the FCC's affiliation rules) with certain types of programming
distributors (such as cable operators) from, among other things: (i)
discriminating in prices, terms, or conditions between various programming
distributors; and (ii) entering into agreements with certain programming
distributors which provide for exclusivity, except in limited circumstances. To
the extent UVSG's programming is deemed to be affiliated with programming
distributors covered by these rules, such programming is also subject to these
pricing and marketing limitations. For a more detailed discussion of these
regulations, see "Liberty Media Group--Programming
Services--Regulation--Programming Companies--Regulation of Program Licensing."

         Internet Services.

         The TCI Ventures Group's primary Internet service asset is its
investment in @Home, a provider of Internet services over the cable television
infrastructure to consumers and businesses. @Home was founded by the Company and
Kleiner, Perkins, Caufield & Byers ("KPCB"), a venture capital firm, in March
1995. In August 1996, Comcast and Cox became investors in @Home; in April 1997,
Rogers Cablesystems Limited ("Rogers") and Shaw Cablesystems Ltd. ("Shaw"), two
of the leading cable operators in Canada, became investors in @Home. On July 11,
1997, @Home consummated its initial public offering in which it received net
cash proceeds of approximately $100 million for shares of Series A Common Stock
of @Home representing at that time approximately 8% of @Home's common equity.
The Series A Common Stock of @Home has one vote per share, whereas @Home's
Series B Common Stock, which is owned by the Company, has ten votes per share.

         In October 1997, @Home entered into an exclusive distribution
arrangement with CSC as described below and 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 are immediately exercisable, 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. For a description of the TCI Group's agreement to
transfer such systems to CSC, see "General Development of Business." 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.



                                      I-82
<PAGE>   85


         @Home began commercial operation of the @Home service in September 1996
and currently offers two Internet services: @Home for residential consumers and
@Work for businesses. @Home's primary offering, the @Home service, allows
residential subscribers to connect their personal computers via cable modem to a
new high-speed network developed and managed by @Home. This service enables
subscribers to receive the "@Home Experience," which includes Internet service
over hybrid fiber-coaxial cable ("HFC") plant at peak data transmission speeds
up to 300 times faster than typical dial-up connections, "always on"
availability and rich multimedia programming through an intuitive graphical user
interface. The technology foundation of the @Home Experience is @Home's
scaleable, distributed, intelligent network architecture (the "@Network"), a
"parallel Internet" that optimizes traffic routing, improves security and
consistency of service, and facilitates end-to-end network management, enhancing
@Home's ability to address performance bottlenecks before they affect the user
experience. The content foundation of the @Home Experience is provided by
@Home's @Media group, which aggregates content, sells advertising to businesses
and will provide premium services to @Home subscribers. For businesses, @Home's
@Work services provide a platform for Internet, intranet and extranet
connectivity solutions and networked business applications over both cable
infrastructure and leased digital telecommunications lines. By combining the
@Network's distributed architecture with cable, telephone and technology
relationships, the @Work services provide a compelling platform for nationwide
delivery of network-based business applications.

         @Home has entered into distribution arrangements for the @Home service
with eight leading cable companies in North America: TCI, Comcast, Cox, Rogers,
Shaw, Marcus Cable Operating Company, L.P., InterMedia Partners IV L.P. and CSC.
Such cable companies operate cable systems which pass approximately 50 million
homes in North America. @Home believes that as of December 31, 1997,
approximately 4.5 million of these homes were passed by upgraded two-way HFC
plant. Although there are no contractual obligations relating to the schedule
for upgrading their cable systems, TCI, Comcast, Cox and CSC (the "@Home Cable
Partners") have agreed, subject to certain exceptions, that @Home will be their
exclusive provider of high-speed residential consumer Internet access services
during the period ending June 4, 2002. (The TCI entity which is the distributor
of the @Home services is a member of the TCI Group, and the assets and business
of such entity are included in the TCI Group.) In March 1997, @Home entered into
exclusive arrangements for the distribution of its @Home service in Canada
through Rogers and Shaw, two of the leading cable system operators in Canada.
Rogers and Shaw have the right to redistribute the @Home service to other cable
system operators in Canada.

         Transmission of the @Home service over cable is dependent on the
availability of high speed two-way HFC infrastructure. Although they are not
contractually obligated to upgrade their cable systems, @Home believes that the
@Home Cable Partners will complete the upgrade to two-way HFC of a majority of
the homes passed in their cable systems within five years. However, cable system
operators have limited experience with these upgrades, and there can be no
assurance that the necessary upgrades will be completed according to such
schedule or at all.

         As of December 31, 1997, @Home had launched the @Home service in
portions of 21 cities and communities in the United States and Canada and had
approximately 50,000 cable modem subscribers across North America. As of
December 31, 1997, @Work had over 300 installed accounts, and the @Work service
was available in 14 metropolitan markets including Chicago, Los Angeles, New
York, Orange County, San Diego, San Francisco, Seattle, and Washington, DC. In
order to accelerate deployment of @Home and @Work services into major
metropolitan areas, @Home has established a strategic relationship with TCG, the
country's largest CLEC, to provide co-location facilities and local telephone
circuits for infrastructure and subscriber connectivity.


                                      I-83
<PAGE>   86


         In February 1998, NDTC, on behalf of TCI, entered into a Memorandum of
Understanding with @Home pursuant to which @Home agreed to develop software and
provide integration services for TCI's advanced set-top devices that will
deliver both digital television and data services. The Memorandum of
Understanding contemplates that @Home will supply e-mail accounts for these
devices and will provide connectivity, geographically dispersed mail servers,
and overall system management for TCI's e-mail services. @Home would also work
with NDTC on the overall software integration related to TCI's advanced digital
set-top devices, ensuring that application frameworks are consistent with
conditions and specifications currently outlined by CableLabs' OpenCable(TM)
initiative. Consummation of the transactions contemplated by the Memorandum of
Understanding is subject to the negotiation of a definitive agreement and other
conditions and there can be no assurance such transactions will be consummated.

         Competition. The markets for consumer and business Internet services
and online content are extremely competitive, and the Company expects that
competition will intensify in the future. @Home's most direct competitors in
these markets are Internet service providers ("ISPs"), national long distance
carriers and local exchange carriers, wireless service providers, online service
providers ("OSPs") and Internet content aggregators. Many of these competitors
are offering (or may soon offer) technologies that will attempt to compete with
some or all of @Home's high-speed data service offerings. Such technologies
include Integrated Services Digital Network ("ISDN") and Asymmetric Digital
Subscriber Line ("ADSL"). In January 1998, Compaq Computer Corporation, Intel
Corporation, Microsoft Corporation, other technology companies and numerous
telecommunications providers announced an initiative to develop a simplified
version of ADSL that reduces the complexity and expense of installing the
service. This initiative may accelerate the deployment of ADSL services. @Home
also competes with other cable-based data services that are seeking to contract
with cable system operators to bring their services into geographic areas that
are not covered by an exclusive relationship with @Home. The bases of
competition in these markets include transmission speed, reliability of service,
ease of access, price/performance, ease-of-use, content quality, quality of
presentation, timeliness of content, customer support, brand recognition,
operating experience and revenue sharing. Many of @Home's competitors and
potential competitors have substantially greater resources than @Home.



                                      I-84
<PAGE>   87


         Government Regulation. The law relating to liability of OSPs and ISPs
for information carried on or disseminated through their networks is currently
unsettled. A number of lawsuits have sought to impose liability for defamatory
speech and infringement of copyrights. Some courts have held OSPs/ISPs liable
for the copyright infringement of others accomplished using the OSP/ISP's
facility, while other courts have held that such providers would be liable only
upon taking affirmative steps in furtherance of the infringement. Because
materials are downloaded and redistributed by subscribers and cached or
replicated by @Home in connection with @Home's offering of its services, there
is a possibility that claims may be made against @Home or the @Home Cable
Partners under both United States and foreign law for defamation, negligence,
copyright or trademark infringement, or other theories based on the nature and
content of such materials. Such types of claims have been brought, and sometimes
successfully pressed, against OSPs in the past. In particular, copyright and
trademark laws are evolving both domestically and internationally, and there is
uncertainty concerning how broadly the rights afforded under these laws will be
applied to online environments. Various legislative proposals addressing
copyright liability for OSPs/ISPs have been introduced in Congress, which may be
considered in conjunction with Congress's consideration of legislation to
implement the World Intellectual Property Organization ("WIPO") Copyright
Treaty. While the U.S. Supreme Court has declared unconstitutional the provision
in the 1996 Telecom Act which prohibited the use of an interactive computer
service to knowingly transmit "indecent" and "patently offensive" communications
to minors (i.e., any recipient under 18 years of age), the Court upheld the
Act's prohibition on the knowing transmission of "obscene" communications to
minors. Thus an OSP or ISP may still be liable under the Act if it knowingly
permits, and intends for, a telecommunications facility under its control to be
used for the transmission of "obscene" material to minors. In addition,
legislation has been introduced in the Senate which, if enacted, would prohibit
the commercial distribution on the World Wide Web to persons under 17 years of
age of sexually oriented material which is deemed "harmful to minors."

         Although @Home's services are not directly subject to current
regulations of the FCC or any other federal or state communications regulatory
agency, changes in the regulatory environment relating to the Internet
connectivity market, including regulatory changes that, directly or indirectly,
affect telecommunications costs, limit usage of subscriber-related information
or increase the likelihood or scope of competition from the RBOCs or other
telecommunications companies, could affect @Home's pricing and/or ability to
successfully market its services. For example, regulation of cable television
rates may affect the speed at which cable operators who have agreed or will
agree in the future to provide the @Home service will be able to upgrade their
cable systems as necessary to carry @Home's services. Similarly, enactment of
proposed privacy legislation currently pending in Congress, which would restrict
the use of subscriber information by interactive computer services for marketing
and other purposes, could adversely affect the marketing of @Home's services as
well as its revenue from advertising. In addition, the FCC is currently
considering requests by Bell Atlantic, Ameritch and US West for relief pursuant
to Section 706 of the 1996 Telecom Act from various restrictions and regulatory
requirements which currently serve to inhibit the RBOCs' provision of Internet
services. Other RBOCs are expected to pursue relief similar to that proposed in
the pending RBOC petitions, which seek authority to provide high-speed,
packet-switched data services, including Internet access and related services,
without regard to LATA boundaries and free from otherwise applicable access,
unbundling and resale obligations and certain other regulatory requirements. The
FCC also is considering a separate request which if approved would provide all
ILECs with significant relief from existing access, unbundling, pricing and cost
recovery rules and policies, in order to encourage the deployment and operation
of the ILECs of high-capacity, packet-switched networks and other advanced
telecommunications facilities and related services, including Internet access
services.

                                      I-85
<PAGE>   88


         The @Home Cable Partners have advised @Home that their local cable
operators typically have elected to classify the provision of all or some of the
@Home services as "additional cable services" under their respective local
franchise agreements, and to pay franchise fees in accordance therewith. Local
franchise authorities may attempt to subject cable systems to higher or other
franchise fees or taxes or otherwise seek to require cable operators to obtain
additional franchises, in connection with their distribution of the @Home
service. There are thousands of franchise authorities, and thus it will be
difficult or impossible for @Home or such cable operators to operate under a
unified set of franchise requirements. Legislation has been introduced in
Congress which if enacted would impose a moratorium limiting the ability of
state and local governments to impose taxes on Internet services or the use
thereof for a specified period pending the formulation and submission to
Congress by the President of recommendations concerning appropriate parameters
for state and local taxation of such services. However, state and local
authorities have expressed strong opposition to such legislation, and there
remains the possibility that the @Home services may be subject to potentially
burdensome taxes or other assessments in a multitude of state and local
jurisdictions. It is also possible that governmental authorities may attempt to
classify @Home in some other manner (e.g., as a common carrier-type service or
information service) and impose additional potentially burdensome regulatory
requirements on @Home, the @Home Cable Partners, or other cable operators
carrying the @Home services.

         Other Assets.

         In addition to the ventures and businesses mentioned above, other
assets of the Company attributed to the TCI Ventures Group include (i) NDTC, a
wholly-owned subsidiary of TCI, which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets and (ii) ETC, a wholly-owned subsidiary of TCI that develops and
distributes for-profit education, training and communication services and
products.

         NDTC provides a wide range of analog and digital television services,
including the digital compression of television and multimedia programming,
satellite uplinking, transponder management, primary origination, production,
and post-production services, and the encryption and authorization of
transmitted signals, primarily to television programming suppliers and satellite
distributors (the "Video Services"). Using a combination of these capabilities,
NDTC also supplies a package of television programming signal transport and
addressable set-top authorization services directly to cable systems; such
service is known as NDTC's Headend-in-the-Sky service or "HITS." NDTC launched
its HITS programming line-up in September 1997, initiating the broadcast of
approximately 130 channels of digital video programming and approximately 40
channels of digital music, which are accessible by cable operators who subscribe
to the HITS service. NDTC is currently providing the HITS service to TCI and has
contracts to provide service to certain additional cable operators. NDTC is also
currently conducting negotiations with many other operators.

         NDTC derives a substantial portion of its revenue from companies that
are affiliated with TCI. For the year ended December 31, 1997, revenue from
services provided to TCI (including its consolidated subsidiaries, but not other
affiliates) was $39 million, or approximately 41% of NDTC's total revenue for
1997. NDTC has been, and intends to continue, seeking to expand its customer
base to increase the number of unaffiliated customers over time.


                                      I-86
<PAGE>   89


         Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
cable operators, including HITS' affiliates, 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, 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 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.

         NDTC has the right to terminate the Digital Terminal Purchase Agreement
if, among other reasons, the transactions related to the GI MOU are not
consummated or if 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.

         NDTC's Video Services, specifically the transmission, production and
post-production services, are highly competitive. There are a number of
well-established competitors located on both the east and west coasts to both
NDTC's uplinking and satellite transmission services and its production and
post-production services, many of which competitors have been in existence
significantly longer than NDTC and may have an established customer base. NDTC's
HITS authorization and transport services compete with locally operated
authorization controllers, purchased from the same vendor that supplies set-top
terminals to cable operators, and with programmers who provide their own digital
signal transport. There can be no assurance that the HITS service will achieve
significant market penetration beyond the TCI affiliated companies.

         While NDTC's Video Services and other services offered by NDTC are not
directly regulated, the NDTC uplink facilities are operated pursuant to FCC
licenses and subject to applicable FCC rules, including but not limited to the
FCC's environmental rules, which, among other things, establish limits on human
exposure to RF radiation emanating from FCC-licensed facilities. Failure to
comply with applicable FCC rules could result in fines, denial of renewal, or
revocation of the relevant license(s).


                                      I-87
<PAGE>   90


         ETC's current investments include interests in : (i) CareerTrack, Inc.,
a training company which is a leader in the development, marketing and
production of business and educational seminars and related publications
targeting mid-level corporate managers; (ii) National School Conference
Institute, Inc., a training company which is a leading provider of public
seminars and satellite-delivered staff development programming for educators;
(iii) The Lightspan Partnership, Inc., a venture capital-financed, start-up
company which develops and markets innovative, curriculum-based, interactive
reading, language arts and mathematics programming for K-6 schools; and (v)
Academic Systems Corporation, a venture capital-financed, start-up company which
provides multimedia instructional materials for higher education. ETC also holds
a 100% interest in Ingenius(TM), a general partnership formed to develop and
distribute interactive multimedia current events programming. Ingenius(TM) is in
the process of winding down most of its lines of business and is offering for
sale substantially all of its remaining assets, which consist primarily of
intellectual property.

         As described in more detail above, in September 1997, the Company
announced that it and ETC entered into a letter of intent with Knowledge
Universe which contemplates that TCI, through ETC, will become a partner of
Knowledge Universe in a new venture in which Knowledge Universe would make a
substantial investment and to which ETC would contribute a significant portion
of its assets. Although the letter of intent has expired, the parties continue
to discuss the transactions contemplated by it. In contemplation of the proposed
restructuring of ETC's assets, in November 1997, TCI (through a wholly-owned
subsidiary) purchased the approximately 20% of the common stock of ETC formerly
held by certain members of ETC's management, and ETC is now wholly-owned by TCI.

         In September 1997, the primary assets of TCI SUMMITrak, L.L.C., a
development-stage, customer management system, the assets of which were
attributed to the TCI Ventures Group, were sold to CSG Systems, Inc. ("CSG"). In
the transaction, the TCI Ventures Group received $106 million in cash, the right
to contingent consideration of up to $12 million in cash and warrants to
purchase up to 1.5 million shares of CSG stock at $24 per share, once certain
numbers of TCI affiliated subscribers 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 such assets, the TCI
Group committed to purchase billing services from CSG pursuant to three
successive five-year agreements. The assets remaining in TCI SMTRK, LLC after
such sale were transferred to TCIC, a member of the TCI Group, in exchange for a
$19 million reduction of the intercompany amount owed by TCI Ventures Group to
TCI Group.

         GENERAL

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

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

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

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


                                      I-88
<PAGE>   91


         At December 31, 1997, the Company had approximately 37,000 employees,
the majority of which are employees of TCIC.

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

         The Company has neither material foreign operations nor export sales.

Item 2.  Properties.

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

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




                                      I-89
<PAGE>   92


Item 3.  Legal Proceedings.

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

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

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

         A settlement was reached in this action, for which final approval was
granted on January 7, 1998. The settlement did not have a material adverse
effect upon the financial condition of the Company. The Company is awaiting
receipt of final documentation for the court order. This case will not be
reported on in the future.

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

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

         A settlement was reached in this action, for which final approval was
granted on January 7, 1998. The settlement did not have a material adverse
effect upon the financial condition of the Company. The Company is awaiting
receipt of final documentation for the court order. This case will not be
reported on in the future.


                                      I-90
<PAGE>   93


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

         Turner Broadcasting Systems, Inc. Shareholder Litigation. Following the
announcement of the proposed merger (the "TBS-Time Warner Merger") between
Turner Broadcasting Systems, Inc. ("TBS") and Time Warner, Inc. ("Time Warner")
several purported class action lawsuits were filed by TBS shareholders in Fulton
County Superior Court, Georgia. On November 1, 1995, plaintiffs in thirteen of
the cases filed a second amended class action Complaint in what will be a
consolidated action styled Lewis v. TBS, Inc. C.A. No. B-41500 (the "Lewis
Action"). The defendants include, among others, Tele-Communications, Inc., John
Malone, Peter Barton and Fred Vierra. The claims and defendants in the actions
other than the Lewis Action are substantially the same as set forth in the
second amended complaint in the Lewis Action. Plaintiffs allege in the second
amended complaint in the Lewis Action that defendants have injured the public
stockholders of TBS in conjunction with the TBS-Time Warner Merger proposal by
(a) misrepresenting the extent to which defendants Time Warner, TCI, John Malone
and R.E. Turner ("Turner") have acted for their own benefit and not for the
benefit of TBS or its stockholders, (b) failing to adequately disclose the full
nature and value of special considerations granted to TCI and Turner in
connection with the TBS-Time Warner Merger proposal, (c) failing to engage in
arms' length bargaining or give any consideration to maximizing TBS stockholder
value, (d) proposing to provide the public holders of TBS stock with unfair
consideration in the TBS-Time Warner Merger, and (e) seeking to entrench certain
of the TBS officers and directors. Plaintiffs in the Lewis Action seek to enjoin
the consummation of the TBS-Time Warner Merger, enjoin the transfer of any
assets to TCI in connection with the TBS-Time Warner Merger, or to rescind the
TBS-Time Warner Merger or transfer of assets if such acts are consummated.
Plaintiffs also seek unspecified compensatory and punitive damages. The TBS-Time
Warner merger was consummated on October 10, 1996. On December 20, 1996, the
Georgia State Court dismissed the plaintiffs third amended complaint in the
Lewis Action. Plaintiffs have stated their intention to appeal the dismissal
order and filed a fourth amended complaint on January 16, 1997. On July 14,
1997, the court granted defendants motion for summary judgment on the fourth
amended complaint. On October 14, 1997,plaintiffs filed an appeal from dismissal
of the third amended complaint order granting summary judgment on claims raised
in the fourth amended complaint. Discovery has not commenced in any of the
actions. Based upon the facts available, management believes that, although no
assurance can be given as to the outcome of these actions, the ultimate
disposition should not have a material adverse effect upon the financial
condition of the Company.


                                      I-91
<PAGE>   94


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

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


                                      I-92
<PAGE>   95


         The gravamen of the complaint in C.A. No 15188 is that the HSN
directors breached their fiduciary duties by approving the merger agreement.
Plaintiffs also claim that TCI and Liberty, by supporting the proposed merger,
breached their asserted fiduciary duties as controlling stockholders of HSN.
Specifically, plaintiffs allege that the proposed merger is designed to allow
Silver King and, indirectly, TCI and Liberty to acquire HSN without paying
adequate consideration to the public holders of HSN common stock by timing the
transaction at a time when the price of HSN common stock is low and by ignoring
the anticipated positive prospects of HSN. Plaintiffs further allege that TCI
and Liberty will be unjustly enriched because, under the merger agreement, they
would receive a premium for their shares of HSN Class B stock while retaining
what plaintiffs assert to be a controlling interest in Silver King through their
ownership of Silver King Class B stock. According to plaintiffs, Silver King has
knowingly aided and abetted these alleged breaches of fiduciary duties.
Plaintiffs seek to enjoin the consummation of the proposed merger or, should the
proposed merger proceed, rescission or rescissory damages. Plaintiffs also seek
unspecified compensatory damages, fees and costs. The consolidated action
remains pending and discovery has not commenced. The HSN-Silver King merger was
completed on December 20, 1996. Based upon the facts available, management
believes that, although no assurance can be given as to the outcome of this
action, the ultimate disposition should not have a material adverse effect upon
the financial condition of the Company.

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


                                      I-93
<PAGE>   96


         The gravamen of the complaint is that the DMX directors would breach
their fiduciary duties by approving the proposed business combination.
Specifically, plaintiff alleges that, due to TCI's alleged control over the DMX
board, the DMX directors are unwilling to negotiate with TCI to maximize the
value for the public stockholders of DMX. Plaintiff claims that the proposed
consideration to be paid the public stockholders of DMX is grossly unfair,
inadequate and substantially below the fair value of DMX. Plaintiff seeks to
enjoin the consummation of proposed business combination or, should the proposed
transaction proceed, to rescind the transaction. The TCI Music-DMX Merger was
consummated on July 11, 1997. Plaintiff also seeks unspecified rescissory and
compensatory damages, fees and costs. The action remains pending and discovery
has not commenced. Based upon the facts available, management believes that,
although no assurance can be given as to the outcome of this action, the
ultimate disposition should not have a material adverse effect upon the
financial condition of the Company.

         Interactive Network, Inc. Shareholder Litigation (No. C95-0026 DLJ,
Northern District of California.) In January of 1995, two class action
complaints ("Actions") were filed against Interactive Network, Inc.
("Interactive") and certain of its then current and former officers and
directors (collectively the "Interactive Defendants") in the United States
District Court for the Northern District of California which sought unspecified
damages for alleged violations of the disclosure requirements of the federal
securities laws. The actions were filed on behalf of a class of shareholders
that purchased the stock of Interactive during the period of August 15, 1994
through November 22, 1994. Pursuant to an order of the Court, the Actions were
consolidated and in April 1995, a Consolidated Amended Class Action Complaint
captioned In re Interactive Network Inc. Securities Litigation ("Consolidated
Case") was filed in the same court which sought damages against the Interaction
Defendants for violation of the federal securities law disclosure requirements
during the class period May 2, 1994 through March 31, 1995. On or about January
13, 1997, Plaintiffs filed a Fourth Amended Complaint, seeking damages against
the Interactive Defendants and Tele-Communications, Inc., TCI Communications,
Inc., TCI Development Corporation, and Gary Howard (collectively, "the TCI
Defendants") for violation of federal securities law disclosure requirements
during the class period May 16, 1994 through March 31, 1995. In addition, the
Fourth Amended Complaint sought damages against the TCI Defendants based upon
the allegation that they were "controlling persons" of Interactive at the time
the alleged wrongs took place. On January 30, 1997, the TCI Defendants and the
Interactive Defendants separately moved to dismiss the Fourth Amended Complaint
on the ground that it failed to state a cause of action against them. On April
4, 1997, the Court issued an order dismissing, with prejudice, the primary
liability claims against the TCI Defendants. The Court granted the Plaintiffs
leave to amend their Complaint as to their claim for violation of federal
securities law disclosure requirements against the Interactive Defendants. The
Court further granted Plaintiffs leave to amend their "controlling person" claim
against the TCI Defendants. On or about April 30, 1997, Plaintiffs filed a Fifth
Amended Complaint seeking damages for violation of federal securities law
disclosure requirements against the Interactive and TCI Defendants during the
class period January 19, 1994 through March 31, 1995. The Fifth Amended
Complaint also seeks damages against the TCI Defendants as "controlling
persons." On October 9, 1997, the Court granted the Interactive Defendants'
Motion to Dismiss with Prejudice substantial portions of the Fifth Amended
Complaint. The remaining claims are limited to a class of just several months.
On January 16, 1998, the Court entered a scheduling order establishing pre-trial
deadlines, including a May 6, 1998 deadline for class certification. Based upon
the facts available, management believes that, although no assurances can be
given as to the outcome of this action, the ultimate disposition should not have
a material adverse effect upon the financial condition of the Company.



                                      I-94
<PAGE>   97



         Interactive Network, Inc. v. Tele-Communications, Inc., et al.(Alameda
County Superior Court, Case No. 754933-7). On October 20, 1995, Interactive
Network, Inc. ("Interactive") filed a complaint in the Superior Court of
California for the county of Alameda naming Tele-Communications, Inc., TCI
Communications, Inc., TCI Development Corporation, TCI Programming Holding Co.,
TCI Cablevision of California, Inc. ("the TCI defendants") and Gary Howard as
defendants. The Complaint alleges claims for breach of fiduciary duty, abuse of
control, intentional interference with prospective business advantage,
intentional interference with contractual relations, breach of contract,
constructive fraud, fraud and deceit, negligent misrepresentation,
misappropriation of corporate assets, unfair competition and unjust enrichment
arising out of the business relationship between the TCI defendants and
Interactive. Plaintiffs twice amended the complaint, following a series of
motions attacking the pleadings by the TCI defendants, resulting in the "Third
Amended Complaint". The Third Amended Complaint alleges that the TCI defendants
breached various duties owed to Interactive as a result of the TCI defendants'
purported status as a controlling shareholder. The Complaint further alleges
that the TCI defendants fraudulently promised to provide financing to
Interactive and fraudulently induced Interactive to enter into various
transactions. The Third Amended Complaint seeks various unspecified compensatory
and punitive damages as well as injunctive relief. On June 17, 1996, certain of
the TCI defendants, on their own behalf and as the agent of various additional
secured creditors, denied all claims and filed a cross-complaint for breach of
contract against Interactive seeking in excess of $24 million pursuant to
various promissory notes entered into by Interactive. On July 22, 1996,
Interactive filed a "cross-complaint to the cross-complaint" alleging economic
duress, breach of the implied covenant of good faith and fair dealing, fraud and
breach of contract in connection with the promissory notes entered into by
Interactive. On February 25, 1998, the parties agreed to a settlement, subject
to final execution of settlement documents. The settlement did not have a
material adverse effect upon the financial condition of the Company. This case
will not be reported on in the future.

         Clarence L. Elder, both individually and as the group Representative
vs. Tele-Communications, Inc. et al. On December 11, 1995, plaintiff filed suit
in the Circuit Court for Baltimore City, Case No. 95345001/CL205580 against UCTC
L.P. Company, UCTC of Baltimore, Inc., UTI Purchase Company, Inc. and
Tele-Communications, Inc. The allegations made in the complaint pertain to
plaintiff's interest in United Cable Television of Baltimore Limited
Partnership. Plaintiff claims he was wrongfully denied certain preference
distributions, rights to purchase stock, rights to escrow funds, and tax
distributions. Plaintiff claims entitlement to compensatory damages in excess of
$70,000,000 plus punitive damages in excess of $450,000,000. Plaintiff asserts
claims for: breach of contract; negligent misrepresentation; negligence; unjust
enrichment; conversion; fraud; and breach of fiduciary duty. The Court granted
defendants' Motion for Summary Judgment and plaintiff has filed an appeal. On
September 24, 1997, the Maryland Court of Special Appeals affirmed in all but
one respect the Circuit Court's summary judgment in favor of the defendants. The
court found that the settlement agreement at issue is ambiguous concerning the
number of Limited Partnership units the plaintiffs were entitled to purchase
(186.6 or 311), but ruled in favor of defendants concerning the price at which
the units must be sold and all other issues.



                                      I-95
<PAGE>   98


         Plaintiffs have filed a motion for reconsideration, and have filed a
petition for certiorari in the Court of Appeals on December 24, 1997 as their
motion for reconsideration is denied. If the Court of Special Appeals decision
is not disturbed, the only issue for trial will be the number of units
Plaintiffs are entitled to purchase at fair market value, as determined in
accordance with the appraisal previously obtained by defendants. Based upon the
facts available, management believes that, although no assurance can be given as
to the outcome of this action, the ultimate disposition should not have a
material adverse effect upon the financial condition of the Company.

         Les Dunnaville v. United Artists Cable, et al. On February 9, 1994, Les
Dunnaville and Jay Sharrieff, former employees of United Cable Television of
Baltimore Limited Partnership, filed an amended complaint in the Circuit Court
for Baltimore City against United Cable Television of Baltimore Limited
Partnership, TCI Cablevision of Maryland, Tele-Communications, Inc. and three
company employees, Roy Harbert, Tony Peduto, and Richard Bushey (the suit was
initially filed on December 3, 1993, but the parties agreed on December 30, 1993
that no responsive pleading would be due pending filing of an amended
complaint). The action alleges, inter alia, intentional interference with
contract, tortious interference with prospective advantage, defamation, false
light, invasion of privacy, intentional infliction of emotional distress, civil
conspiracy, violation of Maryland's Fair Employment Practices Act, and
respondeat superior with respect to the individual defendants. Six counts in the
complaint each seek compensatory damages of $1,000,000 and punitive damages of
$1,000,000; the intentional infliction of emotional distress count seeks
compensatory damages of $1,000,000 and punitive damages of $2,000,000; and the
count which alleges violation of Maryland's Fair Employment Practices Act seeks
damages of $500,000. By order dated May 18, 1994, the Court dismissed the
respondeat superior claim. Defendants filed Motions for Summary Judgment in
December 1995 and January 1996 on all remaining counts of plaintiffs' complaint.
The Court granted summary judgment in defendants' favor on March 18, 1996. The
plaintiffs appealed the Circuit Court ruling to the Maryland Court of Special
Appeals. In a decision dated June 5, 1997, the Maryland Court of Special Appeals
affirmed the trail court's grant of summary judgment in all respects except for
one portion of the defamation claim involving alleged statements of Roy Harbert.
The trial court is scheduled to try the one remaining claim on April 2, 1998.
Based upon the facts available, management believes that, although no assurance
can be given as to the outcome of this action, the ultimate disposition should
not have a material adverse effect upon the financial condition of the Company.

         Donald E. Watson v. Tele-Communications, Inc., et al. On March 10,
1995, Donald Watson, doing business under the name of Tri-County Cable, filed
suit in Superior Court for the District of Columbia against TCI, TCI East, Inc.,
District Cablevision Limited Partnership, District Cablevision, Inc., TCI of
D.C., Inc., TCI of Maryland, Inc., TCI Development Corporation, United Cable
Television of Baltimore Limited Partnership, TCI of Pennsylvania, Inc. and two
individuals, Richard Bushey and Roy Harbert. The action alleges breach of
settlement agreement, intentional misrepresentations, tortious interference with
prospective advantage, tortious interference with contract, tortious
interference with economic relations, and discrimination on the basis of race.
Three counts in the Complaint each seek compensatory damages of $2,500,000 and
punitive damages of $25,000,000; one count seeks compensatory damages of
$2,500,000 and punitive damages of $40,000,000; and two counts each seek
compensatory damages of $20,000,000 and punitive damages of $40,000,000. In an
order dated September 25, 1997, the Court granted summary judgment in favor of
defendants on the claims of intentional misrepresentations, tortious
interference with prospective advantage, tortious interference with contract,
and discrimination on the basis of race. The remaining claims will be tried at
some date in the future. Based upon the facts available, management believes
that, although no assurance can be given as to the outcome of this action, the
ultimate disposition should not have a material adverse effect upon the
financial condition of the Company.



                                      I-96
<PAGE>   99


         C. Lamont Smith, et al. v. Mile Hi Cable Partners, et al. On December
9, 1996, C. Lamont Smith and The Black Movie Channel, LLC filed suit in the
District Court for the City and County of Denver against subsidiaries of
Tele-Communications, Inc. (TCI Communications, Inc.; Mile Hi Cable Partners, LP;
Liberty Media Corporation and Encore Media Corporation); Black Entertainment
Television; Steve Santamaria; Media Management Group, Inc. and Virginia Butler.
Plaintiffs assert, in part, that the defendants misappropriated plaintiffs'
concept for the development of a 24 hours a day, seven days a week, cable or
satellite premium channel which would broadcast movies made by or featuring
African Americans, as well as educational programming and community oriented
programming of interest to both the Hispanic and Black communities. Plaintiffs
claim anticipated annual net profits from such a network would exceed $600
million. Plaintiffs also assert that the franchise agreement with the City and
County of Denver has been breached for alleged implied covenants of good faith
and fair dealing under the Denver franchise; promissory estoppel and breach of
implied contract; misappropriation of confidential information and trade
secrets; breach of confidence; breach of fiduciary duty; as well as unjust
enrichment; fraud; negligent misrepresentation; non-disclosure and concealment;
civil conspiracy; and violation of the Colorado Antitrust Act of 1992.
Plaintiffs seek an award of consequential, special and restitutionary damages in
an unspecified amount as well as exemplary damages, prejudgment interest, expert
witness fees, attorneys fees and costs. On August 5, 1997, the trial court
entered an Order dismissing all of plaintiffs' claims against defendants Liberty
and Encore as well as plaintiffs' first, second, fifth, and a portion of the
twelfth claim for relief against the remaining Company defendants. The motion
for judgment on the pleadings with respect to plaintiffs' other claims was
granted in part. The court dismissed three additional claims. We anticipate the
parties will stipulate to certification of an immediate appeal, which will take
from 12 to 18 months. Based upon the facts available, management believes that,
although no assurance can be given as to the outcome of this action, the
ultimate disposition should not have a material adverse effect upon the
financial condition of the Company.

         James Dalton, et al. v. Tele-Communications, Inc., et al. On February
24, 1997, James Dalton, et al. filed suit in District Court for Arapahoe County,
Colorado, Case No. 97-CV421, against Tele-Communications, Inc. ("TCI") and
certain officers of TCI. Plaintiffs filed this action under the Colorado
Securities Act and Colorado common law on behalf of all persons who purchased
TCI securities from January 10, 1996 through October 24, 1996 ("the class
period"). Plaintiffs claim, in part, that the defendants made false and
misleading statements during the class period concerning TCI's revenue and cash
flow growth, customer growth, and expansion and diversification into a
multi-business platform; and that TCI failed to disclose the performance of its
various operations. Plaintiffs claim further, in part, that TCI's cash flow
growth was weak and below levels necessary to fund a multi-business
diversification program and that TCI was competitively disadvantaged and would
likely be threatened by adverse conditions impacting its business. Plaintiffs
are seeking nationwide class certification and claim that the amount in
controversy is less than $75,000 per named plaintiff, exclusive of interest and
costs. On September 3, 1997, defendants motion to dismiss was denied. Defendants
answered the Complaint on October 3, 1997. Discovery is proceeding and the
parties have agreed to attend a mediation on May 19, 1998. Based upon the facts
available, management believes that, although no assurances can be given as to
the outcome of this action, the ultimate disposition should not have a material
adverse effect upon the financial condition of the Company.



                                      I-97
<PAGE>   100


         IMedia Corporation v. Western Tele-Communications, Inc. On August 12,
1997, in the United States District Court for the Northern District of
California, Case No. C 97-2960 CAL, Plaintiff Imedia Corporation ("Imedia")
filed suit against Western Tele-Communications, Inc. ("WTCI"). The Plaintiff
alleges that Defendant WTCI breached its contract to pay IMedia $5,000,000 for
the use of IMedia's StatMux software, developed for multiplexing digitally
compressed video signals. Plaintiff also claims for loss of per-subscriber fees
through September 30, 2004, pursuant to the contract. Additionally, Plaintiff
requests an injunction against WTCI or any affiliated company prohibiting use by
WTCI of any multiplexing software other than IMedia's. Based upon the facts
available, management believes that, although no assurance can be given as to
the outcome of this action, the ultimate disposition of this matter should not
have a material adverse effect upon the financial condition of the Company.

         Kim Magness, et al. v Tele-Communications, Inc. et al. On October 29,
1997 this action was filed in the District Court, Arapahoe County, Colorado,
against Tele-Communications, Inc. and Donne F. Fisher, individually and as
Personal Representative of the Estate of Bob Magness, deceased; Daniel Ritchie,
individually and as Personal Representative of the Estate of Bob Magness,
Deceased; Tele-Communications, Inc., John Malone; and DOES 1-10. This action
concerns the sale of stock by the Estate of Bob Magness and the Petitioner's
request to rescind the transaction. Plaintiffs allege, among other things, the
following Claims for Relief: Statutory Claim - Request to Void Transaction;
Breach of Fiduciary Duty; and Indemnification. The Complaint seeks a judgment
voiding, unwinding, and invalidating the agreements and transactions; a judgment
and order requiring TCI to return shares of stock to the Estate; an order
prohibiting any action to sell, transfer, pledge, hypothecate or dispose of
shares purchased from the Estate; a judgment awarding damages and surcharge,
including lost profits, consequential damages, and lost appreciation damages;
and reasonable costs and attorney fees. This case was settled on or about
January 5, 1998. This case will not be reported on in the future. A shareholder
derivative suit was subsequently filed which challenges this settlement and a
related payment to John Malone, see Magness Shareholder Litigation.

         The TCI Series D Preferred Stockholders Litigation. In October 1997, an
individual and putative class action complaint was filed in the Delaware Court
of Chancery by certain holders of Tele-Communications, Inc. ("TCI") Convertible
Preferred Stock, Series D (the "Series D Preferred Stock"). TCI is the only
named defendant in the action styled as Batten v. Tele-Communications, In., C.A.
No. 15972 (the "Series D Preferred Stockholders Litigation"). The complaint was
filed in connection with an offer made by TCI to the holders of TCI Group Common
Stock to exchange up to 30% of the outstanding shares of TCI Group Common Stock
for shares of the newly created TCI Ventures Group Common Stock (the "Exchange
Offer"). On January 21, 1998, the court dismissed Batten v. Tele-Communications,
Inc. with prejudice and without prejudice to all other class members. This case
will not be reported on in the future.



                                      I-98
<PAGE>   101


         BET Litigation. In September 1997, five substantially similar purported
class action complaints were filed by stockholders of BET Holdings, Inc. ("BET")
in the Court of Chancery of the State of Delaware under the captions Herbert
Behrens v. Robert L. Johnson, et al., C.A. No. 15921; Harbor Finance Partners v.
Peter Barton, et al., C.A. No. 15923; Alan Friedman v. Robert L. Johnson, et
al., C.A. No. 15924; Tiger Options, L.L.C. v. Robert L. Johnson, et al., C.A.
No. 15936 and Jerome Ramos v. Robert L. Johnson, et al., C.A. No. 15941.
Subsequently, on October 14, 1997, an Order of Consolidation was entered
consolidating these actions under the caption In re BET Holdings, Inc.
Shareholders Litigation, C.A. No. 15921 (the "Consolidated Action"). In the
designated complaint in the Consolidated Action, the named defendants are:
Robert L. Johnson, John C. Malone, Peter R. Barton, Delano E. Lewis, Sheila
Crump Johnson, Herbert P. Wilkins, Denzel Washington, TCI, Liberty Media
Corporation, and BET. The Consolidated Action focuses on the announcement of an
offer by TCI, Liberty and Robert L. Johnson, the Chief Executive Officer of BET,
to purchase all outstanding shares of BET for $48 per share, alleging that the
proposed $48 per share price was inadequate and that the transaction
contemplated by the offer would constitute a breach of fiduciary duty by the
directors of BET. In March 1998, the parties agreed to a settlement in principle
which is subject to final negotiation and execution of settlement document,
confirmatory discovery, court approval and other matters. Based upon the facts
available, management believes that, although no assurances can be given as to
the outcome of this action, the ultimate disposition of this matter should not
have a material adverse effect upon the financial condition of the Company.

         On October 7, 1997, a purported class lawsuit captioned Yvonne
Baskerville v. Robert L. Johnson, et al., Civil Action No. 97ca00778 was filed
in the Superior Court of The District of Columbia. The defendants in the
Baskerville action are: Robert L. Johnson, John C. Malone, Denzel Washington,
Delano E. Lewis, Sheila Crump Johnson, BET, TCI and Liberty Media Corporation.
The Baskerville action is substantially similar to the Consolidated Action. The
Complaint, among other things, alleges Breach of Fiduciary Duty in connection
with a proposed "freeze-out" transaction, where they allege that defendants
intended to take full equity ownership of BET through a merger into a new
entity. The Complaint seeks judgment declaring class action; granting injunctive
relief against consummation of the transaction or order rescinding the proposed
merger transaction; and ordering defendants to account for all damages including
costs and disbursements, attorney fees, and expert fees. By consent of the
parties, proceedings in the Baskerville action have been stayed conditionally.
No prediction can be made at this time as to the outcome of these actions. Based
upon the facts available management believes that, although no assurances can be
given as to the outcome of these actions, the ultimate disposition of this
matter should not have a material adverse effect upon the financial condition of
the Company.

         TCG Shareholder Litigation. In December of 1997 and January of 1998, in
the Court of the Chancery of the State of Delaware, New Castle County the
following three actions were filed: Sternberg v. TCI Communications, Inc., et
al., Case No. 16092-NC, Cirillo v. Tele-Communications, Inc., et al., Case No.
16139-NC, and Blain v. Tele-Communications, Inc., et al., Case No. 16161-NC.
Plaintiffs filed suit against the Company and officers, directors, and
controlling shareholders of TCG. These class action complaints were brought on
behalf of the public stockholders of TCG alleging defendants breached fiduciary
duties by proceeding with the proposed merger of TCG with AT&T. The Complaints
allege, among other things, breach of fiduciary duties. The Complaints seek
class certification, injunctive relief, attorney fees, and costs. Plaintiffs did
not demand a jury trial. Based upon the facts available, management believes
that, although no assurances can be given as to the outcome of this action, the
ultimate disposition of this matter should not have a material adverse effect
upon the financial condition of the Company.



                                      I-99
<PAGE>   102


         Late Fee Litigation. The Company has been named in a number of
purported and certified class actions in various jurisdictions concerning late
fee charges and practices. Certain cable systems directly or indirectly owned or
managed by the Company charge late fees to customers who do not pay their cable
bills on time. These late fee cases challenge the amount of the late fees and
the practices under which they are imposed. The Plaintiffs raise claims under
state consumer protection statutes, other state statutes, and the common law.
Plaintiffs generally allege that the late fees charged by various cable systems
are not reasonably related to the costs incurred by the cable systems as a
result of the late payment. Plaintiffs seek to require cable systems to reduce
their late fees on a prospective basis and to provide compensation for alleged
excessive late fee charges for past periods. These cases are at various stages
of the litigation process. Based upon the facts available management believes
that, although no assurances can be given as to the outcome of these actions,
the ultimate disposition of these matters should not have a material adverse
effect upon the financial condition of the Company.

         Magness Shareholder Litigation. On January 8, 1998, the following
actions were filed in the Court of Chancery of the State of Delaware In and For
New Castle County: Morgan, et al. v. Tele-Communications, Inc., et al., Civil
Action No. 16128-NC; Steiner v. Tele-Communications, Inc., et al., Civil Action
No. 16130-NC; Weisberg v. Tele-Communications, Inc., et al., Civil Action No.
16131-NC. Pan v. Tele-Communications, Inc., et al., Civil Action No. 16133,
Klein v. Tele-Communications, Inc., et al., Civil Action No. 16135, Crandon
Capital Partners v. Tele-Communications, Inc., et al., Civil Action No. 16136
and Deutsch v. Tele-Communications, Inc., et al., Civil Action No. 16148. Also
named as defendants in these cases are John C. Malone, John W. Gallivan, Donne
F. Fisher, Leo J. Hindery, Jr., J.C. Sparkman, Paul A. Gould, Jerome H. Kern,
Kim Magness, and Robert A. Naify. These are derivative shareholder actions
challenging the Magness Estate settlement and the related payment to John C.
Malone. Plaintiffs allege, among other things, the following claims for relief:
breach of fiduciary duties, self-dealing and unjust enrichment, and waste of
Company assets. The Complaints seek repayment of amounts paid for call
agreements, injunctive relief, attorney fees, costs and unspecified compensatory
damages. The plaintiffs have not demanded a jury trial. Based upon the facts
available, management believes that, although no assurances can be given as to
the outcome of this action, the ultimate disposition of this matter should not
have a material adverse effect upon the financial condition of the Company.

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

         None.


                                     I-100
<PAGE>   103



Item 6.  Selected Financial Data.

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

<TABLE>
<CAPTION>
                                                                          December 31,                               
                                                  ---------------------------------------------------------------
                                                   1997(d)       1996(a)       1995(a)       1994(a)       1993(a)
                                                  -------        ------        ------        ------        ------
                                                                         amounts in millions
<S>                                               <C>             <C>           <C>           <C>           <C>  
 Summary Balance Sheet Data:
 ---------------------------

 Property and equipment, net                      $ 7,679         7,528         7,409         5,876         4,935

 Franchise costs, net                             $15,147        15,436        12,230         9,444         9,197

 Total assets                                     $32,487        30,169        25,429        19,148        16,351

 Debt                                             $15,250        14,926        13,211        11,162         9,900

 Minority interests in equity of
  consolidated subsidiaries                       $ 1,684         1,493           651           429           285

 Redeemable securities                            $   660           658           478           170            18

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

 Stockholders' equity                             $ 4,492         4,178         4,461         2,578         2,010

Common shares outstanding (net of treasury
   shares and shares held by
   subsidiaries):
     Class A common stock                              --            --            --           491           403
     Class B common stock                              --            --            --            85            47
     TCI Group Series A Stock                         469           579           572            --            --
  
     TCI Group Series B Stock                          38            85            85            --            --

     Liberty Group Series A Stock                     313 (b)       342 (b)       337 (b)        --            --

     Liberty Group Series B Stock                      32 (b)        32 (b)        32 (b)        --            --

     TCI Ventures Group Series A Stock                377 (c)        --            --            --            --
                                                      
     TCI Ventures Group Series B Stock                 32 (c)        --            --            --            --
</TABLE>


- ---------
(a)      Restated - see note 13 to the TCI consolidated financial statements.
(b)      Adjusted to give effect to the 1998 Liberty Stock Dividend.
(c)      Adjusted to give effect to the Ventures Stock Dividend.
(d)      Restated - see note 19 to the TCI consolidated financial statements.





                                      II-4
<PAGE>   104




<TABLE>
<CAPTION>
                                                                                      Years ended December 31,
                                                           -----------------------------------------------------------------------
                                                             1997(h)           1996(a)        1995(a)        1994(a)        1993(a)
                                                           -------             -------        -------       --------        ------
                                                                              amounts in millions, except per share data
<S>                                                        <C>                 <C>            <C>            <C>            <C>  
Summary Statement of Operations Data:
- -------------------------------------

Revenue                                                    $ 7,570             8,022          6,506          4,682          3,977

Operating income                                           $   849               632            542            788            916

Interest expense                                           $(1,160)           (1,096)        (1,010)          (785)          (731)

Share of losses of affiliates, other than
  Liberty Media Corporation, net                           $  (930)             (450)          (213)           (64)           (90)
                                                           

Gain (loss) on disposition of assets                       $   401             1,593             49            (10)            42

Earnings (loss) from continuing
  operations                                               $  (561)              292           (183)            91            (13)

Net earnings (loss) attributable to common
  stockholders:
     TCI Class A and Class B common stock                  $    --                --            (78) (b)        83            (15)
     TCI Group Stock                                          (537)             (799)          (112) (c)        --             --
     Liberty Group Stock                                       125             1,056            (27) (c)        --             --
     TCI Ventures Group Stock                                 (191)(d)            --             --             --             --
                                                           -------           -------        -------        -------        -------
                                                           $  (603)              257           (217)            83            (15)
                                                           =======           =======        =======        =======        =======
Basic earnings (loss) attributable to
  common stockholders per common share(g):
     TCI Class A and Class B common stock                       --                --           (.12) (b)       .15           (.03)
     TCI Group Stock                                       $  (.85)            (1.20)          (.17) (c)        --             --
     Liberty Group Stock                                   $   .34              2.82 (e)       (.07) (c)(e)     --             --
     TCI Ventures Group Stock                              $  (.47)(d)(f)         --             --             --             --

Diluted earnings (loss) attributable to
  common stockholders per common and
  potential common share (g):
     TCI Class A and Class B common stock                  $    --                --           (.12) (b)       .15           (.03)
     TCI Group Stock                                       $  (.85)            (1.20)          (.17) (c)        --             --
     Liberty Group Stock                                   $   .31(e)           2.58 (e)       (.07) (c)(e)     --             --
     TCI Ventures Group Stock                              $  (.47)(d)(f)         --             --             --             --

Weighted average common shares
  outstanding:
     TCI Class A and Class B common stock                       --                --            648 (b)        541            433
     TCI Group Stock                                           632               665            656 (c)         --             --
     Liberty Group Stock                                       366(e)            374 (e)        369 (c)(e)      --             --
     TCI Ventures Group Stock                                  410(d)(f)          --             --             --             --
</TABLE>

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

(a)      Restated - see note 13 to the TCI consolidated financial statements.
(b)      From January 1, 1995 through August 10, 1995 (on August 10, 1995, TCI
            distributed in the form of a dividend, 2.25 shares (as adjusted) of
            Liberty Group Stock for each four shares of TCI Group Stock owned,
            the "Liberty Distribution").
(c)      From the date of the Liberty Distribution through December 31, 1995.
(d)      From the date of the TCI Ventures Exchange through December 31, 1997.
(e)      Adjusted to give effect to the 1998 Liberty Stock Dividend.
(f)      Adjusted to give effect to the Ventures Stock Dividend
(g)      Earnings per share have been restated for all periods to reflect the
         adoption of Statement of Financial Accounting Standard No. 128, 
         "Earnings per Share."  See note 3 to TCI's consolidated financial 
         statements.
(h)      Restated - see note 19 to the TCI consolidated financial statements.


                                      II-5
<PAGE>   105



         The following tables present selected information relating to the
financial condition and results of operations of TCI Group for the past three
years.  The following data should be read in conjunction with TCI Group's
combined financial statements.
<TABLE>
<CAPTION>
                                                                          December 31,
                                                           ----------------------------------------
                                                             1997            1996(a)         1995(a)
                                                           --------          ------          ------
                                                                       amounts in millions

Summary Balance Sheet Data:
- ---------------------------
<S>                                                        <C>                <C>             <C>  
Property and equipment, net                                $  6,942           6,781           6,756

Franchise costs, net                                       $ 15,077          14,793          11,657

Total assets                                               $ 23,578          22,819          19,529

Debt                                                       $ 14,106          14,319          12,690

Minority interests in equity of attributed subsidiaries    $  1,048           1,083             237

Redeemable securities                                      $    660             658             478

Trust Preferred Securities                                 $  1,500           1,000              --

Combined equity (deficit)                                  $   (802)           (764)            468
</TABLE>


<TABLE>
<CAPTION>
                                                                      Years ended December 31,        
                                                                  -------------------------------
                                                                   1997        1996        1995 
                                                                  -------     -------     -------
                                                                         amounts in millions
<S>                                                               <C>           <C>         <C>  
Summary Statement of Operations Data:
- -------------------------------------

Revenue                                                           $ 6,429       5,881       4,827

Operating, selling, general and administrative expenses, and
   stock compensation                                             $(3,855)     (3,842)     (2,942)

Depreciation and amortization                                     $(1,427)     (1,406)     (1,199)

Operating income                                                  $ 1,147         596         686

Interest expense                                                  $(1,105)     (1,029)       (969)

Share of losses of affiliates, net                                $   (90)        (79)         (3)

Loss before loss of Liberty Media Group and TCI Ventures Group
   through the date of the Liberty Distribution and the TCI
   Ventures Exchange, respectively                                $  (150)       (506)       (187)

Net loss                                                          $  (495)       (764)       (156)

Net loss attributable to common stockholders                      $  (537)       (799)       (190)

Basic and diluted loss attributable to common stockholders per
   common share (b)                                               $  (.85)      (1.20)       (.17)
</TABLE>

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

(a)      As a result of the TCI Ventures Exchange, the TCI Group combined
         financial statements were restated to exclude those assets and
         liabilities which, prior to being attributed to TCI Ventures Group in
         connection with the issuance of the TCI Ventures Group Stock, had been
         attributed to TCI Group.  Additionally, the combined financial
         statements of TCI Group were restated to reflect the adoption of the
         equity method of accounting for an investee.  See notes 1 and 12 to
         the accompanying combined financial statements of TCI Group.

(b)      Earnings per share have been restated for all periods to reflect the
         adoption of Statement of Financial Accounting Standards No. 128,
         "Earnings per Share."  See note 3 to TCI Group's combined financial
         statements.





                                      II-6
<PAGE>   106



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

<TABLE>
<CAPTION>
                                                                              Years ended December 31,
                                                                   --------------------------------------------
                                                                       1997            1996            1995
                                                                   ------------    ------------    ------------  
                                                                               amounts in millions             
<S>                                                                <C>                      <C>             <C>
Summary Balance Sheet Data:
- -------------------------- 

Investments in affiliates, accounted for under the equity
   method, and related receivables                                 $      524              545             299

Investment in Time Warner, Inc. ("Time Warner")                    $    3,538            2,017              --
                                                                

Investment in Turner Broadcasting System, Inc. ("TBS")             $       --               --             945
                                                                

Other investments, at cost, and related receivables                $      427               82             111
                                                                

Excess cost over acquired net assets, net                          $      194                7             331

Total assets                                                       $    5,039            3,059           2,518

Debt                                                               $      349                2             251

Minority interest in equity of attributed subsidiaries             $      120                1              88
                                                                

Combined equity                                                    $    2,920            2,397           1,613
</TABLE>

<TABLE>
<CAPTION>
                                                                              Years ended December 31,       
                                                                   --------------------------------------------
                                                                       1997            1996            1995    
                                                                   ------------    ------------    ------------
                                                                               amounts in millions
<S>                                                                <C>            <C>            <C>
Summary Statement of Operations Data:
- ------------------------------------ 

Revenue                                                            $      374            1,339           1,441

Cost of sales, operating, selling, general administrative
  expenses and stock compensation                                  $     (473)          (1,192)         (1,437)

Depreciation and amortization                                      $      (12)             (61)            (98)

Operating income (loss)                                            $     (111)              86            (111)

Share of earnings (losses) of affiliates, net                      $      (12)               8             (15)

Gain (loss) on dispositions                                        $      304            1,537              (2)

Net earnings (loss)                                                $      125            1,056             (56)

Basic earnings (loss) attributable to common stockholders per
  common share (a)                                                 $      .34             2.82            (.07)

Diluted earnings (loss) attributable to common stockholders per
  common and potential common share (a)                            $      .31             2.58            (.07)

</TABLE>

(a)      Earnings per share have been restated for all periods to reflect the
         adoption of Statement of Financial Accounting Standards No. 128,
         "Earnings per Share."  See note 3 to Liberty Media Group's combined
         financial statements.





                                      II-7
<PAGE>   107



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

<TABLE>
<CAPTION>
                                                                        December 31,                   
                                                           ----------------------------------
                                                              1997 (a)     1996        1995
                                                           --------       ------      -------
                                                                   amounts in millions
<S>                                                        <C>            <C>         <C>  
Summary Balance Sheet Data:
- -------------------------- 

Investment in Sprint Spectrum Holding Company, L.P. and
   MinorCo, L.P. (and their respective predecessor) and
   PhillieCo, L.P. (collectively, the "PCS Ventures"),
   accounted for under the equity method                   $    607         830         689
                                                           

Investment in Telewest Communications plc ("Telewest"),    
   accounted for under the equity method                   $    324         488         550
                                                           

Investment in other affiliates, accounted for under the    
   equity method                                           $  1,166         751         635

Property and equipment, net                                $    709         737         449

Franchise cost, net                                        $    420         926         573

Total assets                                               $  3,943       4,260       3,447

Debt and capital lease obligations                         $    795         726         321

Minority interests in equity of attributed subsidiaries    $    519         412         326

Combined equity                                            $  2,336       2,511       2,379
</TABLE>


<TABLE>
<CAPTION>
                                                                       Years ended December 31,        
                                                                  ----------------------------------
                                                                    1997         1996         1995 
                                                                  --------     --------     --------
                                                                         amounts in millions
<S>                                                               <C>          <C>          <C>  
Summary Statement of Operations Data:
- -------------------------------------

Revenue                                                           $    969          926          326

Operating, general and administrative expenses, and stock
   compensation                                                   $   (957)        (818)        (284)

Impairment of intangible assets                                   $   ( 15)          --           --

Depreciation and amortization                                     $   (184)        (149)         (75)

Operating loss                                                    $   (187)         (51)         (33)

Interest expense                                                  $    (54)         (51)         (42)

Share of losses of affiliates, net                                $   (819)        (368)        (195)

Net earnings (loss)                                               $   (536)        (258)          60

Basic and diluted loss attributable to common stockholders per
   common share subsequent to the TCI Ventures Exchange           $   (.47)
                                                                  ========
</TABLE>

(a) Restated - see note 18 to the TCI Ventures Group combined 
    financial statements.



                                      II-8
<PAGE>   108



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

         The following discussion and analysis provides information concerning
the results of operations and financial condition of the Company, TCI Group,
Liberty Media Group and TCI Ventures Group.  Such discussion should be read in
conjunction with the accompanying consolidated financial statements and notes
thereto of the Company and the accompanying combined financial statements and
notes thereto of each of the TCI Group, Liberty Media Group and TCI Ventures
Group.

         Targeted Stock

         On August 3, 1995, the stockholders of TCI authorized the Board to
issue two new series of stock, Liberty Group Series A Stock and Liberty Group
Series B Stock.  The Liberty Group Stock is intended to reflect the separate
performance of TCI's assets which produce and distribute programming services.
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.  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
comprised primarily of TCI's domestic cable and communications business.  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.

         On August 28, 1997, the stockholders of TCI authorized the Board to
issue the TCI Ventures Group Stock.  The TCI Ventures Group Stock is intended
to reflect the separate performance of 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.


         Prior to stockholder approval to issue the TCI Ventures Group Stock,
TCI commenced 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 the TCI Ventures Exchange was consummated.

         Collectively, TCI Group, Liberty Media Group and TCI Ventures Group
are referred to as "Groups" and individually, may be referred to herein as a
"Group."  The TCI Group Series A Stock, TCI Ventures Group Series A Stock and
Liberty Group Series A Stock are sometimes collectively referred to herein as
the "Series A Stock," and 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."

         As a result of the TCI Ventures Exchange, the combined financial
statements of TCI Group were restated to exclude those assets and related
liabilities which, prior to being attributed to TCI Ventures Group in
connection with the issuance of the TCI Ventures Group Stock, had been
attributed to TCI Group.





                                      II-9
<PAGE>   109



         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 of each such Group, the capital structure of TCI, which encompasses
the TCI Group Stock, Liberty Group Stock and TCI 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,
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
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.

         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,
respectively, 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 Group Stock 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.

         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.





                                     II-10
<PAGE>   110
'


         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.

         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.  TCI Group has provided and will continue to provide centralized
cash management functions under which cash receipts of certain entities
included in the other Groups could be remitted to TCI Group and certain cash
disbursements of the other Groups 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 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
accompanying 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 equity.





                                     II-11
<PAGE>   111



         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.

         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 TCI
Ventures Group or 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 the TCI Group's Inter-Group Interest in TCI
Ventures Group or Liberty Media Group, respectively.





                                     II-12
<PAGE>   112



         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. 

         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").
 
         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.
    



                                     II-13
<PAGE>   113



   
         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 (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, $64 million and $76
million of the Call Payments will be allocated to TCI Group, Liberty Media
Group and TCI 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.





                                     II-14
<PAGE>   114



         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.





                                     II-15
<PAGE>   115



         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.



                                     II-16
<PAGE>   116



         The Company's domestic cable and communications businesses and assets
are included in TCI Group, and the Company's programming businesses 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 operating
results of each of the TCI Group, Liberty Media Group and TCI 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 accompanying combined financial
         statements of TCI Group.

         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 Federal Communications Commission ("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.





                                     II-17
<PAGE>   117



         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 accompanying combined financial statements of TCI Group.  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 income                            $      (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.





                                     II-18
<PAGE>   118



         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 the Liberty Media 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
accompanying combined financial statements of TCI Group.

         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 Media Group and TCI 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 Media Group and TCI Ventures Group would
incur for comparable services on a stand-alone basis.  During the years ended
December 31, 1997, 1996 and 1995, Liberty Media Group was allocated $3 million
per year and TCI Ventures Group was allocated $10 million, $8 million and $4
million, respectively, in corporate general and administrative costs by TCI
Group.





                                     II-19
<PAGE>   119



         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 the date of the accompanying combined financial statements of TCI
Group.  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 Trust Preferred Securities 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 accompanying combined financial statements of TCI
Group.





                                     II-20
<PAGE>   120



         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 MEDIA GROUP

         Liberty Media Group's assets include 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.  Liberty
Media Group's assets also include businesses engaged in electronic retailing,
direct marketing, advertising sales relating to programming services,
infomercials and transaction processing.  A significant portion of Liberty
Media Group's operations are conducted through corporations and partnerships in
which Liberty Media Group holds a 20%-50% ownership interest.  As Liberty Media
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 Media Group's
combined financial statements.

         During July 1997, Liberty Media Group, TCI Group and a corporation
which held the 10% minority interest in Encore Media Corporation ("EMC") that
Liberty Media 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
Media 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 Media 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 Media
Group's ownership interest in QE+.

         TCI Group received the remaining 20% interest in Encore Media Group
and the aforementioned consideration from Liberty Media 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.





                                     II-21
<PAGE>   121



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

         Effective December 31, 1997, Liberty Media 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 Media 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 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
statements of Liberty Media Group.  See note 5 to the accompanying combined
financial statements of Liberty Media 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 Inc. ("TCI Music"), TCI Merger Sub, a wholly-owned
subsidiary of TCI Music ("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.





                                     II-22
<PAGE>   122



         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 Media Group acquired the TCI Music Series B Common
Stock and 2.6 million shares of the TCI-owned TCI Music Series A Common Stock
by issuing an $80 million promissory note (the "Music Note") to TCI and
assuming the 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
(the "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.  Following the above-described
transaction, Liberty Media Group holds TCI Music Common Stock, which when
combined with the TCI Music Common Stock received by Liberty Media Group in the
DMX Merger, represented approximately 86% of the equity and 98% of the voting
power of TCI Music.  Therefore, TCI Music was included in the combined
financial statements of Liberty Media Group as of the date of the DMX Merger.
Due to the related party nature of the transaction, the $85 million excess of
the consideration paid over the carryover basis of the TCI Music Common Stock
acquired by Liberty Media Group from TCI was reflected as a decrease to
combined equity.

         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 approximated their respective fair values at the
acquisition date.  The Music Note is reflected in amounts due to related
parties.  See note 10 to the accompanying combined financial statements of
Liberty Media Group.

         On December 16, 1997, shareholders of the Box Worldwide, Inc. ("The
Box Worldwide") voted to approve an Agreement and Plan of Merger dated as of
August 12, 1997 (the "Box Merger"),pursuant to which The Box Worldwide became a
wholly-owned subsidiary of TCI Music and each outstanding share of common stock
of The Box Worldwide was converted into the right to receive .07 of a share of
TCI Music Preferred Stock ("TCI Music Preferred").  Each share of TCI Music
Preferred is convertible into 3 shares of TCI Music Series A Common Stock
without an associated Right.

         Effective December 31, 1997, shareholders of Paradigm Music
Entertainment Company ("Paradigm") voted to approve an Agreement and Plan of
Merger dated as of December 8, 1997 (the "Paradigm Merger"), pursuant to which
Paradigm became a wholly-owned subsidiary of TCI Music and shareholders of
Paradigm received 0.61 restricted shares of TCI Music Series A Common Stock,
without an associated Right, for each share of Paradigm common stock held.  The
acquisitions of The Box Worldwide and Paradigm were accounted for by the
purchase method.  Accordingly, the results of operations of such acquired
entities have been included in the combined financial results of Liberty Media
Group since their respective dates of acquisition.





                                     II-23
<PAGE>   123




         Effective April 1, 1996, United Video Satellite Group, Inc. ("UVSG"),
a subsidiary of TCI and a member of the TCI Ventures Group, and Netlink USA
("Netlink"), a subsidiary of TCI and a member of Liberty Media Group, formed
Superstar/Netlink Group LLC ("Superstar/Netlink"), a limited liability company
comprised of UVSG's Superstar Satellite Entertainment and Netlink's retail
C-band satellite business.  Liberty Media Group and UVSG each own 50% of
Superstar/Netlink.  As of April 1, 1996, Netlink's retail C-band satellite
business is no longer included in the combined financial statements of Liberty
Media Group.  Superstar/Netlink is accounted for using the equity method.

         As of April 29, 1996, Liberty Media Group, The News Corporation
Limited ("News Corp.") and Tele-Communications International, Inc. ("TINTA")
formed two sports programming ventures both of which are accounted for using
the equity method.  In the United States, Liberty Media Group and News Corp.
formed Fox/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 in connection with the
formation of Fox Sports.


         Internationally, News Corp. and Liberty/TINTA LLC ("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 America and in Hispanic markets in
the United States; an interest in Torneos y Competencias S.A., an Argentinean
sports programming and production business; various international sports and
satellite transponder rights and cash. Liberty/TINTA also contributed its 50%
interest in Premier Sports and All-Star Sports. Both are Australian 24-hour
sports services available via multichannel, multipoint distribution systems or
cable television. The formation of Liberty/TINTA was recorded at carryover basis
and no gain was recognized.

         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").





                                     II-24
<PAGE>   124




         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 and voting power
of HSN).  BDTV-II is a corporation formed by Liberty Media Group and Barry
Diller pursuant to the BDTV Agreement, in which the relative equity ownership
and voting power of Liberty Media Group and Mr. Diller are substantially the
same as their respective equity ownership and voting power in BDTV-I.  Pursuant
to an Exchange Agreement between Liberty Media Group and Silver King, the
shares of HSN held by Liberty Media Group following the HSN Merger are
mandatorily exchangeable (the "Exchange Agreement") from time to time for
shares of common stock and Class B common stock of Silver King (in the same
ratio as the merger ratio in the HSN Merger) either upon the occurrence of
certain events or changes in laws, rules or regulations which would entitle
Liberty Media Group to own directly a greater number of shares of Silver King
or in connection with the sale of the shares of Silver King to be received in
the exchange to a third party who would be entitled to own such shares under
applicable law.  If all shares of Silver King stock issuable pursuant to the
Contingent Right and the Exchange Agreement were issued, Liberty Media Group's
beneficial ownership of Silver King stock would increase from 21.37% to
approximately 36% of the outstanding common equity (with such shares and the
shares owned by BDTV-I and BDTV-II (and collectively with BDTV III INC.,
"BDTV") representing approximately 77% of the total voting power of the Silver
King common equity).

         As a result of the HSN Merger, HSN is no longer 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, as well as a direct interest in HSN which would be exchangeable into
shares of Silver King.  Accordingly, HSN and BDTV are accounted for using the
equity method.  Subsequent to the HSN Merger, the surviving corporation changed
its name to HSN, Inc. ("HSNI").





                                     II-25
<PAGE>   125



         Summary of Operations

         Liberty Media Group's programming services include production,
acquisition and distribution through all available formats and media of branded
entertainment, educational and informational programming and software,
including multimedia products ("Entertainment and Information Programming
Services").  Through December 20, 1996 (the date of the HSN Merger), Liberty
Media 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 and for Electronic Retailing
Services, which includes a retail function.  The table below sets forth, for the
periods indicated, certain financial information and the percentage
relationship that certain items bear to revenue.  This summary provides trend
data related to the normal recurring operations of Liberty Media Group.
Corporate expenses have been reflected separately in the following table.
Liberty Media Group holds significant equity investments, the results of which
are not a component of operating income, but are discussed below under "Other
Income and Expense".  Other items of significance are discussed separately
below.

<TABLE>
<CAPTION>
                                                                  Years ended December 31,
                                      ---------------------------------------------------------------------------------
                                                    1997                    1996                     1995
                                      ------------------------     -----------------------     ------------------------
                                                                 dollar amounts in thousands
<S>                                         <C>      <C>                 <C>     <C>                 <C>      <C>      
Entertainment and Information
- -----------------------------
Programming Services
- --------------------

   Revenue                                  100%     $ 374,223           100%    $ 355,242           100%     $ 521,050
   Operating, selling, general and
      administrative                        (83)%     (310,845)          (72)%    (257,601)          (91)%     (475,533)
   Stock compensation                       (16)%      (60,747)           (6)%     (20,142)           (1)%       (2,183)
   Depreciation and amortization             (3)%      (12,248)           (7)%     (23,676)          (10)%      (54,688)
                                      ---------      ---------     ---------     ---------     ---------      ---------

      Operating income (loss)                (2)%    $  (9,617)           15%    $  53,823            (2)%    $ (11,354)
                                      =========      =========     =========     =========     =========      =========
</TABLE>


<TABLE>
<CAPTION>
                                                                  Years ended December 31,
                                      ---------------------------------------------------------------------------------
                                               1997                          1996                        1995
                                      ------------------------     -----------------------     ------------------------
                                                                 dollar amounts in thousands
<S>                                         <C>    <C>                   <C>     <C>                 <C>      <C>       
Electronic Retailing Services
- -----------------------------

Net sales                                   N/A          N/A             100%    $ 984,117           100%     $ 919,796 
Cost of sales                               N/A          N/A             (61)%    (605,116)          (66)%     (602,849)
Operating, selling, general and                                                                                        
   administrative                           N/A          N/A             (31)%    (305,681)          (39)%     (359,130)
Stock compensation                          N/A          N/A              --            --            --            758 
Depreciation and amortization               N/A          N/A              (4)%     (36,891)           (4)%      (43,249)
                                                                   ---------     ---------     ---------      --------- 
                                                                                                                        
   Operating income (loss)                  N/A          N/A               4%    $  36,429            (9)%    $ (84,674)
                                                                   ---------     ---------     ---------      --------- 
                                                                                                                        
Corporate expenses                                                                                                     
- ------------------                                                                                                     
                                           
   Selling, general and administrative
                                                   $  (8,552)                     $ (6,484)                    $ (4,743)
   Stock compensation                                (93,115)                        2,789                      (10,261)
   Depreciation and amortization                        (116)                         (125)                         (74)
                                                   ---------                      --------                     --------
                                                                                                                        
      Operating loss                               $(101,783)                     $ (3,820)                    $(15,078)
                                                   =========                      ========                     ========
</TABLE>




                                     II-26
<PAGE>   126



         Entertainment and Information Programming Services

         As of April 1, 1996, upon formation of Superstar/Netlink, Netlink's
retail operations were no longer included in the combined financial results of
Liberty Media Group. Similarly, effective April 29, 1996, Liberty Media Group's
regional sports programming businesses were no longer included in the combined
financial results of Liberty Media 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 Media Group.
And, as of July 11, 1997 the operations of TCI Music are also included in the
combined financial results of Liberty Media Group. Consequently, the amounts in
the table above are not comparable year to year. The following table presents
adjustments to remove the effects of the aforementioned acquisitions and
dispositions.

<TABLE>
<CAPTION>
                                                          Year ended December 31, 1997               
                                           ------------------------------------------------------
                                                                  Effect of
                                                                 acquisitions
                                            Historical         and dispositions       As adjusted     
                                           ------------        ----------------      ------------
                                                             amounts in thousands
<S>                                        <C>                 <C>                 <C>
Revenue                                    $    374,223             (126,568)            247,655

Operating, selling, general and
    administrative expenses                    (310,845)             164,950            (145,895)

Stock compensation                              (60,747)                 294             (60,453)

Depreciation and amortization                   (12,248)               7,226              (5,022)
                                           ------------        -------------        ------------ 

    Operating income (loss)                $     (9,617)              45,902              36,285
                                           ============        =============        ============
</TABLE>





                                     II-27
<PAGE>   127




<TABLE>
<CAPTION>
                                                    Year ended December 31, 1996
                                           ----------------------------------------------
                                                              Effect of
                                                            acquisitions
                                             Historical   and dispositions   As adjusted
                                           ------------   ----------------   ------------
                                                        amounts in thousands
<S>                                        <C>                  <C>               <C>    
Revenue                                    $    355,242         (163,736)         191,506

Operating, selling, general and
    administrative expenses                    (257,601)         152,614         (104,987)

Stock compensation                              (20,142)           3,540          (16,602)

Depreciation and amortization                   (23,676)          20,207           (3,469)
                                           ------------     ------------     ------------

    Operating income                       $     53,823           12,625           66,448
                                           ============     ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                    Year ended December 31, 1995
                                           ----------------------------------------------
                                                              Effect of
                                                            acquisitions
                                             Historical   and dispositions   As adjusted
                                           ------------   ----------------   ------------
                                                       amounts in thousands
<S>                                        <C>                  <C>               <C>    
Revenue                                    $    521,050         (383,179)         137,871

Operating, selling, general and
    administrative expenses                    (475,533)         390,109          (85,424)

Stock compensation                               (2,183)              --           (2,183)

Depreciation and amortization                   (54,688)          50,803           (3,885)
                                           ------------     ------------     ------------

    Operating income (loss)                $    (11,354)          57,733           46,379
                                           ============     ============     ============
</TABLE>

         Excluding the effect of acquisitions and dispositions, revenue from
Entertainment and Information Programming Services increased 29% or $56 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
Encore, including the thematic multiplex services ("Multiplex").  During the
year ended December 31, 1997, revenue from Encore 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 satellites ("DBS")
operators, when compared to the year ended December 31, 1996.





                                     II-28
<PAGE>   128



         Operating, selling, general and administrative expenses from
Entertainment and Information Programming Services, as adjusted for the effect
of acquisitions and dispositions, increased 39% or $41 million for the year
ended December 31, 1997 compared to the year ended December 31, 1996.
Programming costs for Encore and 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 operating, selling, general and
administrative expenses for 1997 over 1996.  The remaining increases 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
Media Group.

         The increase in stock compensation of Entertainment and Information
Programming Services for the year ended December 31, 1997, as compared to 1996,
is due to an increase in Encore Media Group's stock compensation of $44 million
(see note 11 to accompanying combined financial statements of Liberty Media
Group).

         Revenue from Entertainment and Information Programming Services
increased 39% or $54 million for the year ended December 31, 1996, compared to
the year ended December 31, 1995 excluding the effect of acquisitions and
dispositions. Revenue from Encore 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. The remaining increase in revenue for Entertainment and Information
Programming Services is related to increases in revenue from affiliate fees from
Southern and the increase in the STARZ Content Fees.

         Excluding the effect of acquisitions and dispositions, operating,
selling, general and administrative expenses increased 23% or $19 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.

         The increase in stock compensation of Entertainment and Information
Programming Services for the year ended December 31, 1996 compared to 1995 is
due to an increase in stock compensation for Encore of approximately $14
million.





                                     II-29
<PAGE>   129



         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 Media 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!.

         Electronic Retailing Services

         This information reflects the results of HSN, which was included in
the combined financial results of Liberty Media 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.  The remaining increase in revenue
was due to increases in sales by other HSN wholly-owned subsidiaries, Internet
Shopping Network, Inc. ("ISN") and Vela Research, Inc. ("Vela"), which were
offset by decreases related to the sale of assets of Ortho-Vent, Inc., a
subsidiary of HSN Mail Order, Inc. ("Mail Order"), and decreases by HSN's
infomercial joint venture.  During April 1996, HSN sold a majority of its
interest in its infomercial joint venture for $5.9 million to an affiliate of
TINTA resulting in a $1.9 million pre-tax gain.

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

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

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





                                     II-30
<PAGE>   130



         Corporate Expenses

         The increase in corporate selling, general and administrative expense
from 1996 to 1997 was primarily due to increased legal expenses.  The increase
from 1995 to 1996 was an increase in personnel costs and stockholder expenses.
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 the date of the financial
statements.  The expense is subject to future adjustment based on market price
fluctuations and, ultimately, on the final determination of market value when
the rights are exercised.

         Certain TCI corporate general and administrative costs are charged to
Liberty Media Group at rates set at the beginning of each year based on
projected utilization for that year.  The utilization-based charges are set at
levels that management believes to be reasonable and that would approximate the
costs Liberty Media Group would incur for comparable services on a stand alone
basis.  During the years ended December 31, 1997, 1996 and 1995, Liberty Media
Group was allocated approximately $3 million each year in corporate general and
administrative costs by TCI Group.

         Other Income and Expense

         Interest expense was $6 million, $17 million and $19 million in 1997,
1996 and 1995, respectively.  Because the operations of HSN have not been
included in the combined financial results of Liberty Media Group since
December 20, 1996, interest expense related to HSN accounted for a decrease of
$10 million in Liberty Media Group's interest expense for the year ended
December 31, 1997 compared to 1996.

         Dividend and interest income was $48 million, $22 million and $12
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 common
stock with limited voting rights (the "TW Exchange Stock"), offset by the loss
of dividends on 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 $4.5 million received on the TW Exchange Stock in December of
1996.

         Liberty Media Group's share of losses of affiliates was $12 million in
1997 compared to earnings of $8 million in 1996.

         Liberty Media Group's share of earnings of affiliates attributable to
its interest in Discovery Communications, Inc. ("Discovery") decreased $30
million during the year ended December 31, 1997 compared to 1996.  While
Discovery's revenue increased by 30% in 1997, its earnings before interest,
taxes, depreciation and amortization decreased by 36%, principally because of
costs associated with launching new services (primarily Animal Planet),
continuing investments in international services and the acquisition of the
Nature Company.  Additionally, expense from Discovery's executive compensation
plan, which is based on a periodic valuation of Discovery, increased by 40%
during 1997 compared to 1996 and interest expense for Discovery was 141% higher
in 1997 than 1996.





                                     II-31
<PAGE>   131



         Liberty Media Group's share of earnings of affiliates attributable to
its interest in QVC Inc. ("QVC") increased approximately $7 million during 1997
compared to 1996.  QVC's revenue increased by 12% during the year ended
December 31, 1997, resulting in a corresponding 12% increase in earnings before
interest, taxes, depreciation and amortization over the year ended December 31,
1996.  In the aggregate, interest expense, taxes, depreciation and amortization
for QVC increased by 8% during 1997, resulting in a 32% increase in net income
for QVC for the year ended December 31, 1997 compared to the year ended
December 31, 1996.

         In addition, Liberty Media Group's share of earnings of affiliates
attributable to its interest in Superstar/Netlink increased $8 million during
1997 compared to 1996.  This increase is partially due to the timing of the
formation of Superstar/Netlink which did not occur until April of 1996.
Effective January 1, 1997, Liberty Media Group formed Your Choice TV, LLC
("YCTV") with Discovery and TCI Ventures Group.  Liberty Media Group's share of
losses of affiliates attributable to its interest in YCTV decreased Liberty
Media Group's share of earnings by approximately $6 million for the year ended
December 31, 1997.  As described above, DMX was included in the combined
financial results of Liberty Media Group beginning in July of 1997, resulting
in the share of losses attributable to Liberty Media Group's interest in DMX
decreasing by $13 million during 1997 compared to the year ended December 31,
1996.  The share of losses of Liberty/TINTA was responsible for approximately
$8 million of the decrease in share of earnings of affiliates from 1996 to
1997.  Prior to 1997, Liberty Media Group had no obligation, nor intention, to
fund Liberty/TINTA.  During 1997, Liberty Media Group made the determination to
provide funding to Liberty/TINTA in 1998 based on a specific plan.
Consequently, Liberty Media Group's share of losses of Liberty/TINTA for the
year ended December 31, 1997 includes previously unrecognized losses of
Liberty/TINTA of approximately $4 million.  Losses for Liberty/TINTA were not
recognized in prior periods due to the fact that Liberty Media Group's
investment in Liberty/TINTA had been reduced to zero.

         Liberty Media Group's share of earnings of affiliates was $8 million
in 1996 compared to losses of $15 million in 1995.

         The increase in earnings in 1996 was partially due to the investment
in Superstar/Netlink in April 1996 which contributed $11 million to the share
of earnings for 1996.  The decrease in losses of Courtroom Television Network
("Court TV") was responsible for approximately $19 million of the increase in
earnings from 1995 to 1996.  In August 1995, Liberty Media Group made an
additional $29 million investment in Court TV which represented Liberty Media
Group's pro rata share of capital calls made in prior years by the other
partners of Court TV that Liberty Media Group had no obligation to fund.  Due
to the additional investment in Court TV, Liberty Media Group's share of losses
of Court TV for the year ended December 31, 1995 includes $18 million of
previously unrecognized losses of Court TV.  Such losses were not recognized in
prior periods due to the fact that Liberty Media Group's investment in Court TV
had been reduced to zero.

         Earnings before interest, taxes and depreciation and amortization for
QVC increased 18% in 1996 compared to 1995.  Interest expense for QVC decreased
approximately $10 million for the year ended December 31, 1996 compared to the
year ended December 31, 1995.  Additionally, QVC recorded a one time charge in
1995 for compensation resulting from stock option redemptions.  Consequently,
Liberty Media Group's share of earnings in affiliates attributable to its
interest in QVC increased $20 million in 1996 compared to 1995.





                                     II-32
<PAGE>   132



         These increases in share of earnings attributable to Liberty Media
Group's investments in affiliates were offset by increased share of losses in
other affiliates attributable to Liberty Media Group.  Such losses include
share of losses of DMX which contributed $14 million in losses to Liberty Media
Group in 1996.  Additionally, due to the formation of Fox Sports, share of
earnings in affiliates attributable to Liberty Media Group's interest in
certain regional sports programming businesses reflect twelve months of
earnings in 1995 but only four months of earnings in 1996.  This represents a
$6 million decrease in earnings in 1996.

         Liberty Media Group's share of earnings in affiliates attributable to
its interest in Discovery decreased by approximately $4 million in 1996
compared to 1995.  Discovery's earnings before interest, taxes and depreciation
and amortization increased 34% in 1996 compared to 1995 for its established
businesses.  This increase was almost entirely offset by increased losses
before interest, taxes and depreciation and amortization of its developing
businesses.  Discovery also recorded increased depreciation and amortization on
increased fixed assets resulting from a 1996 acquisition by Discovery and
increased expense relating to an executive compensation plan.

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

         On October 10, 1996, Time Warner and TBS consummated a merger (the
"TBS/Time Warner Merger") whereupon Liberty Media 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 Media Group recognized a
pre-tax gain of approximately $1.5 billion in the fourth quarter of 1996.





                                     II-33
<PAGE>   133



         TCI VENTURES GROUP

         As of December 31, 1997, the TCI Ventures Group consisted principally
of the following assets and their related liabilities: (i) TCI's  85% equity
interest (representing a 92% voting interest) in TINTA, which is TCI's primary
vehicle for the conduct of its international cable, telephony and programming
businesses (other than those international programming businesses attributed to
Liberty Media Group), (ii) 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.), 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, (iii) TCI's 39% equity interest
(representing a 85% voting interest) in UVSG, which provides
satellite-delivered video, audio, data and program promotion services to cable
television systems, satellite dish owners, radio stations and private network
users, primarily throughout North America, (iv) TCI's 39% equity interest
(representing a 72% voting interest) in At Home Corporation ("@Home"), a
provider of high speed multimedia Internet services, and TCI's interest in
other Internet-related assets and (v) other assets, including ETC w/tci, Inc.
("ETC"), a wholly-owned subsidiary of the Company which is a developer and
distributor of for-profit education, training and communications services and
products and National Digital Television Center, Inc. ("NDTC"), which provides
digital compression and authorization services to programming suppliers and to
video distribution outlets.  The stocks of TINTA, TCG, @Home and UVSG are
traded on the National Market tier of The Nasdaq Stock Market.

         The TCI Ventures Group does not include any business that uses TCI's
domestic cable network to distribute services to customers (e.g., cable,
telephony and Internet services).  Such domestic "distribution" businesses will
continue to be attributed to the TCI Group.

         A significant portion of the TCI Ventures Group's operations are
conducted through corporations and partnerships in which the TCI Ventures Group
holds a 20%-50% ownership interest.  As the TCI 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 the TCI Ventures Group's combined
financial statements.





                                     II-34
<PAGE>   134



         In January 1997, TINTA reduced its voting interest in Flextech p.l.c.
("Flextech") to 50% by issuing to a nominee an irrevocable proxy (the "Flextech
Proxy") to vote 960,850 Flextech ordinary shares ("Flextech Ordinary Shares")
at any shareholder meeting to be held through December 31, 1997.  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 TINTA's ownership
interest in Flextech to 35.9% and the issuance to TINTA by Flextech of a
special voting share (the "Special Voting Share").  The Special Voting Share
when combined with TINTA's other share capital in Flextech, allows TINTA to
cast 50% of the votes on most matters brought to the shareholders of Flextech
for vote.  The Special Voting Share will terminate upon the occurrence of the
earlier of (i) the third anniversary of issuance or (ii) any transfer of
Flextech shares by TINTA outside a specified affiliated group.  In connection
with the associated dilution of TINTA's ownership interest in Flextech, the TCI
Ventures Group recorded a $152 million increase to the carrying value of its
investment in Flextech, a $66 million increase to combined equity, a $53
million increase to deferred taxes and a $33 million increase to minority
interest in consolidated subsidiaries.  No gain was recognized due to certain
contingent obligations of TINTA.  In light of TINTA's decreased voting interest
in Flextech, TINTA, effective January 1, 1997, ceased to consolidate Flextech
and began to account for Flextech using the equity method of accounting.


         On April 25, 1995, TINTA acquired a 51% ownership interest in
Cablevision S.A. and certain affiliated companies ("Cablevision").  On October
9, 1997, TINTA sold a portion of its 51% interest in Cablevision to CEI
Citicorp Holdings Sociedad Anonima ("CEI") and T.I. Telefonica Internacional de
Espana S.A. (together with CEI, 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 1997 transactions (collectively, the
"Cablevision Sale") reduced TINTA's interest in Cablevision to 26.2%.  Cash
proceeds received by TINTA of $120 million were based on a negotiated value of
$210 million for approximately one-half of TINTA's 51% interest in Cablevision.
TINTA recognized a gain of $49 million on the Cablevision Sale.  TINTA will
continue to have the right to manage Cablevision pursuant to a renewable
five-year management contract that was entered into in connection with the
Cablevision Sale, and all material corporate transactions of Cablevision will
require TINTA's approval, so long as TINTA maintains at least a 16% interest in
Cablevision.  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.





                                     II-35
<PAGE>   135



         The following table sets forth certain financial information for the
TCI Ventures Group and the businesses attributed to it during the years ended
December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                      1997 (10)                   1996                           1995          
                                          --------------------------   --------------------------   --------------------------
                                                                       dollar amounts in thousands
<S>                                       <C>                    <C>   <C>                    <C>   <C>                    <C>  
         Revenue:                                                                                                            
            UVSG (1) (2)                  $     507,598           52%  $       409,616         44%                --        --  
            TINTA (3) (4) (5)                   219,834           22           314,560         34   $        190,533        59% 
            ETC                                  84,956            9            90,598         10             49,994        15  
            NDTC (6)                             94,247           10            74,881          8             53,393        16  
            WTCI (7)                             36,197            4            31,857          4             31,877        10  
            @Home                                 7,437            1               673         --                 --        --  
            Corporate and other                  18,925            2             3,491         --                194        --  
                                          -------------       ------   ---------------     ------   ----------------    ------  
                                          $     969,194          100%  $       925,676        100%  $        325,991       100% 
                                          =============       ======   ===============     ======   ================    ======  
                                                                                                                                
         Operating, selling, general,                                                                                           
            administrative:                                                                                                     
               UVSG (1) (2)               $     403,603           50%  $       342,544         41%                --        --  
               TINTA (3) (4) (5)                144,445           18           282,355         34   $        165,389        59% 
               ETC                              108,665           13           107,785         13             51,360        18  
               NDTC                              58,385            7            44,171          5             30,867        11  
               WTCI                              24,665            3            19,530          2             19,399         7  
               @Home                             49,049            6            23,950          3              2,845         1  
               Corporate and other               25,744            3            13,563          2              9,361         4  
                                          -------------       ------   ---------------     ------   ----------------    ------  
                                          $     814,556          100%  $       833,898        100%  $        279,221       100% 
                                          =============       ======   ===============     ======   ================    ======  
         Depreciation, amortization,                                                                                            
            stock compensation and                                                                                              
            other non-cash charges:                                                                                             
               UVSG (1) (2)               $      35,371           10%  $        29,775         21%                --        --  
               TINTA (3) (4) (5)                 70,513           21            55,562         39   $         36,360        45% 
               ETC                               21,035            6             4,953          4              3,900         5  
               NDTC                              33,142           10            28,776         20             18,737        24  
               WTCI                               8,942            3            10,595          7             10,164        13  
               @Home                             17,138            5             1,774          1                 21        --  
               Corporate and other (8)          155,446           45            10,900          8             10,529        13  
                                          -------------       ------   ---------------     ------   ----------------    ------  
                                          $     341,587          100%  $       142,335        100%  $         79,711       100% 
                                          =============       ======   ===============     ======   ================    ======  
         Operating income (loss):                                                                                               
            UVSG (1) (2)                  $      68,624           (9)  $        37,297         (9)                --        (9) 
            TINTA (3) (4) (5)                     4,876                        (23,357)             $        (11,216)           
            ETC                                 (44,744)                       (22,140)                       (5,266)           
            NDTC                                  2,720                          1,934                         3,789            
            WTCI                                  2,590                          1,732                         2,314            
            @Home                               (58,750)                       (25,051)                       (2,866)           
            Corporate and other                (162,265)                       (20,972)                      (19,696)           
                                          ------------                 ---------------              ----------------            
                                          $    (186,949)               $       (50,557)             $        (32,941)           
                                          =============                ===============              ================         
</TABLE>


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




                                     II-36
<PAGE>   136




         (1)     On January 25, 1996, the stockholders of UVSG adopted an
                 agreement and plan of merger dated as of July 10, 1995, as
                 amended.  The results of operations of UVSG have been combined
                 with those of the TCI Ventures Group since January 25, 1996.

         (2)     Effective April 1, 1996, UVSG and the Liberty Media Group
                 contributed their retail C-band home satellite dish business
                 assets, obligations and operations, to a new entity owned 50%
                 each by UVSG and Liberty Media Group.  The operations of
                 Superstar/Netlink have been consolidated effective April 1,
                 1996, with the operating results of UVSG as UVSG has voting
                 control over Superstar/Netlink.

         (3)     On October 1, 1996, Cablevision acquired 99.9% of the issued
                 and outstanding stock of Oeste Cable Color S.A. ("OCC").  In
                 accordance with the purchase method of accounting OCC has been
                 included in Cablevision's consolidated statements since the
                 acquisition date.

         (4)     As described above, TINTA, effective January 1, 1997, ceased
                 to consolidate Flextech and began to account for Flextech
                 using the equity method of accounting.  As a result, TINTA's
                 results of operations for the year ended December 31, 1997 do
                 not include Flextech's results of operations on a consolidated
                 basis.  The following table sets forth summary information
                 with respect to the operating results of Flextech that were
                 included in TINTA's results of operations for the years ended
                 December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                             Years ended December 31,
                                                                1996          1995
                                                             ---------     ---------
                                                               amounts in thousands
<S>                                                          <C>              <C>   
                      Revenue                                $  94,397        49,092
                      Operating costs and expenses before
                           depreciation and amortization
                                                              (131,182)      (63,176)
                      Depreciation and amortization             (8,042)       (5,009)
                                                             ---------     ---------

                      Operating loss                         $ (44,827)    $ (19,093)
                                                             =========     =========
</TABLE>





                                     II-37
<PAGE>   137



         (5)     As described above, effective October 1, 1997, TINTA ceased to
                 consolidate Cablevision and began to account for Cablevision
                 using the equity method of accounting.  As a result, effective
                 October 1, 1997, TINTA's results of operations no longer
                 include Cablevision's results of operations on a consolidated
                 basis.  The following table sets forth summary information
                 with respect to the operating results of Cablevision that were
                 included in TINTA's results of operations for the periods
                 indicated:

<TABLE>
<CAPTION>
                                                                               April 25, 1995
                                      Nine months ended      Year ended            through
                                      September 30, 1997  December 31, 1996   December 31, 1995   
                                      ------------------  -----------------   -----------------
                                                amounts in thousands
<S>                                     <C>                       <C>                <C>    
                 Revenue                $      173,517            189,548            118,864
                 Operating costs and
                    expenses before
                    depreciation and
                    amortization              (105,020)          (114,139)           (69,258)
                 Depreciation and
                    amortization               (40,882)           (41,429)           (25,060)
                                        --------------     --------------     --------------

                 Operating income       $       27,615             33,980             24,546
                                        ==============     ==============     ==============
</TABLE>



         (6)     A significant number of NDTC's major customers are affiliates
                 of TCI, 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.

         (7)     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.

         (8)     Amount includes stock compensation expense of $124 million.

         (9)     Not meaningful.

         (10)    Restated -- see note 18 to the accompanying combined financial 
                 statements of TCI Ventures Group.





                                     II-38
<PAGE>   138



         Revenue 

         Revenue increased by $44 million or 5% during the year ended December
31, 1997 as compared to 1996.  Revenue increased by $600 million or 184% during
the year ended December 31, 1996 as compared to 1995.  The 1997 increase is
largely attributable to increases of UVSG and NDTC that were partially offset
by decreases due to the deconsolidation of Flextech and Cablevision.  The 1996
increase is primarily attributable to the effects of acquisitions.

         Revenue from UVSG increased by $98 million or 24% during the year
ended December 31, 1997 as compared to the corresponding prior year period.
Such increase is due primarily to (i) $40 million of additional revenue
attributable to Netlink's retail operations which have been included in
Superstar/Netlink since April 1, 1996, (ii) the inclusion of UVSG for twelve
months in 1997 versus eleven months in 1996, (iii) increases in UVSG's program
promotion and guide services business of $13 million, (iv) a $10 million growth
in the revenue of Superstar/Netlink and (v) a $6 million increase in revenue
from UVSG's software development and systems integration services.

         UVSG revenue of $410 million for the year ended December 31, 1996
represents in excess of two-thirds of the combined increase in revenue for
1996.  Such increase is principally the result of the acquisition in January of
1996 of UVSG by the TCI Ventures Group.  Additionally, such 1996 increase
reflects $121 million of additional revenue resulting from Superstar/Netlink.

         TINTA revenue decreased by $95 million or 30% during the year ended
December 31, 1997 as compared to the corresponding prior year period.  Such
decrease is primarily attributable to the deconsolidation of Flextech and
Cablevision in 1997.

         TINTA revenue 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 and OCC.
A significant component of the increase in programming revenue is attributable
to acquisitions made by Flextech in 1996.

         Revenue from ETC increased $41 million or 81% from 1995 to 1996.  Such
increase is attributable to the June 1995 acquisition of CareerTrack, Inc.

         Operating Costs and Expenses

         Operating costs and expenses, excluding depreciation, amortization,
stock compensation and other non-cash charges decreased by $19 million or 2%
during the year ended December 31, 1997 as compared to 1996.  Operating costs
and expenses, excluding depreciation and amortization and stock compensation,
increased by $555 million or 199% during the year ended December 31, 1996 as
compared to 1995.  The 1997 change is attributable to decreases due to the
deconsolidation of Flextech and Cablevision which were partially offset by
increased costs of UVSG and NDTC.  The 1996 increase is primarily attributable
to the effects of acquisitions.

         Operating costs and expenses, excluding depreciation, amortization,
stock compensation and other non-cash charges from UVSG increased $61 million or
18% during the year ended December 31, 1997 as compared to 1996.  Such increase
is primarily attributable to Netlink's retail operations which have been
included in Superstar/Netlink since April 1, 1996, the inclusion of UVSG for
twelve months in 1997 versus eleven months in 1996 and increased personnel costs
resulting from the growth in UVSG's program promotion and guide services
business.





                                     II-39
<PAGE>   139



         Operating costs and expenses, excluding depreciation, amortization,
stock compensation and other non-cash charges from UVSG represents 62% of the
combined increase in operating costs and expenses for 1996.  Such increase is
principally the result of the acquisition in January of 1996 of UVSG by the TCI
Ventures Group. Additionally, the 1996 increase reflects $110 million of
additional expense resulting from Superstar/Netlink.

         TINTA operating costs and expenses, excluding depreciation,
amortization, stock compensation and other non-cash charges decreased $138
million or 49% for the year ended December 31, 1997, as compared to the
corresponding prior year period. Such decrease is primarily attributable to the
deconsolidation of Flextech and Cablevision in 1997.

         TINTA operating costs and expenses, excluding depreciation,
amortization, stock compensation and other non-cash charges increased $117
million or 71% for the year ended December 31, 1996, as compared to the
corresponding prior year period. TINTA 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 and stock
compensation 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 OCC, 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 adjustment of $9 million in 1996 to reduce the carrying value of the
affected programming rights.

         Operating costs and expenses from ETC, excluding depreciation and
amortization, increased $56 million or 110% from 1995 to 1996.  The 1996
increase is attributable to the June 1995 acquisition of CareerTrack, Inc.

         In addition, ETC recorded a $15 million charge to operations during
1997 for the impairment of certain of its intangible assets.

         Certain TCI corporate general and administrative costs are charged to
the TCI 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 TCI Ventures Group would incur for comparable services on a stand alone
basis. During the years ended December 31, 1997, 1996 and 1995, TCI Ventures
Group was allocated $10 million, $8 million and $4 million, respectively, in
corporate general and administrative costs by TCI Group.

         Stock compensation expense increased $149 million and decreased $12
million during 1997 and 1996, respectively.  Such amounts represent changes in
TCI Ventures Group's stock compensation liability. TCI Ventures Group records
stock compensation expense relating to restricted stock awards, options and/or
stock appreciation rights (collectively, "Awards") granted (i) by TCI to certain
TCI employees and/or directors who are involved with the TCI Ventures Group and
(ii) by TINTA, UVSG, and @Home to employees and/or directors of such entities.
Stock compensation with respect to Awards granted by TCI includes amounts
related to TCI common stock and to common stock of certain non-public
subsidiaries of TCI and is allocated to TCI Ventures Group based on the Awards
held by TCI employees and/or directors who are involved with TCI Ventures Group.
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.





                                     II-40
<PAGE>   140



         The $35 million or 23% and $74 million or 99% increases in
depreciation and amortization expense during the years ended December 31, 1997
and 1996, respectively, are the result of increases in the TCI Ventures Group's
assets that are subject to depreciation and amortization. The increases in such
assets were primarily attributable to acquisitions, as described above, and
capital expenditures.  Such increases in 1997 were partially offset by the
effects of the deconsolidation of Flextech and Cablevision.

         Other Income and Expense

         The TCI 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 the Company.  The partners of PhillieCo are subsidiaries of
Sprint, Cox and the Company.  The TCI 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.

         Telewest Communications plc ("Telewest"), an entity in which the TCI
Ventures Group has a 26.6% indirect interest, has incurred losses since its
inception. The TCI 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 (sometimes referred to herein as the "U.S.") dollar denominated
senior debentures (the "Telewest Debentures").  Changes in the exchange rate
used to translate the Telewest Debentures into United Kingdom ("U.K.") pounds
sterling ("L.") 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.





                                     II-41
<PAGE>   141



         The share of losses from the TCI 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 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.  In the
event the AT&T transaction is completed, the TCI Ventures Group would account
for its investment in AT&T using the cost method.

         As described above, effective October 1, 1997, TINTA ceased to
consolidate Cablevision and began to account for Cablevision using the equity
method of accounting.  The TCI Ventures Group's share of losses from
Cablevision was $3 million from October 1, 1997 through December 31, 1997.

         The TCI Ventures Group's share of the losses of affiliates other than
the PCS Ventures, Telewest, TCG and Cablevision (the "Other Affiliates")
increased $36 million or 48% and $14 million or 23% during the years ended
December 31, 1997 and 1996, as compared to the corresponding prior year
periods.  The 1997 increase is attributable to increased losses of Jupiter
Programming Co., Ltd., Jupiter Telecommunications, Co., Ltd., MultiThematiques
S.A., Liberty/TINTA LLC and Asia Business News (Singapore) PTE Ltd. ("ABN").
TCI Ventures Group expects that such entities will continue to incur losses as
they continue to expand their operations and/or launch new services.  As of
December 31, 1997, TINTA surrendered all of its shares of ABN in exchange for a
$25 million unsecured note receivable.  Accordingly, effective December 31,
1997, ABN will no longer be accounted for under the equity method of
accounting.  In addition, as described above, TCI Ventures Group, effective
January 1, 1997, ceased to consolidate Flextech and began to account for
Flextech using the equity method of accounting.  The majority of the 1996
increase is attributable to (i) increased losses of certain of its affiliates
in 1996 and (ii) the TCI Ventures Group's share of losses of affiliates that
were acquired in 1996 and late 1995.  For additional information, see note 13
to the accompanying combined financial statements of TCI Ventures Group.

         Interest income decreased $16 million or 53% and increased $15 million
or 97% during the years ended December 31, 1997 and 1996, respectively.  Such
changes are primarily due to changes in the outstanding balance on amounts
loaned to TCI.

         Interest expense increased $3 million or 5% and $9 million or 23%
during the years ended December 31, 1997 and 1996, respectively, as a result of
increases in the outstanding debt balance and increases in capital lease
obligations.  The 1996 increase in the outstanding debt balance is primarily
attributable to the issuance of the Debentures.





                                     II-42
<PAGE>   142



         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
10,350,000 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, the TCI Ventures Group's economic interest in @Home
decreased from 43% to 39%.  In connection with the associated dilution of the
TCI Ventures Group's ownership interest of @Home, the TCI 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 20,000,000 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, the TCI Ventures Group recognized a gain of $123
million.

         In February 1997, TSX Corporation ("TSX"), an equity affiliate of the
TCI Ventures Group, and Antec Corporation ("Antec") entered into a business
combination with Antec being the surviving entity.  In connection with this
transaction, the TCI Ventures Group recognized a $29 million gain (before
deducting deferred income taxes of $11 million) representing the difference
between the fair value of the Antec shares received and the carrying value of
its investment in TSX at the date of the transaction.  The TCI Ventures Group
accounts for its investment in Antec using the cost method.

         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 $318
million (after deducting expenses and fees).  TCG conducted an initial public
offering on July 2, 1996 in which it sold 27,025,000 shares of Class A common
stock for aggregate net proceeds of approximately $410 million. In connection
with the dilution of the TCI Ventures Group's ownership interest in TCG that
occurred in connection with the above transactions, the TCI Ventures Group
recognized gains aggregating $112 million and $12 million (before deducting
deferred income tax expense of approximately $44 million and $5 million,
respectively) during the years ended December 31, 1997 and 1996, respectively.

         In connection with the dilution of the TCI Ventures Group's ownership
interest in Telewest that occurred in connection with a 1995 merger
transaction, TCI Ventures Group recognized a gain of $165 million (before
deducting the related tax expense of $58 million) during the year ended
December 31, 1995. During 1996, the TCI Ventures Group also recognized a gain
of $258,000 in connection with the issuance of stock by Telewest.

         The TCI Ventures Group recognized net gains upon the disposition of
assets of $117 million, $80 million and $49 million during 1997, 1996 and 1995,
respectively.  The 1997 gain is primarily attributable to (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. ("Sky").
TINTA owned its interest in Sky through a 25.5% interest in HKP Partners of New
Zealand.  The 1996 gain is attributable to the sale of certain investments for
aggregate proceeds of $73 million.  The 1995 gain is attributable to the sale
of the cable television subsidiaries of IVS Cable Holdings Limited, a
subsidiary of Flextech.





                                     II-43
<PAGE>   143



         The minority interests' share of net losses (earnings) was $(3
million), $28 million and $(15 million) during the years ended December 31,
1997, 1996, and 1995, respectively.  Such amounts are comprised of the minority
interests' share of losses (earnings) for @Home, UVSG and TINTA.

         The TCI Ventures Group recognized realized and unrealized foreign
currency transaction gains (losses) of $224,000, $7 million and $(3 million)
during the years ended December 31, 1997, 1996, and 1995, respectively.  Such
gains (losses) resulted primarily from the remeasurement into the U.S. dollar
of (i) a French franc denominated obligation to make capital contributions to
MultiThematiques S.A. and (ii) the UK pound denominated intercompany debt owed
by Flextech to an indirect subsidiary of TINTA.

         During 1997 and 1996, holding losses on certain available-for-sale
securities were determined to be other than temporary.  Accordingly, the TCI
Ventures Group recognized losses of $1 million and $59 million during 1997 and
1996, respectively, in connection with the impairment of such securities.

         Net Earnings (Losses)

         The TCI Ventures Group reported net earnings (losses) of $(536 
million), $(258 million) and $60 million during the years ended December 31,
1997, 1996 and 1995, respectively.  Included in such amounts was the
recognition of certain non-operating gains aggregating $289 million, $92
million and $336 million during 1997, 1996 and 1995, respectively.  TCI
Ventures Group would have reported net losses in all periods presented
excluding the impact of such gains.  With the exception of UVSG, WTCI and
TINTA's Puerto Rico subsidiary, the entities included in the TCI 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.

         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.





                                     II-44
<PAGE>   144



         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 Media 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.

         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 Media 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 Media Group) earned management fees from QE+ equal to 20% of managed
costs, as defined.  In addition, Liberty Media 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.





                                     II-45
<PAGE>   145



         During July 1997, TCI Group, Liberty Media 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 
Media 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 Media 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 STARZ! Content Fees and (v) the termination of
an option to increase Liberty Media Group's ownership interest in QE+.

         TCI Group received the remaining 20% interest in Encore Media Group
and the aforementioned consideration from Liberty Media 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, 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 Media 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 Media 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, the TCI Ventures Group's interest in DigiVentures,
LLC ("DigiVentures") was assigned to TCI Group.  In connection therewith, TCI
Group assumed DigiVenture's capital lease obligations totaling $176 million and
paid $7 million in cash to TCI Ventures Group.





                                     II-46
<PAGE>   146



         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.

         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.





                                     II-47
<PAGE>   147



         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.

         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.  See note 8 to the accompanying combined financial
statements of TCI Group for additional information regarding the material terms
of the lines of credit.





                                     II-48
<PAGE>   148



         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 accompanying 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.

         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 accompanying combined financial statements.





                                     II-49
<PAGE>   149



         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 Media
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.

         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.





                                     II-50
<PAGE>   150



         Effective as of December 16, 1997, NDTC, a subsidiary of TCI and a
member of TCI 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.

         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.  





                                     II-51
<PAGE>   151



         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.  See
note 8 to the accompanying combined financial statements for additional
information regarding Interest Rate Swaps.

   
         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.

         LIBERTY MEDIA GROUP

         Liberty Media Group's source 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 Media Group
exceed cash provided by Liberty Media Group, TCI Group may transfer funds to
Liberty Media Group.  Conversely, to the extent cash provided by Liberty Media
Group exceeds cash needs of Liberty Media Group, Liberty Media Group may
transfer funds to TCI Group.





                                     II-52
<PAGE>   152



         Effective February 6, 1998, the Company issued the 1998 Liberty Stock
Dividend which consisted of one share of Liberty Group Stock for every two
shares of Liberty Group Stock owned.  The 1998 Liberty Stock Dividend has been
treated as a stock split, and accordingly, all share and per share amounts have
been retroactively restated to reflect the 1998 Liberty Stock Dividend.

         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 $18,239,000.

         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
Stock.  Liberty Media 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 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.  All of the above described
purchases are reflected as a reduction of combined equity in the accompanying
combined financial statements of Liberty Media 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 TCI increased its ownership in the equity of UVSG to approximately
73%, of which 56% is attributed to the TCI Ventures Group and 17% is attributed
to Liberty Media Group.  In addition, TCI's collective voting power increased
to 93%.

         On February 17, 1998, TCI, Liberty Media Group and UVSG announced that
UVSG agreed to acquire Liberty Media Group's interest in Superstar/Netlink and
Liberty Media Group's interest in Netlink in a tax free stock transaction.  In
exchange for such interests, UVSG will issue 6.4 million shares of UVSG Series
A common stock to Liberty Media Group.  As a result of such transaction, TCI's
collective interest in UVSG will increase to 77%, 29% of which is attributable
to Liberty Media Group and 48% of which is attributed to TCI Ventures Group. No
assurance can be given that such transaction will be consummated.

         In connection with the DMX Merger, TCI and TCI Music entered into a
Contribution Agreement.  Pursuant to the Contribution Agreement, 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 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 (the "Contributed Net
DMX Revenue"), (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
(the "Contributed Tuners"), and (iv) TCI granted a Right to each stockholder
who became a stockholder of TCI Music pursuant to the DMX Merger.





                                     II-53
<PAGE>   153



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

         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.  Such amount has
been reflected as a deferred option premium in the accompanying combined
financial statements of Liberty Media 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).  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 Media Group.

         Encore Media Group's loan agreement contains restrictions regarding
transfers of funds to other members of Liberty Media Group in the form of
loans, advances or cash dividends.  Additionally, subsequent to the sale of
Netlink to UVSG, cash provided by operating activities of Netlink will no
longer be available as a source of cash for Liberty Media Group.  Although no
assurance can be given, cash provided by operating activities of Southern and
Netlink have been a significant source of cash for Liberty Media Group.  Cash
generated by Liberty Media Group's remaining operating activities, distributions
from affiliates, dividend and interest payments, availability under its credit
facilities and  available cash balances should provide adequate cash to meet its
obligations.

         As of December 31, 1997, Liberty Media Group holds approximately 57
million shares of the TW Exchange Stock.  Holders of TW Exchange Stock are
entitled to receive dividends ratably with Time Warner common stock.  Liberty
Media Group received $19 million and $4.5 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 Media 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 Media 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.





                                     II-54
<PAGE>   154



         Liberty Media Group has a 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 Media Group
pledged a portion of its TW Exchange Stock.  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.  The EMG Senior Facility serves
to replace an EMC bank credit facility which was terminated.  On December 30,
1997, TCI Music entered into a revolving loan agreement which provides for
borrowings of up to $100 million.  Borrowings of $53 million were outstanding
at December 31, 1997.

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

         The Music Note may be reduced by the payment of cash or the issuance
by TCI of shares of Liberty Media Group Stock for the benefit of entities
included within the TCI Group.  Additionally, Liberty Media 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 Media Group's investment in TCI Music, to be determined at
July 11, 2002.  Including Rights held by subsidiaries of TCI that are not
members of the Liberty Media Group, the obligation under the Rights Agreement
could be as high as $85 million.

         It is anticipated that the EMG Promissory Note will be repaid during
the first quarter of 1998.

         As of December 31, 1997, Liberty Media Group was not exposed to
material near-term losses in future earnings, fair values, or cash flows
resulting from derivative financial instruments.

         Liberty Media Group has guaranteed capital contributions to a joint
venture entered into by Encore International, Inc. ("EI").  The amount of the
guarantee at December 31, 1997 is approximately $11 million and is
automatically reduced as EI makes capital contributions or advances to the
joint venture.

         Liberty Media Group intends to continue to develop its entertainment
and information programming services and has made certain financial commitments
related to the acquisition of programming.  As of December 31, 1997, Liberty
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 Liberty Media Group will obtain such financing.
If additional financing cannot be obtained, Liberty Media Group could attempt
to sell assets but there can be no assurance that asset sales, if any, can be
consummated at a price and on terms acceptable to Liberty Media Group.
Further, Liberty Media Group and/or TCI could attempt to sell equity securities
but, again, there can be no certainty that such a sale could be accomplished on
acceptable terms.





                                     II-55
<PAGE>   155



         Due to the high costs of first-run movie programming, the operations
of STARZ! generate a significant operating loss.  However, the operating loss
should be reduced as revenue increases. Although no assurance can be given, 
Encore Media Group should have sufficient cash from operations of Encore and
Multiplex, as well as availability under its credit facility to meet the needs
of their costs of programming.

         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, Liberty Media Group paid $64 million during the first
quarter of 1998 for its allocated share of the Call Payments.  See note 10 to
the accompanying combined financial statements of Liberty Media Group.

         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.





                                     II-56
<PAGE>   156



         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.

         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 Media 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.

         On August 1, 1997, the United State Copyright Office released a
"Review of the Copyright Licensing Regimes Covering Retransmission of Broadcast
Signals" in response to a request from the Chairman of the United States Senate
Committee on the Judiciary.  The Copyright Office recommended a number of
significant changes in the laws regulating the copyright licensing of broadcast
retransmissions which, if adopted, would have a significant impact upon
Netlink.  Congressional committees have held and scheduled hearings on such
recommendations.





                                     II-57
<PAGE>   157



         On October 28, 1997, the Librarian of Congress (the "Librarian")
announced final rules increasing the monthly copyright royalty fee for the
secondary transmission of superstations and network stations by satellite
carriers, such as Netlink, to 27 cents per subscriber for distant superstations
and network stations.  Those monthly fees had been 17.5 cents for superstations
and 6 cents for network stations.  The copyright royalty fees for Netlink were
approximately $3 million for each of the three years ended December 31, 1997.
The Librarian adopted the royalty fees which had been recommended by the
Copyright Arbitration Royalty Panel (the "Panel") in a report submitted to the
Librarian.  Although the Panel has recommended that the new fees be effective
as of July 1, 1997, the Librarian determined that the fees became effective on
January 1, 1998.  Consequently, the copyright fees paid by Netlink for the
retransmission of broadcast signals to home satellite dish owners will increase
significantly.  The resulting increases in retail prices to subscribers may
cause a substantial decrease in the number of subscribers to Netlink services.
On October 30, 1997, the Satellite Broadcasting & Communications Association,
of which Netlink is a member, filed a Petition for Review of the Librarian's
decision with the United States Court of Appeals for the District of Columbia
Circuit which remains pending.  The Court of Appeals refused to grant an
interim stay of the increase.  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.

         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.





                                     II-58
<PAGE>   158



         TCI VENTURES GROUP

         The following table sets forth total assets and debt and capital lease
obligations for the TCI Ventures Group and each of the businesses attributed to
it:

<TABLE>
<CAPTION>
                                                         December 31,
                                                             1997(1)
                                                     ------------------
                                                    amounts in thousands
<S>                                                  <C>     <C>
Total assets
    TINTA                                            $        1,394,000
    TCI Telephony                                               927,862
    UVSG                                                        428,984
    NDTC                                                        348,940
    @Home                                                       323,928
    ETC                                                          87,487
    WTCI                                                         81,283
    Other                                                       350,763 
                                                     ------------------
                                                     $        3,943,247
                                                     ==================

Debt and capital lease obligations (2)
    TINTA                                            $          390,042
    DigiVentures                                                175,833
    NDTC                                                        158,172
    UVSG                                                         28,164
    ETC                                                          11,083
    @Home                                                        25,706
    Other                                                         6,340
                                                     ------------------
                                                     $          795,340
                                                     ==================
</TABLE>


- ---------------
(1)      Restated - see note 18 to the accompanying combined financial 
         statements of TCI Ventures Group.


(2)      For additional information concerning the terms of TCI Ventures Group's
         debt, see note 14 to the accompanying combined financial statements of
         the TCI Ventures Group.

         The TCI Ventures Group's combined operating activities provided cash
of $90.5 million, $85.9 million and $6.9 million during the years ended
December 31, 1997, 1996 and 1995, respectively.  As discussed above, effective
October 1, 1997, Cablevision's cash flows will no longer be included in the TCI
Ventures Group's combined statements of cash flows.  Cablevision operating
activities provided cash of $40 million during the nine months ended September
30, 1997.  In addition, as discussed above, effective January 1, 1997,
Flextech's cash flows will no longer be included in the TCI Ventures Group's
combined statements of cash flows.  At December 31, 1997, @Home and UVSG held
cash and cash equivalents of $120 million and $31 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 the TCI Ventures Group.

         During the years ended December 31, 1997, 1996 and 1995, cash used by
TCI Ventures Group's investing activities aggregated $429.2 million, $654.7
million and $1.3 billion, respectively.  Such amounts include $548.9 million,
$473.1 million and $1.0 billion, respectively, that were used by the TCI
Ventures Group to fund investments in, and loans to, affiliates.





                                     II-59
<PAGE>   159



         Substantially all of the entities the ownership of which, or the
investment in which, has been attributed to the TCI 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, principally with respect to the Sprint PCS Partnerships, the TCI
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 the TCI 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 the TCI 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 a cash flow generating business of one of the TCI
Ventures Group Entities to fund the cash flow deficits of the businesses of one
or more of the other TCI 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 the TCI Ventures Group entities. In addition, TINTA and
certain of the other TCI Ventures Group entities, such as Teleport and 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 severely 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.

         The Sprint PCS Partners, including TCI Telephony, have agreed to
contribute up to an aggregate of approximately $4.2 billion of equity to Sprint
PCS from inception through fiscal 1999 (of which TCI Telephony's share is
approximately $1.3 billion).  As of December 31, 1997 approximately $4.0
billion of such $4.2 billion had been contributed to Sprint PCS, of which
amount TCI Telephony had contributed approximately $1.3 billion.  The TCI
Ventures Group currently expects that the remaining approximately $200 million
of such amount (of which TCI Telephony's share would be approximately $60
million) will be contributed by the Sprint PCS Partners by the end of the
second quarter of 1998 (although it is not presently known whether any
additional capital will be contributed by any or all of the Sprint PCS
Partners).  The TCI Ventures Group expects that the Sprint PCS Partnerships
will require additional equity thereafter.





                                     II-60
<PAGE>   160



         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.





                                     II-61
<PAGE>   161



         Historically, the TCI Ventures Group's combined operating activities
have not provided sufficient funds to meet all of the TCI Ventures Group's
capital requirements.  The TCI 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.  WTCI and NDTC are the only wholly-owned subsidiaries attributed to
the TCI Ventures Group that are operating companies and such entities are
currently the TCI Ventures Group's only source of cash provided by operating
activities.  As a result, the TCI 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 the TCI 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 TCI Ventures Group entities to any other of such TCI Ventures
Group entities would be subject to various business considerations, as well as
any legal restrictions, including pursuant to agreements among the investors.
At December 31, 1997, TCI Ventures Group had a revolving loan facility from the
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), 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 Revolving Credit Facility is payable
by the TCI Ventures Group to the 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 the September
10, 1997 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, TCI 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 the TCI Ventures Group's capital requirements, no
assurance can be given that the TCI 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 the TCI Ventures Group by, among other things,
engaging in public offerings or private placements of TCI Ventures Group common
stock or through issuance of debt securities or preferred equity securities
attributed to the TCI Ventures Group.  It is anticipated, however that the TCI
Ventures Group may continue to be dependent upon funding from the TCI Group. The
TCI 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 the TCI Ventures Group.





                                     II-62
<PAGE>   162



         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.  Although TINTA has, at December 31,
1997, (i) $88.7 million due from TCI Ventures Group pursuant to an unsecured
promissory note, (ii) a $200 million credit facility with the TCI Ventures
Group and (iii) the ability to access any excess cash and borrowing
availability from its Puerto Rico subsidiary (the "Puerto Rico Subsidiary"),
TINTA's ability to otherwise obtain debt financing to assist its operating
companies and to meet its capital obligations at other than the subsidiary
level will be 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

         @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.





                                     II-63
<PAGE>   163



         Because TCI's investment in @Home is attributed to the TCI Ventures
Group while the entity which will distribute the @Home service to customers of
TCI's cable systems is attributed to the TCI Group, certain conflicts of
interest between the TCI Group and the TCI Ventures Group may result in that
actions taken by the TCI Group, such as the speed at which TCI's cable
television systems are upgraded to the level necessary to support distribution
of the @Home service, will have a direct impact upon the value of the TCI
Ventures Group's interest in @Home.  Similarly, the extent to which TCI elects
to use @Home as the provider of certain services which are not covered by TCI's
exclusivity obligations to @Home, rather than another third party, may have an
effect upon the business of @Home and therefore upon the value of the TCI
Ventures Group.

         Effective October 2, 1997, @Home entered into an exclusive
distribution agreement with CSC and 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 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, TCI Ventures
Group's equity interest and voting power in @Home will decrease to
approximately 36% and 69%, respectively.

         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.  TCI has
announced the proposed sale or transfer of certain cable systems that would
reduce TCI's number of base homes passed.  In addition, TCI has announced that
it is considering various plans and proposals that may result in the disposition
of other of its cable systems.  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 through such cable systems are no longer owned or
controlled by TCI.  If TCI does not require that such cable systems remain
exclusive to @Home, the TCI Ventures Group could be required to sell shares to
Cox, Comcast, CSC and Kleiner, Perkins, Caufield and Byers, at fair market
value.  There can be no assurance that, if the TCI Ventures Group is required to
sell shares of @Home, the price paid to the TCI Ventures Group would represent
adequate consideration to the TCI Ventures Group because such fair market value
may not adequately reflect the TCI 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 the TCI 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.





                                     II-64
<PAGE>   164



         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
anticipates that it may also be able to pass the increases on to both its
retail and its 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.

         The TCI Group has agreements with UVSG for the carriage of UVSG's
Prevue Networks and superstation programming on certain of the cable systems
attributed to the TCI Group and for UVSG's subscriber management services, and
UVSG purchases programming from companies attributed to the Liberty Media
Group.  Because TCI's investment in UVSG is attributed to the TCI Ventures
Group, situations may arise where management of the entity attributed to one
Group may make a decision which adversely affects one of the other Groups.

         Many of the TCI Ventures Group 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, the TCI Ventures Group's operating results and
financial condition may be materially adversely affected.





                                     II-65
<PAGE>   165



         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.

         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.

         In April 1997, (i) Flextech and BBC Worldwide formed the two BBC Joint
Ventures and (ii) Flextech acquired from the other shareholders of UK Living
Limited ("UKLL") and UK Gold Television Limited ("UKGL") all of the share
capital in those two companies not already owned by Flextech and the TCI
Ventures Group through the issuance of new Flextech Ordinary Shares.

         Flextech had issued convertible non-preference shares ("Flextech
Non-Preference Shares") in connection with previous acquisition transactions
due to TINTA's requirement that it maintain specified voting interests in
Flextech.  With the issuance of the Special Voting Share, the purpose for the
Flextech Non-Preference Shares was eliminated.  Accordingly, and in order to
simplify the capital structure of Flextech, upon the issuance of the Special
Voting Share, the Flextech Non-Preference Shares were converted into Flextech
Ordinary Shares.  TINTA had put obligations with respect to Flextech
Non-Preference Shares which were issued in connection with certain Flextech
acquisitions.  Such put obligations were eliminated with the conversion of
Flextech Non-Preference Shares into Flextech Ordinary Shares.





                                     II-66
<PAGE>   166



         Flextech has undertaken to finance the working capital requirements of
one of the BBC Joint Ventures (the "Principal Joint Venture"). Flextech has also
agreed to make available to the other BBC Joint Venture (the "Second Joint
Venture"), if required, funding of up to L.10 million ($17 million). 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 (the "Standby
Commitment").  In addition to Flextech's April 1997 purchase of L.22 million
($36 million) of ordinary shares in the Principal Joint Venture, Flextech is
obligated to provide the Principal Joint Venture with a primary credit facility
of L.88 million ($145 million) and, subject to certain restrictions, a standby
credit facility of L.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.

         If BBC Worldwide requires TINTA to perform Flextech's funding
obligations pursuant to the Standby Commitment, then TINTA will acquire
Flextech's entire equity interest in the Principal Joint Venture for L.1.00,
and will replace Flextech's directors on the board of the Principal Joint
Venture with representatives of TINTA.  Flextech will pay commitment and
standby fees to TINTA for its undertaking under the Standby Commitment.  If
Flextech repays to TINTA all loans it makes to the Principal Joint Venture
(plus interest at TINTA's marginal cost of funds plus 2% per annum) within 180
days after TINTA first becomes obligated to perform Flextech's financial
obligations, it may reacquire its interest in the Principal Joint Venture for
L.1.00.  TINTA may also, within the same period, require Flextech to reacquire
its interest on the same terms.  The Standby Commitment will terminate on the
earliest of (i) the date on which Flextech has met all of its required
financial obligations to the Principal Joint Venture under the primary and
standby credit facilities, or (ii) the date on which Flextech delivers a bank
guarantee of all of its funding obligations to the Principal Joint Venture.

         TINTA has formed strategic partnerships with News Corp., Organizacoes
Globo and Grupo Televisa S.A. to develop and operate a direct-to-home satellite
service for Brazil, Mexico, and various Central and South American countries
(collectively, the "DTH Ventures").  Through December 31, 1997, TINTA had
contributed $24.9 million to the DTH Ventures.  It is anticipated that TINTA
could be required to make additional cash contributions in connection with the
DTH Ventures.

         As of December 31, 1997, TINTA had made cash contributions to Torneos
y Compentencias S.A. ("Torneos") on the behalf of Liberty/TINTA of $48
million and purchased a direct 5% interest in Torneos for $12 million.  It is
anticipated that Liberty Media Group's portion of such cash contributions to
Torneos will be repaid to TINTA in cash or other economic consideration to be
determined at some future date.

         TINTA and/or other subsidiaries of TCI have guaranteed notes payable
and other obligations of certain of the TCI 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 ("The
Premium Movie Partnership") 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.





                                     II-67
<PAGE>   167

         The board of directors of UVSG has authorized UVSG to repurchase from
time to time up to an aggregate of 1,000,000 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.

         In addition to the shares of TCI Ventures Group Stock issued in the
TCI Ventures Exchange, at December 31, 1997, 36,237,000 shares of TCI Ventures
Group Series A Stock were reserved for issuance upon exchange of certain
outstanding convertible notes issued by a subsidiary of TCI and upon exercise
of certain stock options.

         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 Ventures Group paid $76 million during the first
quarter of 1998 for its allocated share of the Call Payments.  For additional
information see note 15 to the accompanying combined financial statements of
TCI 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 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 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.

         In September 1997, the Board authorized a stock repurchase program,
under which TCI may repurchase from time to time up to five percent of its TCI
Ventures Group Stock.  As of December 31, 1997, 338,196 shares of TCI Ventures
Group Stock had been repurchased for $3.7 million.

         On September 26, 1997, TINTA sold its interest in Sky for cash
proceeds of $53.0 million.





                                     II-68
<PAGE>   168



         During the third quarter of 1997, TCI 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, TCI Ventures Group has reflected the
$47 million excess (before 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."  TCI Group, in turn, recorded an offsetting decrease to
"Combined Equity" and a $47 million deferred gain to be amortized over the
expected 15-year life of the CSG billing services commitment.

         In January 1998, the TCI Ventures Group's interest in DigiVentures was
assigned to the TCI Group.  In connection therewith the TCI Group assumed
DigiVentures' capital lease obligations totaling $176 million and paid $7
million in cash to the TCI 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 TCI
increased its ownership in the equity of UVSG to approximately 73%, of which 56%
is attributed to the TCI Ventures Group and 17% is attributed to Liberty Media
Group.  In addition, TCI's collective voting power increased to 93%.

         On February 17, 1998, TCI, Liberty Media Group and UVSG announced that
UVSG agreed to acquire Liberty Media Group's interest in Superstar/Netlink and
Liberty Media Group's interest in Netlink in a tax free stock transaction.  In
exchange for such assets, UVSG will issue 6.4 million shares of UVSG Series A
common stock to Liberty Media Group.  As a result of such transaction, TCI's
collective interest in UVSG will increase to 77%, 48% of which is attributable
to TCI Ventures Group and 29% of which is attributable to Liberty Media Group.
No assurance can be given that such transaction will be consummated.

         TCI Ventures Group sold its interest in Acclaim Entertainment, Inc. in
February 1998 for cash proceeds of approximately $17 million.

         On February 12, 1998, the TCI Ventures Group sold its (i) 40% interest
in NHT Partnership, (ii) 50% interest in Louisville Lightwave and (iii) 79%
interest in New Jersey Fiber Technologies, L.P. to Hyperion Telecommunications,
Inc.  for aggregate cash proceeds of $44 million.

         TCI and the other partners of Kansas City Fiber Network, L.P. ("KC
Fiber") have signed an agreement to sell the assets of KC Fiber to TCG for cash
proceeds of $55 million.  The TCI Ventures Group holds a 50% interest in KC
Fiber and the remaining 50% is held by Kansas City Cable Partners, a partnership
in which the TCI Group holds a 50% interest.  The sale of KC Fiber is subject to
certain regulatory and other conditions, and there is no assurance that it will
be consummated.  If consummated, TCI Ventures Group share of such proceeds will
be approximately $20 million.





                                     II-69
<PAGE>   169



         Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
cable operators, including HITS' affiliates, 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.  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 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.

         NDTC has the right to terminate the Digital Terminal Purchase
Agreement if, among other reasons, the transactions related to the GI MOU are
not consummated or if 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 September 23, 1997, TCI announced that it and ETC entered into a
letter of intent with Knowledge Universe, L.L.C. ("Knowledge Universe").  The
letter of intent contemplates that TCI, through ETC, will become a partner of
Knowledge Universe in a new venture into which Knowledge Universe would make a
substantial investment and ETC would contribute a significant portion of its
assets.  As a result, Knowledge Universe would be the majority owner of the new
venture, with ETC retaining a significant minority interest.  There can be no
assurance that the proposed transaction with Knowledge Universe will ultimately
be consummated or that the terms of the proposed transaction will not be
substantially modified.

Item 8.  Financial Statements and Supplementary Data.

         The consolidated financial statements of Tele-Communications, Inc. are
filed under this Item, beginning on Page II-71.  The combined financial
statements of Liberty Media Group are filed under this Item, beginning on Page
II-211.  The combined financial statements of the TCI Ventures Group are filed
under this Item, beginning on Page II-251.  The combined financial statements
of TCI Group are filed under this Item, beginning at Page II-153.  The
financial statement schedules required by Regulation S-X are filed under Item
14 of this Annual Report on Form 10-K.

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

         None.





                                     II-70
<PAGE>   170
                          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


                                     II-71
<PAGE>   171

                   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)



                                     II-72
<PAGE>   172

                   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.



                                     II-73
<PAGE>   173

                   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)


                                     II-74
<PAGE>   174

                   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.


                                     II-75
<PAGE>   175

                   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)


                                      II-76
<PAGE>   176

                   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)


                                      II-77
<PAGE>   177

                   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.


                                     II-78
<PAGE>   178

                   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.


                                     II-79
<PAGE>   179

                   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)

                                     II-80
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                   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)

                                     II-81
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                   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)

                                     II-82
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                   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)

                                     II-83
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                   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)

                                     II-84
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                   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)

                                     II-85
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                   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)

                                     II-86
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                   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)

                                     II-87
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                   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)

                                     II-88
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                   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)

                                     II-89
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                   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)

                                     II-90
<PAGE>   190

                   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)

                                     II-91
<PAGE>   191

                   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)

                                     II-92
<PAGE>   192

                   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)

                                     II-93
<PAGE>   193

                   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)

                                     II-94
<PAGE>   194

                   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)

                                     II-95
<PAGE>   195

                   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)

                                     II-96
<PAGE>   196

                   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)

                                     II-97
<PAGE>   197

                   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)

                                     II-98
<PAGE>   198

                   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)

                                     II-99
<PAGE>   199

                   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)

                                     II-100
<PAGE>   200

                   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)

                                     II-101
<PAGE>   201

                   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)

                                     II-102
<PAGE>   202

                   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)

                                     II-103
<PAGE>   203

                   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)

                                     II-104
<PAGE>   204

                   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)

                                     II-105
<PAGE>   205

                   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)

                                     II-106
<PAGE>   206

                   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)

                                     II-107
<PAGE>   207

                   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)

                                     II-108
<PAGE>   208

                   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)

                                     II-109
<PAGE>   209

                   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)

                                     II-110
<PAGE>   210

                   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)

                                     II-111
<PAGE>   211

                   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)

                                     II-112
<PAGE>   212

                   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)

                                     II-113
<PAGE>   213

                   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)

                                     II-114
<PAGE>   214

                   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)

                                     II-115
<PAGE>   215

                   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)

                                     II-116
<PAGE>   216

                   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)

                                     II-117
<PAGE>   217

                   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)

                                     II-118
<PAGE>   218

                   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)

                                     II-119
<PAGE>   219
\
                   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)

                                     II-120
<PAGE>   220

                   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)

                                     II-121
<PAGE>   221

                   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)

                                     II-122
<PAGE>   222

                   TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

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

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

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

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

                                                                     (continued)

                                     II-123
<PAGE>   223

                   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)

                                     II-124
<PAGE>   224

                   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)

                                     II-125
<PAGE>   225

                   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)

                                     II-126
<PAGE>   226

                   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)


                                     II-127
<PAGE>   227

                   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)

                                     II-128
<PAGE>   228

                   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)

                                     II-129
<PAGE>   229

                   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)

                                     II-130
<PAGE>   230

                   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)

                                     II-131
<PAGE>   231

                   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)

                                     II-132
<PAGE>   232

                   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)

                                     II-133
<PAGE>   233

                   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)

                                     II-134
<PAGE>   234

                   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)

                                     II-135
<PAGE>   235

                   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)

                                     II-136
<PAGE>   236

                   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)

                                     II-137
<PAGE>   237

                   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)

                                    II-138
<PAGE>   238

                   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)

                                    II-139
<PAGE>   239

                   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)

                                     II-140
<PAGE>   240

                   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)

                                     II-141
<PAGE>   241

                   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)

                                     II-142
<PAGE>   242

                   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)

                                     II-143
<PAGE>   243

                   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)

                                     II-144
<PAGE>   244

                   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)

                                     II-145
<PAGE>   245

                   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)

                                     II-146
<PAGE>   246

                   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)

                                     II-147
<PAGE>   247

                   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)

                                     II-148
<PAGE>   248

                   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)

                                     II-149
<PAGE>   249

                   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)

                                     II-150
<PAGE>   250

                   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)

                                     II-151
<PAGE>   251

                   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.

                                     II-152
<PAGE>   252

                          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 audited the accompanying combined balance sheets of TCI Group (a
combination of certain assets of Tele-Communications, Inc., as defined in note
1) as of December 31, 1997 and 1996, and the related combined statements of
operations, equity (deficit), 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 TCI Group are presented for purposes of
additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries. As more fully described in note 1,
the combined financial statements of TCI Group are intended to reflect the
performance of the businesses of Tele-Communications, Inc., which have not been
attributed to the Liberty Media Group or the TCI Ventures Group. The Liberty
Media Group includes the businesses of Tele-Communications, Inc. which produce
and distribute programming services. The TCI Ventures Group includes
Tele-Communications, Inc.'s principal international assets and businesses and
substantially all of Tele-Communications, Inc.'s non-cable and non-programming
assets. The combined financial statements of TCI Group should be read in
conjunction with the consolidated financial statements of Tele-Communications,
Inc. and subsidiaries.

As more fully described in note 1 to the combined financial statements, TCI has
accounted for its interest in the Liberty Media Group and the TCI Ventures Group
in a manner similar to the equity method of accounting for all periods that TCI
Group had an interest in the Liberty Media Group and the TCI Ventures Group
that, in our opinion, should be consolidated with TCI Group to conform to
generally accepted accounting principles. If TCI Group's interest in the Liberty
Media Group and the TCI Ventures Group were consolidated with TCI Group, the
combined financial position, combined results of operations, and combined cash
flows of TCI Group would equal the consolidated financial position, consolidated
results of operations, and consolidated cash flows of Tele-Communications, Inc.
and subsidiaries, which financial statements are included herein.

In our opinion, except for the effects of not consolidating TCI Group's interest
in the Liberty Media Group and the TCI Ventures Group as discussed in the
preceding paragraph, the combined financial statements referred to in the second
paragraph above present fairly, in all material respects, the financial position
of TCI Group as of December 31, 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.


                                                KPMG Peat Marwick LLP

Denver, Colorado
March 20, 1998



                                     II-153
<PAGE>   253





                                   "TCI 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                                  $    56            --

Trade and other receivables, net                               394           308

Prepaid expenses                                                75            77

Committed program rights                                        --            50

Investments in affiliates, accounted for under
   the equity method, and related receivables
   (notes 5 and 12)                                            414           361

Property and equipment, at cost:
   Land                                                         77            69
   Distribution systems                                      9,933         9,311
   Support equipment and buildings                           1,411         1,321
                                                           -------       -------
                                                            11,421        10,701
   Less accumulated depreciation                             4,479         3,920
                                                           -------       -------
                                                             6,942         6,781
                                                           -------       -------

Franchise costs                                             17,802        17,153
   Less accumulated amortization                             2,725         2,360
                                                           -------       -------
                                                            15,077        14,793
                                                           -------       -------

Other assets, net of amortization                              620           449
                                                           -------       -------

                                                           $23,578        22,819
                                                           =======       =======
</TABLE>

* Restated - see notes 1 and 12.


                                                                     (continued)


                                     II-154
<PAGE>   254
                                   "TCI 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 Deficit                           amounts in millions
<S>                                                      <C>                <C>
Accounts payable                                         $    137           194

Accrued interest                                              250           266

Accrued programming expense                                   243           313

Other accrued expenses                                        726           376

Debt (note 8)                                              14,106        14,319

Deferred income taxes (note 13)                             5,147         5,160

Other liabilities                                             563           214
                                                         --------      --------

      Total liabilities                                    21,172        20,842
                                                         --------      --------

Minority interests in equity of attributed
   subsidiaries                                             1,048         1,083

Redeemable securities:
   Preferred stock (note 9)                                   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 10)                                       1,500         1,000

Combined deficit (note 11):
   Combined equity (deficit), including preferred
      stocks of Tele-Communications, Inc. ("TCI")            (276)        1,789
   Unrealized holding gains for available-for-sale
      securities, net of taxes                                  4            --
   TCI Ventures Group cumulative foreign currency
      translation adjustment, net of taxes                     --            26
   TCI Ventures Group unrealized holding gains for
      available-for-sale securities, net of taxes              --            15
   Interest in TCI Ventures Group                              --        (2,729)
                                                         --------      --------
                                                             (272)         (899)

   Due to (from) related parties (note 14)                   (530)          135
                                                         --------      --------

      Total combined deficit                                 (802)         (764)
                                                         --------      --------

Commitments and contingencies (note 15)

                                                         $ 23,578        22,819
                                                         ========      ========
</TABLE>

* Restated - see notes 1 and 12.

See accompanying notes to combined financial statements.



                                     II-155
<PAGE>   255
                                   "TCI 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,
                                                          except per share amounts
<S>                                                  <C>            <C>          <C>  
Revenue                                              $ 6,429        5,881        4,827

Operating costs and expenses:
   Operating (note 14)                                 2,293        2,230        1,686
   Selling, general and administrative (note 14)       1,370        1,635        1,216
   Stock compensation (note 11)                          192          (23)          40
   Restructuring charges                                  --           37           --
   Depreciation                                          950          987          825
   Amortization                                          477          419          374
                                                     -------      -------      -------
                                                       5,282        5,285        4,141
                                                     -------      -------      -------

        Operating income                               1,147          596          686

Other income (expense):
   Interest expense                                   (1,105)      (1,029)        (969)
   Interest income                                        27           26           26
   Intercompany interest                                  16          (14)          20
   Share of losses of affiliates, net (note 5)           (90)         (79)          (3)
   Gain (loss) on disposition of assets, net             (20)          29            2
   Loss on early extinguishment of debt (note 8)         (39)         (71)          (6)
   Minority interests in earnings of attributed
      subsidiaries, net (note 10)                       (168)         (82)          (3)
   Other, net                                            (22)         (69)         (12)
                                                     -------      -------      -------
                                                      (1,401)      (1,289)        (945)
                                                     -------      -------      -------

        Loss before income taxes                        (254)        (693)        (259)

Income tax benefit (note 13)                             104          187           72
                                                     -------      -------      -------

        Loss before earnings (loss) of Liberty
          Media Group and TCI Ventures
          Group (note 1)                                (150)        (506)        (187)

Loss of Liberty Media Group through the date
      of the Liberty Distribution (note 1)                --           --          (29)
Earnings (loss) of TCI Ventures Group through
      the date of the TCI Ventures Exchange
      (note 1)                                          (345)        (258)          60
                                                     -------      -------      -------

        Net loss                                        (495)        (764)        (156)

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

        Net loss attributable to common
          stockholders                               $  (537)        (799)        (190)
                                                     =======      =======      =======

Basic and diluted loss attributable to common
    stockholders per common share (notes 1
    and 3):                                          $  (.85)       (1.20)        (.17)
                                                     =======      =======      =======
</TABLE>

* Restated - see notes 1 and 12.

See accompanying notes to combined financial statements.



                                     II-156
<PAGE>   256




                                   "TCI GROUP"
             (a combination of certain assets, as defined in note 1)

                     Combined Statements of Equity (Deficit)

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                                                  TCI         
                                                                                                 TCI            VENTURES      
                                                                                               VENTURES           GROUP       
                                                                                 UNREALIZED     GROUP          UNREALIZED     
                                                                    COMBINED      HOLDING     CUMULATIVE         HOLDING      
                                                                     EQUITY,     GAINS FOR     FOREIGN         GAINS FOR      
                                                                    INCLUDING    AVAILABLE-    CURRENCY         AVAILABLE-    
                                                                    PREFERRED     FOR-SALE    TRANSLATION        FOR-SALE     
                                                                     STOCKS     SECURITIES,   ADJUSTMENT,      SECURITIES,    
                                                                     OF TCI*   NET OF TAXES   NET OF TAXES     NET OF TAXES  
                                                                    -------   --------------  ------------     ------------  
                                                                                     amounts in millions
<S>                                                                <C>           <C>          <C>               <C>           
Balance at January 1, 1995                                          $ 2,488           (5)          (4)                1       
   Net loss                                                            (156)          --           --                --       
   Purchases of services from related parties                            --           --           --                --       
   Cost allocations to Liberty Media Group and TCI Ventures                                                                   
      Group                                                              --           --           --                --       
   Cable distribution fees received from Home Shopping                                                                        
      Network, Inc. ("HSN")                                              --           --           --                --       
   Allocation of compensation relating to stock appreciation                                                                  
      rights                                                             --           --           --                --       
   Interest income from Liberty Media Group                              --           --           --                --       
   Deferred tax assets transferred from Liberty Media Group              --           --           --                --       
   Turner Broadcasting System, Inc. ("TBS") stock received in                                                                 
      acquisition transferred to Liberty Media Group                     --           --           --                --       
   Intergroup tax allocation                                             --           --           --                --       
   Other intercompany transfers                                          --           --           --                --       
   Change in unrealized gains for available-for-sale securities          --           12           --                60       
   Foreign currency translation adjustment                               --           --           (5)               --       
   Issuance of common stock by Tele-Communications                                                                            
      International, Inc. ("TINTA")                                      --           --           --                --       
   Issuance of common stock by subsidiary                                51           --           --                --       
   Adjustment to reflect elimination of reporting delay with                                                                  
      respect to certain foreign subsidiaries                            (1)          --           --                --       
   Accreted dividends on TCI preferred stock subject to                                                                       
      mandatory redemption requirements                                 (24)          --           --                --       
   Payment of TCI preferred stock dividends                             (10)          --           --                --       
   Issuance of TCI Class A common stock for acquisitions and                                                                  
      investments                                                     1,378           --           --                --       
   Issuance of TCI Class A common stock for acquisition by                                                                    
      Liberty Media Group                                                10           --           --                --       
   Cash paid by TCI Group for investment by Liberty Media                                                                     
      Group contributed to Liberty Media Group combined equity           --           --           --                --       
   Proceeds from issuances of TCI Class A common stock in                                                                     
      public and private offerings                                      431           --           --                --       
   Distribution of TCI Series A and Series B Liberty Media                                                                    
      Group common stock to TCI common stockholders                  (1,364)          --           --                --       
   Costs associated with Liberty Distribution to stockholders            (8)          --           --                --       
   Deferred tax assets transferred from Liberty Media Group                                                                   
      upon implementation of tax sharing agreement                       --           --           --                --       
                                                                    -------      -------      -------           -------       
Balance at December 31, 1995                                        $ 2,795            7           (9)               61       
                                                                    -------      -------      -------           -------       


<CAPTION>
                                                                                 LIBERTY
                                                                                  MEDIA
                                                                                  GROUP
                                                                                UNREALIZED
                                                                                  HOLDING
                                                                 INTEREST        GAINS FOR     INTEREST
                                                                   IN           AVAILABLE-        IN        DUE TO        TOTAL
                                                                   TCI           FOR-SALE       LIBERTY     (FROM)       COMBINED
                                                                 VENTURES       SECURITIES,      MEDIA      RELATED       EQUITY
                                                                  GROUP        NET OF TAXES      GROUP      PARTIES     (DEFICIT)*
                                                                 --------      ------------      -----      -------      -------
                                                                                      amounts in millions
<S>                                                               <C>             <C>             <C>        <C>            <C> 
Balance at January 1, 1995                                        (1,169)           98          (1,489)         (29)        (109) 
   Net loss                                                          (60)           --              29           --         (187) 
   Purchases of services from related parties                         (4)           --              43           37           76  
   Cost allocations to Liberty Media Group and TCI Ventures                                                                       
      Group                                                           17            --             (15)          (9)          (7) 
   Cable distribution fees received from Home Shopping                                                                            
      Network, Inc. ("HSN")                                           --            --              --           27           27  
   Allocation of compensation relating to stock appreciation                                                                      
      rights                                                          (5)           --              (7)          (3)         (15) 
   Interest income from Liberty Media Group                           --            --              (2)          --           (2) 
   Deferred tax assets transferred from Liberty Media Group           --            --              14           --           14  
   Turner Broadcasting System, Inc. ("TBS") stock received in                                                                     
      acquisition transferred to Liberty Media Group                  --            --              (7)          --           (7) 
   Intergroup tax allocation                                          56            --              --           --           56  
   Other intercompany transfers                                     (796)           --             (18)         (30)        (844) 
   Change in unrealized gains for available-for-sale securities      (60)          108            (108)          --           12  
   Foreign currency translation adjustment                             5            --              --           --           --  
   Issuance of common stock by Tele-Communications                                                                                
      International, Inc. ("TINTA")                                 (313)           --              --           --         (313) 
   Issuance of common stock by subsidiary                            (51)           --              --           --           --  
   Adjustment to reflect elimination of reporting delay with                                                                      
      respect to certain foreign subsidiaries                          1            --              --           --           --  
   Accreted dividends on TCI preferred stock subject to                                                                           
      mandatory redemption requirements                               --            --              --           --          (24) 
   Payment of TCI preferred stock dividends                           --            --              --           --          (10) 
   Issuance of TCI Class A common stock for acquisitions and                                                                      
      investments                                                     --            --              --           --        1,378  
   Issuance of TCI Class A common stock for acquisition by                                                                        
      Liberty Media Group                                             --            --             (10)          --           --  
   Cash paid by TCI Group for investment by Liberty Media                                                                         
      Group contributed to Liberty Media Group combined equity        --            --              (2)          --           (2) 
   Proceeds from issuances of TCI Class A common stock in                                                                         
      public and private offerings                                    --            --              --           --          431  
   Distribution of TCI Series A and Series B Liberty Media                                                                        
      Group common stock to TCI common stockholders                   --          (206)          1,570           --           --  
   Costs associated with Liberty Distribution to stockholders         --            --              --           --           (8) 
   Deferred tax assets transferred from Liberty Media Group                                                                       
      upon implementation of tax sharing agreement                    --            --               2           --            2  
                                                                  ------       -------         -------      -------      -------  
Balance at December 31, 1995                                      (2,379)           --              --           (7)         468  
                                                                  ------       -------         -------      -------      -------  

</TABLE>



* Restated - see notes 1 and 12.                                   (continued)




                                     II-157
<PAGE>   257
                                   "TCI GROUP"
             (a combination of certain assets, as defined in note 1)

                     Combined Statements of Equity (Deficit)

                  Years ended December 31, 1997, 1996 and 1995



<TABLE>
<CAPTION>
                                                                                                                  TCI         
                                                                                                 TCI            VENTURES      
                                                                                               VENTURES           GROUP       
                                                                                 UNREALIZED     GROUP          UNREALIZED     
                                                                    COMBINED      HOLDING     CUMULATIVE         HOLDING      
                                                                     EQUITY,     GAINS FOR     FOREIGN         GAINS FOR      
                                                                    INCLUDING    AVAILABLE-    CURRENCY         AVAILABLE-    
                                                                    PREFERRED     FOR-SALE    TRANSLATION        FOR-SALE     
                                                                     STOCKS     SECURITIES,   ADJUSTMENT,      SECURITIES,    
                                                                     OF TCI*   NET OF TAXES   NET OF TAXES    NET OF TAXES  
                                                                    -------   --------------  ------------    -------------  
                                                                                     amounts in millions
<S>                                                                <C>           <C>          <C>                     <C>     
Balance at December 31, 1995                                        $ 2,795            7           (9)                61   
   Net loss                                                            (764)          --           --                 --   
   Purchases of services from related parties                            --           --