VirtualModem Owners Sell to Liberate

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New York -- Source Media Inc. and Insight Communications
Co. Inc. agreed to sell their "VirtualModem" Internet-over-TV platform and
related patents to Liberate Technologies last Thursday for 886,000 shares of Liberate
stock.

That stock was worth about $172 million, so the sale price
seemed high, considering the fact that Insight is the only MSO to have adopted the
VirtualModem platform, which competes against services from WorldGate Communications Inc.
and ICTV Inc.

Still, Source's stock price fell the day the deal was
announced, as did Liberate's. Insight's share price ticked up.

Insight got involved with Source last August, buying 6
percent of the company for $12 million and pledging to spend another $13 million in a
joint venture to distribute Source's Interactive Channel. VirtualModem was part of
that joint venture.

In a related deal last week, Insight agreed to deploy
Liberate's software for interactive-television applications across its cable systems,
which count more than 1 million subscribers.

Insight said it would deploy Liberate's "TV
Navigator" in new and existing General Instrument Corp. digital set-tops, and it
would also use "Liberate Connect" server software.

Source and Insight executives hope the Liberate connection
brings in more customers for VirtualModem and other services from their joint venture,
SourceSuite LLC.

"We now have a significant partner distributing the
platform, and it's fair to assume that they'll get significantly more
distribution with our platform than we would have," Source president and CEO Stephen
Palley said.

Liberate and Insight will continue to sell their
"SourceGuide" interactive program guide and "LocalSource" local
content applications through SourceSuite. Liberate agreed to make the SourceSuite joint
venture a preferred content provider, but it didn't commit to pitching those
applications to cable operators.

"I want to make it clear that Liberate will not be in
the business of selling program guides or Source product, but it will be cooperating
closely with [SourceSuite LLC] to try to bring these really compelling applications to all
Liberate customers," Liberate president and CEO Mitchell Kertzman told analysts last
week.

Insight CEO Michael Willner said the deal should make it
easier to sell VirtualModem to cable operators that have deployed low-end digital
set-tops. "There are 5 million of these boxes out there. They're not going
away," he added.

Janco Partners analyst Linda Walseth called the deal a
"big win" for Source that should benefit LocalSource and SourceGuide. "The
alliance with Liberate and their contribution of shares helps to ease financial pressure
that continued to hang over Source during the past year," she wrote in a report.

But another analyst noted that the intellectual property
associated with VirtualModem was a key Source asset, so investors may have hoped for a
better price.

The definitive agreement, expected to close during the
first calendar quarter, does not reflect the 2-for-1 stock split Liberate planned for Jan.
14.

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