LIBERTY MEDIA CORP /DE/ - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

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FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-20421

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LIBERTY MEDIA CORPORATION
(Exact name of Registrant as specified in its charter)

STATE OF DELAWARE 84-1288730
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

12300 LIBERTY BOULEVARD 80112
ENGLEWOOD, COLORADO (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (720) 875-5400

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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 / /

The number of outstanding shares of Liberty Media Corporation's common stock
as of July 31, 2002 was:

Series A common stock 2,358,053,664 shares; and
Series B common stock 212,045,128 shares.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(continued)

I-1

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-2

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-3

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-4

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2002

See accompanying notes to condensed consolidated financial statements.

I-5

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-6

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2002
(UNAUDITED)

(1) BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the
accounts of Liberty Media Corporation and those of all of its majority-owned and
controlled subsidiaries (collectively, "Liberty" or the "Company", unless the
context otherwise requires). All significant intercompany accounts and
transactions have been eliminated in consolidation.

From March 9, 1999 through August 9, 2001, AT&T Corp. ("AT&T") owned 100% of
the outstanding common stock of Liberty. During such time, the AT&T Class A
Liberty Media Group common stock and the AT&T Class B Liberty Media Group common
stock (together, the AT&T Liberty Media Group tracking stock) were tracking
stocks of AT&T designed to reflect the economic performance of the businesses
and assets of AT&T attributed to the Liberty Media Group. Liberty was included
in the Liberty Media Group. Prior to March 9, 1999, Liberty was a wholly-owned
subsidiary of Tele-Communications, Inc. ("TCI"), which was an independent
publicly traded company prior to its acquisition by AT&T on March 9, 1999.

On May 7, 2001, AT&T contributed to Liberty assets that were attributed to
the Liberty Media Group but not previously owned by Liberty (the "Contributed
Assets"). These assets include (i) preferred stock and common stock interests in
a subsidiary of IDT Corporation, a multinational telecommunications services
provider, and (ii) an approximate 8% indirect common equity interest in Liberty
Digital, Inc. ("Liberty Digital"). Subsequent to these contributions, the
businesses and assets of Liberty and its subsidiaries constituted all of the
businesses and assets of the Liberty Media Group. The contributions have been
accounted for in a manner similar to a pooling of interests and, accordingly,
the financial statements of Liberty for periods prior to the contributions have
been restated to include the financial position and results of operations of the
Contributed Assets.

Effective August 10, 2001, AT&T effected the split-off of Liberty pursuant
to which Liberty's common stock was recapitalized, and each outstanding share of
AT&T Class A Liberty Media Group tracking stock was redeemed for one share of
Liberty Series A common stock and each outstanding share of AT&T Class B Liberty
Media Group tracking stock was redeemed for one share of Liberty Series B common
stock (the "Split Off Transaction"). Subsequent to the Split Off Transaction,
Liberty is no longer a subsidiary of AT&T and no shares of AT&T Liberty Media
Group tracking stock remain outstanding. The Split Off Transaction has been
accounted for at historical cost.

Liberty's domestic subsidiaries generally operate or hold interests in
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. In
addition, certain of Liberty's subsidiaries hold interests in technology and
Internet businesses, as well as interests in businesses engaged in wireless
telephony, electronic retailing, direct marketing and advertising sales relating
to programming services, infomercials and transaction processing. Liberty also
has significant interests in foreign affiliates which operate in cable
television, programming and satellite distribution.

The accompanying interim condensed consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the results
for such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in Liberty's
Annual Report on Form 10-K for the year ended December 31, 2001.

I-7

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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. In this regard, Liberty holds a significant number of investments
that are accounted for using the equity method. Liberty does not control the
decision making process of these affiliates. Accordingly, Liberty relies on
management of these affiliates and their independent accountants to provide it
with accurate financial information prepared in accordance with generally
accepted accounting principles that Liberty uses in the application of the
equity method. The Company is not aware, however, of any errors in or possible
misstatements of the financial information provided by its equity affiliates
that would have a material effect on Liberty's consolidated financial
statements.

Certain prior period amounts have been reclassified for comparability with
the 2002 presentation.

(2) ACCOUNTING CHANGES

STATEMENT 142

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("Statement
142"), which along with Statement of Financial Accounting Standards No. 141,
BUSINESS COMBINATIONS ("Statement 141"), was issued in June 2001. Statement 141
requires that the purchase method of accounting be used for all business
combinations. Statement 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet to be recognized
and reported apart from goodwill. Statement 142 requires that goodwill and other
intangible assets with indefinite useful lives (collectively, "indefinite lived
intangible assets") no longer be amortized, but instead be tested for impairment
at least annually in accordance with the provisions of Statement 142. The
portion of excess costs on equity method investments that represents goodwill
("equity method goodwill") is also no longer amortized, but is considered for
impairment under APB 18. Statement 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with Statement of Financial Accounting Standards No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS.

Statement 141 required the Company to evaluate its existing intangible
assets and goodwill that were acquired in prior purchase business combinations,
and make any necessary reclassifications in order to conform with the new
criteria in Statement 141 for recognition apart from goodwill. Reclassification
of previously acquired intangible assets, including intangible assets in equity
method excess costs, is only made if (a) the asset meets the recognition
criteria of Statement 141, (b) the asset had been assigned an amount equal to
its estimated fair value at the date the business combination was initially
recorded, and (c) the asset was accounted for separately from goodwill as
evidenced by the maintenance of accounting records for the asset. The Company
did not maintain separate accounting records for previously acquired intangible
assets in equity method excess costs. Accordingly, such amounts are deemed to be
equity method goodwill under Statement 142.

Statement 142 required the Company to reassess the useful lives and residual
values of all intangible assets acquired, and make any necessary amortization
period adjustments by the end of the first quarter of 2002. In addition, to the
extent an intangible asset (other than goodwill) was identified as having an
indefinite useful life, the Company was required to test the intangible asset
for impairment in accordance with the provisions of Statement 142. Any
impairment loss was measured as of the date of adoption and has been recognized
as the cumulative effect of a change in accounting principle.

I-8

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In connection with Statement 142's transitional goodwill impairment
evaluation, Statement 142 required the Company to perform an assessment of
whether there was an indication that goodwill was impaired as of the date of
adoption. To accomplish this, the Company identified its reporting units and
determined the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company compared the fair value
of each reporting unit to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeded its fair value, the Company performed
the second step of the transitional impairment test. In the second step, the
Company compared the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with Statement 141, to its carrying amount, both
of which were measured as of the date of adoption.

As of the date of adoption, the Company had unamortized goodwill in the
amount of $9,075 million, unamortized franchise costs of $163 million and
unamortized other identifiable intangible assets in the amount of $738 million,
all of which were subject to the transition provisions of Statements 141 and
142. In connection with its adoption of Statement 142, the Company recognized a
$1,778 million transitional impairment loss, net of taxes of $25 million, as the
cumulative effect of a change in accounting principle. The foregoing
transitional impairment loss includes an adjustment of $36 million for the
Company's proportionate share of transition adjustments that its equity method
affiliates have recorded. As certain equity method affiliates have not completed
their Statement 142 analysis, Liberty will record additional transition
impairment losses in the future.

As noted above, indefinite lived intangible assets are no longer amortized.
Adjusted net loss and loss per common share, exclusive of amortization expense
related to goodwill, franchise costs and equity method goodwill are as follows
(amounts in millions, except per share amounts):

I-9

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Amortization of intangible assets with finite useful lives was $91 million
for the six months ended June 30, 2002. Based on its current amortizable
intangible assets, Liberty expects that amortization expense will be as follows
for the next five years (amounts in millions):

2002........................................................ $182
2003........................................................ 136
2004........................................................ 96
2005........................................................ 92
2006........................................................ 72

Changes in the carrying amount of goodwill for the six months ended
June 30, 2002 are as follows:

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* Represents the acquisition of the minority interest of Liberty Digital, and
a purchase price allocation adjustment for a 2001 acquisition.

STATEMENT 133

Effective January 1, 2001, Liberty adopted Statement of Financial Accounting
Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
("Statement 133"), which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portion of a change in the fair value of the
derivative is recorded in other comprehensive earnings and is recognized in the
statement of operations when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings. If the derivative is not designated as a hedge, changes in the fair
value of the derivative are recognized in earnings.

Derivative gains and losses included in other comprehensive earnings are
reclassified into earnings at the time the sale of the hedged item or
transaction is recognized.

The Company uses various derivative instruments to manage fair value risk
associated with many of its investments and foreign exchange risk. The
derivative instruments may involve elements of credit and market risk in excess
of amounts recognized in the financial statements. The Company monitors its
positions and the credit quality of counter-parties, consisting primarily of
major financial institutions, and does not expect nonperformance by any of its
counter-parties.

I-10

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The adoption of Statement 133 on January 1, 2001, resulted in a cumulative
increase in net earnings of $545 million (after tax expense of $356 million) and
an increase in other comprehensive loss of $87 million. The increase in net
earnings was mostly attributable to separately recording the fair value of the
embedded call option obligations associated with the Company's senior
exchangeable debentures. The increase in other comprehensive loss relates
primarily to changes in the fair value of the Company's warrants and options to
purchase certain available-for-sale securities which are required to be
accounted for in earnings under Statement 133.

(3) LOSS PER COMMON SHARE

Basic loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. The pro forma number
of outstanding common shares for periods prior to the Split Off Transaction is
based upon the number of shares of Series A and Series B Liberty common stock
issued upon consummation of the Split Off Transaction. Diluted loss per common
share presents the dilutive effect on a per share basis of potential common
shares as if they had been converted at the beginning of the periods presented.
Excluded from diluted earnings per share for the six months ended June 30, 2002,
are 78 million potential common shares because their inclusion would be
anti-dilutive.

(4) SUPPLEMENTAL DISCLOSURES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

During the six months ended June 30, 2002, the Company issued Series A
common stock valued at $62 million to acquire the 16% of Liberty Digital it did
not previously own.

I-11

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD

Liberty has various investments accounted for using the equity method. The
following table includes Liberty's carrying amount of its more significant
investments in affiliates:

The following table reflects Liberty's share of earnings (losses) of
affiliates, including excess basis amortization and nontemporary declines in
value:

At June 30, 2002, the aggregate carrying amount of Liberty's investments in
its affiliates exceeded Liberty's proportionate share of its affiliates' net
assets by $8,762 million. Prior to the adoption of Statement 142, such excess
was being amortized over estimated useful lives of up to 20 years based upon the
useful lives of the intangible assets represented by such excess costs.
Amortization aggregating $520 million for the six months ended June 30, 2001 is
included in share of losses of affiliates. Upon adoption of Statement 142, the
Company discontinued amortizing its equity method excess costs in existence at
the adoption date due to their characterization as equity method goodwill. Any
calculated excess costs on investments made after January 1, 2002 will be
allocated on an estimated fair value basis to the underlying assets and
liabilities of the investee. Amounts allocated to assets other than indefinite
lived intangible assets will be amortized over their estimated useful lives.

I-12

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Certain of Liberty's affiliates are general partnerships and, as such, each
partner is 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.

UNITEDGLOBALCOM

On January 30, 2002, the Company and UnitedGlobalCom completed a transaction
(the "New United Transaction") pursuant to which a new holding company,
UnitedGlobalCom, Inc. (formerly known as New UnitedGlobalCom, Inc.) was formed
to own UGC Holdings, Inc. (formerly known as UnitedGlobalCom, Inc., "Old
United"). Upon consummation of the New United Transaction, all shares of Old
United common stock were exchanged for shares of common stock of
UnitedGlobalCom. In addition, the Company contributed (i) cash consideration of
$200 million; (ii) a note receivable from Belmarken Holding B.V., a subsidiary
of Old United, with an accreted value of $892 million and a carrying value of
$496 million (the "Belmarken Loan") and (iii) Senior Notes and Senior Discount
Notes of United-Pan Europe Communications N.V. ("UPC"), a subsidiary of Old
United, with an aggregate carrying amount of $270 million to UnitedGlobalCom in
exchange for 281.3 million shares of Class C common stock of UnitedGlobalCom
with a fair value of $1,406 million. Upon consummation of the New United
Transaction, Liberty owned an approximate 72% economic interest and a 94% voting
interest in UnitedGlobalCom. Subsequent open market purchases of UnitedGlobalCom
Class A common stock have increased Liberty's ownership interest to
306.6 million shares or a 74% economic interest. The closing price of
UnitedGlobalCom's Class A common stock was $2.75 on June 30, 2002. Pursuant to
certain voting and standstill arrangements entered into at the time of closing,
Liberty is currently unable to exercise control of UnitedGlobalCom, and
accordingly, Liberty continues to use the equity method of accounting for its
investment. UnitedGlobalCom is a global broadband communications provider of
video, voice and data services with operations in over 25 countries throughout
the world.

Liberty has accounted for the New United Transaction as the acquisition of
an additional noncontrolling interest in UnitedGlobalCom in exchange for
monetary financial instruments. Accordingly, Liberty calculated a $440 million
gain on the transaction based on the difference between the estimated fair value
of the financial instruments and their carrying value. Due to its continuing
indirect ownership in the assets contributed to UnitedGlobalCom, Liberty limited
the amount of gain it recognized to the minority shareholders' attributable
share (approximately 28%) of such assets or $123 million (before deferred tax
expense of $48 million).

Also on January 30, 2002, UnitedGlobalCom acquired from Liberty its debt and
equity interests in IDT United, Inc. and $751 million principal amount at
maturity of Old United's $1,375 million 10 3/4% senior secured discount notes
due 2008 (the "2008 Notes"), which had been distributed to Liberty in redemption
of a portion of its interest in IDT United. IDT United was formed as an indirect
subsidiary of IDT Corporation for purposes of effecting a tender offer for all
outstanding 2008 Notes at a purchase price of $400 per $1,000 principal amount
at maturity, which tender offer expired on February 1, 2002. The aggregate
purchase price for the Company's interest in IDT United of approximately
$448 million was equal to the aggregate amount Liberty had invested in IDT
United, plus interest. Approximately $305 million of the purchase price was paid
by the assumption by UnitedGlobalCom of debt owed by Liberty to a subsidiary of
Old United, and the remainder was credited against the $200 million cash
contribution by Liberty to UnitedGlobalCom described above. In connection with
the New United Transaction, a subsidiary of Liberty agreed to loan to a
subsidiary of UnitedGlobalCom up to $105 million. As of June 30, 2002, such
subsidiary of UnitedGlobalCom has borrowed $103 million from the Liberty
subsidiary to acquire additional shares of preferred stock and promissory notes
issued by IDT United. The 2008 Notes owned by IDT United, together with 2008

I-13

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Notes acquired by UnitedGlobalCom directly from Liberty referred to above, all
of which remain outstanding, represent approximately 98.2% of the outstanding
2008 Notes.

In June 2002, Liberty loaned an aggregate of $5.1 million to the chairman
and Chief Executive Officer of UnitedGlobalCom. The loans bear interest at LIBOR
plus 2% and are due and payable in December 2002. The loans are collateralized
by shares of UnitedGlobalCom Class B common stock.

USAI

Prior to May 7, 2002, USAI owned and operated businesses in television
production, electronic retailing, ticketing operations, and internet services.
Liberty held 74.4 million shares of USAI's common stock and shares and other
equity interests in certain subsidiaries of USAI that were exchangeable for an
aggregate of 79.0 million shares of USAI common stock.

On May 7, 2002, Liberty, USAI and Vivendi Universal, S.A. ("Vivendi")
consummated a series of transactions. Upon consummation of these transactions,
USAI contributed substantially all of its entertainment assets to Vivendi
Universal Entertainment ("VUE"), a partnership controlled by Vivendi, in
exchange for cash and common and preferred interests in VUE. In connection with
these transactions, Liberty entered into a separate agreement with Vivendi,
pursuant to which Vivendi acquired from Liberty 25 million shares of common
stock of USAI, approximately 38.7 million shares of USANi LLC, which are
exchangeable, on a one-for-one basis, for shares of USAI common stock, and all
of Liberty's approximate 30% interest in multiThematiques S.A., together with
certain liabilities with respect thereto, in exchange for 37.4 million Vivendi
ordinary shares, which at the date of the transaction had an aggregate fair
value of $1,013 million. In connection with this transaction, Liberty agreed to
restrictions on its ability to transfer 9.5 million of such shares prior to
November 2003. Liberty recognized a loss of $814 million in the second quarter
of 2002 based on the difference between the fair value of the Vivendi shares
received and the carrying value of the assets relinquished including goodwill of
$514 million which is allocable to the reporting unit holding the USAI
interests. Liberty owns approximately 3% of Vivendi and accounts for such
investment as an available-for-sale security.

Subsequent to the Vivendi transaction with USAI, USAI was renamed USA
Interactive, and Liberty owns approximately 89.7 million shares or 22% of USA
Interactive. Due to certain governance arrangements which limit its ability to
exert significant influence over USA Interactive, Liberty accounts for such
investment as an available-for-sale security. Prior to the Vivendi transaction,
Liberty accounted for its investment in USAI using the equity method. Share of
earnings in 2002 are for the period through May 7, 2002.

TELEWEST

Telewest operates and constructs cable television and telephone systems in
the United Kingdom, and develops and sells a variety of television programming
also in the U.K. At June 30, 2002, Liberty indirectly owned 744.4 million of the
issued and outstanding Telewest ordinary shares. The closing price of Telewest's
ordinary shares on June 30, 2002 was $.05 per share.

During the six months ended June 30, 2002, Liberty purchased $194 million
and L45 million face amount of Telewest public debt for aggregate cash
consideration of $129 million including accrued interest. Such investments are
accounted for as available-for-sale securities.

During the three months ended June 30, 2001, Liberty determined that its
investment in Telewest experienced a nontemporary decline in value. As a result,
the carrying value of Telewest was adjusted

I-14

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to its estimated fair value, and the Company recognized a charge of
$1,403 million. Such charge is included in share of losses of affiliates.

OTHER

On April 12, 2002, Liberty sold its 40% interest in Telemundo Communications
Group for cash proceeds of $679 million, and recognized a gain of $344 million
(before related tax expense).

Summarized combined results of operations for affiliates are as follows:

(6) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS

Investments in available-for-sale securities (including related derivative
instruments) and other cost investments are summarized as follows:

I-15

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SPRINT PCS

Liberty and certain of its consolidated subsidiaries collectively are the
beneficial owners of approximately 197 million shares of Sprint PCS Group Stock
and certain other instruments convertible into such securities (the "Sprint
Securities"). The Sprint PCS Group Stock is a tracking stock intended to reflect
the performance of Sprint's domestic wireless PCS operations. Liberty accounts
for its investment in the Sprint Securities as an available-for-sale security.
As of June 30, 2002, Liberty beneficially owned approximately 19% of Sprint PCS
Group common stock--Series 2.

Pursuant to a final judgment (the "Final Judgment") agreed to by Liberty,
AT&T and the United States Department of Justice (the "DOJ") on December 31,
1998, Liberty transferred all of its beneficially owned Sprint Securities to a
trustee (the "Trustee") prior to the March 1999 merger of TCI, Liberty's former
parent, and AT&T. The Final Judgment, which was entered by the United States
District Court for the District of Columbia on August 23, 1999, required the
Trustee, on or before May 23, 2002, to dispose of a portion of the Sprint
Securities and to dispose of the balance of the Sprint Securities by May 23,
2004.

At Liberty's request, the DOJ joined Liberty and AT&T in a joint motion to
terminate the Final Judgment which was filed in the District Court in
February 2002. The District Court has approved the motion to terminate the Final
Judgment, with the result that the Trustee has no further obligations under the
Final Judgment. The Trustee is in the process of returning direct ownership of
the Sprint Securities to Liberty.

AOL TIME WARNER

On January 11, 2001, America Online, Inc. completed its merger with Time
Warner Inc. ("Time Warner") to form AOL Time Warner. In connection with the
merger, each share of Time Warner common stock held by Liberty was converted
into 1.5 shares of an identical series of AOL Time Warner stock. Upon completion
of this transaction, Liberty holds a total of 171 million shares in AOL Time
Warner. Liberty recognized a $253 million gain (before deferred tax expense of
$100 million) based upon the difference between the carrying value of Liberty's
interest in Time Warner and the fair value of the AOL Time Warner securities
received.

NEWS CORP.

In May 2001, Liberty consummated a transaction (the "Exchange Transaction")
with News Corp. whereby Liberty exchanged 70.7 million shares of Gemstar for
121.5 million News Corp. American Depository Shares ("ADSs") representing
preferred, limited voting, ordinary shares of News Corp. Included in losses on
dispositions in the accompanying condensed consolidated statement of operations
for the six months ended June 30, 2001 is a loss of $764 million recognized in
connection with the Exchange Transaction based on the difference between the
fair value of the securities received by Liberty and the carrying value of the
Gemstar shares. In December 2001, Liberty exchanged its remaining Gemstar shares
for 28.8 million additional News Corp. ADSs and recorded an additional loss of
$201 million. In connection with these transactions, the Company agreed to
restrictions on its ability to transfer certain of the ADSs prior to May 2003.
Liberty had previously acquired 51.8 million News Corp. ADSs in 1999 in exchange
for Liberty's 50% interest in Fox/Liberty Networks, and had acquired
28.1 million ADSs for $695 million in cash. At June 30, 2002, Liberty owned
236 million ADSs or approximately 18% of the outstanding equity of News Corp.
Liberty accounts for its investment in News Corp. as an available-for-sale
security.

I-16

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

VIVENDI AND USA INTERACTIVE

As described in note 5, Liberty received 37.4 million Vivendi ordinary
shares (9.5 million of which are subject to transfer restrictions) in exchange
for its investment in USAI and multiThematiques S.A., and Liberty retains an
approximate 22% ownership interest in USA Interactive.

VIACOM

On January 23, 2001, BET Holdings II, Inc. ("BET") was acquired by Viacom in
exchange for shares of Class B common stock of Viacom. As a result of the
merger, Liberty received 15.2 million shares of Viacom's Class B common stock
(less than 1% of Viacom's common equity) in exchange for its 35% ownership
interest in BET, which investment had been accounted for using the equity
method. Liberty accounts for its investment in Viacom as an available-for-sale
security. Liberty recognized a gain of $570 million (before deferred tax expense
of $225 million) in the first quarter of 2001 based upon the difference between
the carrying value of Liberty's interest in BET and the value of the Viacom
securities received.

NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS

During the six months ended June 30, 2002 and 2001, Liberty determined that
certain of its available-for-sale securities and other cost investments
experienced nontemporary declines in value. As a result, the carrying amounts of
such investments were adjusted to their respective fair values. These
adjustments resulted in a total charge of $5,134 million and $604 million,
before deducting a deferred tax benefit of $2,002 million and $239 million,
respectively. Nontemporary declines (before related tax benefit) are comprised
of the following:

EQUITY COLLARS, PUT SPREAD COLLARS, NARROW-BAND COLLARS AND PUT OPTIONS

The Company has entered into equity collars, put spread collars, narrow-band
collars, put options and other financial instruments to manage market risk
associated with its ownership of certain marketable securities. These
instruments are recorded at fair value based on option pricing models. Equity
collars provide the Company with a put option that gives the Company the right
to require the counterparty to purchase a specified number of shares of the
underlying security at a specified price (the "Company Put Price") at a
specified date in the future. Equity collars also provide the counterparty with
a call option that gives the counterparty the right to purchase the same
securities at a specified price at a specified date in the future. The put
option and the call option generally are equally priced at the time of
origination resulting in no cash receipts or payments. The Company's equity
collars are accounted for as fair value hedges. Narrow-band collars are equity
collars in which the put and call prices are set so that the call option has a
relatively higher fair value than the put

I-17

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

option at the time of origination. In these cases the Company receives cash
equal to the difference between such fair values. The Company has not designated
its narrow-band collars as fair value hedges.

Put spread collars provide the Company and the counterparty with put and
call options similar to equity collars. In addition, put spread collars provide
the counterparty with a put option that gives it the right to require the
Company to purchase the underlying securities at a price that is lower than the
Company Put Price. The inclusion of the secondary put option allows the Company
to secure a higher call option price while maintaining net zero cost to enter
into the collar. The Company's put spread collars have not been designated as
fair value hedges.

During the six months ended June 30, 2002, the Company sold put options on
36.1 million shares of AOL Time Warner stock for cash proceeds of $484 million.
The put options have not been designated as fair value hedges and are included
in financial instrument liabilities in the accompanying condensed consolidated
balance sheet.

For derivatives designated either as fair value or cash flow hedges, changes
in the time value of the derivatives are excluded from the assessment of hedge
effectiveness and are recognized in earnings. Hedge ineffectiveness, determined
in accordance with Statement 133, had no impact on earnings for the six months
ended June 30, 2002.

Investments in available-for-sale securities and related derivative
instruments at June 30, 2002 and December 31, 2001 are summarized as follows:

Management estimates that the aggregate fair market value of all of its
investments in available-for-sale securities and other cost investments
approximated their aggregate carrying value at June 30, 2002 and December 31,
2001. Management calculates market values of its other cost

I-18

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

investments using a variety of approaches including multiple of cash flow, per
subscriber value, or a value of comparable public or private businesses. No
independent appraisals were conducted for those assets.

FORWARD FOREIGN EXCHANGE CONTRACTS

Historically, the Company has not hedged the majority of its foreign
currency exchange risk because of the long term nature of its interests in
foreign affiliates. During 2001, the Company entered into a definitive agreement
to acquire six regional cable television systems in Germany. A portion of the
consideration for such acquisition, which has been terminated by mutual
agreement, was to be denominated in euros. In order to reduce its exposure to
changes in the euro exchange rate from the date of the agreement to its expected
closing, Liberty had entered into forward purchase contracts with respect to
euro 3,106 million as of March 31, 2002. Such contracts generally have terms
ranging from 90 to 120 days and can be renewed at their expiration at Liberty's
option. Liberty is not accounting for the forward purchase contracts as hedges.
During the second quarter of 2002, the value of the euro strengthened, and
Liberty settled substantially all of its euro contracts. Realized and unrealized
gains on Liberty's euro contracts aggregated $39 million during the six months
ended June 30, 2002, including unrealized gains of $6 million on its remaining
contracts at June 30, 2002.

The Company has two equity affiliates in Japan. In order to reduce its
foreign currency exchange risk related to anticipated additional capital
contributions to such affiliates, the Company entered into forward sale
contracts with respect to yen 8,952 million during the six months ended
June 30, 2002. These contracts have terms similar to the euro forward purchase
contracts described above. In addition to the forward sale contracts, the
Company entered into collar agreements with respect to yen 18,785 million. These
collar agreements have a term of approximately 2 1/2 years, an average call
price of 110 yen/U.S. dollar and an average put price of 133 yen/U.S. dollar.
Liberty is not accounting for the forward sale contracts or yen collars as
hedges. During the six months ended June 30, 2002, the Company had unrealized
losses of $14 million related to its yen contracts.

TOTAL RETURN DEBT SWAPS

From time to time the Company enters into total return debt swaps in
connection with the purchase of its own or third-party public and private
indebtedness. Under these arrangements, Liberty directs a counterparty to
purchase a specified amount of the underlying debt security for the benefit of
the Company. The Company initially posts collateral with the counterparty equal
to 10% of the value of the purchased securities. The Company earns interest
income based upon the face amount and stated interest rate of the underlying
debt securities, and pays interest expense at market rates on the amount funded
by the counterparty. In the event the fair value of the underlying debt
securities declines more than 10%, the Company is required to post cash
collateral for the decline, and the Company records an unrealized loss on
financial instruments. The cash collateral is further adjusted up or down for
subsequent changes in the fair value of the underlying debt security. Liberty
has the contractual right to net settle the total return debt swaps.
Accordingly, Liberty records these instruments at their net fair market value.

At June 30, 2002, the aggregate purchase price of debt securities underlying
Liberty's total return debt swap arrangements was $263 million, including
$177 million related to purchases of Liberty's Senior Notes and Debentures. As
of such date, the Company had posted cash collateral equal to $43 million. In
the event the fair value of the purchased debt securities were to fall to zero,
the Company would be required to post additional cash collateral of
$220 million.

I-19

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

REALIZED AND UNREALIZED GAINS ON FINANCIAL INSTRUMENTS

Realized and unrealized gains (losses) on financial instruments are
comprised of the following:

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

(1) Comprised primarily of put spread collars and forward foreign exchange
contracts.

(7) LONG-TERM DEBT

Debt is summarized as follows:

SENIOR NOTES AND DEBENTURES

Liberty has issued $750 million of 7 7/8% Senior Notes due 2009,
$500 million of 8 1/2% Senior Debentures due 2029, $1 billion of 8 1/4% Senior
Debentures due 2030, and $237.8 million of 7 3/4% Senior Notes due 2009.
Interest on these issuances is payable semiannually.

I-20

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Senior Notes and Debentures are stated net of an aggregate unamortized
discount of $19 million at June 30, 2002 and $20 million at December 31, 2001,
which is being amortized to interest expense in the condensed consolidated
statements of operations over the term to maturity.

SENIOR EXCHANGEABLE DEBENTURES

In November 1999, Liberty issued $869 million of 4% Senior Exchangeable
Debentures due 2029. Interest is payable on May 15 and November 15 of each year.
Each $1,000 debenture is exchangeable at the holder's option for the value of
22.9486 shares of Sprint PCS Group Stock. After the date Liberty's ownership
level of Sprint PCS Group Stock falls below 10%, Liberty may, at its election,
pay the exchange value in cash, Sprint PCS Group Stock or a combination thereof.
Prior to such time, the exchange value must be paid in cash. Liberty's ownership
in Sprint PCS was 19% at June 30, 2002.

In February and March 2000, Liberty issued an aggregate of $810 million of
3 3/4% Senior Exchangeable Debentures due 2030. Interest is payable on
February 15 and August 15 of each year. Each $1,000 debenture is exchangeable at
the holder's option for the value of 16.7764 shares of Sprint PCS Group Stock.
After the date Liberty's ownership level of Sprint PCS Group Stock falls below
10%, Liberty may, at its election, pay the exchange value in cash, Sprint PCS
Group Stock or a combination thereof. Prior to such time, the exchange value
must be paid in cash.

In January 2001, Liberty issued $600 million of 3 1/2% Senior Exchangeable
Debentures due 2031. Interest is payable on January 15 and July 15 of each year.
Each $1,000 debenture is exchangeable at the holder's option for the value of
36.8189 shares of Motorola common stock. Such exchange value is payable, at
Liberty's option, in cash, Motorola stock or a combination thereof. On or after
January 15, 2006, Liberty, at its option, may redeem the debentures for cash.

In March 2001, Liberty issued $817.7 million of 3 1/4% Senior Exchangeable
Debentures due 2031. Interest is payable on March 15 and September 15 of each
year. Each $1,000 debenture is exchangeable at the holder's option for the value
of 18.5666 shares of Viacom Class B common stock. After January 23, 2003, such
exchange value is payable at Liberty's option in cash, Viacom stock or a
combination thereof. Prior to such date, the exchange value must be paid in
cash. On or after March 15, 2006, Liberty, at its option, may redeem the
debentures for cash.

At maturity, all of the Company's exchangeable debentures are payable in
cash.

In accordance with Statement 133, the call option feature of the
exchangeable debentures is reported separately in the condensed consolidated
balance sheet at fair value. Accordingly, at January 1, 2001, Liberty recorded a
transition adjustment to reflect the call option obligations at fair value
($459 million) and to recognize in net earnings the difference between the fair
value of the call option obligations at issuance and the fair value of the call
option obligations at January 1, 2001. Such adjustment to net earnings
aggregated $757 million (before tax expense of $299 million) and is included in
cumulative effect of accounting change. Changes in the fair value of the call
option obligations subsequent to January 1, 2001 are recognized as unrealized
gains (losses) on financial instruments in Liberty's condensed consolidated
statements of operations.

Under Statement 133, the reported amount of the long-term debt portion of
the exchangeable debentures is calculated as the difference between the face
amount of the debentures and the fair value of the call option feature on the
date of issuance. The fair value of the call option obligations related to the
$1,418 million of exchangeable debentures issued during the three months ended
March 31, 2001, aggregated $1,028 million on the date of issuance. Accordingly,
the long-term debt portion was recorded at $390 million. The long-term debt is
accreted to its face amount over the term of the

I-21

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

debenture using the effective interest method. Such accretion aggregated
$3 million during each of the six month periods ended June 30, 2002 and 2001,
and is included in interest expense.

BANK CREDIT FACILITIES

At June 30, 2002, Liberty's subsidiaries had $1,307 million outstanding and
$441 million in unused lines of credit under their respective bank credit
facilities. Certain assets of Liberty's consolidated subsidiaries serve as
collateral for borrowings under these bank credit facilities. The bank credit
facilities generally contain restrictive covenants which require, among other
things, the maintenance of certain financial ratios, and include limitations on
indebtedness, liens, encumbrances, acquisitions, dispositions, guarantees and
dividends. Additionally, the bank credit facilities require the payment of fees
ranging from .15% to .375% per annum on the average unborrowed portions of the
total commitments.

At June 30, 2002, one subsidiary of Liberty was not in compliance with one
covenant with respect to the ratio of its Senior Debt to cash flow (as defined
in the loan agreement). The subsidiary is in discussions with its banks
regarding the resolution of this default. The outstanding balance of the
subsidiary's bank facility was $94 million at June 30, 2002 all of which is
included in current portion of debt. All other consolidated borrowers were in
compliance with their debt covenants at June 30, 2002. The subsidiaries' ability
to borrow the unused capacity noted above is dependent on their continuing
compliance with their debt covenants.

FAIR VALUE OF DEBT

Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to Liberty
for debt of the same remaining maturities. The fair value of Liberty's publicly
traded debt securities at June 30, 2002 is as follows (amounts in millions):

Senior Notes of parent company.............................. $1,000
Senior Debentures of parent company......................... $1,401
Senior exchangeable debentures of parent company, including
call option obligation.................................... $2,058

Liberty believes that the carrying amount of the remainder of its debt
approximated its fair value at June 30, 2002.

A reconciliation of the carrying value of the Company's debt to the face
amount at maturity is as follows (amounts in millions):

Carrying value at June 30, 2002............................. $5,286
Add:
Unamortized issue discount on Senior Notes and
Debentures.............................................. 19
Unamortized discount attributable to call option feature
of exchangeable debentures.............................. 2,235
------
Face amount at maturity................................. $7,540
======

I-22

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) STOCKHOLDERS' EQUITY

PREFERRED STOCK

Liberty's preferred stock is issuable, from time to time, 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
preferred stock adopted by Liberty's Board of Directors. As of June 30, 2002, no
shares of preferred stock were issued.

COMMON STOCK

The Series A common stock has one vote per share, and the Series B common
stock has ten votes per share. Each share of the Series B common stock is
exchangeable at the option of the holder for one share of Series A common stock.

As of June 30, 2002, there were 49.0 million shares of Liberty Series A
common stock and 27.5 million shares of Liberty Series B common stock reserved
for issuance under exercise privileges of outstanding stock options and
warrants.

PURCHASE OF SERIES A COMMON STOCK

During the six months ended June 30, 2002, the Company purchased
25.7 million shares of its Series A common stock in the open market for
aggregate cash consideration of $281 million. These purchases have been
accounted for as retirements of common stock and have been reflected as a
reduction of stockholders' equity in the accompanying condensed consolidated
balance sheet.

Also during the six months ended June 30, 2002, the Company sold put options
on 5 million shares of its Series A common stock for cash proceeds of
$3.7 million. Put options with respect to 2 million shares expired prior to
June 30, 2002, and the Company net cash settled the contracts for less than
$1 million. The remaining put options expire in the third and fourth quarters of
2002 and have a weighted average strike price of $10.04. The Company accounts
for these put options pursuant to EITF 00-19, "ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN
STOCK" ("EITF 00-19"). The put option contracts meet the requirements of EITF
00-19 for initial classification as equity at fair value. Due to the assumption
of physical settlement and the requirement for the delivery of cash as part of
physical settlement, the cash redemption amount has been reclassified from
equity to "obligation to redeem common stock" in the accompanying condensed
consolidated balance sheet.

TRANSACTIONS WITH OFFICERS AND DIRECTORS

During the six months ended June 30, 2002, the Company reduced the exercise
price of 2.3 million stock options previously granted to three executive
officers from a weighted average exercise price of $21.66 to $14.70. As a result
of such repricing, these options are now accounted for as variable plan awards.

Effective February 28, 2001 (the "Effective Date"), the Company restructured
the options and options with tandem SARs to purchase AT&T common stock and AT&T
Liberty Media Group tracking stock (collectively the "Restructured Options")
held by certain executive officers of the Company. Pursuant to such
restructuring, all Restructured Options became exercisable on the Effective
Date, and each executive officer was given the choice to exercise all of his
Restructured Options. Each executive officer who opted to exercise his
Restructured Options received consideration equal to the excess of the closing
price of the subject securities on the Effective Date over the exercise price.
The exercising

I-23

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

officers received (i) a combination of cash and AT&T Liberty Media Group
tracking stock for Restructured Options that were vested prior to the Effective
Date and (ii) cash for Restructured Options that were previously unvested. The
executive officers used the cash proceeds from the previously unvested options
to purchase in the aggregate, 2 million restricted shares of AT&T Liberty Media
Group tracking stock. Such restricted shares are subject to forfeiture upon
termination of employment. The forfeiture obligation will lapse according to a
schedule that corresponds to the vesting schedule applicable to the previously
unvested options.

In addition, each executive officer was granted free-standing SARs equal to
the total number of Restructured Options exercised. The free-standing SARs were
tied to the value of AT&T Liberty Media Group tracking stock and will vest as to
30% in year one and 17.5% in years two through five. Upon completion of the
Split Off Transaction, the free-standing SARs automatically converted to options
without tandem SARs to purchase Liberty common stock. Prior to the Effective
Date, the Restructured Options were accounted for using variable plan accounting
pursuant to APB Opinion No. 25. Accordingly, the above-described transaction did
not have a significant impact on Liberty's results of operations.

During the first quarter of 2000, an executive officer of Liberty Digital, a
subsidiary of Liberty, exercised certain of his stock options with tandem stock
appreciation rights that had been granted by Liberty Digital. In order to
satisfy Liberty Digital's obligations under the stock option agreement, Liberty
Digital and Liberty offered to provide, and the executive agreed to accept, a
combination of cash and AT&T Liberty Media Group tracking stock in lieu of a
cash payment. Accordingly, Liberty paid cash of $50 million and caused AT&T to
issue 5.8 million shares to the executive officer in the first quarter of 2001.

During the second quarter of 2001, Liberty purchased 2,245,155 shares of
common stock of On Command Corporation ("On Command"), a consolidated subsidiary
of Liberty, from an executive officer and director of On Command, who is also a
director of Liberty, for aggregate cash consideration of $25.2 million. Such
purchase price represents a per share price of $11.22. The closing market price
for On Command common stock on the day the transaction was effective was $7.77.
The Company has included the difference between the aggregate market value of
the shares purchased and the cash consideration paid in selling, general and
administrative expenses in the accompanying condensed consolidated statement of
operations.

(9) TRANSACTIONS WITH RELATED PARTIES

Pramer S.C.A., a consolidated subsidiary of Liberty, provides uplink
services and programming to two equity affiliates, Cablevision S.A. and Torneos
y Competencias S.A. Total revenue for such services aggregated $8 million and
$9 million for the six months ended June 30, 2002 and 2001, respectively.

Certain subsidiaries of Liberty produce and/or distribute programming and
other services to cable distribution operators (including AT&T) and others.
Charges to AT&T are based upon customary rates charged to others. Amounts
included in revenue for services provided to AT&T were $181 million for the six
months ended June 30, 2001.

Prior to the Split Off Transaction, AT&T allocated certain corporate general
and administrative costs to Liberty pursuant to an intergroup agreement.
Management believes such allocation methods were reasonable. In addition, there
are arrangements between subsidiaries of Liberty and AT&T and its other
subsidiaries for satellite transponder services, marketing support, programming,
and hosting services. These expenses aggregated $17 million for the six months
ended June 30, 2001.

I-24

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(10) COMMITMENTS AND CONTINGENCIES

Starz Encore Group LLC, ("Starz Encore Group") a wholly owned subsidiary of
Liberty, provides premium programming distributed by cable, direct satellite,
TVRO and other distributors throughout the United States. Starz Encore Group is
obligated to pay fees for the rights to exhibit certain films that are released
by various producers through 2014 (the "Film Licensing Obligations"). The
aggregate amount of the Film Licensing Obligations under these license
agreements is not currently estimable because such amount is dependent upon the
number of qualifying films released theatrically by certain motion picture
studios as well as the domestic theatrical exhibition receipts upon the release
of such qualifying films. Nevertheless, required aggregate payments under the
Film Licensing Obligations could prove to be significant. Total film rights
expense aggregated $182 million and $162 million for the six months ended
June 30, 2002 and 2001, respectively. Starz Encore Group's estimate of the
future minimum obligation related to the Film Licensing Obligations is as
follows (amounts in millions):

Remainder of 2002........................................... $180
2003........................................................ 355
2004........................................................ 182
2005........................................................ 93
2006........................................................ 104
Thereafter.................................................. 386

At June 30, 2002, Liberty has guaranteed $473 million of the bank debt of
Jupiter, an equity affiliate that provides broadband services in Japan.
Substantially all of the debt related to such guaranteed amount is due and
payable by Jupiter in September 2002. Jupiter is currently negotiating the
refinancing of substantially all of its long-term and short-term debt. Liberty
anticipates that it and the other Jupiter shareholders will make loans or equity
contributions to Jupiter in connection with such refinancing, and that Liberty's
share of such equity contributions will be approximately $467 million (of which
$305 million has been contributed as of June 30, 2002). Upon such refinancing,
Liberty anticipates that the majority of its guarantee of Jupiter debt would be
cancelled.

Liberty has also guaranteed various loans, notes payable, letters of credit
and other obligations (the "Guaranteed Obligations") of certain other
affiliates. At June 30, 2002, the Guaranteed Obligations aggregated
approximately $172 million. Currently, Liberty is not certain of the likelihood
of being required to perform under such guarantees.

Liberty leases business offices, has entered into pole rental and
transponder lease agreements and uses certain equipment under lease
arrangements.

Starz Encore Group entered into a 25-year affiliation agreement in 1997 with
TCI. TCI cable systems subsequently acquired by AT&T in the TCI merger operate
under the name AT&T Broadband. Under this affiliation agreement, AT&T Broadband
makes fixed monthly payments to Starz Encore Group in exchange for unlimited
access to all of the existing Encore and STARZ! services. The payment from AT&T
Broadband can be adjusted if AT&T acquires or disposes of cable systems. The
affiliation agreement further provides that to the extent Starz Encore Group's
programming costs increase above or decrease below amounts specified in the
agreement, then AT&T Broadband's payments under the affiliation agreement will
be increased or decreased in an amount equal to a proportion of the excess or
shortfall. Starz Encore Group requested payment from AT&T Broadband of its
proportionate share of excess programming costs during the first quarter of
2001. Excess programming costs payable by AT&T Broadband could be significantly
larger in future years.

By letter dated May 29, 2001, AT&T Broadband has disputed the enforceability
of the excess programming costs pass through provisions of the affiliation
agreement and questioned whether the

I-25

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

affiliation agreement, as a whole, is "voidable." In addition, AT&T Broadband
raised certain issues concerning interpretations of the contractual requirements
associated with the treatment of acquisitions and dispositions. Starz Encore
Group believes the position expressed by AT&T Broadband to be without merit. On
July 10, 2001, Starz Encore Group initiated a lawsuit against AT&T Broadband and
Satellite Services, Inc., a subsidiary of AT&T Broadband that is also a party to
the affiliation agreement, in Arapahoe County District Court, Colorado for
breach of contract. Starz Encore Group is seeking a judgment of specific
performance of the contract, damages and costs.

On October 19, 2001, Starz Encore Group entered into a standstill and
tolling agreement whereby the parties agreed to move the court to stay the
lawsuit until August 31, 2002 to permit the parties an opportunity to resolve
their dispute. This agreement provides that either party may unilaterally
petition the court to lift the stay after April 30, 2002 and proceed with the
litigation. The court granted the stay on October 30, 2001. In conjunction with
this agreement, AT&T Broadband and the Company entered into various agreements
whereby Starz Encore Group indirectly received payment for AT&T Broadband's
proportionate share of the programming costs pass through for 2001.

AT&T, as the successor to TCI, is the subject of an Internal Revenue Service
("IRS") audit for the 1993-1995 tax years. The IRS has notified AT&T and Liberty
that it is considering proposing income adjustments and assessing certain
penalties in connection with TCI's 1994 tax return. The IRS's position could
result in recognition of up to approximately $305 million of additional income,
resulting in as much as $107 million of additional tax liability, plus interest.
In addition, the IRS may assert certain penalties. AT&T and Liberty do not agree
with the IRS's proposed adjustments and penalties, and AT&T and Liberty intend
to vigorously defend their position. Pursuant to the AT&T Tax Sharing Agreement,
Liberty may be obligated to reimburse AT&T for any tax that AT&T is ultimately
assessed as a result of this audit. Liberty is currently unable to estimate a
range of any such reimbursement, but believes that any such reimbursement would
not be material to its financial position.

Liberty has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is reasonably
possible Liberty 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 condensed
consolidated financial statements.

(11) INFORMATION ABOUT LIBERTY'S OPERATING SEGMENTS

Liberty is a holding company with a variety of subsidiaries and investments
operating in the media, communications and entertainment industries. Each of
these businesses is separately managed. Liberty identifies its reportable
segments as those consolidated subsidiaries that represent 10% or more of its
consolidated revenue and those equity method affiliates whose share of earnings
or losses represent 10% or more of Liberty's pre-tax earnings or loss.
Subsidiaries and affiliates not meeting this threshold are aggregated for
segment reporting purposes. The segment presentation for prior periods has been
conformed to correspond to the current period segment presentation.

For the six months ended June 30, 2002, Liberty had four operating segments:
Starz Encore Group, Liberty Livewire, On Command and Other. Starz Encore Group
provides premium programming distributed by cable, direct-to-home satellite and
other distributors throughout the United States and is wholly owned and
consolidated by Liberty. Liberty Livewire provides sound, video and ancillary
post production and distribution services to the motion picture and television
industries in the United States and Europe and is majority owned and
consolidated by Liberty. On Command provides in-room, on-demand video
entertainment and information services to hotels, motels and resorts and is

I-26

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

majority owned and consolidated by Liberty. Other includes Liberty's
non-consolidated investments, corporate and other consolidated businesses not
representing separately reportable segments.

The accounting policies of the segments that are also consolidated
subsidiaries are the same as those described in Liberty's summary of significant
accounting policies. Liberty evaluates performance based on the financial
measures of revenue and operating cash flow (as defined by Liberty),
appreciation in stock price and non-financial measures such as average prime
time rating, prime time audience delivery, subscriber growth and penetration, as
appropriate. Liberty believes operating cash flow is a widely used financial
measure of companies similar to Liberty and its affiliates, which should be
considered in addition to, but not as a substitute for, operating income, net
income, cash provided by operating activities and other measures of financial
performance prepared in accordance with generally accepted accounting
principles. Liberty generally accounts for intersegment sales and transfers as
if the sales or transfers were to third parties, that is, at current prices.

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

Liberty utilizes the following financial information for purposes of
allocating resources to a segment and assessing a segment's performance:

I-27

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table provides a reconciliation of segment operating cash flow
to loss before income taxes and minority interest:

I-28

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. To the extent that such statements are not
recitations of historical fact, such statements constitute forward-looking
statements which, by definition, involve risks and uncertainties. Where, in any
forward-looking statement, the Company expresses an expectation or belief as to
future results or events, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual
results or events to differ materially from those anticipated:

- 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 it has interests, operate;

- uncertainties inherent in new business strategies, new product launches
and development plans;

- rapid technological changes;

- the acquisition, development and/or financing of telecommunications
networks and services;

- the development and provision of programming for new television and
telecommunications technologies;

- future financial performance, including availability, terms and deployment
of capital;

- the ability of vendors to deliver required equipment, software and
services;

- availability of qualified personnel;

- changes in, or failure or inability to comply with, government
regulations, including, without limitation, regulations of the Federal
Communications Commission, 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 it has interests, and the
overall market acceptance of such products and services.

These forward-looking statements and such risks, uncertainties and other
factors speak only as of the date of this Quarterly Report, and Liberty
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein, to reflect any
change in our expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based.

GENERAL

The following discussion and analysis provides information concerning
Liberty's results of operations and financial condition. This discussion should
be read in conjunction with Liberty's accompanying condensed consolidated
financial statements and the notes thereto, as well as Liberty's Annual Report
on Form 10-K for the year ended December 31, 2001.

Liberty's domestic subsidiaries generally operate or hold interests in
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. In
addition, certain of Liberty's subsidiaries hold interests in technology and
Internet businesses, as well as

I-29

interests in businesses engaged in wireless telephony, electronic retailing,
direct marketing and advertising sales relating to programming services,
infomercials and transaction processing. Liberty also has significant interests
in foreign affiliates, which operate in cable television, programming and
satellite distribution.

Liberty's most significant consolidated subsidiaries at June 30, 2002, were
Starz Encore Group LLC, Liberty Livewire Corporation and On Command Corporation.
These businesses are either wholly or majority owned and are controlled by
Liberty and, accordingly, the results of operations of these businesses are
included in the consolidated results of Liberty for the periods in which they
were wholly or majority owned and controlled.

A significant portion of Liberty's operations are conducted through entities
in which Liberty does not have a controlling financial interest but does have
the ability to exercise significant influence over the operating and financial
policies of the investee. These businesses are accounted for using the equity
method of accounting. Accordingly, Liberty's share of the results of operations
of these businesses is reflected in the consolidated results of Liberty as
earnings or losses of affiliates. Included in Liberty's investments in
affiliates at June 30, 2002 were Discovery Communications, Inc., QVC Inc.,
UnitedGlobalCom, Inc. and Jupiter Telecommunications Co., Ltd.

Liberty holds interests in companies in which it does not have significant
influence. The most significant of these include AOL Time Warner Inc., Sprint
Corporation, The News Corporation Limited, Vivendi Universal, S.A., USA
Interactive, Viacom, Inc. and Motorola Inc. which are classified as
available-for-sale securities and are carried at fair value. Realized gains and
losses on disposition are determined on an average cost basis.

Prior to the Split Off Transaction, AT&T owned all the outstanding shares of
Class A Common Stock, Class B Common Stock and Class C Common Stock of Liberty.
On August 9, 2001, Liberty increased its authorized capital stock, and the
Liberty Class A and Class B Common Stock was reclassified as Series A Liberty
Media Corporation common stock and the Class C Common Stock was reclassified as
Series B Liberty Media Corporation common stock. Effective August 10, 2001, AT&T
effected the split off of Liberty from AT&T by means of a redemption of AT&T
Liberty Media Group tracking stock. In the Split Off Transaction, each share of
Class A and Class B AT&T Liberty Media Group tracking stock was exchanged for
one share of Series A common stock and Series B common stock, respectively. Upon
completion of the Split Off Transaction, Liberty ceased to be a subsidiary of
AT&T, and no shares of AT&T Liberty Media Group tracking stock remain
outstanding. The Split Off Transaction has been accounted for at historical
cost.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Starz Encore Group provides premium programming distributed by cable,
direct-to-home satellite and other distribution media throughout the United
States. Liberty Livewire provides sound, video and ancillary post-production and
distribution services to the motion picture and television industries
principally in the United States and Europe. On Command provides in-room,
on-demand video entertainment and information services to hotels, motels and
resorts primarily in the United States. Due to the significance of their
operations and to enhance the reader's understanding, separate financial data
has been provided below for Starz Encore Group, Liberty Livewire and On Command.
Included in the other category are Liberty's other consolidated subsidiaries and
corporate expenses. Liberty's other consolidated subsidiaries include DMX Music,
True Position, Pramer S.C.A. and Liberty Cablevision of Puerto Rico. Liberty
Digital is principally engaged in programming, distributing and marketing
digital and analog music services to homes and businesses. Pramer is an owner
and distributor of cable programming services primarily in Argentina. Liberty
Cablevision of Puerto Rico provides cable television and other broadband
services in Puerto Rico. Liberty holds significant equity investments, the
results of which are not a component of operating income, but are discussed
below

I-30

under "Investments in Affiliates Accounted for Using the Equity Method." Other
items of significance are discussed separately below.

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

(a) Not meaningful.

I-31

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

(a) Not meaningful.

Certain of the Company's consolidated subsidiaries and equity affiliates
(the "Programming Affiliates") are dependent on the entertainment industry for
entertainment, educational and informational programming. In addition, a
significant portion of certain of the Programming Affiliates' revenue is
generated by the sale of advertising on their networks. The prolonged downturn
in the economy has had and could continue to have a negative impact on the
revenue and operating income of the Programming Affiliates. Such an event could
reduce the development of new television and motion picture programming, thereby
adversely impacting the Programming Affiliates' supply of service offerings. In
addition, a soft economy could reduce consumer disposable income and consumer
demand for the products and services of the Programming Affiliates.

Liberty has one consolidated subsidiary (Pramer) and two equity affiliates
(Torneos y Competencias S.A. and Cablevision S.A.) located in Argentina. While
Argentina has been in a recession for the past four years, the Argentine
government has historically maintained an exchange rate of one Argentine peso to
one U.S. dollar (the "peg rate"). Due to worsening economic and political
conditions in late 2001, the Argentine government eliminated the peg rate
effective January 11, 2002. The value of the Argentine peso dropped
significantly on the day the peg rate was eliminated and has dropped further
since that date. In addition, the Argentine government placed restrictions on
the payment of obligations to foreign creditors. While Liberty cannot predict
what future impact these economic events will have on its Argentine businesses,
it notes that during 2001 and the first half of

I-32

2002 these businesses experienced significant adverse effects as customers began
extending payments and lenders began tightening credit criteria. See additional
discussion below.

CONSOLIDATED SUBSIDIARIES

STARZ ENCORE GROUP. The majority of Starz Encore Group's revenue is derived
from the delivery of movies to subscribers under affiliation agreements with
cable operators and satellite direct-to-home distributors. In 1997, Starz Encore
Group entered into a 25-year affiliation agreement with TCI. TCI cable systems
were subsequently acquired by AT&T and operate under the name AT&T Broadband.
Under this affiliation agreement, AT&T Broadband makes fixed monthly payments to
Starz Encore Group in exchange for unlimited access to all of the existing
Encore and STARZ! services. The payment from AT&T Broadband can be adjusted, in
certain instances, if AT&T acquires or disposes of cable systems or if Starz
Encore Group's programming costs increase above certain specified levels. Starz
Encore Group's affiliation agreements with other distributors generally provide
for payments based on the number of subscribers that receive Starz Encore
Group's services.

By letter dated May 29, 2001, AT&T Broadband has disputed the enforceability
of the excess programming costs pass through provisions of the affiliation
agreement and questioned whether the affiliation agreement, as a whole, is
"voidable." In addition, AT&T Broadband raised certain issues concerning the
interpretation of the contractual requirements associated with the treatment of
acquisitions and dispositions. Starz Encore Group believes the position
expressed by AT&T Broadband to be without merit. On July 10, 2001, Starz Encore
Group initiated a lawsuit against AT&T Broadband and Satellite Services, Inc., a
subsidiary of AT&T Broadband that is also a party to the affiliation agreement,
for breach of contract and collection of damages and costs.

On October 19, 2001, Starz Encore Group entered into a standstill and
tolling agreement whereby the parties agreed to move the court to stay the
lawsuit until August 31, 2002 to permit the parties an opportunity to resolve
their dispute. This agreement provides that either party may unilaterally
petition the court to lift the stay after April 30, 2002 and proceed with the
litigation. The court granted the stay on October 30, 2001. In conjunction with
this agreement, AT&T Broadband and Liberty entered into various agreements
whereby Starz Encore Group indirectly received payment for AT&T Broadband's
proportionate share of the programming costs pass through for 2001.

Starz Encore Group's revenue increased 11% and 12% for the three and six
months ended June 30, 2002, respectively, as compared to the corresponding prior
year periods. Such increases are primarily due to 25% and 26% increases in
average subscription units from all forms of distribution. Subscription units
grew at a faster rate than revenue primarily due to a disproportionate increase
in units of Thematic Multiplex channels, which have lower subscription fee rates
than other channels.

Starz Encore Group's subscription units at December 31, 2001 and June 30,
2002 are as follows:

At June 30, 2002, cable, DBS, and other distribution represented 61%, 38%
and 1%, respectively, of Starz Encore Group's total subscription units. AT&T
Broadband and DirecTV customers generated 27% and 22%, respectively, of Starz
Encore Group's revenue for the six months ended June 30, 2002.

I-33

Starz Encore Group's operating, selling, general and administrative expenses
increased 13% and 10% for the three and six months ended June 30, 2002,
respectively, as compared to the corresponding periods in 2001. Such increases
are primarily due to an increase in programming license fees and bad debt
expense of $10 million related to the bankruptcy filing of Adelphia
Communications Corporation.

Effective January 1, 2002, Liberty and its subsidiaries, including Starz
Encore Group, adopted Statement 142. Statement 142 provides that goodwill and
indefinite lived intangibles are no longer amortized, but are evaluated
periodically for impairment. The decrease in Starz Encore Group's depreciation
and amortization is due to the adoption of Statement 142.

LIBERTY LIVEWIRE. Liberty Livewire's revenue decreased 12% and 13% for the
three and six months ended June 30, 2002, respectively, as increases due to
acquisitions in the second half of 2001 were more than offset by decreases due
to reduced television and motion picture activity and lower television
advertising spending.

Liberty Livewire's operating, selling general and administrative expenses
decreased 3% and 6% for the three and six months ended June 30, 2002,
respectively, as compared to the corresponding prior year periods. Such
decreases are due to 15% and 13% decreases in variable expenses such as
personnel and material costs. General and administrative expenses were
relatively comparable over the 2001 and 2002 periods.

The decrease in Liberty Livewire's depreciation and amortization is due
primarily to the adoption of Statement 142 and the resulting elimination of
goodwill amortization.

ON COMMAND. Revenue decreased 3% and 6% for the three and six months ended
June 30, 2002, respectively, as compared to the corresponding periods in 2001.
Such decreases are due primarily to an overall decrease in occupancy rates in
the hotel industry and a reduction in average rooms served by On Command. Such
decreases were partially offset by an increase in average revenue per room in
2002.

On Command's operating, selling, general and administrative expenses
decreased 23% and 20% for the three and six months ended June 30, 2002,
respectively, as compared to the corresponding periods in 2001. Such decreases
are due to (i) a decrease in repair, maintenance and support expenses that vary
with the number of rooms served and (ii) a decrease in research and development
and selling, general and administrative expenses due to cost cutting measures
instituted in the second half of 2001. In addition, On Command incurred
$8 million and $11 million of restructuring and relocation expenses during the
three and six months ended June 30, 2001, respectively.

OTHER. Included in this information are the results of Liberty's other
consolidated subsidiaries and corporate expenses.

Revenue decreased 8% and less than 1% for the three and six months ended
June 30, 2002, respectively, as compared to the corresponding periods in 2001.
Such decreases are due primarily to (i) a decrease in Pramer's revenue due to
the devaluation of the Argentine peso and the recessionary conditions in
Argentina and (ii) the transfer of Ascent Network Services to Liberty Livewire
in September 2001. These decreases were partially offset by revenue growth at
Liberty Digital resulting from the acquisition of AEI Music Network, Inc.
("AEI") in May 2001.

Operating, selling, general and administrative expenses increased 12% and 5%
for the three and six months ended June 30, 2002, respectively, as compared to
the same periods in 2001. These increases are due primarily to an increase in
Liberty Digital's expenses due to the acquisition of AEI and accruals for music
royalty fees. These increases were partially offset by a decrease in Pramer's
expenses due to economic conditions in Argentina.

I-34

The amount of expense associated with stock compensation is generally based
on the vesting of the related stock options and stock appreciation rights and
the market price of the underlying common stock. The amount reflected in the
table is based on the market price of the underlying common stock as of the date
of the financial statements and is subject to future adjustment based on market
price fluctuations and, ultimately, on the final determination of market value
when the rights are exercised.

Depreciation and amortization decreased due to the adoption of Statement 142
and the resulting elimination of goodwill amortization.

OTHER INCOME AND EXPENSE

INTEREST EXPENSE. Interest expense decreased 20% for the six months ended
June 30, 2002, as compared to the corresponding prior year period. Such decrease
is due to a lower average debt balance in 2002, as compared to 2001, and lower
interest rates on certain subsidiary debt.

DIVIDEND AND INTEREST INCOME. Dividend and interest income for each of the
six month periods ended June 30, 2002 and 2001 was $120 million. Interest and
dividend income for the six months ended June 30, 2002 was comprised of interest
income earned on invested cash ($25 million), dividends on Vivendi common stock
($29 million), dividends on News Corp. ADSs ($16 million), dividends on ABC
Family Worldwide preferred stock ($15 million) and other ($35 million).

INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD. Liberty's
share of losses of affiliates for the six months ended June 30, 2002 and 2001
was $244 million and $2,547 million, respectively. A summary of Liberty's share
of earnings (losses) of affiliates, including excess basis amortization and
nontemporary declines in value, is presented below:

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

* No longer an equity affiliate

At June 30, 2002, the aggregate carrying amount of Liberty's investments in
its affiliates exceeded Liberty's proportionate share of its affiliates' net
assets by $8,762 million. Prior to the adoption of Statement 142, such excess
was being amortized over estimated useful lives of up to 20 years based upon the
useful lives of the intangible assets represented by such excess costs.
Amortization aggregating $520 million for the six months ended June 30, 2001 is
included in share of losses of affiliates. Upon adoption of Statement 142,
Liberty discontinued amortizing equity method excess costs in existence at the
adoption date due to their characterization as equity method goodwill. Any
calculated excess costs on investments made after January 1, 2002 will be
allocated on an estimated fair value basis to the

I-35

underlying assets and liabilities of the investee. Amounts allocated to assets
other than indefinite lived intangible assets will be amortized over their
estimated useful lives. Unless otherwise noted below, the change in share of
earnings (losses) of affiliates from 2001 to 2002 is due primarily to the
elimination of excess basis amortization in 2002. Liberty expects to continue to
record share of losses in its affiliates for the foreseeable future.

DISCOVERY. Exclusive of the effects of excess basis amortization, Liberty's
share of losses of Discovery decreased from $63 million in 2001 to $25 million
in 2002. Such decrease is due to improved operating income, which resulted from
a decrease in operating expenses. Discovery's revenue was relatively comparable
over the 2001 and 2002 periods as increases in affiliate revenue offset
decreases in advertising revenue.

QVC. Exclusive of the effects of excess basis amortization, Liberty's share
of earnings of QVC increased from $60 million in 2001 to $72 million in 2002.
Such increase is due to increased revenue and operating margins.

UNITEDGLOBALCOM. Liberty's share of UnitedGlobalCom's net loss included
excess basis amortization of $25 million for the six months ended June 30, 2001.
Excluding the effects of excess basis amortization, Liberty's share of
UnitedGlobalCom's net loss decreased from $148 million in 2001 to $60 million in
2002. Such decrease is due to decreases in UGC's net loss related to
(i) increased foreign currency gains, (ii) improved operating margins in 2002
due to cost control measures, (iii) impairment and restructuring charges
recorded in 2001, (iv) lower amortization in 2002 due to the implementation of
Statement 142, and (v) lower interest expense in 2002 due to the extinguishment
of certain of its debt.

USAI. Prior to May 7, 2002, USAI owned and operated businesses in
television production, electronic retailing, ticketing operations, and internet
services. Liberty held 74.4 million shares of USAI's common stock and shares and
other equity interests in certain subsidiaries of USAI that were exchangeable
for an aggregate of 79.0 million shares of USAI common stock.

On May 7, 2002, Liberty, USAI and Vivendi consummated a series of
transactions. Upon consummation of these transactions, USAI contributed
substantially all of its entertainment assets to Vivendi Universal
Entertainment, a partnership controlled by Vivendi, in exchange for cash and
common and preferred interests in VUE. In connection with these transactions,
Liberty entered into a separate agreement with Vivendi, pursuant to which
Vivendi acquired from Liberty 25 million shares of common stock of USAI,
approximately 38.7 million shares of USANi LLC, which are exchangeable, on a
one-for-one basis, for shares of USAI common stock, and all of Liberty's
approximate 30% interest in multiThematiques S.A., together with certain
liabilities with respect thereto, in exchange for 37.4 million Vivendi ordinary
shares, which at the date of the transaction had an aggregate fair value of
$1,013 million. In connection with this transaction, Liberty agreed to
restrictions on its ability to transfer 9.5 million of such shares prior to
November 2003. Liberty recognized a loss of $814 million in the second quarter
of 2002 based on the difference between the fair value of the Vivendi shares
received and the carrying value of the assets relinquished including goodwill of
$514 million which is allocable to the reporting unit holding the USAI
interests. Liberty owns approximately 3% of Vivendi and accounts for such
investment as an available-for-sale security.

Subsequent to the Vivendi transaction with USAI, USAI was renamed USA
Interactive, and Liberty owns approximately 89.7 million shares or 22% of USA
Interactive. Due to certain governance arrangements which limit its ability to
exert significant influence over USA Interactive, Liberty accounts for such
investment as an available-for-sale security. Prior to the Vivendi transaction,
Liberty accounted for its investment in USAI using the equity method. Share of
earnings in 2002 are for the period through May 7, 2002.

I-36

JUPITER. Exclusive of the effects of excess basis amortization, Liberty's
share of Jupiter's losses decreased from $40 million in 2001 to $14 million in
2002. Such decrease is due to increased revenue and operating margins, which
translated to a reduced net loss in 2002.

TELEWEST. Liberty's share of Telewest's net loss included excess basis
amortization of $98 million and a nontemporary decline in value of
$1,403 million in 2001. Excluding the effects of the excess basis amortization
and the nontemporary decline in value, Liberty's share of Telewest's net loss
decreased from $148 million to $68 million due to a $348 million decrease in
Telewest's net loss. Telewest's net loss decreased due to (1) the adoption of
Statement 142 and the corresponding elimination of goodwill amortization,
(2) lower foreign currency transaction losses and (3) higher operating margins.

LOSSES ON DISPOSITIONS. Aggregate net losses from dispositions during the
six months ended June 30, 2002 and 2001 were $397 million and $58 million,
respectively. The following table provides information regarding significant
components of gains (losses) from dispositions.

See notes 5 and 6 to the accompanying condensed consolidated financial
statements for a discussion of the foregoing transactions.

REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS. Realized
and unrealized gains (losses) on financial instruments are comprised of the
following:

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

(1) Comprised primarily of put spread collars and forward foreign exchange
contracts.

NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS. During the six months
ended June 30, 2002 and 2001, Liberty determined that certain of its other
investments experienced nontemporary declines in

I-37

value. As a result, the carrying amounts of such investments were adjusted to
their respective fair values. These adjustments resulted in a total charge of
$5,134 million and $604 million, before deducting a deferred tax benefit of
$2,002 million and $239 million, respectively. Nontemporary declines (before
related tax benefit) are comprised of the following:

CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Liberty and its subsidiaries
adopted Statement 142 effective January 1, 2002. Upon adoption, the Company
determined that the carrying value of certain of its reporting units (including
allocated goodwill) was not recoverable. Accordingly, the Company recorded an
impairment loss of $1,778 million, net of related taxes, as the cumulative
effect of a change in accounting principle for the six months ended June 30,
2002. This transitional impairment loss includes an adjustment of $37 million
for the Company's proportionate share of transition adjustments that its equity
method affiliates have recorded. As certain affiliates have not completed their
Statement 142 analysis, Liberty may record additional transition impairment
losses in the future. The Company recorded a $545 million increase in net
earnings, net of related taxes, for the six months ended June 30, 2001 in
connection with the adoption of Statement 133. See note 2 to the accompanying
condensed consolidated financial statements.

MATERIAL CHANGES IN FINANCIAL CONDITION

Although Liberty's sources of funds include its available cash balances, net
cash from operating activities, dividend and interest receipts, and proceeds
from asset sales, Liberty is primarily dependent upon its financing activities
to generate sufficient cash resources to meet its future cash requirements and
planned commitments. Liberty's borrowings of debt aggregated $177 million and
$2,219 million for the six months ended June 30, 2002 and 2001, respectively.
Due to covenant restrictions in the bank credit facilities of its subsidiaries,
Liberty is generally not entitled to the cash resources or cash generated by
operations of its subsidiaries and business affiliates.

Liberty's primary uses of cash in recent years have been investments in and
advances to affiliates and acquisitions of consolidated subsidiaries. In this
regard, Liberty's investments in and advances to cost and equity method
affiliates aggregated $371 million and $684 million, respectively, for the six
months ended June 30, 2002 and $1,037 million and $831 million, respectively,
for the six months ended June 30, 2001. In addition, Liberty made debt
repayments of $790 million and $166 million during the six months ended
June 30, 2002 and 2001, respectively. Liberty also acquired shares pursuant to a
previously authorized share buy back program in 2002. During the six months
ended June 30, 2002, Liberty purchased 25.7 million shares of its Series A
common stock in the open market for $281 million.

Liberty anticipates that it will continue to fund its existing ventures as
they develop and expand their businesses, and that such investments and advances
to affiliates will aggregate up to $500 million in the second half of 2002. In
addition, Liberty has entered into agreements to purchase controlling interests
in several cable and interactive television entities for an aggregate purchase
price of

I-38

approximately $1,100 million. Although Liberty may invest amounts in additional
new or existing ventures in 2002, it is unable to quantify such investments at
this time. In addition, Liberty has $1,119 million of debt that is required to
be repaid or refinanced before June 30, 2003. Liberty intends to fund such
investing and financing activities with a combination of available cash and
short term investments, borrowings under existing credit facilities,
monetization of existing marketable securities, proceeds from the sale of
assets, and the issuance of debt and equity securities. In this regard, during
the six months ended June 30, 2002, Liberty received cash proceeds of
$423 million upon settlement of equity collars related to its Sprint PCS
position, cash proceeds of $484 million from the sale of put options on its AOL
Time Warner position and cash proceeds of $679 million from the sale of its
investment in Telemundo Communications Group.

At June 30, 2002, Liberty's consolidated subsidiaries had $1,307 million
outstanding and $441 million in unused availability under their respective bank
credit facilities. Certain assets of Liberty's consolidated subsidiaries serve
as collateral for borrowings under these bank credit facilities. Also, these
bank credit facilities contain provisions which limit additional indebtedness,
sale of assets, liens, guarantees, and distributions by the borrowers. At
June 30, 2002, one subsidiary of Liberty was not in compliance with one covenant
with respect to the ratio of its Senior Debt to cash flow (as defined in the
loan agreement). The subsidiary is in discussions with its banks regarding the
resolution of this default. The outstanding balance of the subsidiary's bank
facility was $94 million at June 30, 2002. All other consolidated subsidiaries
were in compliance with their debt covenants at June 30, 2002. The subsidiaries'
ability to borrow the unused capacity noted above is dependent on their
continuing compliance with their debt covenants.

Although On Command expects to be in compliance with the covenants of its
bank credit facility through December 31, 2002, On Command currently believes
that it will not be in compliance with the leverage ratio covenant as of
March 31, 2002 as a result of certain changes to such covenant that take effect
for the periods ending subsequent to 2002. On Command intends to seek an
amendment to its bank credit facility that would allow On Command to maintain
compliance with this covenant. Although no assurance can be given, On Command
believes that it will be successful in obtaining such an amendment on acceptable
terms to On Command. In the event On Command is unable to obtain an acceptable
amendment to its bank credit facility, On Command would seek to refinance its
bank credit facility with alternative sources of financing. No assurance can be
given that any such alternative financing would be available on terms acceptable
to On Command.

Based on currently available information and expected future transactions,
Liberty expects to receive approximately $190 million in dividend and interest
income during the year ended December 31, 2002. Based on current debt levels and
current interest rates, Liberty expects to make interest payments of
approximately $400 million during the year ended December 31, 2002.

Various partnerships and other affiliates of Liberty 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. Notwithstanding the foregoing, certain
of Liberty's affiliates may require additional capital to finance their
operating or investing activities. In addition, Liberty is party to stockholder
and partnership agreements that provide for possible capital calls on
stockholders and partners. In the event Liberty's affiliates require additional
financing and Liberty fails to meet a capital call, or other commitment to
provide capital or loans to a particular company, such failure may have adverse
consequences to Liberty. These consequences may include, among others, the
dilution of Liberty's equity interest in that company, the forfeiture of its
right to vote or exercise other rights, the right of the other stockholders or
partners to force Liberty to sell its interest at less than fair value, the
forced dissolution of the company to which Liberty has made the commitment or,
in some instances, a breach of contract action for damages against Liberty.
Liberty's ability to meet capital calls or other capital or loan commitments is
subject to its ability to access cash.

I-39

Pursuant to a proposed final judgment agreed to by TCI, AT&T and the United
States Department of Justice on December 30, 1998, Liberty transferred all of
its beneficially owned securities of Sprint PCS to a trustee prior to the AT&T
merger. The Final Judgment, which was entered by the United States District
Court for the District of Columbia on August 23, 1999, required the Trustee to
dispose of a portion of the Sprint Securities held by the trust on or before
May 23, 2002, and to dispose of the balance of the Sprint Securities by May 23,
2004. At Liberty's request, the Department of Justice joined Liberty and AT&T in
a joint motion to terminate the Final Judgment which was filed in the District
Court in February 2002. The District Court has approved the motion to terminate
the Final Judgment, with the result that the Trustee has no further obligations
under the Final Judgment. The Trustee is in the process of returning direct
ownership of the Sprint Securities to Liberty.

On January 30, 2002, Liberty completed a transaction with UnitedGlobalCom
pursuant to which UnitedGlobalCom was formed to own Old United. Upon
consummation of the New United Transaction, all shares of Old United common
stock were exchanged for shares of common stock of UnitedGlobalCom. In addition,
Liberty contributed (i) cash consideration of $200 million; (ii) the Belmarken
Loan with a carrying value of $496 million and (iii) Senior Notes and Senior
Discount Notes of UPC with an aggregate carrying amount of $270 million to
UnitedGlobalCom in exchange for 281.3 million shares of Class C common stock of
UnitedGlobalCom with a fair value of $1,406 million. Upon consummation of the
New United Transaction, Liberty owned an approximate 72% economic interest and a
94% voting interest in UnitedGlobalCom. Subsequent open market purchases of
UnitedGlobalCom Class A common stock have increased Liberty's ownership interest
to 306.6 million shares or a 74% economic interest. Pursuant to certain voting
and standstill arrangements entered into at the time of closing, Liberty is
currently unable to exercise control of UnitedGlobalCom, and accordingly,
Liberty will continue to use the equity method of accounting for its investment.

Also on January 30, 2002, UnitedGlobalCom acquired from Liberty its debt and
equity interests in IDT United, Inc. and $751 million principal amount at
maturity of UnitedGlobalCom's $1,375 million 10 3/4% senior secured discount
notes due 2008, which had been distributed to Liberty in redemption of a portion
of its interest in IDT United. IDT United was formed as an indirect subsidiary
of IDT Corporation for purposes of effecting a tender offer for all outstanding
2008 Notes at a purchase price of $400 per $1,000 principal amount at maturity,
which tender offer expired on February 1, 2002. The aggregate purchase price for
Liberty's interest in IDT United of $448 million equaled the aggregate amount
Liberty had invested in IDT United, plus interest. Approximately $305 million of
the purchase price was paid by the assumption by UnitedGlobalCom of debt owed by
Liberty to a subsidiary of Old United and the remainder was credited against the
$200 million cash contribution by Liberty to UnitedGlobalCom described above. In
connection with the New United Transaction, one of Liberty's subsidiaries agreed
to loan to a subsidiary of UnitedGlobalCom up to $105 million. As of June 30,
2002, such UnitedGlobalCom subsidiary has borrowed $103 million from the Liberty
subsidiary to acquire additional shares of preferred stock and promissory notes
issued by IDT United. The 2008 Notes owned by IDT United, together with 2008
Notes acquired by UnitedGlobalCom directly from Liberty referred to above, all
of which remain outstanding, represent approximately 98.2% of the outstanding
2008 Notes.

UnitedGlobalCom and its significant operating subsidiaries have incurred
losses since their formation, as they have attempted to expand and develop their
businesses and introduce new services. In November 2001, United
Australia/Pacific, Inc. ("UAP"), a 50% owned affiliate of UnitedGlobalCom,
failed to make interest payments on certain of its senior notes. Following such
default, the trustee under the Indenture for UAP's senior notes declared the
principal and interest due and payable. On March 29, 2002, voluntary and
involuntary petitions were filed under Chapter 11 of the United States
Bankruptcy Code with respect to UAP. UAP's ability to continue as a going
concern is dependent on the outcome of this bankruptcy proceeding.

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In February, May and August 2002, UPC failed to make required interest
payments on certain of its senior notes. UPC is negotiating the restructuring of
its debt instruments. In July 2002, UPC announced an agreement in principle with
respect to its recapitalization. Under the terms of the agreement, UPC would
exchange approximately $5.4 billion of its debt into equity of a new holding
company of UPC ("New UPC"). If the recapitalization is consummated,
UnitedGlobalCom would receive approximately 65.5% of New UPC's equity in
exchange for UPC debt securities that it owns; third-party noteholders would
receive approximately 32.5% of New UPC's equity; and existing preferred and
ordinary shareholders, including UnitedGlobalCom, would receive 2% of UPC's
equity. The recapitalization is subject to certain approvals and conditions. If
UPC is unable to secure the required approvals, it may seek relief under a debt
moratorium leading to a suspension of payments or a bankruptcy under applicable
laws. Such proceedings could result in material changes in the nature of UPC's
business, material changes to UPC's financial condition and results of
operations, or UPC's liquidation. In addition, certain other UnitedGlobalCom
subsidiaries do not have sufficient working capital to service their debt or
other liabilities when due during the next year. As a result of the foregoing,
there is substantial doubt about UnitedGlobalCom's ability to continue as a
going concern. UnitedGlobalCom's management is taking steps to address these
matters. However, no assurance can be given that such steps will be successful.

Starz Encore Group is obligated to pay fees for the rights to exhibit
certain films that are released by various producers through 2014. The aggregate
amount of the Film Licensing Obligations under these license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as well
as the domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, required aggregate payments under the Film
Licensing Obligations could prove to be significant. Starz Encore Group's
estimate of the future minimum obligation related to the Film Licensing
Obligations is as follows (amounts in millions):

Remainder of 2002........................................... $180
2003........................................................ 355
2004........................................................ 182
2005........................................................ 93
2006........................................................ 104
Thereafter.................................................. 386

At June 30, 2002, Liberty has guaranteed $473 million of the bank debt of
Jupiter, an equity affiliate that provides broadband services in Japan.
Substantially all of the debt related to such guaranteed amount is due and
payable by Jupiter in September 2002. Jupiter is currently negotiating the
refinancing of substantially all of its long-term and short-term debt. Liberty
anticipates that it and the other Jupiter shareholders will make loans or equity
contributions to Jupiter in connection with such refinancing, and that Liberty's
share of such equity contributions will be approximately $467 million (of which
$305 million has been contributed as of June 30, 2002). Upon such refinancing,
Liberty anticipates that the majority of its guarantee of Jupiter debt would be
cancelled.

Liberty has also guaranteed various loans, notes payable, letters of credit
and other obligations (the "Guaranteed Obligations") of certain other
affiliates. At June 30, 2002, the Guaranteed Obligations aggregated
approximately $172 million. Currently, Liberty is not certain of the likelihood
of being required to perform under such guarantees.

AT&T, as the successor to TCI, is the subject of an Internal Revenue Service
audit for the 1993-1995 tax years. The IRS has notified AT&T and Liberty that it
is considering proposing income adjustments and assessing certain penalties in
connection with TCI's 1994 tax return. The IRS's position could result in
recognition of up to approximately $305 million of additional income, resulting
in as much as $107 million of additional tax liability, plus interest. In
addition, the IRS may assert

I-41

certain penalties. AT&T and Liberty do not agree with the IRS's proposed
adjustments and penalties, and AT&T and Liberty intend to vigorously defend
their position. Pursuant to the AT&T Tax Sharing Agreement, Liberty may be
obligated to reimburse AT&T for any tax that is ultimately assessed as a result
of this audit. Liberty is currently unable to estimate a range of any such
reimbursement, but Liberty believes that any such reimbursement would not be
material to its financial position.

In connection with the private letter ruling received by AT&T with respect
to the tax consequences of the Split Off Transaction, Liberty represented to the
IRS that, within one year following the Split Off Transaction, Liberty would
issue, subject to market and business conditions, at least $250 million to
$500 million of its common stock for cash or other assets, and, within two years
following the Split Off Transaction, Liberty would issue at least $500 million
to $1 billion of its common stock (including any common stock issued during the
first year) for cash or other assets. In light of the adverse market and
business conditions since the date of the Split Off Transaction, AT&T and
Liberty requested a supplemental ruling to modify Liberty's intentions with
respect to the issuance of its common stock. In response to such request, the
IRS, on May 20, 2002, granted Liberty a one-year extension to issue each of the
amounts of stock described above.

Liberty has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is reasonably
possible Liberty 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 condensed
consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Liberty is exposed to market risk in the normal course of business due to
its investments in different foreign countries and ongoing investing and
financial activities. Market risk refers to the risk of loss arising from
adverse changes in foreign currency exchange rates, interest rates and stock
prices. The risk of loss can be assessed from the perspective of adverse changes
in fair values, cash flows and future earnings. Liberty has established
policies, procedures and internal processes governing its management of market
risks and the use of financial instruments to manage its exposure to such risks.

Investments in and advances to Liberty's foreign affiliates are denominated
in foreign currencies. Liberty therefore is exposed to changes in foreign
currency exchange rates. Historically, Liberty has not hedged the majority of
its foreign currency exchange risk because of the long-term nature of its
interests in foreign affiliates. During 2001, Liberty entered into a definitive
agreement to acquire six regional cable television systems in Germany. That
agreement was terminated in April 2002. A portion of the consideration for such
acquisition was to be denominated in euros. In order to reduce its exposure to
changes in the euro exchange rate from the date of the agreement to its expected
closing date, Liberty had entered into forward purchase contracts with respect
to euro 3,106 million as of March 31, 2002. Such contracts generally have terms
ranging from 90 to 120 days and can be renewed at their expiration at Liberty's
option. During the second quarter of 2002, the value of the euro strengthened
and Liberty settled substantially all of its euro contracts. Realized and
unrealized gains on Liberty's euro contracts aggregated $39 million during the
six months ended June 30, 2002, including and unrealized gains of $6 million on
its remaining contracts at June 30, 2002.

The Company has two equity affiliates in Japan. In order to reduce its
foreign currency exchange risk related to anticipated additional capital
contributions to such affiliates, the Company entered into forward sale
contracts with respect to yen 8,952 million during the six months ended
June 30, 2002. These contracts have terms similar to the euro forward purchase
contracts described above. In addition to the forward sale contracts, the
Company entered into collar agreements with respect to yen 18,785 million. These
collar agreements have a term of approximately 2 1/2 years, an average call
price of 110 yen/U.S. dollar and an average put price of 133 yen/U.S. dollar.
During the six months ended

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June 30, 2002, the Company had unrealized losses of $14 million related to its
yen contracts. Liberty continually evaluates its foreign currency exposure based
on current market conditions and the business environment in each country in
which it operates.

Liberty is exposed to changes in interest rates primarily as a result of its
borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of Liberty's long-term and
short-term debt are expected to vary as a result of future requirements, market
conditions and other factors. Liberty manages its exposure to interest rates by
maintaining what it believes is an appropriate mix of fixed and variable rate
debt. Liberty believes this best protects it from interest rate risk. Liberty
has achieved this appropriate mix by (i) issuing fixed rate debt that Liberty
believes has a low stated interest rate and significant term to maturity and
(ii) issuing short-term variable-rate debt to take advantage of historically low
short-term interest rates. As of June 30, 2002, $3,481 million or 66% of
Liberty's debt was composed of fixed rate debt (as adjusted for the effects of
interest rate swap agreements) with a weighted average stated interest rate of
5.64%. The Company's variable rate debt of $1,805 million had a weighted average
interest rate of 3.64% at June 30, 2002. Had market interest rates been 100
basis points higher (representing an approximate 27% increase over Liberty's
variable rate debt effective cost of borrowing) throughout the six months ended
June 30, 2002, Liberty would have recorded approximately $9 million of
additional interest expense. Had the price of the securities underlying the call
option obligations associated with the Company's senior exchangeable debentures
been 10% higher during the six months ended June 30, 2002, Liberty would have
recorded an additional unrealized loss on financial instruments of
$100 million.

Liberty is exposed to changes in stock prices primarily as a result of its
significant holdings in publicly traded securities. Liberty continually monitors
changes in stock markets, in general, and changes in the stock prices of its
significant holdings, specifically. Liberty believes that changes in stock
prices can be expected to vary as a result of general market conditions,
technological changes, specific industry changes and other factors. The Company
uses equity collars, put spread collars, narrow-band collars and other financial
instruments to manage market risk associated with certain investment positions.
These instruments are recorded at fair value based on option pricing models.
Equity collars provide Liberty with a put option that gives it the right to
require the counterparty to purchase a specified number of shares of the
underlying security at a specified price (the "Company Put Price") at a
specified date in the future. Equity collars also provide the counterparty with
a call option that gives the counterparty the right to purchase the same
securities at a specified price at a specified date in the future. The put
option and the call option generally are equally priced at the time of
origination resulting in no cash receipts or payments. Liberty's equity collars
are accounted for as fair value hedges. Narrow-band collars are equity collars
in which the put and call prices are set so that the call option has a
relatively higher fair value than the put option at the time of origination. In
these cases the Company receives cash equal to the difference between such fair
values. The Company has not designated its narrow-band collars as fair value
hedges.

Put spread collars provide Liberty and the counterparty with put and call
options similar to equity collars. In addition, put spread collars provide the
counterparty with a put option that gives it the right to require Liberty to
purchase the underlying securities at a price that is lower than the Company Put
Price. The inclusion of the secondary put option allows Liberty to secure a
higher call option price while maintaining net zero cost to enter into the
collar. However, the inclusion of the secondary put exposes Liberty to market
risk if the underlying security trades below the put spread price. Liberty's put
spread collars have not been designated as fair value hedges.

During the six months ended June 30, 2002, the Company sold put options on
36.1 million shares of AOL Time Warner stock for cash proceeds of $484 million.
The put options have not been designated as fair value hedges.

I-43

The following table provides information regarding Liberty's equity and put
spread collars and put options at June 30, 2002:

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

(1) Includes narrow-band collars

At June 30, 2002, the fair value of the securities underlying the
derivatives in the foregoing table was $3,111 million, (excluding the fair value
of the related derivatives) and the total value of Liberty's available-for-sale
equity securities was $13,843 million. Had the market price of the remaining
available-for-sale securities been 10% lower at June 30, 2002, the aggregate
value of such securities would have been $1,073 million lower resulting in an
increase to unrealized losses in other comprehensive earnings.

Had the market price of Liberty's publicly traded investments accounted for
using the equity method been 10% lower at June 30, 2002, there would have been
no impact on the carrying value of such investments assuming that the decline in
value is deemed to be temporary.

From time to time Liberty enters into total return debt swaps in connection
with its purchase of its own or third-party public and private indebtedness.
Under these arrangements, Liberty directs a counterparty to purchase a specified
amount of the underlying debt security for Liberty's benefit. Liberty initially
posts collateral with the counterparty equal to 10% of the value of the
purchased securities Liberty earns interest income based upon the face amount
and stated interest rate of the underlying debt securities, and pays interest
expense at market rates on the amount funded by the counterparty. In the event
the fair value of the underlying debt securities declines more than 10%, Liberty
is required to post cash collateral for the decline, and Liberty records an
unrealized loss on financial instruments. The cash collateral is further
adjusted up or down for subsequent changes in fair value of the underlying debt
security. At June 30, 2002, the aggregate purchase price of third-party debt
securities underlying total return debt swap arrangements was $85 million. As of
such date, Liberty had posted cash collateral equal to $25 million. In the event
the fair value of the purchased debt securities were to fall to zero, Liberty
would be required to post additional cash collateral of $60 million.

In addition, during the six months ended June 30, 2002, Liberty entered into
a total return debt swap agreement to purchase up to $250 million aggregate face
value of its outstanding senior notes and debentures. Through June 30, 2002,
Liberty had directed the counterparty to purchase debt with a face value of
$179 million for $177 million, including accrued interest, under this agreement.

Liberty measures the effectiveness of its derivative financial instruments
through comparison of the blended rates achieved by those derivative financial
instruments to the historical trends in the underlying market risk hedged. With
regard to interest rate swaps, Liberty monitors the fair value of

I-44

interest rate swaps as well as the effective interest rate the interest rate
swap yields, in comparison to historical interest rate trends. Liberty believes
that any losses incurred with regard to interest rate swaps would be offset by
the effects of interest rate movements on the underlying hedged facilities. With
regard to equity collars, Liberty monitors historical market trends relative to
values currently present in the market. Liberty believes that any unrealized
losses incurred with regard to equity collars and swaps would be offset by the
effects of fair value changes on the underlying assets. These measures allow
Liberty's management to measure the success of its use of derivative instruments
and to determine when to enter into or exit from derivative instruments.

I-45

LIBERTY MEDIA CORPORATION

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

LITIGATION. On July 3, 2002, Angelo, Gordon & Co., L.P., Oaktree Capital
Management, L.L.C., Capital Research and Management Company, Goldentree Asset
Management, LOP and W.R. Huff CM, L.L.C. (collectively, the "Plaintiffs")
commenced a civil lawsuit against Liberty TWSTY Bonds, Inc. ("Liberty TWSTY
Bonds"), Liberty Media Corporation ("Liberty"), Liberty Media
International, Inc. and John C. Malone (collectively, the "Defendants") in the
United States District Court for the Southern District of New York, entitled
ANGELO, GORDON & CO., L.P., ET AL V. LIBERTY TWSTY BONDS, INC., ET AL. (Civil
Action 02-CV-5146 (GBD)) (the "Angelo Litigation"). According to their
complaint, the Plaintiffs seek (i) a judgment and declaration that (a) the
Defendants, as a group and individually, have violated Sections 14(e) and 10(b)
of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations promulgated thereunder and (b) that Mr. Malone is
liable as a control person pursuant to Section 20(a) of the Exchange Act and the
rules and regulations promulgated thereunder, (ii) preliminary and permanent
injunctive relief enjoining the Defendants, their respective officers, agents,
servants, employees, attorneys, affiliates and all other persons acting,
directly or indirectly, for, on behalf of or in concert with the Defendants from
(a) proceeding with a tender offer to purchase certain notes and debentures of
Telewest Communications plc. ("Telewest") (the "Offer") until the Defendants
make appropriate disclosures to correct all of the alleged false and misleading
statements and omissions made in their public filings and otherwise concerning
Telewest, the Defendants or the Offer, and thereafter prohibiting the Defendants
from purchasing or making any tender offer for the Notes for an appropriate
period to allow full dissemination of such disclosures to the holders of the
Notes and to the marketplace; (b) proceeding with the Offer in violation of
Sections 14(e) and 10(b) of the Exchange Act; (c) taking or attempting to take
any further steps to acquire any Notes in violation of Sections 14(e) and 10(b)
of the Exchange Act; and (d) voting any Notes acquired by the Defendants or
their affiliates on or after April 15, 2002 through open market purchases,
privately negotiated transactions or the Offer in connection with any
restructuring of Telewest, or from voting any equity securities of Telewest into
which such Notes may be converted; (iii) an order that any Notes acquired by the
Defendants or their affiliates on or after April 15, 2002 through open market
purchases, privately negotiated transactions or the Offer shall not be counted
as part of any class of Notes or otherwise in connection with any restructuring
of Telewest; and (iv) an award of costs and disbursements relating to the
proceeding, together with reasonable attorneys' fees, and such further relief
that the Court may consider just and proper. Liberty TWSTY Bonds terminated the
Offer on July 24, 2002. Liberty believes that the Offer and the related
disclosures complied, in all material respects, with the requirements of all
applicable securities laws.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

None.

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(b) Reports on Form 8-K filed during the quarter ended June 30, 2002:

II-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.

LIBERTY MEDIA CORPORATION

Date: August 14, 2002 By: /s/ CHARLES Y. TANABE
-----------------------------------------
Charles Y. Tanabe
SENIOR VICE PRESIDENT AND GENERAL COUNSEL

Date: August 14, 2002 By: /s/ DAVID J.A. FLOWERS
-----------------------------------------
David J.A. Flowers
SENIOR VICE PRESIDENT AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)

Date: August 14, 2002 By: /s/ CHRISTOPHER W. SHEAN
-----------------------------------------
Christopher W. Shean
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)

II-3