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 SEPTEMBER 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
ENGLEWOOD, COLORADO
(Address of principal executive 80112
offices) (Zip Code)

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 October 31, 2002 was:

Series A common stock 2,373,497,555 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)

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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.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2002

See accompanying notes to condensed consolidated financial statements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

(1) BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the
accounts of Liberty Media Corporation and its 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, and the businesses and assets of Liberty and its
subsidiaries constituted all of the businesses and assets of 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.

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.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 continues to be
considered for impairment under Accounting Principles Board Opinion No. 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.

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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 expects that it will record additional
transition impairment losses before the transition period ends on December 31,
2002.

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):

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Amortization of intangible assets with finite useful lives was $141 million
for the nine months ended September 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........................................................ $181
2003........................................................ 160
2004........................................................ 122
2005........................................................ 113
2006........................................................ 81

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

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(1) During the nine months ended September 30, 2002, Liberty completed several
small acquisitions for aggregate consideration of $328 million, comprised of
stock valued at $195 million and cash of $133 million. In connection with
these acquisitions, Liberty recorded additional goodwill of $183 million,
which represents the excess of the purchase price over the estimated fair
value of tangible and identifiable intangible assets acquired.

One of these acquisitions was Liberty's purchase of 38% of the common equity
and 85% of the voting power of OpenTV Corp. ("OpenTV"), which when combined
with Liberty's previous ownership interest in OpenTV, brought Liberty's
total ownership to 41% of the equity and 86% of the voting power of OpenTV.
During the period between the execution of the purchase agreement in
May 2002 and the consummation of the acquisition in August 2002, OpenTV
disclosed that it was lowering its revenue and cash flow projections for
2002 and extending the time before it would be cash flow positive. As a
result, OpenTV wrote off all of its separately recorded goodwill. In light
of the announcement by OpenTV and the adverse impact on its stock price, as
well as other negative factors arising in its industry sector, Liberty
determined that the goodwill initially recorded in purchase accounting
($90 million) was not recoverable. This assessment is supported by an
appraisal performed by an independent third party. Accordingly, Liberty
recorded an impairment charge for the entire amount of the goodwill during
the third quarter.

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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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 nine months ended
September 30, 2002, are 78 million potential common shares because their
inclusion would be anti-dilutive.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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(1) Includes the acquisition of the minority interest in Liberty Digital, Inc.

(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:

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

At September 30, 2002, the aggregate carrying amount of Liberty's
investments in its affiliates exceeded Liberty's proportionate share of its
affiliates' net assets by $8,496 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 $681 million for the nine months
ended September 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.

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

UnitedGlobalCom is a global broadband communications provider of video,
voice and data services with operations in over 25 countries throughout the
world. 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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 a 74% economic
interest. The closing price of UnitedGlobalCom's Class A common stock was $1.64
on September 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.

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 September 30, 2002, such
subsidiary of UnitedGlobalCom has borrowed $103 million from the Liberty
subsidiary. Such loan accrues interest at 8% per annum.

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 approximately 5 million 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, common and preferred interests in VUE and the cancellation of
approximately 320.9 million shares of USANi LLC, which were exchangeable on a
one-for-one basis for shares of USAI common stock. 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 and all of Liberty's
approximate 30% interest

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, Liberty owns approximately
20% of USAI. Due to certain governance arrangements which limit its ability to
exert significant influence over USAI, 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
for USAI in 2002 are for the period through May 7, 2002.

TELEWEST

Telewest operates cable television and telephone systems in the United
Kingdom, and develops and sells a variety of television programming also in the
U.K. At September 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 September 30, 2002 was $0.013 per share.

During the nine months ended September 30, 2002, Liberty purchased
$370 million and L67 million face amount of Telewest public debt for aggregate
cash consideration of $210 million, including accrued interest. Such investments
are accounted for as available-for-sale securities.

On September 30, 2002, Telewest disclosed that it had reached a non-binding
preliminary agreement relating to a restructuring of a significant portion of
its bonds. The agreement provides for the cancellation of all outstanding notes
and debentures issued by Telewest and one of its subsidiaries, as well as
certain other unsecured foreign exchange contracts, in exchange for new ordinary
shares representing 97% of the issued share capital of Telewest immediately
after the restructuring. Existing shareholders will retain a 3% interest in
Telewest under the proposed restructuring. Telewest has elected to defer payment
of interest under certain of its notes, including a payment that was due on
November 1, 2002. As a result, Telewest is in default under certain of its
financing arrangements. Telewest anticipates that such defaults will be dealt
with in connection with the restructuring of its debt.

During the nine months ended September 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 to its estimated fair value, and the
Company recognized a charge of $1,801 million. Such charge is included in share
of losses of affiliates.

OTHER

In April 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 of $134 million).

During the nine months ended September 30, 2002 and 2001, Liberty recorded
nontemporary declines in fair value aggregating $140 million and $163 million,
respectively, related to certain of its other equity method investments. Such
amount is included in share of losses of affiliates.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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:

SPRINT PCS

Liberty and certain of its consolidated subsidiaries collectively are the
beneficial owners of 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
September 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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, and expects this process to be completed by
the end of 2002.

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. 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 nine months ended September 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 September 30, 2002,
Liberty owned approximately 18% of the outstanding equity of News Corp. Liberty
accounts for its investment in News Corp. as an available-for-sale security.

VIVENDI AND USA INTERACTIVE

As more fully described in note 5, Liberty received 37.4 million Vivendi
ordinary shares (9.5 million of which are subject to transfer restrictions until
November 2003) in exchange for a portion of its investment in USAI and its
investment in multiThematiques, S.A., and Liberty retained an approximate 20%
ownership interest in USAI.

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

I-17

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 nine months ended September 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 $5,402 million and $665 million,
before deducting a deferred tax benefit of $2,107 million and $263 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 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.

I-18

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During the nine months ended September 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
the fair value of the put options ($1,003 million at September 30, 2002) is
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 nine months
ended September 30, 2002.

Investments in available-for-sale securities and related derivative
instruments at September 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 September 30, 2002 and
December 31, 2001. Management calculates market values of its other cost
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.

I-19

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 entered into forward purchase contracts with respect to euro
3,106 million as of March 31, 2002. Liberty is not accounting for the forward
purchase contracts as hedges. Liberty settled substantially all of these euro
contracts in 2002. Realized and unrealized gains on Liberty's euro contracts
aggregated $39 million during the nine months ended September 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 Y8,952 million ($73.5 million at September 30, 2002)
during the nine months ended September 30, 2002. In addition to the forward sale
contracts, the Company entered into collar agreements with respect to
Y18,785 million ($154.3 million at September 30, 2002). These collar agreements
have a remaining term of approximately two 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
nine months ended September 30, 2002, the Company had unrealized losses of
$8 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 September 30, 2002, the aggregate purchase price of debt securities
underlying Liberty's total return debt swap arrangements was $286 million,
including $200 million related to purchases of Liberty's senior notes and senior
debentures. As of such date, the Company had posted cash collateral equal to
$65 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 $221 million. The posting of such cash collateral and the related
settlement of the agreements with respect to Liberty's senior notes and senior
debentures would reduce the Company's outstanding debt by an equal amount.

I-20

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 during the
nine months ended September 30, 2002 and 2001 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-21

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Senior Notes and Senior Debentures are stated net of an aggregate
unamortized discount of $19 million at September 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 September 30, 2002. On or after November 15, 2003,
Liberty, at its option, may redeem the debentures, in whole or in part, for
cash.

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. On or after February 15, 2004, Liberty, at its option, may
redeem the debentures, in whole or in part, for 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

I-22

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 debentures
using the effective interest method. Such accretion aggregated $5 million and
$4 million during the nine months ended September 30, 2002 and 2001,
respectively, and is included in interest expense.

BANK CREDIT FACILITIES

At September 30, 2002, Liberty's subsidiaries had $1,293 million outstanding
and $405 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 September 30, 2002, the subsidiary of Liberty that operates the DMX Music
service was not in compliance with three covenants contained in its bank loan
agreement. The subsidiary is in discussions with its banks regarding the
resolution of these defaults. The outstanding balance of the subsidiary's bank
facility was $94 million at September 30, 2002, all of which is included in
current portion of debt. All other consolidated borrowers were in compliance
with their debt covenants at September 30, 2002. The subsidiaries' ability to
borrow the unused capacity noted above is dependent on their continuing
compliance with their covenants at the time of, and after giving effect to, a
requested borrowing.

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 September 30, 2002 is as follows (amounts in
millions):

Senior Notes of parent company.............................. $1,036
Senior Debentures of parent company......................... $1,498
Senior exchangeable debentures of parent company, including
call option obligation.................................... $1,962

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

I-23

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 September 30, 2002........................ $5,182
Add:
Unamortized issue discount on Senior Notes and
Debentures.............................................. 19
Unamortized discount attributable to call option feature
of exchangeable debentures.............................. 2,233
------
Face amount at maturity................................. $7,434
======

(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 September 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 September 30, 2002, there were 48.1 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.

PURCHASES OF SERIES A COMMON STOCK

During the nine months ended September 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 nine months ended September 30, 2002, the Company sold put
options on 6.6 million shares of its Series A common stock for cash proceeds of
$3 million. Put options with respect to 2.0 million shares expired prior to
September 30, 2002, and the Company net cash settled the contracts for less than
$1 million. The remaining put options expire in the fourth quarter of 2002 and
the first quarter of 2003 and have a weighted average strike price of $8.45. 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.

I-24

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) TRANSACTIONS WITH OFFICERS AND DIRECTORS

In connection with the merger of TCI and AT&T in March 1999 (the "AT&T
Merger"), an employment agreement between the Company's Chairman and TCI was
assigned to the Company.

The Chairman's employment agreement provides, among other things, for
deferral of a portion (not in excess of 40%) of the monthly compensation payable
to him for all employment years commencing on or after January 1, 1993. The
deferred amounts will be payable in monthly installments over a 20-year period
commencing on the termination of the Chairman's employment, together with
interest thereon at the rate of 8% per annum compounded annually from the date
of deferral to the date of payment. The aggregate liability under this
arrangement at September 30, 2002 is $1.5 million, and is included in other
liabilities in the accompanying condensed consolidated balance sheet.

The Chairman's employment agreement also provides that in the event of
termination of his employment with Liberty, he will be entitled to receive 240
consecutive monthly payments equal to $15,000 increased at the rate of 12% per
annum compounded annually from January 1, 1998 to the date payment commences
($73,307 per month as of September 30, 2002). Such payments would commence on
the first day of the month succeeding the termination of employment. In the
event of the Chairman's death, his beneficiaries would be entitled to receive
the foregoing monthly payments. The aggregate liability under this arrangement
at September 30, 2002 is $17.6 million dollars, and is included in other
liabilities in the accompanying condensed consolidated balance sheet.

The Company's chairman deferred a portion of his monthly compensation under
his previous employment agreements with TCI. The Company assumed the obligation
to pay that deferred compensation in connection with the AT&T Merger. The
deferred obligation (together with interest at the rate of 13% per annum
compounded annually), which aggregated $9.3 million at September 30, 2002 and is
included in other liabilities, will be payable under the terms of the previous
employment agreement. The rate at which interest accrues on the deferred
obligation was established in 1983 pursuant to the previous employment
agreement.

During the third quarter of 2002, Liberty transferred an indirect 1%
beneficial ownership interest in 55.5 million shares of Sprint PCS stock and
related collar agreements to Liberty TP Management, Inc. ("Liberty TP
Management") in exchange for an $8.9 million note payable, which accrues
interest at 5%. Liberty's Chairman holds all of the outstanding common stock of
TP Investment, Inc., which in turn owns (1) all of the Class B preferred stock
of Liberty TP Management and (2) a 5% membership interest, representing a 50%
voting interest, in Liberty TP LLC. Liberty TP LLC holds 20.6% of the common
equity and 27.2% of the voting power of Liberty TP Management. Liberty
indirectly holds the remaining interests in Liberty TP LLC and Liberty TP
Management.

During the first quarter of 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, which new exercise price
exceeded the closing market price of Liberty Series A common stock on the date
of repricing. As a result of such repricing, these options are now accounted for
as variable plan awards. Options held by Liberty's Chairman, Chief Executive
Officer and Chief Operating Officer were not included in the foregoing
repricing.

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

I-25

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 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, Inc. ("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 a then-executive officer and director of On Command (the "On
Command Executive"), 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.

During the third quarter of 2000, On Command issued 13,500 shares of its
Series A, $.01 Par Value Convertible Participating Preferred Stock ("Series A
Preferred Stock"), to the On Command Executive, in exchange for a $21.1 million
promissory note. The promissory note is secured by the Series A Preferred Stock
or proceeds thereon, and the former executive officer's personal obligations
under such promissory note are limited to 25% of the face amount of the note and
related accrued interest. The note, which may not be prepaid, is due and payable
on August 1, 2005, and interest on the note accrues at a rate of 7% per annum,
compounded quarterly.

(10) TRANSACTIONS WITH RELATED PARTIES

Pramer S.C.A., a consolidated subsidiary of Liberty, provides uplink
services and programming to several equity affiliates in South America. Total
revenue for such services aggregated $13 million and $14 million for the nine
months ended September 30, 2002 and 2001, respectively.

I-26

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 the period in 2001 prior to the Split Off Transaction
for services provided to AT&T were $210 million.

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 $20 million for the period in
2001 prior to the Split Off Transaction.

(11) COMMITMENTS AND CONTINGENCIES

Starz Encore Group LLC ("Starz Encore"), a wholly-owned subsidiary of
Liberty, provides premium video programming distributed by cable operators,
direct-to-home satellite providers and other distributors throughout the United
States. Starz Encore has entered into agreements with a number of motion picture
producers which obligate Starz Encore to pay fees for the rights to exhibit
certain films that are released by these producers. The unpaid balance under
agreements for film rights related to films that were available at
September 30, 2002 is reflected as a liability in the accompanying condensed
consolidated balance sheet. The balance due as of September 30, 2002 is payable
as follows: $66 million in 2002; $81 million in 2003; $27 million in 2004; and
$18 million in 2005.

Starz Encore has also contracted to pay fees for the rights to exhibit films
that have been released, but are not available to Starz Encore until some future
date. These amounts have not been accrued at September 30, 2002. Starz Encore's
estimate of amounts payable under these agreements is as follows: $21 million in
2002; $345 million in 2003; $164 million in 2004; $101 million in 2005;
$112 million in 2006; and $416 million thereafter.

Starz Encore is also obligated to pay fees for films that are released by
certain producers through 2014 when these films meet certain criteria described
in the agreements. No estimate of amounts payable under these agreements can be
made at this time. However, such amounts could prove to be significant. Starz
Encore's total film rights expense aggregated $270 million and $250 million for
the nine months ended September 30, 2002 and 2001, respectively.

At September 30, 2002, Liberty has guaranteed $475 million (Y57.5 billion)
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 December 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 September 30,
2002). Upon such refinancing, Liberty anticipates that the majority of its
guarantee of Jupiter debt would be cancelled.

Liberty has guaranteed transponder and equipment lease obligations of one of
its investees ("Sky Latin America"). At September 30, 2002, the Company's
guarantee of the remaining obligations due under such agreements aggregated
$116 million. Subsequent to September 30, 2002, Globo Communicacoes e
Participacoes ("GloboPar"), another investor in Sky Latin America, announced
that it was reevaluating its capital structure. As a result, Liberty believes
that it is probable that GloboPar will not meet some, if not all, of its future
funding obligations with respect to Sky Latin America. To

I-27

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the extent that GloboPar does not meet its funding obligations, Liberty and
other investors could mutually agree to assume GloboPar's obligations. To the
extent that Liberty or such other investors do not fully assume GloboPar's
funding obligations, any funding shortfall could lead to defaults under
applicable lease agreements. Liberty believes that the maximum amount of its
aggregate exposure under the default provisions is not in excess of the gross
remaining obligations guaranteed by Liberty, as set forth above. Although no
assurance can be given, such amounts could be accelerated under certain
circumstances. Liberty cannot currently predict whether it will be required to
perform under any of such guarantees.

Liberty has also guaranteed various loans, notes payable, letters of credit
and other obligations (the "Guaranteed Obligations") of certain other
affiliates. At September 30, 2002, the Guaranteed Obligations aggregated
approximately $53 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 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 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'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 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 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 believes the position expressed by
AT&T Broadband to be without merit. On July 10, 2001, Starz Encore 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 entered into a standstill and tolling
agreement with AT&T Broadband 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 provided that either party might
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 indirectly received payment for AT&T
Broadband's proportionate share of the programming costs pass through for 2001.

On September 5, 2002, Starz Encore and AT&T Broadband jointly moved the
court to extend the stay pending further negotiations in light of the proposed
corporate transaction in which AT&T Broadband and Comcast Corporation would
become subsidiaries of a new entity, AT&T Comcast Corporation. On October 2,
2002, the court granted the parties' joint request that the stay be extended to
and including January 31, 2003, on condition that the parties undertake efforts
to settle the dispute

I-28

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

through a third-party mediator. The parties have also extended their standstill
and tolling agreement through to the conclusion of the extended stay.

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 proposing income adjustments and assessing certain penalties in
connection with TCI's 1994 tax return. The IRS's position could result in
recognition of approximately $305 million of additional income, resulting in as
much as $107 million of additional tax liability, plus interest. In addition,
the IRS has proposed certain penalties. AT&T and Liberty do not agree with the
IRS's proposed adjustments and penalties, and AT&T and Liberty are vigorously
defending 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 any such tax
liability and resulting reimbursement.

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.

(12) 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, net earnings (loss) or total assets; 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 nine months ended September 30, 2002, Liberty had four operating
segments: Starz Encore, Liberty Livewire, On Command and Other. Starz Encore
provides premium programming distributed by cable operators, direct-to-home
satellite providers 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
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

I-29

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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:

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

I-30

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-31

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 September 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 in which it
does have the ability to exercise significant influence over the investee's
operating and financial policies. 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 September 30, 2002 were Discovery Communications, Inc.,
QVC Inc., UnitedGlobalCom, Inc., Jupiter Telecommunications Co., Ltd. and
Telewest Communications plc.

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 common
stock and the Class C Common Stock was reclassified as Series B 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 Liberty 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 provides premium programming distributed by cable operators,
direct-to-home satellite providers and other distributors 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, 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, OpenTV Corp., Pramer S.C.A. and Liberty Cablevision of Puerto
Rico. DMX Music is principally engaged in programming, distributing and
marketing digital and analog music services to homes and businesses. True
Position provides equipment and technology that deliver location-based services
to wireless users worldwide. OpenTV provides interactive television solutions,
including operating middleware, web browser software,

I-32

interactive applications, and consulting and support services. 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 under "Investments in Affiliates Accounted for Using the Equity Method."
Other items of significance are discussed separately below.

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

(a) Not meaningful.

I-33

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

(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. A slow economy 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 has placed restrictions
on the payment of obligations to foreign creditors. While Liberty cannot predict
what future impact

I-34

these economic events will have on its Argentine businesses, it notes that
during 2001 and 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. The majority of Starz Encore'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
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 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's programming
costs increase above certain specified levels. Starz Encore's affiliation
agreements with other distributors generally provide for payments based on the
number of subscribers that receive Starz Encore'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 believes the position expressed by
AT&T Broadband to be without merit. On July 10, 2001, Starz Encore 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 entered into a standstill and tolling
agreement with AT&T Broadband 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 provided that either party might
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 indirectly received payment for AT&T Broadband's
proportionate share of the programming costs pass through for 2001.

On September 5, 2002, Starz Encore Group and AT&T Broadband jointly moved
the court to extend the stay pending further negotiations in light of the
proposed corporate transaction in which AT&T Broadband and Comcast Corporation
would become subsidiaries of a new entity, AT&T Comcast Corporation. On
October 2, 2002, the court granted the parties' joint request that the stay be
extended to and including January 31, 2003, on condition that the parties
undertake efforts to settle the dispute through a third-party mediator. The
parties have also extended their standstill and tolling agreement through to the
conclusion of the extended stay.

Starz Encore's revenue increased 12% for each of the three and nine month
periods ended September 30, 2002, respectively, as compared to the corresponding
prior year periods. Such increases are primarily due to 24% and 27% increases in
average subscription units from all forms of distribution during such periods.
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.

I-35

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

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

Starz Encore's operating, selling, general and administrative expenses
increased 14% and 11% for the three and nine months ended September 30, 2002,
respectively, as compared to the corresponding periods in 2001. Such increases
are primarily due to increases in programming license fees, marketing expenses
and bad debt expense. The majority of the increase in bad debt expense
($10 million) during the nine month period is related to the bankruptcy filing
of Adelphia Communications Corporation.

Effective January 1, 2002, Liberty and its subsidiaries, including Starz
Encore, 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's depreciation and
amortization is due to the adoption of Statement 142.

LIBERTY LIVEWIRE. Liberty Livewire's revenue decreased 9% and 11% for the
three and nine months ended September 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 production activity and lower
television advertising spending.

Liberty Livewire's operating, selling general and administrative expenses
decreased 15% and 9% for the three and nine months ended September 30, 2002,
respectively, as compared to the corresponding prior year periods. Such
decreases are due to 12% 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 increased 5% and decreased 3% for the three and nine
months ended September 30, 2002, respectively, as compared to the corresponding
periods in 2001. Such changes are due to the net effect of an increase in higher
average rates for certain pay-per-view products, an overall decrease in
occupancy rates in the hotel industry, and a reduction in average rooms served
by On Command.

On Command's operating, selling, general and administrative expenses
decreased 4% and 16% for the three and nine months ended September 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.

I-36

In addition, On Command incurred $2 million and $13 million of restructuring and
relocation costs during the three and nine months ended September 30, 2001,
respectively.

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

Revenue decreased 12% and 4% for the three and nine months ended
September 30, 2002, respectively, as compared to the corresponding periods in
2001. The three month decrease is due primarily to a decrease in Pramer's
revenue due to the devaluation of the Argentine peso and the recessionary
conditions in Argentina. The nine month decrease is due primarily to (i) a
decrease in Pramer's revenue and (ii) the transfer of Ascent Network Services
("ANS") to Liberty Livewire in September 2001. The nine month decreases were
partially offset by revenue growth at DMX Music resulting from the acquisition
of AEI Music Network, Inc. ("AEI") in May 2001.

Operating, selling, general and administrative expenses increased 3% and 4%
for the three and nine months ended September 30, 2002, respectively, as
compared to the same periods in 2001. The three month increase is due to the net
effect of increases related to (1) the formation of Liberty's new subsidiary,
Liberty Broadband Interactive Television in May 2002 and (2) the acquisition of
OpenTV Corp. in August 2002, partially offset by decreases in Pramer's expenses
and the sale of ANS. The nine month increase is due to the foregoing factors as
well as an increase due to the acquisition of AEI and accruals for music royalty
fees.

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 19% for the nine months ended
September 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 and parent company bank
debt.

DIVIDEND AND INTEREST INCOME. Dividend and interest income was
$162 million and $204 million for the nine months ended September 30, 2002 and
2001, respectively. This decrease is due primarily to lower invested cash
balances and lower interest rates in 2002. Interest and dividend income for the
nine months ended September 30, 2002 was comprised of interest income earned on
invested cash ($35 million), dividends on Vivendi common stock ($29 million),
dividends on News Corp. ADSs ($16 million), dividends on ABC Family Worldwide
preferred stock ($23 million) and other ($59 million).

INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD. Liberty's
share of losses of affiliates for the nine months ended September 30, 2002 and
2001 was $650 million and $3,227 million,

I-37

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 September 30, 2002, the aggregate carrying amount of Liberty's
investments in its affiliates exceeded Liberty's proportionate share of its
affiliates' net assets by $8,496 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 $681 million for the nine months
ended September 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
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 $105 million in 2001 to $47 million
in 2002. Such decrease is due to improved operating income, which resulted from
an increase in revenue and a slight decrease in operating expenses. During the
nine months ended September 30, 2002, Discovery reported increases in both
affiliate revenue and advertising revenue.

QVC. Exclusive of the effects of excess basis amortization, Liberty's share
of earnings of QVC increased from $82 million in 2001 to $105 million in 2002.
Such increase is due to increased revenue and operating margins.

UNITEDGLOBALCOM. Excluding the effects of excess basis amortization,
Liberty's share of UnitedGlobalCom's net loss increased from $231 million in
2001 to $355 million in 2002. Such increase is due to Liberty's increased
ownership of UGC partially offset by a decrease 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.

I-38

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, common
and preferred interests in VUE and the cancellation of approximately
20.9 million shares of USANi LLC, which were exchangeable on a one-for-one basis
for shares of USAI common stock. 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 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, Liberty owns approximately
89.7 million shares or 20% of USAI. Due to certain governance arrangements which
limit its ability to exert significant influence over USAI, 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 for USAI in 2002 are for the period through May 7,
2002.

JUPITER. Exclusive of the effects of excess basis amortization, Liberty's
share of Jupiter's losses decreased from $55 million in 2001 to $17 million in
2002. Such decrease is due to increased revenue and operating margins driven by
increased cable distribution and growth in telephony and Internet revenue, which
translated to a reduced net loss in 2002.

TELEWEST. Liberty's share of Telewest's net loss included excess basis
amortization of $108 million and a nontemporary decline in value of
$1,801 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 $217 million to $92 million due to a 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.

OTHER. During the nine months ended September 30, 2002 and 2001, Liberty
recorded nontemporary declines in fair value aggregating $140 million and
$163 million, respectively, related to certain of its other equity method
investments. Such amount is included in share of losses of affiliates.

I-39

LOSSES ON DISPOSITIONS. Aggregate net losses from dispositions during the
nine months ended September 30, 2002 and 2001 were $405 million and
$67 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 during the nine months
ended September 30, 2002 and 2001 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 nine months
ended September 30, 2002 and 2001, Liberty determined that certain of its other
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 $5,402 million and
$665 million,

I-40

before deducting a deferred tax benefit of $2,107 million and $263 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 nine months ended
September 30, 2002. This 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 affiliates have not
completed their Statement 142 analysis, Liberty expects that it will record
additional transition impairment losses before the transition period ends on
December 31, 2002. The Company recorded a $545 million increase in net earnings,
net of related taxes, for the nine months ended September 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 $185 million and
$2,368 million for the nine months ended September 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 $479 million and $708 million, respectively, for the nine
months ended September 30, 2002, and $1,240 million and $901 million,
respectively, for the nine months ended September 30, 2001. In addition, Liberty
made debt repayments of $902 million and $248 million during the nine months
ended September 30, 2002 and 2001, respectively. Liberty also acquired shares
pursuant to a previously authorized share buy back program in 2002. During the
nine months ended September 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. In addition, Liberty has entered into
agreements to purchase controlling interests in several cable and interactive
television entities for an aggregate purchase price of approximately
$820 million. Although Liberty may invest additional amounts in new or existing
ventures in 2002, it is unable to quantify such investments at this time. In
addition, Liberty has $793 million of debt that is

I-41

required to be repaid or refinanced before September 30, 2003. Liberty intends
to fund such investing and financing activities with a combination of available
cash and short term investments, bank borrowings, monetization of existing
marketable securities, proceeds from the sale of assets, and the issuance of
debt and equity securities. In this regard, during the nine months ended
September 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.

Subsequent to September 30, 2002, Liberty commenced a rights offering
pursuant to which existing shareholders received .04 transferable subscription
rights to purchase shares of Liberty Series A common stock for each share of
common stock held by them at the close of business on October 31, 2002. Under
the basic subscription privilege, each whole right entitles the holder to
purchase one share of Liberty's Series A common stock at a subscription price of
$6.00 per share. The rights offering will expire on December 2, 2002, unless
extended by the Company. If the rights offering is fully subscribed, of which no
assurance can be given, Liberty will issue 103,426,000 shares of Series A common
stock for cash proceeds of $621 million before estimated expenses of
$1 million. Liberty intends to use the net cash proceeds for general corporate
purposes, as described above.

At September 30, 2002, Liberty's consolidated subsidiaries had
$1,293 million outstanding and $405 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 September 30, 2002, the subsidiary of Liberty that operates
the DMX Music service was not in compliance with three covenants contained in
its bank loan agreement. The subsidiary is in discussions with its banks
regarding the resolution of these defaults. The outstanding balance of the
subsidiary's bank facility was $94 million at September 30, 2002. All other
consolidated subsidiaries were in compliance with their debt covenants at
September 30, 2002. The subsidiaries' ability to borrow the unused capacity
noted above is dependent on their continuing compliance with their covenants at
the time of, and after giving effect to, a requested borrowing.

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, 2003 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, Liberty expects that the aggregate
dividend and interest income it will receive during the year ended December 31,
2002 will be approximately $190 million. Based on current debt levels and
current interest rates, Liberty expects that the aggregate interest payments it
will make during the year ended December 31, 2002 will be approximately
$400 million.

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

I-42

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.

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 an accreted value of $892 million and 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
September 30, 2002, such UnitedGlobalCom subsidiary has borrowed $103 million
from the Liberty subsidiary. Such loan accrues interest at 8% per annum.

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.

I-43

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.

In February, May, August and November 2002, UPC failed to make required
interest payments on certain of its senior notes. UPC has been negotiating the
restructuring of its debt instruments, and on September 30, 2002, UPC and an
ad-hoc committee representing UPC's bondholders signed definitive agreements
with respect to UPC's 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 has entered into agreements with a number of motion picture
producers which obligate Starz Encore to pay fees for the rights to exhibit
certain films that are released by these producers. The unpaid balance under
agreements for film rights related to films that were available at
September 30, 2002 is reflected as a liability in the accompanying condensed
consolidated balance sheet. The balance due as of September 30, 2002 is payable
as follows: $66 million in 2002; $81 million in 2003; $27 million in 2004; and
$18 million in 2005.

Starz Encore has also contracted to pay fees for the rights to exhibit films
that have been released, but are not available to Starz Encore until some future
date. These amounts have not been accrued at September 30, 2002. Starz Encore's
estimate of amounts payable under these agreements is as follows: $21 million in
2002; $345 million in 2003; $164 million in 2004; $101 million in 2005;
$112 million in 2006; and $416 million thereafter.

Starz Encore is also obligated to pay fees for films that are released by
certain producers through 2014 when these films meet certain criteria described
in the agreements. No estimate of amounts payable under these agreements can be
made at this time. However, such amounts could prove to be significant. Starz
Encore's total film rights expense aggregated $270 million and $250 million for
the nine months ended September 30, 2002 and 2001, respectively.

At September 30, 2002, Liberty has guaranteed $475 million (Y57.5 billion)
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 December 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 September 30,
2002). Upon such refinancing, Liberty anticipates that the majority of its
guarantee of Jupiter debt would be cancelled.

I-44

Liberty has guaranteed transponder and equipment lease obligations of Sky
Latin America. At September 30, 2002, the Company's guarantee of the remaining
obligations due under such agreements aggregated $116 million. Subsequent to
September 30, 2002, GloboPar announced that it was reevaluating its capital
structure. As a result, Liberty believes that it is probable that GloboPar will
not meet some, if not all, of its future funding obligations with respect to Sky
Latin America. To the extent that GloboPar does not meet its funding
obligations, Liberty and other investors could mutually agree to assume
GloboPar's obligations. To the extent that Liberty or such other investors do
not fully assume GloboPar's funding obligations, any funding shortfall could
lead to defaults under applicable lease agreements. Liberty believes that the
maximum amount of its aggregate exposure under the default provisions is not in
excess of the gross remaining obligations guaranteed by Liberty, as set forth
above. Although no assurance can be given, such amounts could be accelerated
under certain circumstances. Liberty cannot currently predict whether it will be
required to perform under any of such guarantees.

Liberty has also guaranteed various loans, notes payable, letters of credit
and other obligations (the "Guaranteed Obligations") of certain other
affiliates. At September 30, 2002, the Guaranteed Obligations aggregated
approximately $53 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 proposing income adjustments and assessing certain penalties in connection
with TCI's 1994 tax return. The IRS's position could result in recognition of
approximately $305 million of additional income, resulting in as much as
$107 million of additional tax liability, plus interest. In addition, the IRS
has proposed certain penalties. AT&T and Liberty do not agree with the IRS's
proposed adjustments and penalties, and AT&T and Liberty are vigorously
defending 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 any such tax
liability and resulting reimbursement.

The private letter ruling issued by the IRS with respect to the tax
consequences of the Split Off Transaction stated that within one year following
the Split Off Transaction, Liberty intended to 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 intended to 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. On May 20, 2002, the IRS granted Liberty a one-year
extension to issue each of the foregoing amounts of stock. Liberty believes that
the issuance of stock pursuant to the rights offering described above conforms
with the statement of its intentions.

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

I-45

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 entered into forward purchase
contracts with respect to euro 3,106 million as of March 31, 2002. Liberty
settled substantially all of its euro contracts in 2002. Realized and unrealized
gains on Liberty's euro contracts aggregated $39 million during the nine months
ended September 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 Y8,952 million ($73.5 million at September 30, 2002)
during the nine months ended September 30, 2002. In addition to the forward sale
contracts, the Company entered into collar agreements with respect to
Y18,785 million ($154.3 million at September 30, 2002). These collar agreements
have a remaining term of approximately two years, an average call price of 110
yen/U.S. dollar and an average put price of 133 yen/U.S. dollar. During the nine
months ended September 30, 2002, the Company had unrealized losses of
$8 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 September 30, 2002, $3,483 million or 67% 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 $1,699 million had a weighted average
interest rate of 3.73% at September 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 nine months ended
September 30, 2002, Liberty would have recorded approximately $14 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 nine months ended September 30, 2002, Liberty would
have recorded an additional unrealized loss on financial instruments of
$77 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

I-46

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 nine months ended September 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.

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

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

(1) Includes narrow-band collars

At September 30, 2002, the fair value of the securities underlying the
derivatives in the foregoing table was $2,105 million, (excluding the fair value
of the related derivatives) and the total value of Liberty's available-for-sale
equity securities was $10,736 million. Had the market price of the remaining
available-for-sale securities been 10% lower at September 30, 2002, the
aggregate value of such securities would have been $863 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 September 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

I-47

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 September 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 $37 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 $48 million.

In addition, during the nine months ended September 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
September 30, 2002, Liberty had directed the counterparty to purchase debt with
a face value of $201 million for $200 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 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.

ITEM 4. CONTROLS AND PROCEDURES

The Company's chief executive officer, principal accounting officer and
principal financial officer performed an evaluation of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing of this
quarterly report on Form 10-Q. Based on this evaluation, the Company believes
that such controls and procedures effectively ensure that information required
to be disclosed in this quarterly report on Form 10-Q is appropriately recorded,
processed and reported. There have been no significant changes in the Company's
disclosure controls and procedures or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.

I-48

LIBERTY MEDIA CORPORATION

PART II--OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES

On August 27, 2002, Liberty issued 15,385,836 shares of Series A common
stock valued at $131 million to OTV Holdings Limited, a wholly-owned subsidiary
of MIH Limited, as payment of a portion of the purchase price for 365,460 A
Ordinary Shares and 30,206,154 B Ordinary Shares of OpenTV owned by OTV Holdings
Limited. The issuance was made in reliance on the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933 for transactions by an
issuer not involving any public offering.

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

(a) Exhibits

None.

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

II-1

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: November 14, 2002 By: /s/ CHARLES Y. TANABE
-----------------------------------------
Charles Y. Tanabe
Senior Vice President and General Counsel

Date: November 14, 2002 By: /s/ DAVID J.A. FLOWERS
-----------------------------------------
David J.A. Flowers
Senior Vice President and Treasurer
(Principal Financial Officer)

Date: November 14, 2002 By: /s/ CHRISTOPHER W. SHEAN
-----------------------------------------
Christopher W. Shean
Senior Vice President and Controller
(Principal Accounting Officer)

II-2

CERTIFICATIONS

I, Robert R. Bennett, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Liberty Media
Corporation;

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

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

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

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

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

Date: November 14, 2002

/s/ ROBERT R. BENNETT
- --------------------------------------------
Robert R. Bennett
President and Chief Executive Officer

II-3

I, David J.A. Flowers, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Liberty Media
Corporation;

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

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

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

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

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

Date: November 14, 2002

/s/ DAVID J.A. FLOWERS
- --------------------------------------------
David J.A. Flowers
Senior Vice President and Treasurer

II-4

I, Christopher W. Shean, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Liberty Media
Corporation;

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

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

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

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

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

Date: November 14, 2002

/s/ CHRISTOPHER W. SHEAN
- --------------------------------------------
Christopher W. Shean
Senior Vice President and Controller

II-5