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

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

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

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
incorporation or organization) Identification No.)

12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
(Address of principal executive 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 / /

Indicate by check mark whether the Registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act. Yes /X/ No / /

The number of outstanding shares of Liberty Media Corporation's common stock
as of July 31, 2003 was:

Series A common stock 2,473,846,455 shares; and
Series B common stock 211,818,776 shares.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-1

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(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 EARNINGS (LOSS)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-4

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2003

See accompanying notes to condensed consolidated financial statements.

I-5

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

I-6

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003
(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.

Liberty owns interests in a broad range of video programming, broadband
distribution, interactive technology services and communications businesses.
Liberty and its affiliated companies operate in the United States, Europe, Asia
and South America.

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, 2002.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Liberty considers (i) the fair value of its
derivative instruments, (ii) its assessment of the recoverability of its
long-lived assets and (iii) its assessment of nontemporary declines in fair
value of its investments to be its most significant estimates.

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

Certain prior period amounts have been reclassified for comparability with
the 2003 presentation.

(2) ACCOUNTING CHANGE

STATEMENT 142

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("Statement
142"). Statement 142 requires that goodwill and other intangible assets with
indefinite useful lives 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 is also no longer amortized, but continues to be considered for
impairment under Accounting Principles Board Opinion No. 18 ("APB Opinion 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.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

Statement 142 also required the Company to perform an assessment of whether
there was an indication that goodwill was impaired as of the date of adoption.
To accomplish this, the Company identified its reporting units and determined
the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. Statement 142 requires the Company
to consider equity method affiliates as separate reporting units. As a result, a
portion of the Company's enterprise-level goodwill balance was allocated to
various reporting units which included a single equity method investment as its
only asset. For example, goodwill was allocated to a separate reporting unit
which included only the Company's investment in Discovery Communications, Inc.
This allocation is performed for goodwill impairment testing purposes and does
not change the reported carrying value of the investment. However, to the extent
that all or a portion of an equity method investment which is part of a
reporting unit containing allocated goodwill is disposed of in the future, the
allocated portion of goodwill will be relieved and included in the gain or loss
on disposal.

The Company determined the fair value of its reporting units using
independent appraisals, public trading prices and other means. The Company then
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, to its carrying amount, both of
which were measured as of the date of adoption.

In connection with its adoption of Statement 142, the Company recognized a
$1,869 million transitional impairment loss, net of taxes of $127 million, as
the cumulative effect of a change in accounting principle. The foregoing
transitional impairment loss includes an adjustment of $325 million for the
Company's proportionate share of transition adjustments that its equity method
affiliates recorded.

Amortization of intangible assets with finite useful lives was $85 million
and $91 million for the six months ended June 30, 2003 and 2002, respectively.
Based on its current amortizable intangible assets, Liberty expects that
amortization expense will be as follows for the next five years and thereafter
(amounts in millions):

Remainder of 2003........................................... $ 67
2004........................................................ 106
2005........................................................ 102
2006........................................................ 81
2007........................................................ 72
Thereafter.................................................. 101
----
$529
====

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding for the
period. Diluted earnings (loss) per common share presents the dilutive effect on
a per share basis of potential common shares as if they had been converted at
the beginning of the periods presented. Excluded from diluted earnings per share
for the six months ended June 30, 2003, are 77 million potential common shares
because their inclusion would be anti-dilutive.

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

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

The following table reflects Liberty's share of earnings (losses) of
affiliates:

At June 30, 2003, the aggregate carrying amount of Liberty's investments in
its affiliates exceeded Liberty's proportionate share of its affiliates' net
assets by $8,908 million. Such amount is evaluated for impairment pursuant to
the provisions of APB Opinion 18.

QVC

QVC markets and sells a wide variety of consumer products and accessories
primarily by means of televised shopping programs on the QVC network and via the
Internet through IQVC. At June 30, 2003, Liberty had a 42% ownership interest in
QVC. Liberty's share of earnings from QVC is reduced by Liberty's share of
certain stock compensation amounts that QVC includes in stockholders' equity.
Liberty's share of such amounts aggregated $19 million during the six months
ended June 30, 2003.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On February 28, 2003, Liberty notified Comcast Corporation of its election
to trigger an exit process under the stockholders agreement governing Comcast's
and Liberty's interests in QVC. As of June 30, 2003, Liberty and Comcast reached
an agreement pursuant to which Liberty will acquire Comcast's approximate 56%
ownership interest in QVC for a purchase price of $7.9 billion. This agreement
supercedes the exit process initiated by Liberty on February 28, 2003 under the
QVC stockholders agreement. The purchase price will be comprised of
approximately 218 million shares of Liberty Series A common stock valued at
$11.71 per share (aggregate value of approximately $2.6 billion) and a
$5.3 billion three-year note payable bearing interest at 90-day LIBOR plus 1.5%.
The interest rate on any portion of this indebtedness held by Comcast or any
affiliate of Comcast is subject to adjustment in the event of a change in
Liberty's credit rating. Liberty's acquisition of Comcast's interest in QVC will
be accounted for using the purchase method of accounting, and upon consummation
QVC will be included in Liberty's consolidated results of operations and
financial position. Although Liberty expects that this transaction will be
consummated during the second half of 2003, it is subject to certain closing
conditions, including receipt of applicable regulatory approvals, and no
assurance can be given that it will be consummated on the terms described above,
or at all.

Summarized results of operations for QVC (excluding stock compensation
reflected in QVC's stockholders' equity) are as follows:

J-COM

J-COM is a broadband provider of entertainment, information and
communication services in Japan. As of December 31, 2002, Liberty and Sumitomo
Corporation ("Sumitomo") each held an approximate 36% interest in J-COM. On
March 27, 2003, Liberty purchased an additional 8% equity interest from Sumitomo
for $141 million, increasing Liberty's ownership interest in J-COM to 44% and
decreasing Sumitomo's ownership interest to 28%. This change in equity ownership
did not affect Liberty's and Sumitomo's respective shareholder loans to J-COM.

On May 15, 2003, Liberty and Sumitomo each converted a portion of its
shareholder loans to equity interests in J-COM. Subsequent to this conversion,
Liberty's and Sumitomo's equity ownership interests in J-COM are approximately
45% and 32%, respectively.

UGC

UGC is a global broadband communications provider of video, voice and data
services with operations in over 25 countries throughout the world. As of
June 30, 2003, Liberty owns approximately 305 million shares of UGC common
stock, or an approximate 73% economic interest and a 94% voting

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

interest in UGC. The closing price of UGC's Class A common stock was $5.10 on
June 30, 2003. Pursuant to certain voting and standstill arrangements, Liberty
is currently unable to exercise control of UGC, and accordingly, Liberty applies
the equity method of accounting for its investment.

Because Liberty currently has no commitment to make additional capital
contributions to UGC, Liberty suspended recording its share of UGC's losses in
the third quarter of 2002 when its investment was reduced to zero. Suspended
losses at June 30, 2003 aggregated $112 million. In the event that Liberty
increases its investment in UGC in the future and such investment is deemed to
represent funding of these suspended losses, Liberty will be required to
recognize these suspended losses to the extent of its additional investment.

SUMMARIZED AFFILIATE INFORMATION

Summarized combined results of operations for affiliates (including
Discovery, J-COM and UGC) other than QVC are as follows:

I-11

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Investments in available-for-sale securities and other cost investments are
summarized as follows:

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* Other available-for-sale securities include $1,364 million of parent company
and $34 million of subsidiary investments in certain marketable debt
securities at June 30, 2003, and $622 million of parent company and
$49 million of subsidiary investments in such securities at December 31,
2002.

NEWS CORP.

Effective March 27, 2003, Liberty entered into a put/call arrangement with
News Corp. Pursuant to this arrangement, Liberty has the option, exercisable at
any time prior to September 30, 2003, to acquire $500 million of American
Depositary Receipts ("ADRs") for News Corp. preferred limited voting ordinary
shares at $21.50 per ADR. If Liberty does not exercise its option and in the
event News Corp. acquires an ownership interest in Hughes Electronics
Corporation within two years, News Corp. has the option to require Liberty to
purchase $500 million of ADRs for News Corp. preferred limited voting ordinary
shares at $21.50 per ADR. This put/call arrangement is accounted for as a
derivative instrument and has an estimated fair value of $75 million at
June 30, 2003. Changes in the estimated fair value are included in unrealized
gains on financial instruments in the accompanying condensed consolidated
statements of operations.

UNREALIZED HOLDING GAINS AND LOSSES

Unrealized holding gains and losses related to investments in
available-for-sale securities that are included in accumulated other
comprehensive earnings are summarized below. Such amounts are in

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

addition to the unrealized gains and losses recognized in the Company's
consolidated statements of operations.

Management estimates that the aggregate fair market value of all of its
investments in available-for-sale securities and other cost investments
approximated their aggregate carrying value at June 30, 2003 and December 31,
2002. 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 cost investment assets.

(6) DERIVATIVE INSTRUMENTS

The Company's derivative instruments are summarized as follows:

I-13

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

The Company has entered into equity collars, narrow-band collars, put spread
collars, written put and call options and other financial instruments
(collectively, "AFS Derivatives") to manage market risk associated with its
investments in certain marketable securities. Prior to January 1, 2003, the only
derivative instruments designated by the Company as hedges were its equity
collars, which were designated as fair value hedges. Effective December 31,
2002, the Company elected to dedesignate its equity collars as fair value
hedges. Accordingly, changes in the fair value of the Company's
available-for-sale securities that previously had been reported in earnings due
to the designation of equity collars as fair value hedges are now reported as a
component of other comprehensive income in the Company's balance sheet. Changes
in the fair value of the equity collars continue to be reported in earnings.

EXCHANGEABLE DEBENTURE CALL OPTION OBLIGATIONS

In March and April 2003, Liberty issued $1,750 million of 0.75% Senior
Exchangeable Debentures due 2023. Each $1,000 debenture is exchangeable at the
holder's option for the value of 57.4079 shares of AOL Time Warner common stock.
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
("Statement 133"), the call option feature of the exchangeable debentures is
reported separately in the condensed consolidated balance sheet at fair value.
The estimated value of the call option feature of the AOL Time Warner
exchangeables at the time of issuance was $406 million. Changes in the fair
value of the call option obligations subsequent to initial recording are
recognized as unrealized gains or losses on financial instruments in Liberty's
condensed consolidated statements of operations.

REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS

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

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(1) Comprised primarily of forward foreign exchange contracts and interest rate
swap agreements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) LONG-TERM DEBT

Debt is summarized as follows:

SENIOR NOTES

During the second quarter of 2003, Liberty issued $1,000 million face amount
of senior notes due 2013 with an interest rate of 5.70% for cash proceeds of
$990 million net of offering discount and underwriting fees.

SENIOR EXCHANGEABLE DEBENTURES

In March and April 2003, Liberty issued $1,750 million of 0.75% Senior
Exchangeable Debentures due 2023 and received net cash proceeds of
$1,715 million after expenses. Interest is payable on March 30 and September 30
of each year. Each $1,000 debenture is exchangeable at the holder's option for
the value of 57.4079 shares of AOL Time Warner common stock. Liberty may, at its
election, pay the exchange value in cash, AOL Time Warner common stock, shares
of Liberty Series A common stock or a combination thereof. On or after April 5,
2008, Liberty, at its option, may redeem the debentures, in whole or in part,
for shares of AOL Time Warner common stock, cash or any combination thereof. On
March 30, 2008, March 30, 2013 or March 30, 2018, the holders may cause Liberty
to purchase the exchangeable debentures, and Liberty, at its election, may pay
the purchase price in shares of AOL Time Warner common stock, cash, Liberty
Series A common stock, or any combination thereof.

In accordance with Statement 133, the call option feature of the
exchangeable debentures is reported separately from the long-term debt in the
condensed consolidated balance sheet at fair value. Under Statement 133, the
reported amount of the long-term debt portion of the exchangeable debentures is
calculated as the difference between the face amount of the debentures and the
fair value of the call option feature on the date of issuance. The fair value of
the call option obligations related to the $1,750 million of exchangeable
debentures issued during the six months ended June 30, 2003

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

aggregated $406 million on the date of issuance. Accordingly, the long-term debt
portion was recorded at $1,344 million. The long-term debt is accreted to its
face amount over the term of the debentures using the effective interest method.
Accretion related to all of the Company's exchangeable debentures aggregated
$22 million and $3 million during the six months ended June 30, 2003 and 2002,
respectively, and is included in interest expense.

BANK CREDIT FACILITIES

At June 30, 2003, Liberty's subsidiaries had $1,104 million outstanding and
$192 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. Such fees were not significant for the six months ended
June 30, 2003 and 2002.

At June 30, 2003, 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 and the participating banks have entered into a
forbearance agreement whereby the banks have agreed to forbear from exercising
certain default-related remedies against the subsidiary through March 31, 2004.
The outstanding balance of the subsidiary's bank facility was $89 million at
June 30, 2003, all of which is included in current portion of debt. Another
consolidated subsidiary of Liberty, On Command Corporation ("On Command"),
reached agreement with its bank lenders to postpone until October 1, 2003, a
step down of the leverage ratio covenant of its bank facility. In the absence of
this postponement, On Command would not have been in compliance with the
leverage ratio covenant at June 30, 2003. Accordingly, the outstanding balance
of the On Command bank facility ($266 million) is included in current portion of
debt at June 30, 2003. All other consolidated borrowers were in compliance with
their debt covenants at June 30, 2003. 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 June 30, 2003 is as follows (amounts in millions):

Senior notes of parent company.............................. $2,179
Senior debentures of parent company......................... $1,880
Senior exchangeable debentures of parent company, including
call option obligation.................................... $4,364

Liberty believes that the carrying amount of the remainder of its debt
approximated its fair value at June 30, 2003.

I-16

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 June 30, 2003............................. $7,114
Add:
Unamortized issue discount on senior notes and
debentures.............................................. 22
Unamortized discount attributable to call option feature
of exchangeable debentures.............................. 2,576
------
Face amount at maturity................................. $9,712
======

(8) STOCKHOLDERS' EQUITY

SHARES RESERVED FOR ISSUANCE

As of June 30, 2003, there were 49 million shares of Liberty Series A common
stock and 28 million shares of Liberty Series B common stock reserved for
issuance under exercise privileges of outstanding stock options and warrants.

PURCHASES OF COMMON STOCK

During the six months ended June 30, 2003, the Company purchased
17.3 million shares of its common stock in the open market for aggregate cash
consideration of $170 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.

During 2002, Liberty sold put options on 7.0 million shares of its Series A
common stock, 4.0 million of which were outstanding at December 31, 2002.
Liberty sold another 9.3 million options in the first quarter of 2003. All of
these options expired prior to June 30, 2003. The Company accounted 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"), and recorded a net increase to additional paid-in capital of
$37 million during the six months ended June 30, 2003.

(9) STOCK BASED COMPENSATION

The Company has granted to its employees options and options with tandem
stock appreciation rights ("SARs") to purchase shares of Liberty Series A and
Series B common stock. The Company accounts for these grants pursuant to the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB Opinion No. 25"). The
Company's options and options with tandem SARs are accounted for as variable
plan awards, and compensation is recognized based upon the percentage of the
options that are vested and the difference between the market price of the
underlying common stock and the exercise price of the options at the balance
sheet date. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, "ACCOUNTING
FOR STOCK-BASED COMPENSATION," ("Statement 123") to its

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

options. Compensation expense for options with tandem SARs is the same under APB
Opinion No. 25 and Statement 123.

Starz Encore has granted Phantom Stock Appreciation Rights ("PSARs") to
certain of its officers, including its chief executive officer. Compensation
under the PSARs is computed based upon the percentage of PSARs that are vested
and a formula derived from the appraised fair value of the net assets of Starz
Encore. All amounts earned under the plan are payable in cash, Liberty common
stock or a combination thereof. Effective December 27, 2002, the chief executive
officer of Starz Encore elected to exercise 54% of his outstanding PSARs.
Subsequent to June 30, 2003, Starz Encore settled the amount due the officer
with a cash payment of $287 million.

(10) COMMITMENTS AND CONTINGENCIES

FILM RIGHTS

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 June 30, 2003
is reflected as a liability in the accompanying condensed consolidated balance
sheet. The balance due as of June 30, 2003 is payable as follows: $116 million
in 2003; $74 million in 2004; and $20 million in 2005.

Starz Encore has also contracted to pay fees for the rights to exhibit films
that have been released theatrically, but are not available for exhibition by
Starz Encore until some future date. These amounts have not been accrued at
June 30, 2003. Starz Encore's estimate of amounts payable under these agreements
is as follows: $142 million in 2003; $393 million in 2004; $145 million in 2005;
$116 million in 2006; $107 million in 2007; and $303 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 are expected to be significant. Starz
Encore's total film rights expense aggregated $193 million and $182 million for
the six months ended June 30, 2003 and 2002, respectively.

I-18

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In addition to the foregoing contractual film obligations, two motion
picture studios that have output contracts with Starz Encore through 2006 and
2010, respectively, have the right to extend their contracts for an additional
three years. If the studios elect to extend these contracts, Starz Encore has
agreed to pay the studios $60 million and $190 million, respectively.

GUARANTEES

Liberty guarantees Starz Encore's obligations under certain of its studio
output agreements. At June 30, 2003, Liberty's guarantee for obligations for
films released by such date aggregated $676 million. While the guarantee amount
for films not yet released is not determinable, such amount could be
significant. As noted above Starz Encore has recognized the liability for a
portion of its obligations under the output agreements. As this represents a
commitment of Starz Encore, a consolidated subsidiary of Liberty, Liberty has
not recorded a separate liability for its guarantee of these obligations.

At June 30, 2003, Liberty has guaranteed Y15.3 billion ($128 million) of the
bank debt of J-COM, an equity affiliate that provides broadband services in
Japan. Liberty's guarantees expire as the underlying debt matures. The debt
maturity dates range from 2003 to 2018. In addition, Liberty has agreed to fund
up to an additional Y20 billion ($167 million at June 30, 2003) to J-COM in the
event J-COM's cash flow (as defined in its bank loan agreement) does not meet
certain targets. In the event J-COM meets certain performance criteria, this
commitment reduces to Y10 billion ($83.5 million at June 30, 2003) at
December 31, 2003 and expires on September 30, 2004.

Liberty and the other investors have guaranteed transponder and equipment
lease obligations through 2018 of their investee that provides direct-to-home
satellite services in Latin America ("Sky Latin America"). At June 30, 2003, the
Company's portion of the guarantee of the remaining obligations due under such
agreements aggregated $110 million. In 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 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 June 30, 2003, the Guaranteed Obligations aggregated
approximately $52 million and are not reflected in Liberty's condensed
consolidated balance sheet at June 30, 2003. Currently, Liberty is not certain
of the likelihood of being required to perform under such guarantees.

OPERATING LEASES

Liberty and its subsidiaries lease business offices, have entered into pole
rental and transponder lease agreements and use certain equipment under lease
arrangements.

I-19

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

LITIGATION

STARZ ENCORE GROUP LLC V. AT&T BROADBAND LLC AND SATELLITE
SERVICES, INC. In 1997, Starz Encore entered into a 25-year affiliation
agreement with Tele-Communications, Inc. ("TCI"). TCI cable systems subsequently
acquired by AT&T Corp. ("AT&T") in 1999 operated under the name AT&T Broadband.
As further described below, AT&T Broadband completed a transaction with Comcast
Corporation in November 2002. 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, or if Starz
Encore's programming costs increase or decrease, as the case may be, above or
below amounts specified in the agreement. In such cases, AT&T Broadband's
payments under the affiliation agreement would 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.

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 in that letter to be without merit. On July 10, 2001, Starz
Encore Group initiated a lawsuit against AT&T Broadband and Satellite
Services, Inc., a subsidiary of AT&T Broadband that is also a party to the
affiliation agreement, in Arapahoe County District Court, Colorado for breach of
contract and collection of damages and costs.

On October 19, 2001, the parties to the Colorado action entered into a
standstill and tolling agreement whereby the parties agreed to move the court to
stay the lawsuit until August 31, 2002 to permit the parties an opportunity to
resolve their dispute. The court granted the stay on October 30, 2001. In
conjunction with this agreement, Liberty and AT&T Broadband entered into various
agreements whereby Starz Encore indirectly received full compensation 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 through a third-party mediator. The parties also extended
their standstill and tolling agreement through to the conclusion of the extended
stay, which expired without further extension.

On November 18, 2002, AT&T Broadband completed a transaction with Comcast
Corporation (formerly known as AT&T Comcast Corporation) and Comcast Holdings
Corporation (formerly known as Comcast Corporation) in which AT&T Broadband and
Comcast Holdings Corporation became wholly owned subsidiaries of Comcast
Corporation. On the same day, Comcast Corporation and Comcast Holdings
Corporation filed an action for declaratory judgment against Starz Encore in the
U.S. District Court for the Eastern District of Pennsylvania, alleging that
Comcast Holdings' agreement with Starz Encore permits Comcast Corporation to
terminate AT&T Broadband's affiliation agreement with Starz Encore and to
replace that agreement with the affiliation agreement entered into by Comcast
Holdings with Starz Encore. Comcast Holdings' affiliation agreement with Starz
Encore provides for a per subscriber fee rather than the fixed monthly payments
prescribed by the AT&T

I-20

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Broadband agreement and has no provision for the pass through of excess
programming costs. Starz Encore has filed a motion to dismiss this case on
grounds that the claims made by the plaintiffs should be made in the Colorado
state court proceeding described above. Comcast has filed a motion for summary
judgement in its favor, which Starz Encore has moved the court to strike. If the
court does not strike Comcast's motion, Starz Encore will vigorously oppose it.

On January 31, 2003, Starz Encore amended its complaint in the Colorado
action to add Comcast Corporation and Comcast Holdings Corporation as
defendants, claiming, among other things, breach of contract and intentional
interference with contractual relations by those parties. On March 3, 2003,
Starz Encore filed a motion seeking leave to file a second amended complaint
adding related claims arising from those parties' ongoing actions with respect
to Starz Encore.

AT&T Broadband has stopped making payments under its affiliation agreement
with Starz Encore. Instead, Comcast Corporation has made payments to Starz
Encore related to distribution of Starz Encore's services on AT&T Broadband's
cable systems based on its claim that the lower rates payable under Comcast
Holdings' affiliation agreement are applicable, which has resulted in lower
aggregate payments to Starz Encore. In addition, both AT&T Broadband and Comcast
have limited their cooperation with Starz Encore on various matters, including,
for example, promotion of Starz Encore's channels.

Starz Encore is vigorously contesting Comcast's claims in the Pennsylvania
federal court proceeding and believes that it will succeed in its defense of
those claims. Starz Encore is also vigorously prosecuting its claims in the
Colorado state court proceeding and believes that it will succeed in obtaining a
judgment against the defendants in that proceeding. However, because both
actions are at an early stage, it is not possible to predict with a high degree
of certainty the outcome of either action, and there can be no assurance that
those actions will ultimately be resolved in favor of Starz Encore. If Starz
Encore were to fail in its efforts to enforce its affiliation agreement with
AT&T Broadband, that failure would have a material adverse effect on Starz
Encore's revenue and operating income.

Because of the uncertainty in predicting the outcome of the court actions,
Liberty has determined for financial reporting purposes to exclude from Starz
Encore's revenue the amounts due under the AT&T Broadband affiliation agreement
from and after November 18, 2002. Rather, from that date it is including revenue
amounts due under the Comcast affiliation agreement on account of distribution
of the Starz Encore service on AT&T Broadband's systems. This treatment is in
accordance with SEC Staff Accounting Bulletin 101, which provides that revenue
should not be recognized unless collectibility of amounts owed is reasonably
assured. The reduction in revenue based upon the difference in payments
prescribed in each of the Comcast and AT&T Broadband affiliation agreements was
approximately $45 million for the six months ended June 30, 2003.

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 consolidated
financial statements.

(11) INFORMATION ABOUT LIBERTY'S OPERATING SEGMENTS

Liberty is a holding company with a variety of subsidiaries and investments
operating in the media, communications and entertainment industries. Each of
these businesses is separately managed. Liberty identifies its reportable
segments as those consolidated subsidiaries that represent 10% or more of its
consolidated revenue, earnings or loss before income taxes or total assets; and
those equity method

I-21

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

Liberty evaluates performance and makes decisions about allocating resources
to its subsidiaries and affiliates based on the measures of revenue and
operating cash flow, 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, which it
defines as revenue less operating, selling, general and administrative expenses,
should be considered in addition to, but not as a substitute for, operating
income, net income, cash flow provided by operating activities and other
measures of financial performance prepared in accordance with generally accepted
accounting principles. Liberty generally accounts for intersegment sales and
transfers as if the sales or transfers were to third parties, that is, at
current prices.

For the six months ended June 30, 2003, Liberty had five operating segments:
Starz Encore, Ascent Media Group, Inc. ("Ascent Media"), On Command and "Other,"
which are all consolidated entities, and QVC, which is an equity method
affiliate. Starz Encore provides premium programming distributed by cable
operators, direct-to-home satellite providers and other distributors throughout
the United States. Ascent Media provides sound, video and ancillary post
production and distribution services to the motion picture and television
industries in the United States and Europe. On Command provides in-room,
on-demand video entertainment and information services to hotels, motels and
resorts. "Other" includes Liberty's non-consolidated investments, corporate and
other consolidated businesses

I-22

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

not representing separately reportable segments. QVC markets and sells a wide
variety of consumer products and accessories primarily by means of televised
shopping programs on the QVC network.

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

I-23

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;

- spending on domestic and foreign television advertising;

- the regulatory and competitive environment of the industries in which the
Company, and the entities in which it has interests, operate;

- continued consolidation of the broadband distribution industry;

- 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;

- the outcome of any pending or threatened litigation;

- 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;

- threatened terrorists attacks and ongoing military action in the Middle
East and other parts of the world.

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 its expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based.

I-24

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, 2002.

Liberty owns interests in a broad range of video programming, broadband
distribution, interactive technology services and communications businesses.
Liberty and its affiliated companies operate in the United States, Europe, Asia
and South America.

Liberty's most significant consolidated subsidiaries at June 30, 2003, were
Starz Encore Group LLC, Ascent Media Group, Inc. 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 Liberty's consolidated results.

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 its consolidated results as
earnings or losses of affiliates. Included in Liberty's investments in
affiliates at June 30, 2003 were Discovery Communications, Inc., QVC Inc.,
UnitedGlobalCom, Inc. and Jupiter Telecommunications Co., Ltd.

Liberty also holds interests in companies in which it does not have
significant influence. The most significant of these include The News
Corporation Limited, InterActiveCorp, AOL Time Warner Inc., Sprint Corporation,
Vivendi Universal, S.A., Motorola Inc. and Viacom, Inc. These investments are
classified as available-for-sale securities and are carried at fair value.

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. Ascent Media 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 of the Company's financial
performance, separate financial data has been provided in the table below for
Starz Encore, Ascent Media and On Command. The "other" category includes
Liberty's other consolidated subsidiaries and corporate expenses. Liberty's
other consolidated subsidiaries include Maxide Acquisition, Inc. (d/b/a DMX
Music), TruePosition, Inc. ("TruePosition"), OpenTV Corp. ("OpenTV"), Pramer
S.C.A. ("Pramer") 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. TruePosition provides equipment
and technology that deliver location-based services to wireless users. OpenTV
provides interactive television solutions, including operating middleware, web
browser software, interactive applications, and consulting and support services.
Pramer is an owner and distributor of cable programming services throughout
Latin America. 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

I-25

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-26

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

(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 (1) the development of new television and motion picture programming,
thereby adversely impacting the Programming Affiliates' supply of service
offerings; (2) consumer disposable income and consumer demand for the products
and services of the Programming Affiliates and (3) the amount of resources
allocated for network and cable television advertising by major corporations.

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 ("DTH") distributors. In 1997, Starz
Encore entered into a 25-year affiliation agreement with TCI. TCI cable systems
(referred to herein as AT&T Broadband) were acquired by AT&T in 1999. Under this
affiliation agreement, AT&T Broadband makes fixed monthly payments to Starz
Encore in exchange

I-27

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
Broadband 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.

AT&T Broadband was a party to a business combination with Comcast
Corporation (formerly known as AT&T Comcast Corporation) in November 2002. In
that combination, AT&T Broadband and Comcast Holdings Corporation (formerly
known as Comcast Corporation) became wholly-owned subsidiaries of Comcast
Corporation. As described in note 10 to the accompanying condensed consolidated
financial statements, AT&T Broadband has disputed the enforceability of various
provisions of its affiliation agreement with Starz Encore. That dispute is the
subject of a lawsuit brought in a Colorado state court by Starz Encore in which
AT&T Broadband, Comcast Corporation and Comcast Holdings Corporation have been
named as defendants. Comcast Corporation and Comcast Holdings Corporation have
filed a lawsuit against Starz Encore in a federal district court in
Pennsylvania, alleging that Comcast Corporation is entitled to terminate AT&T
Broadband's affiliation agreement with Starz Encore and to replace that
agreement with the agreement entered into by Comcast Holdings Corporation, which
expires in December 2008.

AT&T Broadband has stopped making payments under its affiliation agreement
with Starz Encore. Instead, Comcast Corporation has made payments to Starz
Encore related to distribution of Starz Encore's services on AT&T Broadband's
cable systems based on its claim that the per subscriber fees payable under
Comcast Holdings' affiliation agreement are applicable, which has resulted in
lower aggregate payments to Starz Encore. In addition, both AT&T Broadband and
Comcast have limited their cooperation with Starz Encore on various matters,
including, for example, promotion of Starz Encore's channels.

Starz Encore is vigorously contesting Comcast's claims in the Pennsylvania
federal court proceeding and believes that it will succeed in its defense of
those claims. Starz Encore is also vigorously prosecuting its claims in the
Colorado court proceeding and believes that it will succeed in obtaining a
judgment against the defendants in that proceeding. However, because both
actions are at an early stage, it is not possible to predict with a high degree
of certainty the outcome of either action, and there can be no assurance that
those actions will ultimately be resolved in favor of Starz Encore. If Starz
Encore were to fail in its efforts to enforce its affiliation agreement with
AT&T Broadband, that failure would have a material adverse effect on Starz
Encore's revenue and operating income.

Because of the uncertainty in predicting the outcome of the court actions,
Starz Encore has determined for financial reporting purposes to exclude from its
revenue the amounts due under the AT&T Broadband affiliation agreement from and
after November 18, 2002. Rather, from that date it is including revenue amounts
due under the Comcast Holdings affiliation agreement on account of distribution
of the Starz Encore service on AT&T Broadband's systems. This treatment is in
accordance with SEC Staff Accounting Bulletin 101, which provides that revenue
should not be recognized unless collectibility of amounts owed is reasonably
assured. The reduction in revenue based upon the difference in payments
prescribed in each of the Comcast Holdings and AT&T Broadband affiliation
agreements was approximately $45 million for the six months ended June 30, 2003.

For the year ending December 31, 2003, Starz Encore estimates that the
difference in revenue as calculated under the AT&T Broadband and Comcast
Holdings affiliation agreements, respectively, will be between $95 million and
$105 million. This estimated reduction in revenue is the result of (i) a lower
effective per-subscriber fee under the Comcast Holdings affiliation agreement
and (ii) a decrease in subscribers in the AT&T Broadband systems. The decrease
in subscribers is due to the negative effects of changes in marketing efforts
and packaging of Starz Encore's services that Comcast has implemented in 2003.
While Starz Encore has estimated the full-year revenue impact of its dispute
with Comcast, no assurance can be given that the impact of any additional
marketing or packaging changes that Comcast may implement will not exceed this
estimate. The estimated difference in revenue would have approximately a
dollar-for-dollar impact on Starz Encore's operating income, as Starz Encore
would not realize any significant cost savings associated with the reduction in
revenue.

I-28

There were no excess programming costs in 2002 that Starz Encore had the
right to pass through to AT&T Broadband under its affiliation agreement, and
none are currently expected in 2003. Because the amount of excess programming
costs is subject to a variety of factors, including receipts from theatrical
release of motion pictures covered by Starz Encore's agreements with movie
studios, Starz Encore is unable to estimate the share of those excess
programming costs that could be passed through to AT&T Broadband, were the AT&T
Broadband affiliation agreement held enforceable, for 2004 and thereafter.
However, such amounts are expected to be significant.

Starz Encore's revenue decreased 5% and 4% for the three and six months
ended June 30, 2003, respectively, as compared to the corresponding prior year
periods. Such decreases are the net effect of the impact of the dispute with
Comcast partially offset by a 17% increase in the number of average
subscriptions to Starz Encore's services. Substantially all of the increase in
average subscriptions is attributable to Starz Encore's Thematic Multiplex
service, which has lower subscription rates than its other services.

While Starz Encore's average subscription units increased during the six
months ended June 30, 2003, as compared to the six months ended June 30, 2002,
Starz Encore's total subscription units decreased from March 31, 2003 to
June 30, 2003. Such decrease reflects the impact of the dispute with Comcast
described above, as well as the impact of promotional efforts on the part of
certain other DTH and cable operators to sell other premium movie services to
their customers instead of Starz Encore's services. Starz Encore is negotiating
with these multichannel television distributors to obtain more favorable channel
packaging and increased promotional efforts. However, no assurance can be given
that these negotiations will be successful.

Starz Encore's subscription units are presented in the table below.
Subscription units for December 31, 2002 reflect certain minor adjustments to
conform with Starz Encore's new policy of only presenting paying subscription
units. Previously, Starz Encore had included certain of its subscribers
receiving the service during rent free promotional campaigns.

At June 30, 2003, cable, DTH satellite, and other distribution represented
64%, 35% and 1%, respectively, of Starz Encore's total subscription units.
Comcast, DirecTV and Echostar generated 26%, 23% and 11% respectively, of Starz
Encore's revenue for the six months ended June 30, 2003.

Starz Encore's operating expenses increased 3% for the three months ended
June 30, 2003, and were flat for the six months ended June 30, 2003, as compared
to the corresponding prior year periods. The three month increase is due
primarily to increases in programming costs. In the first quarter of 2003, Starz
Encore entered into a settlement agreement regarding the payment of certain
music license fees, which resulted in the reversal of a related accrual in the
amount of $8 million. This reversal offset the programming cost increases for
the six months ended June 30, 2003.

Starz Encore's SG&A expenses decreased 54% and 47% for the three and six
months ended June 30, 2003, respectively, as compared to the corresponding prior
year periods. These decreases are due primarily to decreases in sales and
marketing expenses ($20 million and $35 million for the three and six months
ended June 30, 2003, respectively) and bad debt expense ($11 million and
$13 million

I-29

for the three and six months ended June 30, 2003, respectively) The decrease in
sales and marketing expenses is due to the reduced number of co-operative
promotions by certain multichannel television distributors discussed above. The
higher bad debt expense in 2002 resulted from the bankruptcy filing of Adelphia
Communications Corporation.

During the first quarter of 2003, a cable operator failed to make all
license fee payments due Starz Encore after December 31, 2002 under its
affiliation agreement with Starz Encore. During the second quarter of 2003, the
cable operator paid all past-due amounts and is currently paying under the terms
of its affiliation agreement.

ASCENT MEDIA. Ascent Media's revenue decreased 5% and 7% for the three and
six months ended June 30, 2003, respectively, as compared to the corresponding
prior year periods. The three month decrease is due to a decrease in revenue for
Ascent Media's Networks Group ($10 million) due to the sale of a facility in
December 2002 and the re-negotiation of certain contracts resulting in lower
rates for services. These decreases were partially offset by an increase in
revenue for Ascent Media's Creative Services Group ($4 million). The six month
decrease in Ascent Media's revenue is due primarily to a decrease in its
Networks Group ($16 million) due to the aforementioned factors.

Ascent Media's operating expenses decreased 6% and 9% for the three and six
months ended June 30, 2003, respectively, as compared to the corresponding prior
year periods. Such decreases are due to a decrease in expenses that vary with
revenue such as personnel and material costs.

Ascent Media's SG&A expenses were relatively comparable over the 2003 and
2002 periods.

ON COMMAND. Revenue decreased 3% and 2% for the three and six months ended
June 30, 2003, respectively, as compared to the corresponding prior year period.
These decreases are due to the net effect of a decrease in revenue related to On
Command's mature-themed movies, partially offset by increases in revenue for
feature films and Internet services. On Command believes these changes in
revenue are due to (i) changes in travel patterns for business and family
travelers and (ii) a reduction in buy rates for On Command's mature-themed
pay-per-view products.

On Command's operating expenses were relatively flat for the three months
ended June 30, 2003 and decreased 3% for the six months ended June 30, 2003, as
compared to the corresponding prior year periods. These changes are due to the
net effect of increases in programming fees offset by decreases in other
expenses that vary with revenue and the number of rooms served.

On Command's SG&A expenses increased $1 million and $3 million for the three
and six months ended June 30, 2003, respectively, as compared to the
corresponding prior year periods. These increases are due to individually
insignificant increases in various components of this line item.

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

Other revenue increased $10 million or 12% and $22 million or 13% for the
three and six months ended June 30, 2003, respectively, as compared to the
corresponding periods in 2002. The increase is primarily due to the acquisition
of OpenTV in August 2002.

Other operating expenses increased 23% and 30% for the three and six months
ended June 30, 2003, respectively, as compared to the corresponding prior year
periods. Such increases are due primarily to the August 2002 acquisitions of
OpenTV and Wink Communications, Inc. ("Wink").

Other SG&A expenses increased 6% and 17% for the three and six months ended
June 30, 2003, respectively, as compared to the corresponding prior year
periods. The three month increase is due to lower expenses at DMX due to cost
containment initiatives offset by increases due to the acquisition of OpenTV and
Wink. The six month increase is primarily due to the OpenTV and Wink
acquisitions partially offset by a decrease at DMX.

I-30

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.

OTHER INCOME AND EXPENSE

DIVIDEND AND INTEREST INCOME. Interest and dividend income for the six
months ended June 30, 2003 was comprised of interest income earned on invested
cash ($28 million), dividends on News Corp. ADRs ($19 million), dividends on ABC
Family Worldwide preferred stock ($15 million) and other ($28 million).

INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD. Liberty's
share of earnings (losses) of affiliates is presented below:

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

* No longer an equity investment

DISCOVERY. The decrease in Liberty's share of losses of Discovery is due to
improved operating income, which resulted from an increase in revenue partially
offset by an increase in operating expenses. During the six months ended
June 30, 2003, Discovery reported increases in both affiliate revenue and
advertising revenue.

QVC. Liberty's share of earnings from QVC is reduced by Liberty's share of
certain stock compensation amounts that QVC includes in stockholders' equity.
The increase in Liberty's share of earnings of QVC is the net effect of an
increase in QVC's net earnings offset by an increase in stock compensation in
2003. QVC's revenue, gross profit and operating income increased in 2003 and
contributed to the increase in QVC's net earnings.

J-COM. The change in Liberty's share of J-COM's results of operations is
due to increased revenue and operating margins driven by increased cable
distribution and growth in telephony and Internet revenue, which translated into
net earnings in 2003, as compared to a net loss in 2002.

As of December 31, 2002, Liberty and Sumitomo Corporation each held an
approximate 36% interest in J-COM. On March 27, 2003, Liberty purchased an
additional 8% interest from Sumitomo for $141 million, increasing Liberty's
ownership interest in J-COM to 44% and decreasing Sumitomo's ownership interest
to 28%. On May 15, 2003, Liberty and Sumitomo each converted a portion of its
shareholder loans to equity interests in J-COM. Subsequent to this conversion,
Liberty's and Sumitomo's equity ownership interests in J-COM are approximately
45% and 32%, respectively.

I-31

UGC. Because Liberty currently has no commitment to make additional capital
contributions to UGC, Liberty suspended recording its share of UGC's losses in
the third quarter of 2002 when its investment was reduced to zero. Suspended
losses at June 30, 2003 aggregated $112 million. In the event that Liberty
increases its investment in UGC in the future and such investment is deemed to
represent funding of these suspended losses, Liberty will be required to
recognize these suspended losses to the extent of its additional investment.

TELEWEST. As of December 31, 2002, Liberty's share of Telewest's losses had
reduced its carrying value in Telewest to zero. Telewest has disclosed that it
has reached a nonbinding 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 recently
announced that shareholders could expect to receive 1.5% rather than 3% of the
issued share capital of the restructured company. As a result of Telewest's
proposed restructuring, which Liberty expects will reduce its overall ownership
in Telewest to below 10%, Liberty determined that beginning in 2003 it no longer
has the ability to exercise significant control over the operations of Telewest.
In addition, Liberty has removed its representatives from the Telewest board of
directors. Accordingly, Liberty no longer accounts for its investment in
Telewest using the equity method.

At June 30, 2003, Liberty's accumulated other comprehensive earnings
includes $287 million (before related deferred taxes) of unrealized foreign
currency losses related to its investment in the equity of Telewest. These
unrealized foreign currency losses will only be recognized by Liberty upon the
sale of its Telewest investment.

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

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

(1) Comprised primarily of forward foreign exchange contracts and interest rate
swap agreements.

Prior to January 1, 2003, the only derivative instruments designated by the
Company as hedges were its equity collars, which were designated as fair value
hedges. Effective December 31, 2002, the Company elected to dedesignate its
equity collars as fair value hedges. Accordingly, changes in the fair value of
the Company's available-for-sale securities that previously had been reported in
earnings due to the designation of equity collars as fair value hedges are now
reported as a component of other comprehensive income in the Company's balance
sheet. Changes in the fair value of the equity collars continue to be reported
in earnings.

NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS. During the six months
ended June 30, 2003 and 2002, Liberty determined that certain of its other
investments experienced nontemporary declines in value. The primary factors
considered by Liberty in determining the timing of the recognition for the

I-32

majority of these impairments was the length of time the investments traded
below Liberty's cost bases and the lack of near term prospects for recovery in
the stock prices. As a result, the carrying amounts of such investments were
adjusted to their respective fair values. These adjustments resulted in total
charges of $27 million and $5,134 million, respectively.

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 $1,869 million, net of related taxes, as the cumulative
effect of a change in accounting principle for the six months ended June 30,
2002. This transitional impairment loss includes an adjustment of $325 million
for the Company's proportionate share of transition adjustments that its equity
method affiliates recorded.

MATERIAL CHANGES IN FINANCIAL CONDITION

CORPORATE

Although Liberty's sources of funds include its available cash balances, net
cash from operating activities, and dividend and interest receipts, Liberty is
primarily dependent upon its financing activities, proceeds from asset sales and
monetization of its public investment portfolio, including derivative
instruments, to generate sufficient cash resources to meet its future cash
requirements and planned commitments. Due to covenant restrictions in the bank
credit facilities of its subsidiaries, Liberty is not entitled to the cash
resources or cash generated by operations of certain of its subsidiaries and
business affiliates. Similarly, debt of Liberty's subsidiaries is generally
non-recourse to Liberty.

Liberty's primary use of cash in recent years has been investments in and
advances to affiliates. In this regard, Liberty's investments in and advances to
equity and cost method affiliates aggregated $459 million and $1,134 million,
respectively, for the six months ended June 30, 2003, and $684 million and
$371 million, respectively, for the six months ended June 30, 2002. In addition,
Liberty made debt repayments of $302 million and $790 million during the six
months ended June 30, 2003 and 2002, respectively. Liberty also acquired shares
pursuant to a previously authorized share buy back program. During the six
months ended June 30, 2003, Liberty purchased 17.3 million shares of its common
stock in the open market for $170 million.

Liberty anticipates that it will continue to fund and make additional
investments in its existing ventures, and that such investments and advances to
affiliates will aggregate approximately $100 million in the second half of 2003.
In addition, effective March 27, 2003, Liberty entered into a put/call
arrangement with News Corp. Pursuant to this arrangement, Liberty has the
option, exercisable at any time prior to September 30, 2003, to acquire
$500 million of ADRs for News Corp. preferred limited voting ordinary shares at
$21.50 per ADR. If Liberty does not exercise its option and in the event News
Corp. acquires an ownership interest in Hughes Electronics Corporation within
two years, News Corp. has the option to require Liberty to purchase
$500 million of ADRs for News Corp. preferred limited voting ordinary shares at
$21.50 per ADR. Although Liberty may invest additional amounts in new or
existing ventures in 2003, it is unable to quantify such investments at this
time. In addition, Liberty has $250 million of corporate debt and $474 million
of subsidiary debt that is required to be repaid or refinanced before June 30,
2004.

Liberty intends to fund its 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 six months ended June 30, 2003, Liberty issued $1,750 million of 0.75%
Senior Exchangeable Debentures due 2023. Each $1,000 debenture is exchangeable
at the holder's option for the value of 57.4079 shares of AOL Time Warner common
stock. Liberty received cash proceeds of $1,715 million upon issuance of the
exchangeable debentures after related offering costs. In addition, Liberty
(i) issued $1,000 million

I-33

face amount of senior notes with an interest rate of 5.70% for net cash proceeds
of approximately $990 million, (ii) received cash proceeds of $1,089 million
upon the sale of assets and the settlement of equity collars related to certain
of its available-for-sale securities and (iii) received premium proceeds of
$238 million from the origination of financial instruments.

On February 28, 2003, Liberty notified Comcast Corporation of its election
to trigger an exit process under the stockholders agreement governing Comcast's
and Liberty's interests in QVC. Effective June 30, 2003, Liberty and Comcast
reached an agreement pursuant to which Liberty will acquire Comcast's
approximate 56% ownership interest in QVC for a purchase price of $7.9 billion.
This agreement supercedes the exit process initiated by Liberty on February 28,
2003 under the QVC stockholders agreement. The purchase price will be comprised
of approximately 218 million shares of Liberty Series A common stock valued at
$11.71 per share (aggregate value of approximately $2.6 billion) and a
$5.3 billion three-year note payable bearing interest at 90-day LIBOR plus 1.5%.
The interest rate on any portion of this indebtedness held by Comcast or any
affiliate of Comcast is subject to adjustment in the event of a change in
Liberty's credit rating. Liberty's acquisition of Comcast's interest in QVC will
be accounted for using the purchase method of accounting, and upon consummation
QVC will be included in Liberty's consolidated results of operations and
financial position. Although Liberty expects that this transaction will be
consummated during the second half of 2003, it is subject to certain closing
conditions, including receipt of applicable regulatory approvals, and no
assurance can be given that it will be consummated on the terms described above,
or at all.

Subsequent to the announcement by Liberty of its intention to purchase QVC,
Standard and Poor's Securities, Inc. ("S&P"), Fitch Investors Service, L.P.
("Fitch") and Moody's Investors Service, Inc. ("Moody's") each affirmed its
respective rating for Liberty's senior debt at the last level of investment
grade. In addition, S&P and Fitch each affirmed its stable outlook. However,
Moody's placed Liberty's senior debt on review for possible downgrade. Except as
described in the immediately preceding paragraph, none of Liberty's existing
indebtedness includes any covenant under which a default could occur as a result
of a downgrade in Liberty's credit rating. However, any such downgrade may
adversely affect Liberty's access to the public debt markets and its overall
cost of future borrowings.

Based on currently available information, Liberty expects that the aggregate
dividend and interest income it will receive during the year ended December 31,
2003 will be approximately $180 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, 2003 will be approximately
$420 million, of which approximately $375 million relates to parent company
debt.

SUBSIDIARIES

At June 30, 2003, Liberty's consolidated subsidiaries had $1,104 million
outstanding and $192 million in unused availability under their respective bank
credit facilities. Certain assets of Liberty's consolidated subsidiaries serve
as collateral for borrowings under these bank credit facilities. Also, these
bank credit facilities contain provisions which limit additional indebtedness,
sale of assets, liens, guarantees, and distributions by the borrowers. At
June 30, 2003, 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 and the participating banks have entered into a forbearance agreement
whereby the banks have agreed to forbear from exercising certain default-related
remedies against the subsidiary through March 31, 2004. The outstanding balance
of the subsidiary's bank facility was $89 million at June 30, 2003. All other
consolidated subsidiaries were in compliance with their debt covenants at
June 30, 2003. 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.

I-34

On June 27, 2003, On Command reached agreement with its bank lenders to
postpone until October 1, 2003 a step down of the leverage ratio covenant of its
Revolving Credit Facility. Such Revolving Credit Facility had an outstanding
balance of $266 million at June 30, 2003. On Command and its bank lenders
executed an Amended and Restated Credit Agreement on April 17, 2003, and an
amendment thereto on June 27, 2003 (as amended, the "Amended and Restated Credit
Agreement"). The effectiveness of the Amended and Restated Credit Agreement is
contingent upon the contribution of $40 million by Liberty to On Command to be
used to repay principal due, and permanently reduce lender commitments, pursuant
to the Amended and Restated Credit Agreement. However, Liberty has no obligation
to make any contribution to On Command, and no assurance can be given that any
such contribution will be made. After the proposed reduction of lender
commitments, the Amended and Restated Credit Agreement would mature on
December 31, 2007. As a result of the postponement of the leverage ratio step
down, On Command was in compliance with the leverage ratio covenant of its
existing Revolving Credit Facility at June 30, 2003, and On Command expects to
be in compliance with such covenant at September 30, 2003. However, On Command
believes that it will be out of compliance with such covenant at December 31,
2003 if the Amended and Restated Credit Agreement does not become effective by
that date.

If the Amended and Restated Credit Agreement has not become effective by
December 31, 2003, On Command anticipates that it will request a further
amendment to its existing Revolving Credit Facility to postpone the step down of
the leverage ratio covenant. It is uncertain if On Command's lenders would agree
to such a further amendment and what terms might be imposed by On Command's
lenders in connection with such further amendment. In the event that the Amended
and Restated Credit Agreement does not become effective on or before
December 31, 2003, On Command anticipates that a default would occur under the
terms of its existing Revolving Credit Facility. Upon the occurrence of a
default, if left uncured, the bank lenders would have various remedies,
including terminating their revolving loan commitment, declaring all outstanding
loan amounts including interest immediately due and payable, and exercising
their rights against their collateral which consists of substantially all of On
Command's assets. No assurance can be given that the Amended and Restated Credit
Agreement will become effective. In addition, if the Amended and Restated Credit
Agreement does not become effective, no assurance can be given that On Command
will be able to successfully restructure or refinance its existing Revolving
Credit Facility on terms acceptable to On Command, or that On Command will be
able to avoid a default under it existing Revolving Credit Facility. In light of
the uncertainties with respect to the restructuring of the Revolving Credit
Facility, On Command's independent auditors included an explanatory paragraph in
their audit report for the year ended December 31, 2002 that addressed the
uncertainty surrounding the ability of On Command to continue as a going
concern.

EQUITY AFFILIATES

Various partnerships and other equity method affiliates of Liberty finance a
substantial portion of their acquisitions and capital expenditures with
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. Liberty's ability to meet capital calls or other capital
or loan commitments is subject to its ability to access cash.

At June 30, 2003, Liberty owned approximately 305 million shares of UGC
common stock which represents an approximate 73% economic interest and a 94%
voting interest in UGC. Pursuant to certain voting and standstill arrangements,
Liberty is currently unable to exercise control of UGC, and accordingly, Liberty
applies the equity method of accounting for its investment.

UGC 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-35

In February, May, August and November 2002 and February 2003, United
Pan-Europe Communications N.V. ("UPC"), a consolidated subsidiary of UGC, 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, approximately $5.4 billion of UPC's debt would be exchanged for
equity of a new holding company of UPC ("New UPC"). If the recapitalization is
consummated, UGC 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 UGC, would receive 2% of UPC's equity. The
recapitalization is subject to certain approvals and conditions. In
December 2002, UPC filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code and commenced a moratorium of payments in The Netherlands under
Dutch bankruptcy law. The U.S. Bankruptcy Court confirmed the plan of
reorganization as modified on February 21, 2003. The Dutch court ratified the
plan of compulsory composition (Akkord) on March 13, 2003. A UPC creditor has
appealed the Dutch decision. The Dutch Court of Appeals rejected this appeal on
April 15, 2003, and the creditor made a final appeal to the Dutch Supreme Court
on April 24, 2003. UPC does not expect that this appeal will affect the
successful completion of its restructuring, which it expects will be finalized
in the third quarter of 2003.

In addition, certain other UGC 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 UGC's
ability to continue as a going concern. UGC's management is taking steps to
address these matters. However, no assurance can be given that such steps will
be successful.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

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 June 30, 2003
is reflected as a liability in the accompanying condensed consolidated balance
sheet. The balance due as of June 30, 2003 is payable as follows: $116 million
in 2003; $74 million in 2004; and $20 million in 2005.

Starz Encore has also contracted to pay fees for the rights to exhibit films
that have been released theatrically, but are not available for exhibition by
Starz Encore until some future date. These amounts have not been accrued at
June 30, 2003. Starz Encore's estimate of amounts payable under these agreements
is as follows: $142 million in 2003; $393 million in 2004; $145 million in 2005;
$116 million in 2006; $107 million in 2007; and $303 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 are expected to be significant. Starz
Encore's total film rights expense aggregated $193 million and $182 million for
the six months ended June 30, 2003 and 2002, respectively.

In addition to the foregoing contractual film obligations, two motion
picture studios that have output contracts with Starz Encore through 2006 and
2010, respectively, have the right to extend their contracts for an additional
three years. If the studios elect to extend these contracts, Starz Encore has
agreed to pay the studios $60 million and $190 million, respectively.

Liberty guarantees Starz Encore's obligations under certain of its studio
output agreements. At June 30, 2002, Liberty's guarantee for obligations for
films released by such date aggregated $676 million. While the guarantee amount
for films not yet released is not determinable, such amount could be
significant. As noted above Starz Encore has recognized the liability for a
portion of its

I-36

obligations under the output agreements. As this represents a commitment of
Starz Encore, a consolidated subsidiary of Liberty, Liberty has not recorded a
separate liability for its guarantee of these obligations.

At June 30, 2003, Liberty guaranteed Y15.3 billion ($128 million) of the
bank debt of J-COM, an equity affiliate that provides broadband services in
Japan. Liberty's guarantees expire as the underlying debt matures. The debt
maturity dates range from 2003 to 2018. In addition, Liberty has agreed to fund
up to Y20 billion ($167 million at June 30, 2003) to J-COM in the event J-COM's
cash flow (as defined in its bank loan agreement) does not meet certain targets.
In the event J-COM meets certain performance criteria, this commitment reduces
to Y10 billion ($83.5 million at June 30, 2003) at December 31, 2003 and expires
on September 30, 2004.

Liberty and the other investors have guaranteed transponder and equipment
lease obligations through 2018 of Sky Latin America. At June 30, 2003, the
Company's portion of the guarantee of the remaining obligations due under such
agreements aggregated $110 million. In 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 of certain other affiliates. At June 30, 2003, these
guaranteed obligations aggregated approximately $52 million and are not
reflected in Liberty's condensed consolidated balance sheet. Currently, Liberty
is not certain of the likelihood of being required to perform under such
guarantees.

Pursuant to a tax sharing agreement between Liberty and AT&T when Liberty
was a subsidiary of AT&T, Liberty received a cash payment from AT&T in periods
when Liberty generated taxable losses and such taxable losses were utilized by
AT&T to reduce the consolidated income tax liability. To the extent such losses
were not utilized by AT&T, such amounts were available to reduce federal taxable
income generated by Liberty in future periods, similar to a net operating loss
carryforward. During the period from March 31, 1999 to December 31, 2002,
Liberty received cash payments from AT&T aggregating $555 million as payment for
Liberty's taxable losses that AT&T utilized to reduce its income tax liability.
In the event AT&T generates ordinary losses in 2003 or capital losses in 2003 or
2004 and is able to carry back such losses to offset taxable income previously
offset by Liberty's losses, Liberty may be required to refund some or all of
these cash payments.

AT&T, as the successor to TCI, was the subject of an Internal Revenue
Service audit for the 1993-1999 tax years. The IRS notified AT&T and Liberty
that it was proposing income adjustments and assessing certain penalties in
connection with TCI's 1994 tax return. The IRS, AT&T and Liberty have reached an
agreement whereby AT&T will recognize additional income of $94 million with
respect to this matter, and no penalties will be assessed. Pursuant to the tax
sharing agreement between Liberty and AT&T, Liberty may be obligated to
reimburse AT&T for any tax that is ultimately assessed as a result of this
agreement. Liberty is currently unable to estimate any such tax liability and
resulting reimbursement, but believes that any such reimbursement will not be
material to its financial position.

Liberty has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is reasonably
possible Liberty may incur losses upon conclusion of such matters, an estimate
of any loss or range of loss cannot be made. In the opinion of

I-37

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.

Liberty is exposed to changes in interest rates primarily as a result of its
borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of Liberty's long-term and
short-term debt are expected to vary as a result of future requirements, market
conditions and other factors. Liberty manages its exposure to interest rates by
maintaining what it believes is an appropriate mix of fixed and variable rate
debt. Liberty believes this best protects it from interest rate risk. Liberty
has achieved this appropriate mix by (i) issuing fixed rate debt that Liberty
believes has a low stated interest rate and significant term to maturity and
(ii) issuing short-term variable-rate debt to take advantage of historically low
short-term interest rates. As of June 30, 2003, $5,837 million or 82% 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
4.58%. The Company's variable rate debt of $1,277 million had a weighted average
interest rate of 3.62% at June 30, 2003. Had market interest rates been 100
basis points higher (representing an approximate 28% increase over Liberty's
variable rate debt effective cost of borrowing) throughout the six months ended
June 30, 2003, Liberty would have recorded approximately $7 million of
additional interest expense. Had the price of the securities underlying the call
option obligations associated with the Company's senior exchangeable debentures
been 10% higher during the six months ended June 30, 2003, Liberty would have
recorded an additional unrealized loss on financial instruments of
$196 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, written put and
call options and other financial instruments to manage market risk associated
with certain investment positions. These instruments are recorded at fair value
based on option pricing models. Equity collars provide Liberty with a put option
that gives it the right to require the counterparty to purchase a specified
number of shares of the underlying security at a specified price (the "Company
Put Price") at a specified date in the future. Equity collars also provide the
counterparty with a call option that gives the counterparty the right to
purchase the same securities at a specified price at a specified date in the
future. The put option and the call option generally are equally priced at the
time of origination resulting in no cash receipts or payments. 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.

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

I-38

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.

The following table provides information regarding Liberty's equity and put
spread collars and put options at June 30, 2003:

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

(1) Includes narrow-band collars

At June 30, 2003, the fair value of Liberty's available-for-sale equity
securities was $19,762 million. Had the market price of such securities been 10%
lower at June 30, 2003, the aggregate value of such securities would have been
$1,976 million lower resulting in an increase to unrealized losses in other
comprehensive earnings. Had the market price of Liberty's publicly traded
investments accounted for using the equity method been 10% lower at June 30,
2003, there would have been no impact on the carrying value of such investments
assuming that the decline in value is deemed to be temporary.

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. Liberty has not hedged the majority of its foreign
currency exchange risk because of the long-term nature of its interests in
foreign affiliates. However, in order to reduce its foreign currency exchange
risk related to its recent investment in J-COM, the Company has entered into
forward sale contracts with respect to Y20,802 million ($174 million at
June 30, 2003). In addition to the forward sale contracts, the Company has
entered into collar agreements with respect to Y18,785 million ($157 million at
June 30, 2003). These collar agreements have a remaining term of approximately
one year, an average call price of 110 yen/U.S. dollar and an average put price
of 133 yen/U.S. dollar. During the six months ended June 30, 2003, the Company
had unrealized gains of $4 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.

From time to time Liberty enters into total return debt swaps in connection
with its purchase of its own or third-party public and private indebtedness.
Under these arrangements, Liberty directs a counterparty to purchase a specified
amount of the underlying debt security for Liberty's benefit. Liberty initially
posts collateral with the counterparty equal to 10% of the value of the
purchased securities. Liberty earns interest income based upon the face amount
and stated interest rate of the underlying debt securities, and pays interest
expense at market rates on the amount funded by the counterparty. In the event
the fair value of the underlying debt securities declines 10%, Liberty is
required to post cash collateral for the decline, and Liberty records an
unrealized loss on financial instruments. The cash collateral is further
adjusted up or down for subsequent changes in fair value of the underlying debt
security. At June 30, 2003, the aggregate purchase price of debt securities

I-39

underlying total return debt swap arrangements was $285 million ($200 million of
which related to Liberty's senior notes and debentures). As of such date,
Liberty had posted cash collateral equal to $48 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 $237 million.

Liberty periodically assesses the effectiveness of its derivative financial
instruments. 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 debt 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.

Each of Liberty's derivative instruments is executed with a counterparty,
generally well known major financial institutions. While Liberty believes these
derivative instruments effectively manage the risks highlighted above, they are
subject to counterparty credit risk. Counterparty credit risk is the risk that
the counterparty is unable to perform under the terms of the derivative
instrument upon settlement of the derivative instrument. To protect itself
against credit risk associated with these counterparties Liberty generally:

- executes its derivative instruments with several different counterparties,
and

- executes equity derivative instrument agreements which contain a provision
that requires the counterparty to post the "in the money" portion of the
derivative instrument into a cash collateral account for Liberty's
benefit, if the respective counterparty's credit rating were to reach
certain levels, generally a rating that is below Standard & Poor's rating
of A- and/or Moody's rating of A3.

Due to the importance of these derivative instruments to its risk management
strategy, Liberty actively monitors the creditworthiness of each of these
counterparties. Based on its analysis, Liberty currently considers
nonperformance by any of its counterparties to be unlikely.

ITEM 4. CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried
out an evaluation, under the supervision and with the participation of
management, including its chief executive officer, principal accounting officer
and principal financial officer (the "Executives"), of the effectiveness of its
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Executives concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2003 to provide
reasonable assurance that information required to be disclosed in its reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.

There has been no change in the Company's internal controls over financial
reporting that occurred during the three months ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, its internal
controls over financial reporting.

I-40

LIBERTY MEDIA CORPORATION

PART II--OTHER INFORMATION

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

(a) Exhibits

31.1 Rule 13a-14(a)/15d-14(a) Certifications

31.2 Rule 13a-14(a)/15d-14(a) Certifications

31.3 Rule 13a-14(a)/15d-14(a) Certifications

32 Section 1350 Certification.

(b) Reports on Form 8-K filed during the quarter ended June 30, 2003:

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

* This Report on Form 8-K was "furnished" to the Securities and Exchange
Commission, and is not to be deemed (1) "filed" for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, or otherwise subject to
the liabilities of that Section or (2) incorporated by reference into any
filing by Liberty under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.

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: August 13, 2003 By: /s/ CHARLES Y. TANABE
---------------------------------------
Charles Y. Tanabe
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL

Date: August 13, 2003 By: /s/ DAVID J.A. FLOWERS
---------------------------------------
David J.A. Flowers
SENIOR VICE PRESIDENT
AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)

Date: August 13, 2003 By: /s/ CHRISTOPHER W. SHEAN
---------------------------------------
Christopher W. Shean
SENIOR VICE PRESIDENT
AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)

II-2

EXHIBIT INDEX

Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):

31.1 Rule 13a-14(a)/15d-14(a) Certifications

31.2 Rule 13a-14(a)/15d-14(a) Certifications

31.3 Rule 13a-14(a)/15d-14(a) Certifications

32 Section 1350 Certification.