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

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

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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

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

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

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

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

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 October 31, 2003 was:

Series A common stock 2,691,592,648 shares; and
Series B common stock 211,818,776 shares.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(continued)

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2003

See accompanying notes to condensed consolidated financial statements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 is a holding company which, through its ownership of interests in
subsidiaries and affiliates, is primarily engaged in (i) electronic retailing,
(ii) international cable television distribution, telephony and programming, and
(iii) the production, acquisition and distribution through all available formats
and media of branded entertainment, educational and informational programming
and software. In addition, companies in which Liberty owns interests are engaged
in, among other things, (i) interactive commerce via the Internet, television
and telephone, (ii) domestic cable and satellite broadband distribution
services, and (iii) wireless domestic telephony and other technology ventures.
Liberty, through its affiliated companies, operates in the United States,
Europe, South America and Asia.

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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) ACCOUNTING CHANGE (CONTINUED)
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.

Statement 142 required the Company to perform an assessment of whether there
was an indication that goodwill was impaired as of the date of adoption. To
accomplish this, the Company identified its reporting units and determined the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. 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 as of the
date of adoption. In situations where the implied fair value of the reporting
unit's goodwill was less than its carrying value, Liberty recorded a transition
impairment charge. In total, 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 in 2002. 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 $144 million
and $141 million for the nine months ended September 30, 2003 and 2002,
respectively. Based on its current amortizable

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) ACCOUNTING CHANGE (CONTINUED)
intangible assets, Liberty expects that amortization expense will be as follows
for the next five years and thereafter (amounts in millions):

Remainder of 2003........................................... $ 68
2004........................................................ 342
2005........................................................ 324
2006........................................................ 279
2007........................................................ 255
Thereafter.................................................. 1,776
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$3,044
======

(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 nine months ended September 30, 2003, are 82 million potential common
shares because their inclusion would be anti-dilutive.

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

(5) ACQUISITION OF CONTROLLING INTEREST IN QVC, INC.

On September 17, 2003, Liberty completed its previously announced
acquisition (the "Closing") of Comcast Corporation's ("Comcast") approximate
56.5% ownership interest in QVC, Inc. ("QVC") for an aggregate purchase price of
approximately $7.9 billion (the "QVC Purchase Price"). 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
QVC.com. Prior to the Closing, Liberty owned approximately 41.7% of QVC.
Subsequent to the Closing, Liberty owns approximately 98.2% of

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) ACQUISITION OF CONTROLLING INTEREST IN QVC, INC. (CONTINUED)
QVC's outstanding shares, and the remaining shares of QVC are held by members of
the QVC management team.

The QVC Purchase Price was comprised of 217.7 million shares of Liberty's
Series A common stock valued, for accounting purposes, at $2,555 million (the
"Shares"), Floating Rate Senior Notes due 2006 in an aggregate principal amount
of $4,000 million (the "Floating Rate Notes") and approximately $1,358 million
in cash (including acquisition costs). The foregoing value of the Series A
common stock issued was based on the average closing price for such stock for
the five days surrounding July 3, 2003, which was the date that Liberty
announced that it had reached an agreement with Comcast to acquire Comcast's
interest in QVC. Substantially all of the cash component of the purchase price
was funded with the proceeds from the Company's issuance of its 3.50% Senior
Notes due 2006 in the aggregate principal amount of $1.35 billion. The resale of
the Shares and the Floating Rate Notes by certain subsidiaries of Comcast was
registered under the Securities Act of 1933, as amended, pursuant to the
Company's effective registration statement on Form S-3 (the "Resale Shelf").

Subsequent to the Closing, QVC is a consolidated subsidiary of Liberty. For
financial reporting purposes, the acquisition is deemed to have occurred on
September 1, 2003, and since that date QVC's results of operations have been
consolidated with Liberty's. Prior to its acquisition of Comcast's interest,
Liberty accounted for its investment in QVC using the equity method of
accounting. Liberty has recorded the acquisition of QVC as a step acquisition,
and accordingly, QVC's assets and liabilities have been recorded at amounts
equal to (1) 56.5% of estimated fair value at the date of acquisition plus
(2) 43.5% of historical cost. The $2,071 million excess of the purchase price
over the estimated fair value of 56.5% of QVC's assets and liabilities combined
with Liberty's historical equity method goodwill of $1,848 million has been
recorded as goodwill in the accompanying condensed consolidated balance sheet.
The excess of the purchase price for Comcast's interest in QVC over the
estimated fair value of QVC's assets and liabilities is attributable to the
following: (i) QVC's position as a market leader in its industry, (ii) QVC's
ability to generate significant cash from operations and Liberty's access to
such cash, and (iii) QVC's perceived significant international growth
opportunities.

Liberty's total investment in QVC of $10,717 million is comprised of
$2,804 million of its historical equity method investment and $7,913 million
representing the purchase price for Comcast's interest. This total investment
has been allocated to QVC's assets and liabilities as follows (amounts in
millions):

Current assets, including cash and cash equivalents of
$632 million.............................................. $ 1,764
Property and equipment...................................... 569
Intangible assets subject to amortization--customer
relationships............................................. 2,336
Intangible assets not subject to amortization:
Trademarks................................................ 2,385
Cable and satellite television distribution rights........ 2,022
Goodwill.................................................. 3,919
Other assets................................................ 269
Other liabilities........................................... (860)
Minority interest........................................... (99)
Deferred income taxes....................................... (1,588)
-------
$10,717
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) ACQUISITION OF CONTROLLING INTEREST IN QVC, INC. (CONTINUED)
The foregoing allocation is based on preliminary estimates and is subject to
adjustment upon receipt of a final appraisal.

The following unaudited pro forma information for Liberty and its
consolidated subsidiaries for the nine months ended September 30, 2003 and 2002
was prepared assuming the acquisition of QVC occurred on January 1, 2002. These
pro forma amounts are not necessarily indicative of operating results that would
have occurred if the QVC acquisition had occurred on January 1, 2002.

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

Investments in available-for-sale securities, which are recorded at their
respective fair market values, and other cost investments are summarized as
follows:

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* At September 30, 2003, other available-for-sale securities include
$1,532 million of investments in certain third-party marketable debt
securities held by Liberty parent and $35 million of such securities held by
Liberty subsidiaries. At December 31, 2002, such investments aggregated
$622 million and $49 million, respectively.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(6) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
(CONTINUED)
NEWS CORP.

Effective September 30, 2003, Liberty notified News Corp. of its intention
to exercise its rights under a put/call arrangement with News Corp., whereby
Liberty could acquire $500 million of American Depositary Receipts ("ADRs") for
News Corp. preferred limited voting ordinary shares at $21.50 per ADR. Such
transaction closed subsequent to September 30, 2003.

IAC/INTERACTIVECORP

During the nine months ended September 30, 2003 and pursuant to certain
anti-dilutive rights, Liberty acquired an aggregate 48.7 million shares of
IAC/InterActiveCorp for cash consideration of $1,166 million.

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 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 September 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,
discounted cash flow, per subscriber value, or a value of comparable public or
private businesses. No independent appraisals were conducted for those cost
investment assets.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) DERIVATIVE INSTRUMENTS

The Company's derivative instruments are summarized as follows:

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(1) Includes narrow-band collars.

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 an aggregate principal amount of
$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 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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) DERIVATIVE INSTRUMENTS (CONTINUED)
reported separately in the condensed consolidated balance sheet at fair value.
The estimated value of the call option feature of the 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.

(8) LONG-TERM DEBT

Debt is summarized as follows:

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) LONG-TERM DEBT (CONTINUED)
SENIOR NOTES

In September 2003, Liberty issued $1,350 million principal amount of 3.5%
senior notes due 2006 for net cash proceeds of $1,347 million. Liberty used the
proceeds from this offering to partially finance its purchase of Comcast's
interest in QVC. See note 5.

Also as part of the consideration for QVC, Liberty issued $4,000 million of
Floating Rate Notes to Comcast. The Floating Rate Notes accrue interest at LIBOR
plus a margin. The margin on the $2,500 million principal amount of Floating
Rate Notes sold pursuant to the Resale Shelf on September 24, 2003 is fixed at
1.5%. The margin on the $1,000 million principal amount of Floating Rate Notes
held by certain subsidiaries of Comcast is 1.5%, but is subject to adjustment in
the event of a change in Liberty's credit rating. On September 24, 2003, Liberty
repurchased $500 million principal amount of the Floating Rate Notes at a
purchase price equal to 100% of the principal amount plus accrued interest.

During the second quarter of 2003, Liberty issued $1,000 million principal
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 an aggregate principal amount of
$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 Time Warner common stock.
Liberty may, at its election, pay the exchange value in cash, 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 Time Warner common stock, cash or any combination
thereof. On March 30, 2008, March 30, 2013 or March 30, 2018, each holder may
cause Liberty to purchase its exchangeable debentures, and Liberty, at its
election, may pay the purchase price in shares of 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 nine months ended September 30, 2003 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
$41 million and $5 million during the nine months ended September 30, 2003 and
2002, respectively, and is included in interest expense.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) LONG-TERM DEBT (CONTINUED)

BANK CREDIT FACILITIES

At September 30, 2003, Liberty's subsidiaries had $1,013 million outstanding
and $222 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 by the borrower 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
nine months ended September 30, 2003 and 2002.

At September 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
September 30, 2003, all of which is included in current portion of debt.

FAIR VALUE OF DEBT

Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to Liberty
for debt of the same remaining maturities. The fair value of Liberty's publicly
traded debt securities at September 30, 2003 is as follows (amounts
in millions):

Fixed rate senior notes of parent company................... $2,134
Floating Rate Notes......................................... $3,455
Senior debentures of parent company......................... $1,744
Senior exchangeable debentures of parent company, including
call option obligation.................................... $4,208

Liberty believes that the carrying amount of the Company's bank credit
facilities approximated its fair value at September 30, 2003.

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

Carrying value at September 30, 2003........................ $11,886
Add:
Unamortized issue discount on senior notes and
debentures.............................................. 25
Unamortized discount attributable to call option feature
of exchangeable debentures.............................. 2,533
-------
Face amount at maturity................................. $14,444
=======

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) STOCKHOLDERS' EQUITY

SHARES RESERVED FOR ISSUANCE

As of September 30, 2003, there were 54 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 nine months ended September 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 put options in the first quarter of 2003. All
of these options expired unexercised prior to September 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," and recorded a net increase to additional paid-in capital
of $37 million during the nine months ended September 30, 2003.

(10) STOCK BASED COMPENSATION

The Company has granted to its employees options, stock appreciation rights
("SARs"), and options with tandem 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 options.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(10) STOCK BASED COMPENSATION (CONTINUED)
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 employees, 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. During
the third quarter of 2003, Starz Encore satisfied the amount due the officer
with a cash payment of $287 million.

QVC has a qualified and nonqualified combination stock option/stock
appreciation rights plan (collectively, the "Tandem Plan") for employees,
officers, directors and other persons designated by the Stock Option Committee
of QVC's board of directors. Under the Tandem Plan, the option price is
generally equal to the fair market value, as determined by an independent
appraisal, of a share of the underlying common stock of QVC at the date of the
grant. The fair value of a share of QVC common stock as of June 30, 2003 (the
latest value date) is $2,270. If the eligible participant elects the SAR feature
of the Tandem Plan, the participant receives 75% of the excess of the fair
market value of a share of QVC common stock over the exercise price of the
option to which it is attached at the exercise date. The holders of a majority
of the outstanding options have stated an intention not to exercise the SAR
feature of the Tandem Plan. Because the exercise of the option component is more
likely than the exercise of the SAR feature, compensation expense is measured
based on the stock option component. As a result, QVC is applying fixed plan
accounting in accordance with APB Opinion No. 25. Under the Tandem Plan,
option/SAR terms are ten years from the date of grant, with options/SARs
generally becoming exercisable over four years from the date of grant. At
September 30, 2003, there were a total of 170,039 options outstanding, 59,408 of
which were vested at a weighted average exercise price of $984.27 and 110,631 of
which were unvested at a weighted average exercise price of $1,469.16.

I-18

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) 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
September 30, 2003 is reflected as a liability in the accompanying condensed
consolidated balance sheet. The balance due as of September 30, 2003 is payable
as follows: $79 million in 2003; $101 million in 2004; and $32 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
September 30, 2003. Starz Encore's estimate of amounts payable under these
agreements is as follows: $42 million in 2003; $581 million in 2004;
$149 million in 2005; $118 million in 2006; $110 million in 2007; and
$350 million thereafter.

Starz Encore is also obligated to pay fees for films that are released by
certain producers through 2010 when these films meet certain criteria described
in the studio output agreements. The actual contractual amount to be paid under
these agreements is not known at this time. However, such amounts are expected
to be significant. Starz Encore's total film rights expense aggregated
$294 million and $270 million for the nine months ended September 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 first studio elects to extend its contract, Starz Encore has
agreed to pay the studio $60 million within five days of the studio's notice to
extend. The studio is required to exercise its option by December 31, 2004. If
the second studio elects to extend its contract, Starz Encore has agreed to pay
the studio $190 million in four annual installments. The studio is required to
exercise this option by December 31, 2007. If made, Starz Encore's payments to
the studios would be amortized ratably over the term of the respective output
agreement extension.

GUARANTEES

Liberty guarantees Starz Encore's obligations under certain of its studio
output agreements. At September 30, 2003, Liberty's guarantee for obligations
for films released by such date aggregated $741 million. While the guarantee
amount for films not yet released is not determinable, such amount is expected
to 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 September 30, 2003, Liberty has guaranteed Y15.1 billion ($135 million)
of the bank debt of Jupiter Telecommunications Co., Ltd. ("J-COM"), an equity
affiliate that provides broadband services in Japan. Liberty's guarantees expire
as the underlying debt matures and is repaid. The debt maturity dates range from
2003 to 2018. In addition, Liberty has agreed to fund up to an additional
Y20 billion ($179 million at September 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,

I-19

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
this commitment reduces to Y10 billion ($90 million at September 30, 2003) at
December 31, 2003 and expires on September 30, 2004.

Liberty has guaranteed various leases, loans, notes payable, letters of
credit and other obligations (the "Guaranteed Obligations") of certain other
affiliates. At September 30, 2003, the Guaranteed Obligations aggregated
approximately $137 million and are not reflected in Liberty's condensed
consolidated balance sheet at September 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.

LITIGATION

Liberty has contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible Liberty may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.

(12) OPERATING SEGMENTS

Liberty is a holding company owning interests in a variety of subsidiaries
and other companies 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 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
(excluding stock compensation), 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 nine months ended September 30, 2003, Liberty had five operating
segments: QVC, Starz Encore, Ascent Media Group, Inc. ("Ascent Media"), On
Command Corporation ("On Command") and "Other." 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 QVC.com. Starz
Encore provides premium programming distributed by cable operators,
direct-to-home satellite

I-20

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) OPERATING SEGMENTS (CONTINUED)
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 not representing separately reportable segments.

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

(1) Represents the elimination of amounts for QVC for periods when QVC was an
equity affiliate.

I-21

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) OPERATING SEGMENTS (CONTINUED)
The following table provides a reconciliation of consolidated segment
operating cash flow to loss before income taxes and minority interest:

I-22

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;

- consumer spending levels, including the availability and amount of
individual consumer debt;

- 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 the development and integration of new business
lines and business strategies;

- rapid technological changes;

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

- uncertainties associated with product and service development and market
acceptance, including 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 suppliers and vendors to deliver products, 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

- 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-23

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 is a holding company which, through its ownership of interests in
subsidiaries and affiliates, is primarily engaged in (i) electronic retailing,
(ii) international cable television distribution, telephony and programming, and
(iii) the production, acquisition and distribution through all available formats
and media of branded entertainment, educational and informational programming
and software. In addition, companies in which Liberty owns interests are engaged
in, among other things, (i) interactive commerce via the Internet, television
and telephone, (ii) domestic cable and satellite broadband distribution
services, and (iii) wireless domestic telephony and other technology ventures.
Liberty, through its affiliated companies, operates in the United States,
Europe, South America and Asia.

Liberty's most significant consolidated subsidiaries at September 30, 2003
were QVC, Inc., 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 for the periods in
which they were wholly- or majority-owned and controlled.

A significant portion of Liberty's operations are conducted through entities
in which Liberty does not have a controlling financial interest but in which it
does have the ability to exercise significant influence over the investee's
operating and financial policies. These businesses are accounted for using the
equity method of accounting. Accordingly, Liberty's share of the results of
operations of these businesses is reflected in its consolidated results as
earnings or losses of affiliates. Included in Liberty's investments in
affiliates at September 30, 2003 were Discovery Communications, 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, IAC/InterActiveCorp and Time Warner Inc. These investments
are classified as available-for-sale securities and are carried at fair value.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

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 QVC.com. 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 QVC, Starz Encore, Ascent Media and On Command. As more fully
described in note 5 to the accompanying condensed consolidated financial
statements, Liberty acquired a controlling interest in QVC on September 17,
2003. For financial reporting purposes, the acquisition is deemed to have
occurred on September 1, 2003, and QVC's results of operations have been
consolidated with Liberty's since that date. Accordingly, the information for
QVC in the following table represents one month of operations. The "other"
category includes Liberty's other consolidated subsidiaries and corporate
expenses. Liberty's other consolidated subsidiaries include OpenTV Corp.
("OpenTV"), Maxide Acquisition, Inc. (d/b/a DMX Music), TruePosition, Inc.
("TruePosition"), Pramer S.C.A. ("Pramer") and Liberty Cablevision of Puerto
Rico. OpenTV provides interactive television solutions, including

I-24

operating middleware, web browser software, interactive applications, and
consulting and support services. 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. 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 multiple equity investments, the results
of which are not a component of operating income, but are discussed below under
"Investments in Affiliates Accounted for Using the Equity Method." Other items
of significance are discussed separately below.

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

(a) Not meaningful.

I-25

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

(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. A 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

I-26

of the Programming Affiliates and (3) the amount of resources allocated for
network and cable television advertising by major corporations.

CONSOLIDATED SUBSIDIARIES

QVC. QVC is a retailer of a wide range of consumer products, which are
marketed and sold primarily by merchandise-focused televised shopping programs.
In the United States, the programs are aired through its nationally televised
shopping network--24 hours a day, 7 days a week ("QVC-US"). Internationally, QVC
has electronic retailing program services based in the United Kingdom
("QVC-England"), Germany ("QVC-Deutschland") and Japan ("QVC-Japan"). Liberty
has consolidated QVC's results of operations since September 1, 2003. As such,
increases in Liberty's revenue and expenses for the three and nine months ended
September 30, 2003 are primarily the result of the September 2003 acquisition of
QVC.

The following discussion describes QVC's results of operations for the full
three and nine months ended September 30, 2003. Depreciation and amortization
for periods prior and subsequent to Liberty's acquisition of Comcast's interest
in QVC are not comparable as a result of the effects of purchase accounting.
However, in order to provide a more meaningful basis for comparing the 2003 and
2002 periods, the operating results of QVC for the one month ended
September 30, 2003 have been combined with the two months and eight months ended
August 31, 2003 in the following table and discussion. The combining of
predecessor and successor accounting periods is not permitted by generally
accepted accounting principles.

Net revenue for the three and nine months ended September 30, 2003 and 2002
includes the following revenue by geographical area:

QVC's consolidated net revenue increased $330 million or 11% during the nine
months ended September 30, 2003 as compared to the nine months ended
September 30, 2002 primarily as a result of the 52% and 136% increase in net
revenue from existing QVC-Deutschland and QVC-Japan

I-27

subscribers, respectively. In addition, the number of homes receiving the
QVC-Deutschland and QVC-Japan service increased 6% and 67%, respectively, from
September 30, 2002 to September 30, 2003. QVC-US net revenue increased 6% and 3%
for the three and nine months ended September 30, 2003, respectively. The nine
month increase is due to a 1% increase in net revenue from existing U.S.
subscribers and a 2% increase in the number of homes receiving the QVC service
in the nine months ended September 30, 2003 compared to the same period in 2002.
As the QVC service is already received by substantially all of the cable
television and direct broadcast satellite homes in the U.S., future growth in
sales will depend on continued additions of new customers from homes already
receiving the QVC service and continued growth in sales to existing customers.
QVC's future sales may also be affected by the willingness of cable and
satellite distributors to continue to carry QVC's programming service as well as
general economic conditions.

During the three and nine months ended September 30, 2003, the increases in
revenue were also impacted by changes in the exchange rates for the UK pound,
the EURO and the Japanese yen. The percentage increase in revenue for each of
QVC's geographic areas in dollars and in local currency is as follows:

Gross profit increased from 36% of net revenue for the three months ended
September 30, 2002 to 37% for the three months ending September 30, 2003 and
remained at 37% of net revenue for the nine months ended September 30, 2003.
These increases in gross profit percentage are primarily the result of a shift
in the product mix from lower margin home products to higher margin apparel and
accessory categories.

QVC's operating expenses are comprised of commissions and license fees,
order processing and customer service, provision for doubtful accounts, and
credit card processing fees. Operating expenses increased $8 million or 8% and
$21 million or 7% for the three and nine months ended September 30, 2003, as
compared to the corresponding prior year periods. These increases are primarily
due to the increases in sales volume. As a percentage of net revenue, operating
expenses decreased from 10% to 9% for each of the three and nine month periods
ended September 30, 2003. As a percent of net revenue, commissions and license
fees decreased for both the three and nine months ended September 30, 2003
compared to the same periods in 2002 due to an increase in Internet sales, for
which lower commissions are required to be paid. In addition, commissions and
license fee expense decreased as a percentage of net revenue for QVC-Japan where
commissions are based on number of subscribers rather than sales volume. As a
percent of net revenue, order processing and customer service expenses decreased
in each geographical segment as a result of reduced personnel expense due to
operator efficiencies in call handling and staffing. The provision for doubtful
accounts decreased in the first nine months of 2003 by $2.3 million and in the
third quarter of 2003 by $1.4 million as compared to the same periods in 2002
due to a lower average accounts receivable balance as well as an improvement in
customer account collections. Credit card processing fees remained consistent at
1% of net revenue for the three months and nine months ended September 30, 2003
and 2002.

QVC's SG&A expenses were relatively comparable over the 2002 and 2003
periods as increases in transponder, personnel and occupancy costs were
partially offset by decreases in advertising and

I-28

marketing costs. SG&A expenses as a percent of net revenue decreased for both
the three and nine month periods.

QVC's depreciation and amortization expense increased for both the three and
nine month periods ended September 30, 2003 due to the amortization of
intangible assets recorded in connection with Liberty's purchase of QVC.

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.

As further described in Part II, Item I, "Legal Proceedings" of this
Quarterly Report on Form 10-Q, Starz Encore was a party to litigation with
Comcast regarding the affiliation agreement between AT&T Broadband (now known as
Comcast Cable Holdings, LLC, "Comcast Cable Holdings") and Starz Encore (the
"1997 Affiliation Agreement"). On September 23, 2003, Starz Encore and Comcast
announced that they had entered into a multi-year agreement (the "2003 Comcast
Affiliation Agreement") for the carriage of the STARZ! and Encore movie services
on all Comcast owned and operated cable systems (including those of Comcast
Cable Holdings). This agreement resolves all of the litigation that was pending
between Starz Encore and Comcast with respect to the 1997 Affiliation Agreement.

Pursuant to the terms of the 2003 Comcast Affiliation Agreement, Comcast is
to make payments to Starz Encore for Comcast Cable Holdings subscribers for the
period from November 18, 2002 to December 31, 2003 based on the per-subscriber
rates included in the Comcast consignment agreement that was in effect prior to
the execution of the 2003 Comcast Affiliation Agreement. The 2003 Comcast
Affiliation Agreement, which expires in June 2009, also includes provisions for
the distribution of new Starz Encore products in select Comcast systems and
provisions for co-operative marketing efforts between Comcast and Starz Encore.
The 2003 Comcast Affiliation Agreement does not include programming pass-through
provisions that were included in the 1997 Affiliation Agreement.

Prior to the resolution of this matter and due to the uncertainty in
predicting the outcome of the court actions, Starz Encore determined for
financial reporting purposes to exclude from its revenue the amounts due under
the 1997 Affiliation Agreement from and after November 18, 2002. Rather, from
that date it included revenue amounts due under the Comcast consignment
agreement on account of distribution of the Starz Encore service on Comcast
Cable Holdings systems.

Starz Encore's revenue decreased 11% and 6% for the three and nine months
ended September 30, 2003, respectively, as compared to the corresponding prior
year periods. Such decreases are the net effect of a reduction in revenue from
Comcast Cable Holdings ($78 million for the nine month period) partially offset
by an increase in the number of average subscription units to Starz Encore's
services (13% for the nine month period). Substantially all of the increase in
average subscription units is attributable to Starz Encore's Thematic Multiplex
service, which has lower subscription rates than its other services. The
reduction in revenue from Comcast Cable Holdings is the result of (i) a lower
effective per-subscriber fee under the Comcast consignment agreement and (ii) a
decrease in STARZ! subscription units in the Comcast Cable Holdings systems. The
decrease in STARZ! subscription units in these systems is due to the negative
effects of changes in marketing efforts and packaging of STARZ! that Comcast
implemented prior to the execution of the 2003 Comcast Affiliation Agreement.
Comcast, DirecTV and Echostar generated 24%, 23% and 11% respectively, of Starz
Encore's revenue for the nine months ended September 30, 2003.

While Starz Encore's average subscription units increased during the
nine months ended September 30, 2003, as compared to the nine months ended
September 30, 2002, Starz Encore's total subscription units have remained
relatively flat since March 31, 2003. This trend reflects the impact of the
dispute with Comcast described above, as well as the impact of promotional
efforts on the part of

I-29

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 September 30, 2003, cable, DTH satellite, and other distribution
represented 64%, 35% and 1%, respectively, of Starz Encore's total subscription
units.

Starz Encore's operating expenses increased 6% and 2% for the three and
nine months ended September 30, 2003, respectively, as compared to the
corresponding prior year periods. Such increases are 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 partially offset the programming cost increases for the nine months
ended September 30, 2003.

Starz Encore estimates that its 2004 programming expense will increase
between $175 million and $225 million over amounts expensed in 2003. Such
increases are based on the expected box office performance of movie titles that
will become available to Starz Encore during that time period through its output
arrangements with various movie studios. In addition, Starz Encore expects
increases in the number of first-run titles to be utilized on its programming
services, a higher cost per title for movie titles under its license agreements
that will be effective beginning in 2004 and amortization of deposits previously
made under the output agreements. The portion of increased programming costs
that would otherwise have been eligible to be passed through under the 1997
Affiliation Agreement cannot be passed through under the 2003 Comcast
Affiliation Agreement. Accordingly, unless Starz Encore is able to generate
offsetting increases in revenue or reductions in other costs, these increased
programming costs are expected to result in a direct reduction to Starz Encore's
operating income in 2004. Starz Encore expects that programming costs in 2005
will not be less than the 2004 costs. These estimates are subject to a number of
assumptions that could change depending on the number of movie titles actually
becoming available to Starz Encore and their ultimate box office performance.
Accordingly, the actual amount of cost increases experienced by Starz Encore may
differ from the amounts noted above.

Starz Encore's SG&A expenses decreased 13% and 37% for the three and
nine months ended September 30, 2003, respectively, as compared to the
corresponding prior year periods. These decreases are due primarily to decreases
in sales and marketing expenses ($11 million and $46 million for the three and
nine months ended September 30, 2003, respectively) and bad debt expense
($12 million for the nine months ended September 30, 2003). The decrease in
sales and marketing expenses is due to the reduced number of co-operative
promotions by certain multichannel television distributors discussed

I-30

above. During the third and fourth quarters of 2003, Starz Encore entered into
new affiliation agreements with certain multichannel television distributors,
including Comcast. Consequently, Starz Encore anticipates that its co-operative
promotions and its sales and marketing expenses will increase in 2004. The
higher bad debt expense in 2002 resulted from the bankruptcy filing of Adelphia
Communications Corporation.

ASCENT MEDIA. Ascent Media's revenue decreased 7% for each of the three and
nine month periods ended September 30, 2003, 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 ($11 million) due to the sale of a business unit
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 ($2 million). The nine month
decrease in Ascent Media's revenue is due primarily to a decrease in its
Networks Group ($27 million) due to the aforementioned factors.

Ascent Media's operating expenses decreased 11% and 10% for the three and
nine months ended September 30, 2003, respectively, as compared to the
corresponding prior year periods. Such decreases are due to the sale of the
Networks Group business unit referred to above and 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. On Command's revenue was relatively flat for the three and nine
months ended September 30, 2003, as compared to the corresponding prior year
periods. This trend is due to the net effect of a decrease in revenue related to
On Command's mature-themed movies, offset by increases in revenue for feature
films, short subjects, and Internet services. On Command believes these changes
in revenue are due to (i) a reduction in buy rates for On Command's
mature-themed pay-per-view products, (ii) changes in travel patterns for
business and family travelers and (iii) a reduction in the average number of
rooms served.

On Command's operating expenses were relatively flat for the three and
nine months ended September 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 were relatively flat for the three and
nine months ended September 30, 2003, respectively, as compared to the
corresponding prior year periods. These changes are due to individually
insignificant fluctuations 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 $15 million or 16% and $37 million or 14% for the
three and nine months ended September 30, 2003, respectively, as compared to the
corresponding periods in 2002. These increases are primarily due to the
acquisition of OpenTV in August 2002.

Other operating expenses increased $20 million or 47% and $46 million or 35%
for the three and nine months ended September 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 were flat for the three months ended September 30, 2003
and increased 11% for the nine months ended September 30, 2003, as compared to
the corresponding prior year periods. The three month results are due to lower
expenses at DMX due to cost containment initiatives offset by increases due to
the acquisition of OpenTV and Wink. The nine month increase is primarily due to
the OpenTV and Wink acquisitions partially offset by a decrease at DMX.

I-31

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
nine months ended September 30, 2003 was comprised of interest income earned on
invested cash ($43 million), dividends on News Corp. ADRs ($37 million),
dividends on ABC Family Worldwide preferred stock ($23 million) and other
($42 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 nine months ended
September 30, 2003, Discovery reported increases in both affiliate revenue and
advertising revenue.

QVC. As described in note 5 to the accompanying condensed consolidated
financial statements, Liberty acquired a controlling interest in QVC, which is
effective September 1, 2003 for financial reporting purposes. Amounts in the
table represent Liberty's share of earnings through August 31, 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.

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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.

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 an agreement in principle, subject to certain conditions, relating
to a restructuring of a significant portion of its notes and debentures. 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 98.5% of the issued share capital of a new holding company
immediately after the restructuring. Existing shareholders will receive a 1.5%
interest in the new holding company under the proposed restructuring. 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 September 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 nine months
ended September 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
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,

I-33

the carrying amounts of such investments were adjusted to their respective fair
values. These adjustments resulted in total charges of $28 million and
$5,402 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 nine months ended
September 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

On September 17, 2003, Liberty completed its previously announced
acquisition of Comcast Corporation's approximate 56.5% ownership interest in
QVC, Inc. for an aggregate purchase price of approximately $7.9 billion. 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 QVC.com. Prior to the closing, Liberty owned approximately 41.7% of QVC.
Subsequent to the Closing, Liberty owns approximately 98.2% of QVC's outstanding
shares, and the remaining shares of QVC are held by members of the QVC
management team.

The QVC Purchase Price was comprised of 217.7 million shares of Liberty's
Series A common stock valued, for accounting purposes, at $2,555 million,
Floating Rate Senior Notes due 2006 in an aggregate principal amount of
$4,000 million and approximately $1,358 million in cash (including acquisition
costs). The foregoing value of the Series A common stock issued was based on the
average closing price for such stock for the five days surrounding July 3, 2003,
which was the date that Liberty announced that it had reached an agreement with
Comcast to acquire Comcast's interest in QVC. Substantially all of the cash
component of the purchase price was funded with the proceeds from the Company's
issuance of its 3.50% Senior Notes due 2006, in the aggregate principal amount
of $1.35 billion. The resale of the Shares and the Floating Rate Notes by
certain subsidiaries of Comcast was registered under the Securities Act of 1933,
as amended, pursuant to the Company's effective registration statement on
Form S-3.

In connection with the consummation of the sale by certain subsidiaries of
Comcast of $2.5 billion aggregate principal amount of Floating Rate Notes, the
Company and Comcast agreed that the Company would repurchase $500 million
aggregate principal amount of Floating Rate Notes from certain subsidiaries of
Comcast named in the Resale Shelf at a price equal to 100% of the principal
amount thereof plus accrued and unpaid interest thereon to the date of
repurchase. Such repurchase was consummated on September 24, 2003.

Although Liberty's sources of funds include its available cash balances, net
cash from operating activities, and dividend and interest receipts, historically
Liberty has been 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 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 $477 million and $1,480 million,
respectively, for the nine months ended September 30, 2003, and $708 million and
$479 million, respectively, for the nine months ended September 30, 2002.
Included

I-34

in the foregoing 2003 amounts are $388 million and $1,166 million invested in
J-COM and IAC/InterActiveCorp, respectively. In addition, Liberty and its
subsidiaries made debt repayments of $929 million and $902 million during the
nine months ended September 30, 2003 and 2002, respectively. Liberty also
acquired shares of its common stock pursuant to a previously authorized share
buy back program. During the nine months ended September 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 may invest amounts in new ventures in
2003. In addition, Liberty has $250 million of corporate debt and $221 million
of subsidiary debt that is required to be repaid or refinanced before
September 30, 2004.

Liberty intends to fund its investing and financing activities with a
combination of available cash and short term investments, cash from operations,
monetization of existing marketable securities, proceeds from the sale of
assets, bank borrowings, and the issuance of debt and equity securities. In this
regard, during the nine months ended September 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 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 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 $1,488 million upon the sale of assets and the
settlement of financial instruments related to certain of its available-for-sale
securities and (iii) received premium proceeds of $476 million from the
origination of financial instruments.

Liberty expects that QVC will provide Liberty with an additional source of
liquidity. QVC currently does not have any external financing, and distributions
of cash from QVC to Liberty are restricted by the need to maintain a certain
level of liquidity and working capital at QVC. Liberty expects that QVC will
generate cash in excess of these needs, and that Liberty will have access to
this excess cash.

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. 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, the
interest rate on the $1,000 million principal amount of Floating Rate Notes held
by subsidiaries of Comcast, is subject to adjustment in the event of a change in
Liberty's credit rating. In addition, any downgrade in Liberty's credit rating
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 $170 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
$440 million, of which approximately $400 million relates to parent company
debt.

SUBSIDIARIES

At September 30, 2003, Liberty's consolidated subsidiaries had
$1,013 million outstanding and $222 million in unused availability under their
respective bank credit facilities. Certain assets of Liberty's consolidated
subsidiaries serve as collateral for borrowings under these bank credit
facilities. Also, these bank credit facilities contain provisions which limit
additional indebtedness, sale of assets, liens, guarantees, and distributions by
the borrowers. At September 30, 2003, the subsidiary of Liberty

I-35

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 September 30, 2003. All other consolidated
subsidiaries were in compliance with their debt covenants at September 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.

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 September 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.

On September 3, 2003, United Pan-Europe Communications N.V. ("UPC"), a
consolidated subsidiary of UGC, completed a restructuring of its debt
instruments and emerged from bankruptcy. Under the terms of the restructuring,
approximately $5.4 billion of UPC's debt was exchanged for equity of UGC
Europe, Inc., a new holding company of UPC ("UGC-E"). Upon consummation, UGC
received approximately 65.5% of UGC-E's equity in exchange for UPC debt
securities that it owned; third-party noteholders received approximately 32.5%
of UGC-E's equity; and existing preferred and ordinary shareholders, including
UGC, received 2% of UGC-E's equity.

In August 2003, Liberty announced that it has agreed to acquire all of the
outstanding shares of UGC Class B common stock from UGC's founding shareholders
(the "Founders"). Pursuant to the agreement, all of UGC's holders of its
8,198,016 outstanding shares of Class B common stock have agreed to transfer
their Class B shares to Liberty in exchange for 12,576,966 shares of Liberty
Series A common stock and a cash payment of approximately 50% of the Founders'
estimated federal and state income tax liability arising from the transaction.

Upon closing of the exchange, the restrictions on the exercise by Liberty of
its voting power with respect to UGC will terminate, and UGC will be included in
Liberty's consolidated financial position and results of operations Liberty has
agreed to enter into a new Standstill Agreement with UGC that will limit
Liberty's ownership of UGC common stock to 90 percent of the outstanding common
stock unless it makes an offer or effects another transaction to acquire all
outstanding UGC common stock. Under certain circumstances, such an offer or
transaction would require an independent appraisal to establish the price to be
paid to stockholders unaffiliated with Liberty. Also upon closing of the
exchange, the maturity of loans by Liberty to UGC and its subsidiaries in the
aggregate amount of $103 million will be extended, on their current terms, from
January 2004 until January 2009. Although no assurance can be given, Liberty
expects that this transaction will close in the first quarter of 2004.

On October 6, 2003, UGC commenced an offer to exchange its Class A common
stock for the 16.6 million outstanding shares of UGC-E common stock that it does
not already own. If, upon the completion of the exchange offer, UGC owns 90% or
more of the outstanding shares of UGC-E

I-36

common stock, UGC intends to effect a "short-form" merger with UGC-E. As
provided by Delaware law, this short-form merger may be effected without the
approval or participation of UGC-E's board of directors or the remaining holders
of UGC-E's common stock. UGC intends to effect the short-form merger as soon as
practicable after it completes the exchange offer and obtains the requisite
number of shares. In the short-form merger each share of UGC-E common stock not
tendered in the exchange offer would be converted into the right to receive the
same consideration offered in the exchange offer. The offer is conditioned upon
satisfaction of various conditions, some of which UGC may waive, and, if
successful, is expected to close by the end of 2003.

If the offer is successful, the consummation of the offer and, if
applicable, the short-form merger will result in the dilution of Liberty's
equity interest in UGC. However, Liberty expects to continue to own a majority
of the outstanding equity of UGC.

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
September 30, 2003 is reflected as a liability in the accompanying condensed
consolidated balance sheet. The balance due as of September 30, 2003 is payable
as follows: $79 million in 2003; $101 million in 2004; and $32 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
September 30, 2003. Starz Encore's estimate of amounts payable under these
agreements is as follows: $42 million in 2003; $581 million in 2004;
$149 million in 2005; $118 million in 2006; $110 million in 2007; and
$350 million thereafter.

Starz Encore is also obligated to pay fees for films that are released by
certain producers through 2010 when these films meet certain criteria described
in the studio output agreements. The actual contractual amount to be paid under
these agreements is not known at this time. However, such amounts are expected
to be significant.

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 first studio elects to extend its contract, Starz Encore has
agreed to pay the studio $60 million within five days of the studio's notice to
extend. The studio is required to exercise its option by December 31, 2004. If
the second studio elects to extend its contract, Starz Encore has agreed to pay
the studio $190 million in four annual installments. The studio is required to
exercise this option by December 31, 2007. If made, Starz Encore's payments to
the studios would be amortized ratably over the term of the respective output
agreement extension.

Liberty guarantees Starz Encore's obligations under certain of its studio
output agreements. At September 30, 2003, Liberty's guarantee for obligations
for films released by such date aggregated $741 million. While the guarantee
amount for films not yet released is not determinable, such amount is expected
to 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 September 30, 2003, Liberty guaranteed Y15.1 billion ($135 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 and is repaid.
The debt maturity dates range from 2003 to 2018. In addition, Liberty has agreed
to fund up to Y20 billion ($179 million at September 30, 2003) to J-COM in the

I-37

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 ($90 million at September 30, 2003) at
December 31, 2003 and expires on September 30, 2004.

Liberty has guaranteed various leases, loans, notes payable, letters of
credit and other obligations of certain other affiliates. At September 30, 2003,
these guaranteed obligations aggregated approximately $137 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. Liberty is currently unable to determine the likelihood
that it will be required to make any refund payments to AT&T.

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 and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible Liberty may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Liberty is exposed to changes in interest rates primarily as a result of its
borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of Liberty's long-term and
short-term debt are expected to vary as a result of future requirements, market
conditions and other factors. Liberty manages its exposure to interest rates by
maintaining what it believes is an appropriate mix of fixed and variable rate
debt. Liberty believes this best protects it from interest rate risk. Liberty
has achieved this appropriate mix by (i) issuing fixed rate debt that Liberty
believes has a low stated interest rate and significant term to maturity and
(ii) issuing short-term variable-rate debt to take advantage of historically low
short-term interest rates. As of September 30, 2003, $5,847 million or 49%

I-38

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 4.6%. The Company's variable rate debt of $6,039 million had a weighted
average interest rate of 2.5% at September 30, 2003. Had market interest rates
been 100 basis points higher (representing an approximate 40% increase over
Liberty's variable rate debt effective cost of borrowing) throughout the
nine months ended September 30, 2003, Liberty would have recorded approximately
$14 million of additional interest expense. Had the price of the securities
underlying the call option obligations associated with the Company's senior
exchangeable debentures been 10% higher during the nine months ended
September 30, 2003, Liberty would have recorded an additional unrealized loss on
financial instruments of $182 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 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.

Among other factors, changes in the market prices of the securities
underlying the AFS Derivatives affect the fair market value of the AFS
Derivatives. The following table illustrates the impact that changes in the
market price of the securities underlying Liberty's AFS Derivatives would have
on the fair market value of such derivatives. Such changes in fair market value
would be included in realized and unrealized gains (losses) on financial
instruments in the accompanying consolidated statement of operations.

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

(1) Includes narrow-band collars.

I-39

At September 30, 2003, the fair value of Liberty's available-for-sale equity
securities was $19,888 million. Had the market price of such securities been 10%
lower at September 30, 2003, the aggregate value of such securities would have
been $1,989 million lower resulting in an increase to unrealized losses in other
comprehensive earnings. Had the market price of Liberty's publicly traded
investments accounted for using the equity method been 10% lower at
September 30, 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 ($187 million at
September 30, 2003). In addition to the forward sale contracts, the Company has
entered into collar agreements with respect to Y18,785 million ($169 million at
September 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 nine months ended
September 30, 2003, the Company had unrealized losses of $7 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 September 30, 2003, the aggregate purchase price of debt securities
underlying total return debt swap arrangements was $312 million ($200 million of
which related to Liberty's senior notes and debentures). As of such date,
Liberty had posted cash collateral equal to $42 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 $270 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.

Liberty's derivative instruments are executed with counterparties who are
well known major financial institutions with high credit ratings. 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

I-40

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 September 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 September 30, 2003 that
has materially affected, or is reasonably likely to materially affect, its
internal controls over financial reporting.

I-41

LIBERTY MEDIA CORPORATION

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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
made 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
was adjusted if AT&T acquired or disposed of cable systems, or if Starz Encore's
programming costs increased or decreased, 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 have been 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 disputed the enforceability of
the excess programming costs pass through provisions of the affiliation
agreement and questioned whether the affiliation agreement, as a whole, was
"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 believed 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 permitted 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 provided for a per subscriber fee rather than the fixed monthly payments
prescribed by the AT&T

II-1

Broadband agreement and had no provision for the pass through of excess
programming costs. Starz Encore 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.

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 had stopped making payments under its affiliation agreement
with Starz Encore. Instead, Comcast Corporation 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 limited
their cooperation with Starz Encore on various matters, including, for example,
promotion of Starz Encore's channels.

On September 23, 2003, Starz Encore and Comcast announced that they have
entered into a multi-year agreement for the carriage of the STARZ! and Encore
movie services on all Comcast owned and operated cable systems (including those
of the former AT&T Broadband). This agreement resolves all of the litigation
(described above) that was pending between Starz Encore and Comcast with respect
to the 1997 affiliation agreement entered into between Starz Encore and AT&T
Broadband.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

(c) On September 17, 2003, Liberty issued 217,709,773 shares of Series A
common stock to certain subsidiaries of Comcast Corporation in partial
payment of the approximately $7.9 billion purchase price for Comcast's
56.5% equity interest in QVC. The shares were valued for purposes of the
transaction at $2,549 million. Liberty believes this transaction was
exempt from registration under the Securities Act either because it did
not involve a "sale" of securities as defined in Section 2(3) of the
Securities Act or, if it did involve a "sale," the transaction was exempt
from the registration requirements of the Securities Act by virtue of
Section 4(2) of the Securities Act since it did not involve a public
offering.

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.

II-2

(b) Reports on Form 8-K filed during the quarter ended September 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-3

SIGNATURES

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

LIBERTY MEDIA CORPORATION

Date: November 13, 2003 By: /s/ CHARLES Y. TANABE
-----------------------------------------
Charles Y. Tanabe
Senior Vice President and
General Counsel

Date: November 13, 2003 By: /s/ DAVID J.A. FLOWERS
-----------------------------------------
David J.A. Flowers
Senior Vice President
and Treasurer
(Principal Financial Officer)

Date: November 13, 2003 By: /s/ CHRISTOPHER W. SHEAN
-----------------------------------------
Christopher W. Shean
Senior Vice President
and Controller
(Principal Accounting Officer)

II-4

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.