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 MARCH 31, 2004

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 (I.R.S. Employer
incorporation or organization) Identification No.)

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

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

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 April 30, 2004 was:

Series A common stock 2,798,422,034 shares; and
Series B common stock 121,062,825 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

(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)

THREE MONTHS ENDED MARCH 31, 2004

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

MARCH 31, 2004

(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 majority and minority
ownership of interests in subsidiaries and other companies, is primarily engaged
in (i) electronic retailing, (ii) international programming and broadband
distribution of video, voice and data, 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 services, and (iii) wireless
domestic telephony and other technology ventures. Liberty, through its
affiliated companies, operates in the United States, Europe, Asia and South
America.

The accompanying interim condensed consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the results
for such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in Liberty's
Annual Report on Form 10-K for the year ended December 31, 2003.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") 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 the fair value of its
derivative instruments and 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 GAAP 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
condensed consolidated financial statements.

Certain prior period amounts have been reclassified for comparability with
the 2004 presentation.

(2) 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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

share for the three months ended March 31, 2004, are 84 million potential common
shares because their inclusion would be anti-dilutive.

(3) ACQUISITIONS

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

On September 17, 2003, Liberty completed its acquisition of Comcast
Corporation's ("Comcast") approximate 56.5% ownership interest in QVC for an
aggregate purchase price of approximately $7.9 billion. QVC markets and sells a
wide variety of consumer products in the U.S. and several foreign countries
primarily by means of televised shopping programs on the QVC networks and via
the Internet through its domestic and international websites. Prior to the
closing, Liberty owned approximately 41.7% of QVC. Subsequent to the closing,
Liberty owned approximately 98% of QVC's outstanding shares, and the remaining
shares of QVC were held by members of QVC management.

Liberty's purchase price for QVC 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 (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.

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 $2,048 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 ability to
obtain access to such cash, and (iii) QVC's perceived significant international
growth opportunities.

ACQUISITION OF CONTROLLING INTEREST IN UNITEDGLOBALCOM, INC. ("UGC")

UGC is a global broadband communications provider of video, voice and data
services with operations in 14 countries outside the United States. At
December 31, 2003, Liberty owned approximately 307 million shares of UGC common
stock, or an approximate 52% economic interest and a 90% voting interest in UGC.
Pursuant to certain voting and standstill arrangements, Liberty was

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

unable to exercise control of UGC, and accordingly, Liberty used the equity
method of accounting for its investment through December 31, 2003.

On January 5, 2004, Liberty completed a transaction pursuant to which UGC's
founding shareholders (the "Founders") transferred 8.2 million shares of UGC
Class B common stock to Liberty in exchange for 12.6 million shares of Liberty
Series A common stock valued, for accounting purposes, at $152 million and a
cash payment of approximately $16 million (including acquisition costs). This
transaction was the last of a number of independent transactions pursuant to
which Liberty acquired its controlling interest in UGC from 2001 through
January 2004. Liberty's acquisition of approximately 280 million shares of UGC
in January 2002 gave it a greater than 50% economic interest in UGC, but due to
the aforementioned standstill and voting arrangements, Liberty applied the
equity method of accounting for such investment. Upon closing of the January 5,
2004 transaction, the restrictions on the exercise by Liberty of its voting
power with respect to UGC terminated, and Liberty gained voting control of UGC.
Accordingly, UGC has been included in Liberty's consolidated financial position
and results of operations since January 1, 2004. In the event the spin off
transaction described in note 4 is consummated, the historical results of
operations of UGC for periods prior to the spin off will be presented as
discontinued operations in Liberty's consolidated financial statements.

Liberty has accounted for its acquisition of UGC as a step acquisition, and
has allocated its investment basis to its pro rata share of UGC's assets and
liabilities at each significant acquisition date based on the estimated relative
fair values of such assets and liabilities on such dates. Due to recording its
share of UGC's losses, Liberty's investment basis in UGC prior to the
acquisition of the Founders' shares was zero. The following table reflects the
amounts allocated to UGC's assets and liabilities upon completion of the
acquisition of the Founders' shares (amounts in millions):

Current assets, including cash of $310 million.............. $ 609
Property and equipment...................................... 3,386
Customer relationships...................................... 446
Goodwill.................................................... 1,989
Other assets................................................ 346
Current liabilities......................................... (831)
Debt........................................................ (4,154)
Deferred income taxes....................................... (720)
Other liabilities........................................... (296)
Minority interest........................................... (607)
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$ 168
=======

Liberty has entered into a new Standstill Agreement with UGC that limits
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.

During the three months ended March 31, 2004, Liberty also purchased an
additional 20.7 million shares of UGC Class A common stock pursuant to certain
pre-emptive rights granted to it pursuant to the aforementioned standstill
agreement with UGC. The $157 million purchase price for such shares

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

was comprised of (1) the cancellation of indebtedness due from subsidiaries of
UGC to certain subsidiaries of Liberty in the amount of $104 million (including
accrued interest) and (2) $53 million in cash.

Also in January 2004, UGC initiated a rights offering pursuant to which
holders of each of UGC's Class A, Class B and Class C common stock received .28
transferable subscription rights to purchase a like class of common stock for
each share of common stock owned by them on January 21, 2004. The rights
offering expired on February 12, 2004. UGC received cash proceeds of
approximately $1.02 billion from the rights offering and expects to use such
cash proceeds for working capital and general corporate purposes, including
future acquisitions and repayment of outstanding indebtedness. As a holder of
UGC Class A, Class B and Class C common stock, Liberty participated in the
rights offering and exercised its rights to purchase 94.1 million shares for a
total cash purchase price of $565 million. Subsequent to the foregoing
transactions, Liberty owns approximately 54% of UGC's common stock representing
approximately 92% of the voting power of UGC's shares.

PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma information for Liberty and its
consolidated subsidiaries for the three months ended March 31, 2003 was prepared
assuming the acquisitions of QVC and UGC occurred on January 1, 2003. These pro
forma amounts are not necessarily indicative of operating results that would
have occurred if the QVC and UGC acquisitions had occurred on January 1, 2003
(amounts in millions, except per share amounts).

Revenue..................................................... $2,003
Net earnings................................................ $ 153
Earnings per common share................................... $ .05

(4) SPIN OFF OF INTERNATIONAL GROUP

Liberty's Board of Directors has approved a resolution authorizing the
Company to take the necessary actions to effect the spin-off of assets
principally comprised of Liberty's International Group as a tax-free
distribution to its shareholders. The completion of this transaction is subject
to, among other things, a final determination of the assets to be included in
the spin-off, the receipt of a favorable tax opinion and regulatory and other
third party approvals. Upon completion of this transaction, the International
Group will be a separate publicly traded company. This transaction will be
accounted for at historical cost due to the pro rata nature of the distribution.
Subsequent to the completion of the spin off, the historical results of
operations of the International Group for periods prior to the spin off,
including those of UGC, will be presented as discontinued operations in
Liberty's consolidated financial statements. See note 12 for a description and
certain financial information of Liberty's operating segments, including the
International Group.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

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

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

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(1) Includes $669 million and $533 million of shares pledged as collateral for
share borrowing arrangements at March 31, 2004 and December 31, 2003,
respectively.

(2) At March 31, 2004, other available-for-sale debt securities include
$599 million of investments in certain third-party marketable debt
securities held by Liberty parent and $42 million of such securities held by
Liberty subsidiaries. At December 31, 2003, such investments aggregated
$493 million and $26 million, respectively.

Management estimates that the aggregate fair market value of all of its
other cost investments approximated $562 million and $424 million at March 31,
2004 and December 31, 2003, respectively. Management calculates market values of
its other cost investments using a variety of approaches including multiple of
cash flow, discounted cash flow model, per subscriber value, or a value of
comparable public or private businesses. No independent appraisals were
conducted for those cost investments.

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.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

(6) INTANGIBLE ASSETS

GOODWILL

Changes in the carrying amount of goodwill for the three months ended
March 31, 2004 are as follows:

AMORTIZABLE INTANGIBLE ASSETS

Amortization of intangible assets with finite useful lives was $140 million
and $50 million for the three months ended March 31, 2004 and 2003,
respectively. Based on its current amortizable intangible assets, Liberty
expects that amortization expense will be as follows for the next five years
(amounts in millions):

Remainder of 2004........................................... $389
2005........................................................ $524
2006........................................................ $475
2007........................................................ $445
2008........................................................ $436

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

(7) DERIVATIVE INSTRUMENTS

The Company's derivative instruments are summarized as follows:

REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS

Realized and unrealized gains (losses) on financial instruments during the
three months ended March 31, 2004 and 2003 are comprised of the following:

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

(8) LONG-TERM DEBT

Debt is summarized as follows:

UGC DEBT

At March 31, 2004, UGC's debt is comprised of $3,584 million borrowed by a
wholly-owned subsidiary of UGC pursuant to its UPC Distribution Bank Facility
and $294 million of other UGC subsidiary debt. The UPC Distribution Bank
Facility provides for borrowings under four different tranches aggregating euro
3,500 million ($4,095 million at March 31, 2004) at interest rates equal to
EURIBOR or LIBOR plus an applicable spread. Three of the tranches are reducing
term loans, which require repayment beginning in June 2004, and the fourth
tranche is a reducing revolving loan, which requires repayment beginning in
June 2006. The UPC Distribution Bank Facility is secured by the assets of most
of UGC's majority-owned European cable operating companies and contains certain
financial covenants and restrictions regarding payment of dividends, ability to
incur additional indebtedness, disposition of assets, mergers and affiliated
transactions.

OTHER SUBSIDIARY DEBT

At March 31, 2004, Starz Encore had no amounts outstanding and $325 million
in unused availability under its bank credit facility. The bank credit facility
contains restrictive covenants which require, among other things, the
maintenance of certain financial ratios, and include limitations on
indebtedness, liens, encumbrances, acquisitions, dispositions, guarantees and
dividends. Additionally, the bank credit facility requires the payment of fees
of .2% per annum on the average unborrowed portion of the total commitment. Such
fees were not significant for the three months ended March 31, 2004 and 2003.
Starz Encore's ability to borrow the unused capacity noted above is dependent on
its continuing compliance with these covenants at the time of, and after giving
effect to, a requested borrowing.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

At March 31, 2004, 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. The forbearance
agreement originally expired on March 31, 2004, but has been extended until
June 15, 2004. The outstanding balance of the subsidiary's bank facility was
$89 million at March 31, 2004, all of which is included in current portion of
debt.

Also included in other subsidiary debt is $80 million of capitalized
transponder lease obligations.

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 March 31, 2004 is as follows (amounts in millions):

Fixed rate senior notes..................................... $3,414
Floating Rate Notes......................................... $2,503
Senior debentures........................................... $1,851
Senior exchangeable debentures, including call option
obligation................................................ $4,356

Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at March 31, 2004.

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 March 31, 2004............................ $13,488
Add:
Unamortized issue discount on senior notes and
debentures.............................................. 23
Unamortized discount attributable to call option feature
of exchangeable debentures.............................. 2,391
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Face amount at maturity................................. $15,902
=======

(9) STOCKHOLDERS' EQUITY

SHARES RESERVED FOR ISSUANCE

As of March 31, 2004, there were 55.8 million shares of Liberty Series A
common stock and 28.2 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 three months ended March 31, 2004, the Company acquired
approximately 96.0 million shares of its Series B common stock from the estate
and family of the late founder of Liberty's former

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

parent in exchange for approximately 105.4 million shares of Liberty Series A
common stock. Ten million of the acquired Series B shares have been accounted
for as treasury stock in the accompanying condensed consolidated balance sheet,
and the remaining Series B shares have been retired.

(10) STOCK BASED COMPENSATION

The Company has granted to certain of 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.
Compensation expense for options with tandem SARs is the same under APB Opinion
No. 25 and Statement 123.

(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 March 31,
2004 is reflected as a liability in the accompanying

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

condensed consolidated balance sheet. The balance due as of March 31, 2004 is
payable as follows: $196 million in 2004 and $58 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
March 31, 2004. Starz Encore's estimate of amounts payable under these
agreements is as follows: $408 million in 2004; $354 million in 2005;
$146 million in 2006; $112 million in 2007; $107 million in 2008; and
$233 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
$127 million and $94 million for the three months ended March 31, 2004 and 2003,
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
would be required 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. Subsequent to March 31, 2004, the studio exercised its option, and Starz
Encore made the $60 million payment. If the second studio elects to extend its
contract, Starz Encore would be required to pay the studio a total of
$190 million in four annual installments of $47.5 million. 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 March 31, 2004, Liberty's guarantee for obligations for
films released by such date aggregated $857 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 March 31, 2004, Liberty has guaranteed Y14.4 billion ($138 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. The debt maturity dates range from 2004 to 2018.
In addition, Liberty has agreed to fund up to an additional Y10 billion
($96 million at March 31, 2004) to J-COM in the event J-COM's cash flow (as
defined in its bank loan agreement) does not meet certain targets. In the event
J-COM meets certain performance criteria, this commitment expires on
September 30, 2004.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

Liberty has also guaranteed various leases, loans, notes payable, letters of
credit and other obligations (the "Guaranteed Obligations") of certain other
affiliates. At March 31, 2004, the Guaranteed Obligations aggregated
approximately $176 million and are not reflected in Liberty's condensed
consolidated balance sheet at March 31, 2004. Currently, Liberty is not certain
of the likelihood of being required to perform under such guarantees.

In connection with agreements for the sale of certain assets, Liberty
typically retains liabilities that relate to events occurring prior to its sale,
such as tax, environmental, litigation and employment matters. Liberty generally
indemnifies the purchaser in the event that a third party asserts a claim
against the purchaser that relates to a liability retained by Liberty. These
types of indemnification guarantees typically extend for a number of years.
Liberty is unable to estimate the maximum potential liability for these types of
indemnification guarantees as the sale agreements typically do not specify a
maximum amount and the amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be determined at
this time. Historically, Liberty has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying condensed consolidated financial statements with respect to these
indemnification guarantees.

OPERATING LEASES

Liberty leases business offices, has entered into pole rental and
transponder lease agreements and uses 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, which through its ownership of interests in
subsidiaries and other companies, is primarily engaged in the electronic
retailing, media, communications and entertainment industries. Each of these
businesses is separately managed. Liberty has organized its businesses into four
Groups based upon each businesses' services or products: Interactive Group,
International Group, Networks Group and Corporate and Other. Liberty's chief
operating decision maker and management team review the combined results of
operations of each of these Groups (including consolidated subsidiaries and
equity method affiliates), as well as the results of operations of each
individual business in each Group.

Liberty identifies its reportable segments as (A) those consolidated
subsidiaries that (1) represent 10% or more of its consolidated revenue,
earnings before income taxes or total assets or (2) are significant to an
evaluation of the performance of a Group; and (B) those equity method affiliates
(1) whose share of earnings represent 10% or more of Liberty's pre-tax earnings
or (2) are significant to an evaluation of the performance of a Group. The
segment presentation for prior periods has been

I-18

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

conformed to the current period segment presentation. Liberty evaluates
performance and makes decisions about allocating resources to its Groups and
operating segments based on financial measures such as revenue, operating cash
flow, gross margin, and revenue or sales per customer equivalent. In addition,
Liberty reviews non-financial measures such as average prime time rating, prime
time audience delivery, subscriber growth and penetration, as appropriate.

Liberty defines operating cash flow as revenue less cost of sales, operating
expenses, and selling, general and administrative expenses (excluding stock
compensation). Liberty believes this is an important indicator of the
operational strength and performance of its businesses, including the ability to
service debt and fund capital expenditures. In addition, this measure allows
management to view operating results and perform analytical comparisons and
benchmarking between businesses and identify strategies to improve performance.
This measure of performance excludes depreciation and amortization, stock
compensation and restructuring and impairment charges that are included in the
measurement of operating income pursuant to GAAP. Accordingly, operating cash
flow 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 GAAP. 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 three months ended March 31, 2004, Liberty has identified the
following consolidated subsidiaries and equity method affiliates as its
reportable segments:

INTERACTIVE GROUP

- QVC--consolidated subsidiary that markets and sells a wide variety of
consumer products in the U.S. and several foreign countries, primarily by
means of televised shopping programs on the QVC networks and via the
Internet through its domestic and international websites.

- Ascent Media Group ("Ascent Media")--consolidated subsidiary that provides
sound, video and ancillary post-production and distribution services to
the motion picture and television industries in the United States, Europe
and Asia.

INTERNATIONAL GROUP

- UGC--consolidated subsidiary that provides broadband communications
services, including video, voice and data with operations in 14 countries
outside the U.S.

- J-COM--45% owned equity method affiliate that provides broadband
communications services in Japan.

- Jupiter Programming Co., Ltd. ("JPC")--50% owned equity method affiliate
that provides cable and satellite television programming in Japan.

NETWORKS GROUP

- Starz Encore--consolidated subsidiary that provides premium programming
distributed by cable operators, direct-to-home satellite providers and
other distributors throughout the United States.

I-19

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

- Discovery Communications, Inc. ("Discovery")--50% owned equity method
affiliate that provides original and purchased cable television
programming in the U.S. and over 150 other countries.

- Courtroom Television Network, LLC ("Court TV")--50% owned equity method
affiliate that operates a basic cable network that provides informative
and entertaining programming based on the American legal system.

- Game Show Network, LLC ("GSN")--50% owned equity method affiliate that
operates a basic cable network dedicated to the world of games, game
playing and game shows.

Liberty's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different technologies, distribution channels and marketing
strategies. The accounting policies of the segments that are also consolidated
subsidiaries are the same as those described in the summary of significant
policies.

The amounts presented in the table below represent 100% of each business'
revenue and operating cash flow. These amounts are combined on an unconsolidated
basis and are then adjusted to remove the effects of the equity method
investments to arrive at the consolidated balances for each group. This
presentation is designed to reflect the manner in which management reviews the
operating performance of individual businesses within each group regardless of
whether the investment is accounted for as a consolidated subsidiary or an
equity investment. It should be noted, however, that this presentation is not in
accordance with GAAP since the results of equity method investments are required
to be reported on a net basis. Further, Liberty could not, among other things,
cause any noncontrolled affiliate to distribute to Liberty its proportionate
share of the revenue or operating cash flow of such affiliate.

I-20

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

PERFORMANCE MEASURES

I-21

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

BALANCE SHEET INFORMATION

I-22

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2004

(UNAUDITED)

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

I-23

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

Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. To the extent that such statements are not
recitations of historical fact, such statements constitute forward-looking
statements which, by definition, involve risks and uncertainties. Where, in any
forward-looking statement, we express 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 we,
and the entities in which we have interests, operate;

- continued consolidation of the broadband distribution and movie studio
industries;

- uncertainties inherent in the development and integration of new business
lines and business strategies;

- the expanded deployment of personal video recorders and the impact on
television advertising revenue;

- rapid technological changes;

- capital spending for the acquisition and/or development 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 our products and services, and the products and
services of the entities in which we have 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 we expressly
disclaim any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein, to reflect any

I-24

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

The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read in
conjunction with our accompanying condensed consolidated financial statements
and the notes thereto, as well as our Annual Report on Form 10-K for the year
ended December 31, 2003.

OVERVIEW

We are a holding company that owns majority and minority interests in a
broad range of electronic retailing, video programming, broadband distribution
and other communications companies. In recent years we have shifted our
corporate focus to the acquisition and exercise of control over more companies.
The first step in this process was our September 2003 acquisition of Comcast
Corporation's approximate 56% ownership interest in QVC, Inc., which when
combined with our previous 42% ownership interest, gave us over 98% control of
QVC, and we now consolidate the financial position and results of operations of
QVC. In January 2004, we acquired all of the outstanding shares of Class B
common stock of UnitedGlobalCom, Inc. from UGC's founding shareholders.
Previously in December 2003, UGC completed the acquisition of all of the
outstanding shares of UGC Europe, Inc. that it did not already own. As a result
of these two transactions and our exercise of certain pre-emptive rights, UGC
owns 100% of the outstanding common stock of UGC Europe and we own approximately
54% of the outstanding common stock of UGC representing approximately 92% of the
voting power of UGC's shares. We began consolidating the operations of UGC
effective January 1, 2004. In the fourth quarter of 2003, to further align our
corporate structure with our operating assets, we organized our businesses into
four Groups: Interactive Group, International Group, Networks Group and
Corporate and Other.

Our primary businesses in the Interactive Group are QVC and Ascent Media. In
addition, we own approximately 20% of InterActiveCorp, which we account for as
an available-for-sale security. In evaluating the prospects and risks for QVC,
our 2004 goals include continued international expansion by increasing (1) the
number of customers who have access to and use our service and (2) the average
sales per customer. In addition we hope to find new opportunities for domestic
growth, including Internet sales.

Our primary businesses in the International Group are UGC, which provides
broadband services primarily in Europe; J-COM, which provides broadband services
in Japan; and JPC, which provides video programming in Japan. UGC is a
consolidated subsidiary, and J-COM and JPC are equity affiliates. We believe our
primary opportunities in our international markets include continued growth in
subscribers; increasing the average revenue per unit by continuing to rollout
telephony, high speed data and digital video; developing foreign programming
businesses; and maximizing operating efficiencies on a regional basis. Potential
impediments to achieving these goals include increasing price competition for
broadband services; alternative video technologies; and available capital to
finance the proposed rollout of new services.

Our primary businesses in the Networks Group are Starz Encore, Discovery,
Court TV and GSN. In addition we own American Depository Shares representing
approximately 17% of the shares, including shares that represent approximately
9% of the voting power, of The News Corporation Limited, which we account for as
an available-for-sale security. We view the development of digital and
interactive services, our ability to expand these networks and increase
international distribution, and our ability to increase advertising rates
relative to broadcast networks and other cable networks as key opportunities for
growth in the coming months and years. We face several key obstacles in our
attempt to meet these goals, including: continued consolidation in the broadband
and satellite distribution

I-25

industries; the impact on viewer habits of new technologies such as video on
demand and personal video recorders; and alternative movie and programming
sources.

Certain of our subsidiaries and affiliates are dependent on the
entertainment industry for entertainment, educational and informational
programming. In addition, a significant portion of the revenue of certain of our
subsidiaries and affiliates is generated by the sale of advertising on their
networks. A downturn in the economy could have a negative impact on the revenue
and operating income of these businesses. A slow economy could reduce (i) the
development of new television and motion picture programming, thereby adversely
impacting their supply of service offerings; (ii) consumer disposable income and
consumer demand for their products and services; and (iii) the amount of
resources allocated for network and cable television advertising by major
corporations.

Our businesses that operate in countries other than the United States are
subject to a number of risks including fluctuations in currency exchange rates
and political unrest. In addition, the economies in many of the regions where
our international businesses operate have recently experienced moderate to
severe recessionary conditions, including among others, Argentina, Chile, the
United Kingdom, Germany and Japan. These recessionary conditions have strained
consumer and corporate spending and financial systems and financial institutions
in these areas. As a result, our affiliates have experienced a reduction in
consumer spending and demand for services.

In addition to the businesses included in the foregoing Groups, we continue
to maintain significant investments in public companies such as Time
Warner Inc., Motorola, Inc. and Sprint Corporation, which are accounted for as
available-for-sale ("AFS") securities and are included in our Corporate and
Other Group. We view these holdings as financial assets that we can monetize and
use the resulting proceeds for debt repayments or additional investments in any
of our operating Groups.

Also included in our Corporate and Other Group are our Tech/Ventures assets,
which include our consolidated subsidiary True Position, Inc., as well as
minority stakes in Net2Phone, Inc., WildBlue Communications, Inc., and IDT
Corporation. True Position provides equipment and technology that deliver
location-based services to wireless users. Net2Phone is a provider of voice and
enhanced telecommunication services throughout the world, including cable
telephony services. It utilizes Voice over Internet Protocol (VoIP) technology
to transmit digital voice communications over managed data networks and the
Internet. WildBlue Communications is a start-up company that intends to provide
Internet and data services via satellite to residential and small business
customers. IDT Corporation, an AFS investment, is a multinational communications
company whose primary offerings are prepaid debit and rechargeable calling
cards, wholesale telecommunications carrier services and consumer telephone
services.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

To assist you in understanding and analyzing our business in the same manner
we do, we have organized the following discussion of our results of operations
into two parts: Consolidated Operating Results, and Operating Results by
Business Group. The Operating Results by Business Group section includes a
discussion of the more significant businesses within each Group.

I-26

CONSOLIDATED OPERATING RESULTS

REVENUE. Our consolidated revenue increased $1,866 million for the three
months ended March 31, 2004, as compared to the corresponding prior year period.
This increase is due primarily to our acquisitions of controlling interests in
QVC and UGC, which recognized $1,283 million and $547 million of revenue,
respectively, in the first quarter of 2004. See "OPERATING RESULTS BY BUSINESS
GROUP" below for a more complete discussion of these fluctuations.

OPERATING CASH FLOW. We define Operating Cash Flow as revenue less cost of
sales, operating expenses and selling, general and administrative expenses
(excluding stock compensation). Our chief operating decision maker and
management team use this measure of performance in conjunction with other
measures applied on a Group by Group basis to evaluate our businesses and make
decisions about allocating resources among our businesses. We believe this is an
important indicator of the operational strength and performance of our
businesses, including the ability to service debt and fund capital expenditures.
In addition, this measure allows us to view operating results, perform
analytical comparisons and benchmarking between businesses and identify
strategies to improve performance. This measure of performance excludes such
costs as depreciation and amortization, stock compensation and impairments of
long-lived assets that are included in the measurement of operating income
pursuant to general accepted accounting principles. Accordingly, Operating Cash
Flow 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 GAAP. See note 12
to the accompanying condensed consolidated financial statements for a
reconciliation of Operating Cash Flow to Earnings (Loss) Before Income Taxes and
Minority Interests.

Consolidated Operating Cash Flow increased $438 million during the
three months ended March 31, 2004, as compared to the corresponding prior year.
This is due primarily to our acquisitions of controlling interests in QVC and
UGC, which contributed $270 million and $204 million, respectively, to our
consolidated Operating Cash Flow. These increases were partially offset by a

I-27

decrease in our Networks Group, which resulted primarily from Starz Encore's
higher programming costs.

STOCK COMPENSATION. Stock compensation includes compensation related to
(1) options and stock appreciation rights for shares of our common stock that
are granted to certain of our officers and employees, (2) phantom stock
appreciation rights ("PSARs") granted to officers and employees of certain of
our subsidiaries pursuant to private equity plans and (3) amortization of
restricted stock grants. 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,
as well as the vesting of PSARs and the equity value of the related subsidiary.
The expense reflected in our condensed consolidated financial statements 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, vesting percentages and, ultimately, on the final determination of
market value when the options are exercised. Our 2004 stock compensation
includes $62 million related to UGC. In connection with its rights offering in
2004, UGC modified the exercise price of all outstanding options, and now
accounts for such options using variable plan accounting. UGC's stock
compensation expense in the first quarter of 2004 reflects the adjustment from
fixed plan accounting to variable plan accounting.

DEPRECIATION AND AMORTIZATION. The increase in depreciation in 2004 is due
to increases in our depreciable asset base resulting from (1) the consolidation
of QVC and UGC and (2) capital expenditures. The increase in amortization in
2004 is due primarily to the consolidation of QVC and amortization of the
related intangible assets.

OPERATING INCOME. Consolidated operating income increased $75 million in
2004, as compared to the corresponding prior year. This increase is due
primarily to our consolidation of QVC, partially offset by UGC's operating loss.

OTHER INCOME AND EXPENSE

INTEREST EXPENSE. Interest expense was $223 million and $100 million, for
the three months ended March 31, 2004 and 2003, respectively. The increase is
due to our consolidation of UGC in 2004 ($71 million), interest on the debt we
issued to acquire a controlling interest in QVC ($31 million) and an increase in
the accretion of our exchangeable debentures ($17 million).

DIVIDEND AND INTEREST INCOME. Dividend and interest income was $54 million
and $33 million for the three months ended March 31, 2004 and 2003,
respectively. Interest and dividend income for the quarter ended March 31, 2004
was comprised of interest income earned on invested cash ($14 million),
dividends on News Corp. American Depository Shares ($21 million), dividends on
ABC Family Worldwide preferred stock ($8 million) and other ($11 million).

I-28

INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD. A summary
of our share of earnings (losses) of affiliates is included below:

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

* No longer an equity affiliate

See "OPERATING RESULTS BY BUSINESS GROUP" below for a discussion of our more
significant equity method affiliates.

GAINS ON DISPOSITIONS. Our gains on dispositions in 2004 resulted primarily
from our dispositions of certain available-for-sale securities. The gains or
losses were calculated based upon the difference between the carrying value of
the assets relinquished, as determined on an average cost basis, compared to the
fair value of the assets received.

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

INCOME TAXES. Our effective tax rate was not meaningful in 2004 and was 40%
for the three months ended March 31, 2003. Our 2004 tax expense includes state
and foreign taxes and an increase in the valuation allowance for losses of
subsidiaries that we do not consolidate for tax purposes. The effective tax rate
in 2003 differed from the U.S. Federal income tax rate of 35% primarily due to
state and local taxes.

OPERATING RESULTS BY BUSINESS GROUP

The tables in this section present 100% of each business' revenue, operating
cash flow and operating income even though we own less than 100% of many of
these businesses. These amounts are combined on an unconsolidated basis and are
then adjusted to remove the effects of the equity method investments to arrive
at the consolidated amounts for each group. This presentation is designed to
reflect the manner in which management reviews the operating performance of
individual businesses

I-29

within each group regardless of whether the investment is accounted for as a
consolidated subsidiary or an equity investment. It should be noted, however,
that this presentation is not in accordance with GAAP since the results of
operations of equity method investments are required to be reported on a net
basis. Further, we could not, among other things, cause any noncontrolled
affiliate to distribute to us our proportionate share of the revenue or
operating cash flow of such affiliate.

The financial information presented below for equity method affiliates was
obtained directly from those affiliates. We do not control the decision-making
process or business management practices of our equity affiliates. Accordingly,
we rely on the management of these affiliates and their independent auditors to
provide us with financial information prepared in accordance with GAAP that we
use in the application of the equity method. We are not aware, however, of any
errors in or possible misstatements of the financial information provided by our
equity affiliates that would have a material effect on our consolidated
financial statements.

INTERACTIVE GROUP

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

(1) QVC was an equity method affiliate until September 2003 when it became a
consolidated subsidiary.

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

I-30

("QVC-UK"), Germany ("QVC-Germany") and Japan ("QVC-Japan"). As more fully
described in note 3 to the accompanying condensed consolidated financial
statements, we 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 we have consolidated QVC's results of operations since
that date. Accordingly, increases in the Interactive Group's revenue and
expenses for the three months ended March 31, 2004 are primarily the result of
the September 2003 acquisition of a controlling interest in QVC.

The following discussion describes QVC's results of operations for the
three months ended March 31, 2004 and 2003. Depreciation and amortization for
periods prior and subsequent to our acquisition of Comcast's interest in QVC are
not comparable due to the effects of purchase accounting.

Net revenue for the three months ended March 31, 2004 and 2003 includes the
following revenue by geographical area:

QVC's consolidated net revenue increased 20.8% during the three months ended
March 31, 2004 as compared to the corresponding prior year. This increase was
driven by a 19.1% increase in the number of units shipped (from 26.2 million in
2003 to 31.2 million in 2004) and a 1.1% increase in the average selling price
per package. Average sales per customer increased in each of QVC's markets. In
addition, each of QVC's international markets added subscribers in the first
quarter of 2004. The number of homes receiving QVC's services at March 31, 2004
are as follows:

I-31

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
U.S. 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 months ended March 31, 2004 and 2003 the increases in
revenue and expenses were also impacted by changes in the exchange rates for the
UK pound sterling, 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 36.6% of net revenue for the three months ended
March 31, 2003 to 36.8% for the three months ended March 31, 2004. This increase
in gross profit percentage is primarily the result of a higher product margin
due to a shift in the product mix from lower margin home products to higher
margin apparel and accessory categories in QVC-Germany and QVC-UK.

QVC's operating expenses are comprised of commissions, order processing and
customer service, provision for doubtful accounts, and credit card processing
fees. Operating expenses increased 11.8% for the three months ended March 31,
2004, as compared to the corresponding prior year period. This increase is
primarily due to the increase in sales volume. As a percentage of net revenue,
operating expenses were 8.9% and 9.6% for the three months ended March 31, 2004
and 2003, respectively. As a percent of net revenue, commissions decreased in
2004, as compared to 2003. This decrease is due to (i) the termination of
commissions to one distributor in QVC-UK and (ii) the payment of commissions to
certain distributors based on number of subscribers, rather than sales volume,
in QVC-Japan. As a percentage of net revenue, order processing and customer
service expenses decreased in each international market in 2004. Such decrease
is a result of reduced personnel expense due to increased Internet sales and
operator efficiencies in call handling and staffing.

QVC's SG&A expenses increased 15.8% for the three months ended March 31,
2004, as compared to the corresponding prior year period. This increase is
primarily the net result of increases in personnel, information technology and
insurance costs. Personnel cost increases reflect the addition of personnel to
support the increased sales of QVC's foreign operations. Information technology
expenditure increases are the result of higher third-party service costs related
to various software projects, as well as higher software maintenance fees.
Increased insurance costs are the result of higher rates and expanded coverage.

QVC's depreciation and amortization expense increased for the three months
ended March 31, 2004 primarily due to the amortization of intangible assets
recorded in connection with our purchase of QVC.

ASCENT MEDIA. Ascent Media provides sound, video and ancillary post
production and distribution services to the motion picture and television
industries in the United States, Europe, Asia and Mexico. Accordingly, Ascent
Media is dependent on the television and movie production industries and the
commercial advertising market for a substantial portion of its revenue.

I-32

Ascent Media's revenue increased $23 million or 18.7% during the
three months ended March 31, 2004, as compared to the corresponding prior year
period. This increase is due to acquisitions by Ascent Media's Networks Group in
late 2003 and early 2004 ($11 million), as well as increases in projects for
feature films and episodic television in Ascent Media's Audio Group
($6 million) and Creative Services Group ($2 million).

Ascent Media's operating expenses increased $15 million or 21.2% during the
three months ended March 31, 2004, as compared to the corresponding prior year
period. This increase is due to increases in expenses such as personnel and
material costs that vary with revenue, as well as the acquisitions by Ascent
Media's Network Group noted above.

Ascent Media's general and administrative expenses increased $6 million or
20.5% during the three months ended March 31, 2004, as compared to the
corresponding prior year. This increase is due primarily to the acquisitions by
Ascent Media's Networks Group and various individually insignificant increases.

OTHER. Other consolidated subsidiaries included in the Interactive Group
are On Command Corporation, which provides in-room, on demand video
entertainment and information services to hotels, motels and resorts; and OpenTV
Corp., which provides interactive television solutions, including operating
middleware, web browser software, interactive applications, and consulting and
support services. Other consolidated subsidiary revenue was relatively
comparable over the 2004 and 2003 periods. The changes in operating cash flow
and operating income in 2004 for our other consolidated subsidiaries are due to
improvements in the operations of OpenTV.

INTERNATIONAL GROUP

The following table includes information regarding our equity method
affiliates, which presentation is not in accordance with GAAP. See--"Operating
Results by Business Group" above.

I-33

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

(1) UGC was an equity affiliate until January 2004 when it became a 54%-owned
consolidated subsidiary.

(2) Represents an equity method affiliate. Equity ownership percentages for
significant equity affiliates at March 31, 2004 are as follows:

J-COM....................................................... 45%
JPC......................................................... 50%

UGC. UGC's revenue increased 25.5% for the three months ended March 31,
2004. This increase is due to increases in video and high speed Internet
subscribers in both Europe and Chile, an increase in voice subscribers in Chile
and favorable foreign currency exchange rates. These subscriber increases are
the result of additional customers due to organic growth, as well as increased
penetration of services to existing customers. On a local currency basis, UGC's
operating companies in Europe and Chile generated 5.4% and 16.4% increases in
revenue, respectively.

UGC's operating expenses increased 9.9% for the three months ended
March 31, 2004, as compared to the corresponding prior year period. This
increase is due to the strengthening of the euro and Chilean peso against the
U.S. dollar in 2004. On a local currency basis, UGC Europe's operating expenses
decreased 6.7% due to cost control measures and lower bad debt expense, and
Chile's operating expenses were relatively flat.

UGC's SG&A expenses increased 8.2% for the three months ended March 31,
2004, as compared to the corresponding prior year period, due primarily to the
foreign currency exchange fluctuations noted above. On a local currency basis,
UGC Europe's SG&A expenses decreased 10.3% due to cost control initiatives, and
Chile's SG&A expenses increased 7.7%.

I-34

UGC's depreciation and amortization increased $23 million or 11.8% in 2004,
as compared to 2003. This increase is due primarily to foreign exchange rate
fluctuations.

Also included in UGC's operating loss is stock-based compensation expense of
$62 million and $6 million in 2004 and 2003, respectively.

OTHER CONSOLIDATED SUBSIDIARIES. Our other international consolidated
subsidiaries are Liberty Cablevision of Puerto Rico, Inc., which provides cable
television and other broadband services in Puerto Rico, and Pramer S.C.A., which
owns and distributes programming services throughout Latin America. Other
consolidated International Group revenue, operating cash flow and operating
income were relatively consistent from 2003 to 2004.

J-COM. J-COM's revenue increased 28.7% for the three months ended
March 31, 2004, as compared to the corresponding prior year. This increase was
due to a 10.4% increase in the number of homes receiving at least one service,
an 8.2% increase in the average number of services per home and a 5.0% increase
in the average revenue per household receiving at least one service ("ARPH"). In
addition, changes in the exchange rate also positively impacted revenue in 2004.
On a local currency basis, J-COM's revenue increased 15.5% in 2004.

J-COM's operating expenses increased 19.8% for the three months ended
March 31, 2004. This increase is due to higher programming costs as a result of
the increase in cable television subscribers and growth of J-COM's business. As
a percent of revenue, operating expenses decreased from 36.0% in 2003 to 33.5%
in 2004 due to the realization of economies of scale from the growth of the
business. SG&A expenses increased 10.6% in 2004. Exchange rates also impacted
J-COM's expenses, as operating and SG&A expenses increased 7.5% and decreased
..7%, respectively, on a local currency basis.

JPC. JPC's revenue increased 42.5% for the three months ended March 31,
2004, as compared to the corresponding prior year. This increase was largely due
to increases in revenue for SHOP CHANNEL, which experienced a 12.8% increase in
full time equivalent homes ("FTE's") and a 13.8% increase in sales per FTE.
Affiliate revenue and advertising revenue at JPC's other networks also
contributed to the overall revenue increase in 2004 due to continued subscriber
growth at those networks. SHOP CHANNEL revenue accounted for 82.2% and 79.1% of
JPC's revenue in 2004 and 2003, respectively. In addition, changes in the
exchange rate also positively impacted revenue in 2004. On a local currency
basis, JPC's revenue increased 27.5% in 2004.

JPC's operating expenses increased 39.0% in 2004. This increase is primarily
due to higher cost of goods sold at SHOP CHANNEL resulting from a revenue
increase of 47.6% during 2004. JPC's SG&A expenses increased 21.5% in 2004. The
increase in SG&A was due to growth in the business resulting from additional
sales volume at SHOP CHANNEL and increased marketing activity in all channels.
Exchange rates also impacted JPC's expenses as operating and SG&A expenses
increased 24.8% and 9.1%, respectively, on a local currency basis.

I-35

NETWORKS GROUP

The following table includes information regarding our equity method
affiliates, which presentation is not in accordance with GAAP. See--"Operating
Results by Business Group" above.

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

(1) Represents an equity method affiliate. Equity ownership percentages for
significant equity affiliates at March 31, 2004 are as follows:

Discovery................................................... 50%
Court TV.................................................... 50%
GSN......................................................... 50%

STARZ ENCORE. Starz Encore provides premium programming distributed by
cable operators, direct-to-home satellite providers and other distributors
throughout the United States. The majority of Starz Encore's revenue is derived
from the delivery of movies to subscribers under affiliation agreements with
these video programming distributors.

I-36

Starz Encore's revenue increased 1.3% for the three months ended March 31,
2004 as compared to the corresponding prior years. This increase is the net
effect of an increase in the average number of subscription units for Starz
Encore's Thematic Multiplex and Encore services, partially offset by a decrease
in the average number of subscription units for STARZ!, primarily in Comcast
Corporation's cable television systems. Total average subscription units
increased 9.4% in the first quarter of 2004, as compared to the first quarter of
2003. Such increases in subscription units are due in part to new affiliation
agreements between Starz Encore and certain multichannel video program
distributors. Under these new affiliation agreements, Starz Encore has obtained
benefits such as more favorable channel positioning and increased co-operative
marketing commitments. Starz Encore is negotiating with its other multichannel
video programming distributors to obtain similar channel positioning and
increased co-operative marketing commitments. However, no assurance can be given
that these negotiations will be successful. As noted above, the increase in
subscription units is due primarily to subscription units for the Thematic
Multiplex service, which has a lower subscription rate than other Starz Encore
services. Comcast, DirecTV and Echostar Communications generated 23.8%, 23.6%
and 10.9%, respectively, of Starz Encore's revenue for the three months ended
March 31, 2004.

Starz Encore's subscription units at March 31, 2004 and December 31, 2003
are presented in the table below.

At March 31, 2004, cable, direct broadcast satellite, and other distribution
represented 64.7%, 34.0% and 1.3%, respectively, of Starz Encore's total
subscription units.

Starz Encore's operating expenses increased $40 million or 41.8% for the
three months ended March 31, 2004, as compared to the corresponding prior year.
Such increase is due primarily to increases in programming costs, which
increased from $94 million in 2003 to $127 million in 2004. In addition, 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.

Starz Encore estimates that its 2004 programming expense will increase
between $170 million and $190 million over amounts expensed in 2003. In
addition, Starz Encore expects that programming costs in 2005 will exceed the
2004 costs by approximately $125 million to $175 million. Such increases are
based on increases in the expected box office performance of movie titles that
will become available to Starz Encore during these periods through its output
arrangements with various movie studios. In addition, Starz Encore expects a
higher cost per title due to a new rate card for movie titles under certain of
its license agreements that are effective for movies made available to Starz
Encore in 2004 and thereafter and amortization of deposits previously made under
the output agreements. In 2004, Starz Encore is not expected to generate
increases in revenue or reductions in other costs sufficient to fully offset
these programming cost increases. Accordingly, these increased programming costs
are expected to result in a reduction to Starz Encore's operating income in
2004. These estimates are subject to a number of assumptions that could change
depending on the number and timing of movie titles actually becoming available
to Starz Encore and their ultimate box office performance.

I-37

Accordingly, the actual amount of cost increases experienced by Starz Encore may
differ from the amounts noted above.

Starz Encore's selling, general and administrative expenses increased
$1 million or 4.4% during 2004, as compared to the corresponding prior year.
Such increase is due primarily to an increase in sales and marketing expenses
partially offset by a decrease in bad debt expense. As noted above, Starz Encore
has entered into new affiliation agreements with certain multichannel television
distributors. Consequently, Starz Encore anticipates that its 2004 co-operative
promotions and its sales and marketing expenses will continue to be higher than
in 2003.

Starz Encore has granted phantom appreciation rights to certain of its
officers and employees. Compensation relating to the phantom appreciation rights
has been recorded based upon the fair value of Starz Encore. The amount of
expense associated with the phantom appreciation rights is generally based on
the vesting of such rights and the change in the fair value of Starz Encore.

DISCOVERY. Discovery's revenue increased 23.4% for the three months ended
March 31, 2004, as compared to the corresponding period in the prior year. The
revenue increase was driven by a 23.3% increase in net advertising revenue and a
24.2% increase in net affiliate revenue. The increase in advertising revenue is
primarily due to increased audience delivery and ratings at most of the domestic
networks. Affiliate revenue increased due to subscriber growth combined with
subscribers moving from free preview status to paying subscribers at the
developing domestic networks.

Discovery's operating expenses increased 6.1%. Such increases were due
primarily to a 16.2% increase in programming costs associated with Discovery's
continued investment in newer and more dramatic programming. These increases
were offset by reduced operating costs at the consumer products division
associated with the closure of unprofitable stores and other cost saving
initiatives. Discovery's SG&A expenses increased 32.9% due primarily to
increased marketing initiatives and increased personnel costs at the domestic
division combined with unfavorable exchange rate fluctuations at the
international networks.

COURT TV. Court TV's revenue increased 13.0% for the three months ended
March 31, 2004, as compared to the corresponding period in the prior year. The
increase is due to a 15.0% increase in affiliate revenue and a 9.9% increase in
advertising revenue. Advertising revenue increased as a result of a 7.9%
increase in subscribers combined with a 5.4% increase in the important
18-49 year old rating demographic. The subscriber increase also drove the
increase in affiliate revenue.

Court TV's operating expenses, which are comprised primarily of programming
costs, increased 11.1%. The increase in programming costs is due to continued
investment in original and alternative programming. Court TV's SG&A expenses
increased 59.7%. This increase is due to increased consumer marketing and other
promotional costs over the prior year as well as increased overhead resulting
from the growth of the business. As a percentage of revenue, SG&A expenses
increased from 30.2% in the first quarter of 2003 to 43.1% in comparable period
of 2004, primarily due to the increased marketing and promotional costs
discussed above.

GSN. GSN's revenue increased 16.7% for the three months ended March 31,
2004, as compared to the corresponding period in the prior year. This increase
is due to a 12.9% increase in advertising revenue and a 22.9% increase in net
affiliate revenue. Affiliate revenue increased due to 6.6% growth in subscribers
combined with modest rate increases. A decrease in launch support amortization
as a percentage of gross affiliate revenue also contributed to the overall
growth in net affiliate revenue. Advertising revenue increased due to an
improved audience delivery resulting from the subscriber growth combined with a
small increase in advertising rates.

GSN's operating expenses, which are comprised primarily of programming
costs, increased 18.1% but were fairly consistent as a percentage of revenue.
The increase in operating costs is primarily due

I-38

to continued investments in programming. GSN's SG&A expenses increased 11.5% as
compared to the corresponding period in the prior year. As a percentage of
revenue, SG&A expenses decreased from 57.9% in the first quarter of 2003 to
55.2% in 2004. The increase in SG&A is due primarily to increased marketing
costs associated with rebranding the business and promotion of certain programs.

OTHER. Included in the Networks Group consolidated subsidiaries is Maxide
Acquisition, Inc. (d/b/ a DMX Music), which is principally engaged in
programming, distributing, and marketing digital and analog music services to
homes and businesses. Operating results for our other Networks consolidated
subsidiaries were fairly consistent during 2004 and 2003.

MATERIAL CHANGES IN FINANCIAL CONDITION

CORPORATE

Although our sources of funds include our available cash balances, net cash
from operating activities, and dividend and interest receipts, historically we
have been dependent upon our financing activities, proceeds from asset sales and
monetization of our public investment portfolio, including derivative
instruments, to generate sufficient cash resources to meet our cash requirements
and planned commitments. With the 2003 repayment of the bank debt of our
wholly-owned subsidiaries and our acquisition of the controlling interest in
QVC, we expect the cash generated by the operating activities of our
privately-owned subsidiaries to be an additional source of liquidity to the
extent such cash exceeds the working capital needs of the subsidiaries and is
not otherwise restricted. During the first quarter of 2004 we also received cash
proceeds of $512 million upon the sale of assets and the settlement of financial
instruments related to certain of our available-for-sale securities.

Our uses of cash in recent years include investments in and advances to
affiliates and debt repayments. In this regard, our investments in and advances
to cost and equity method affiliates aggregated $917 million and $67 million,
respectively, during the three months ended March 31, 2004. Included in the
foregoing amounts is $907 million invested in News Corp.

In November 2003, we announced our intention to reduce our outstanding
consolidated debt balance by approximately $4.5 billion by the end of 2005. We
initiated the debt reduction plan during the fourth quarter of 2003 by
(i) redeeming $1.0 billion of floating rate notes that had been issued to
Comcast, (ii) repaying $934 million of outstanding bank debt of our wholly-owned
subsidiaries, and (iii) retiring approximately $578 million of other outstanding
corporate indebtedness.

Our liquidity needs in 2004 include an approximate $1.0 billion reduction in
our corporate indebtedness pursuant to our debt reduction plan, as well as
continued funding of our existing investees as they develop and expand their
businesses. We currently anticipate such cash investments to aggregate
$300 million to $350 million for the remainder of 2004, the majority of which
relates to our International Group. We may also invest additional amounts in new
or existing ventures. However, we are unable to quantify such investments at
this time. We also expect our subsidiaries to spend approximately $755 million
for capital expenditures in 2004, including $415 million by UGC and
$180 million by QVC, which amounts we expect to be funded by the cash flows of
the respective subsidiary.

We expect that these investing and financing activities will be funded with
a combination of cash on hand, cash provided by operating activities, proceeds
from equity collar expirations and dispositions of non-strategic assets. Based
on the put price and assuming we physically settle each of our AFS Derivatives
and excluding any provision for income taxes, we would be entitled to cash
proceeds of $265 million in 2004, $1,014 million in 2005, $398 million in 2006,
$389 million in 2007, $405 million in 2008, and $4,714 million thereafter upon
settlement of our AFS Derivatives.

Prior to the maturity of our equity collars, the terms of certain of our
equity and narrow-band collars allow us to borrow against the future put option
proceeds at LIBOR or LIBOR plus an

I-39

applicable spread, as the case may be. As of March 31, 2004, such borrowing
capacity aggregated approximately $6,075 million.

Subsequent to our November 2003 announcement regarding our intention to
reduce our outstanding indebtedness, Standard and Poor's Securities, Inc., Fitch
Investors Service, L.P. and Moody's Investors Service, Inc. each affirmed its
respective rating for our senior debt at the lowest level of investment grade
with a stable outlook. None of our existing indebtedness includes any covenant
under which a default could occur as a result of a downgrade in our credit
rating. However, any such downgrade could adversely affect our access to the
public debt markets and our overall cost of future borrowings.

Based on currently available information, we expect to receive approximately
$150 million in dividend and interest income during the year ended December 31,
2004. Based on current debt levels and current interest rates, we expect to make
interest payments of approximately $750 million during the year ended
December 31, 2004, of which approximately $460 million relates to parent company
debt.

SUBSIDIARIES

At March 31, 2004, Starz Encore had no amounts outstanding and $325 million
available pursuant to its bank credit facility. This bank credit facility
contains provisions which limit additional indebtedness, sale of assets, liens,
guarantees, and distributions by Starz Encore. Starz Encore's ability to borrow
the unused capacity under its bank credit facility is dependent on its
continuing compliance with its covenants at the time of, and after giving effect
to, a requested borrowing. At March 31, 2004, our subsidiary 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. The
forbearance agreement originally expired on March 31, 2004, but has been
extended to June 15, 2004. The outstanding balance of the subsidiary's bank
facility was $89 million at March 31, 2004.

UGC. UGC completed a rights offering in February 2004 and received net cash
proceeds of $1.02 billion. Subsequent to March 31, 2004, UGC completed the sale
of euro 500 million 1 3/4% Convertible Senior Notes due April 15, 2024. These
notes will be convertible into shares of UGC Class A common stock at an initial
conversion price of euro 9.7561 per share, which was equivalent to a conversion
price of $12.00 per share on the date of issuance. UGC plans to use the proceeds
from the rights offering and issuance of its Convertible Senior Notes for
(1) its proposed acquisition of French cable operator, Noos, (2) the repayment
of indebtedness under the UGC Europe Distribution Bank Facility and (3) general
corporate purposes. UGC believes that its existing cash, cash from operating
activities and availability under its existing credit facilities is adequate to
fund its current and long-term liquidity, capital and acquisition needs.

At March 31, 2004, UGC's debt is comprised of $3,584 million borrowed by a
subsidiary of UGC pursuant to its UPC Distribution Bank Facility and
$294 million of other UGC subsidiary debt. The UPC Distribution Bank Facility
provides for borrowings under four different tranches aggregating euro
3,500 million ($4,095 million at March 31, 2004) at interest rates equal to
EURIBOR or LIBOR plus an applicable spread. Three of the tranches are reducing
term loans, which require repayment beginning in June 2004, and the fourth
tranche is a reducing revolving loan, which requires repayment beginning in
June 2006. The UPC Distribution Bank Facility is secured by the assets of most
of UGC's majority-owned European cable operating companies and contains certain
financial covenants and restrictions regarding payment of dividends, ability to
incur additional indebtedness, disposition of assets, mergers and affiliated
transactions.

I-40

EQUITY AFFILIATES

Various partnerships and other affiliates of ours accounted for using the
equity method finance a substantial portion of their acquisitions and capital
expenditures through borrowings under their own credit facilities and net cash
provided by their operating activities. Notwithstanding the foregoing, certain
of our affiliates may require additional capital to finance their operating or
investing activities. In the event our affiliates require additional financing
and we fail to meet a capital call, or other commitment to provide capital or
loans to a particular company, such failure may have adverse consequences to us.
These consequences may include, among others, the dilution of our equity
interest in that company, the forfeiture of our right to vote or exercise other
rights, the right of the other stockholders or partners to force us to sell our
interest at less than fair value, the forced dissolution of the company to which
we have made the commitment or, in some instances, a breach of contract action
for damages against us. Our ability to meet capital calls or other capital or
loan commitments is subject to our ability to access cash.

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 March 31,
2004 is reflected as a liability in the accompanying condensed consolidated
balance sheet. The balance due as of March 31, 2004 is payable as follows:
$196 million in 2004 and $58 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
March 31, 2004. Starz Encore's estimate of amounts payable under these
agreements is as follows: $408 million in 2004; $354 million in 2005;
$146 million in 2006; $112 million in 2007; $107 million in 2008 and
$233 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
$127 million and $94 million for the three months ended March 31, 2004 and 2003,
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.
Subsequent to March 31, 2004, the studio exercised its option, and Starz Encore
made the $60 million payment. If the second studio elects to extend its
contract, Starz Encore has agreed to pay the studio a total of $190 million in
four annual installments of $47.5 million. 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 film licensing obligations under certain
of its studio output agreements. At March 31, 2004, Liberty's guarantee for
studio output obligations for films released by such date aggregated
$857 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 ours, we have not recorded a separate liability for
our guarantee of these obligations.

I-41

At March 31, 2004, we guaranteed Y14.4 billion ($138 million) of the bank
debt of J-COM, an equity affiliate that provides broadband services in Japan.
Our guarantees expire as the underlying debt matures and is repaid. The debt
maturity dates range from 2004 to 2018. In addition, we have agreed to fund up
to Y10 billion ($96 million at March 31, 2004) to J-COM in the event J-COM's
cash flow (as defined in its bank loan agreement) does not meet certain targets.
In the event J-COM meets certain performance criteria, this commitment expires
on September 30, 2004.

We have also guaranteed various leases, loans, notes payable, letters of
credit and other obligations of certain other affiliates. At March 31, 2004, the
Guaranteed Obligations aggregated approximately $176 million and are not
reflected in our balance sheet at March 31, 2004. Currently, we are not certain
of the likelihood of being required to perform under such guarantees.

There were no significant changes to our aggregate contractual obligations
during the three months ended March 31, 2004, except for the addition of such
obligations related to UGC. UGC's contractual obligations at March 31, 2004
include debt payments, lease obligations, programming obligations and other
commitments and aggregated $486 million for 2005; $304 million for 2006;
$413 million for 2007; $679 million for 2008; $836 million for 2009 and
$1,647 million thereafter.

Pursuant to a tax sharing agreement between us and AT&T when we were a
subsidiary of AT&T, we received a cash payment from AT&T in periods when we
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 us in future periods, similar to a net operating loss carryforward.
During the period from March 10, 1999 to December 31, 2002, we received cash
payments from AT&T aggregating $555 million as payment for our 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 our
losses, we may be required to refund as much as $333 million of these cash
payments. We are currently unable to determine the likelihood that we 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 ("IRS") audit for the 1993-1999 tax years. The IRS notified AT&T and us
that it was proposing income adjustments and assessing certain penalties in
connection with TCI's 1994 tax return. The IRS, AT&T and we 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 us and AT&T, we may be obligated to reimburse AT&T for
any tax that is ultimately assessed as a result of this agreement. We are
currently unable to estimate any such tax liability and resulting reimbursement,
but we believe that any such reimbursement will not be material to our financial
position.

In connection with agreements for the sale of certain assets, we typically
retain liabilities that relate to events occurring prior to the sale, such as
tax, environmental, litigation and employment matters. We generally indemnify
the purchaser in the event that a third party asserts a claim against the
purchaser that relates to a liability retained by us. These types of
indemnification guarantees typically extend for a number of years. We are unable
to estimate the maximum potential liability for these types of indemnification
guarantees as the sale agreements typically do not specify a maximum amount and
the amounts are dependent upon the outcome of future contingent events, the
nature and likelihood of which cannot be determined at this time. Historically,
we have not made any significant indemnification payments under such agreements
and no amount has been accrued in the accompanying consolidated financial
statements with respect to these indemnification guarantees.

We have contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible we 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,

I-42

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.

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

We are exposed to changes in interest rates primarily as a result of our
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 our long-term and short-term
debt are expected to vary as a result of future requirements, market conditions
and other factors. We manage our exposure to interest rates by maintaining what
we believe is an appropriate mix of fixed and variable rate debt. We believe
this best protects us from interest rate risk. We have achieved this mix by
(i) issuing fixed rate debt that we believe 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 March 31,
2004, the face amount of our fixed rate debt (considering the effects of
interest rate swap agreements) was $8,401 million, which had a weighted average
stated interest rate of 4.85%. Our variable rate debt of $7,501 million had a
weighted average interest rate of 4.45% at March 31, 2004. Had market interest
rates been 100 basis points higher (representing an approximate 22% increase
over our variable rate debt effective cost of borrowing) throughout the
three months ended March 31, 2004, we would have recognized approximately
$19 million of additional interest expense.

We are exposed to changes in stock prices primarily as a result of our
significant holdings in publicly traded securities. We continually monitor
changes in stock markets, in general, and changes in the stock prices of our
holdings, specifically. We believe 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. We use 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 us with a put option that gives us 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 have equal fair values 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 we receive
cash equal to the difference between such fair values.

Put spread collars provide us 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 us to purchase
the underlying securities at a price that is lower than the Company Put Price.
The inclusion of the secondary put option allows us 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 us to market risk if the underlying
security trades below the put spread price and may restrict our ability to
borrow against the derivative.

I-43

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 our 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 our statement of operations.

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

(1) Includes narrow-band collars.

At March 31, 2004, the fair value of our available-for-sale securities was
$21,430 million. Had the market price of such securities been 10% lower at
March 31, 2004, the aggregate value of such securities would have been
$2,143 million lower resulting in an increase to unrealized losses in other
comprehensive earnings. Such decrease would be partially offset by an increase
in the value of our AFS Derivatives as noted in the table above. Had the stock
price of our publicly traded investments accounted for using the equity method
been 10% lower at March 31, 2004, 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 our foreign affiliates are denominated in
foreign currencies. Therefore, we are exposed to changes in foreign currency
exchange rates. We do not hedge the majority of our foreign currency exchange
risk because of the long-term nature of our interests in foreign affiliates.
However, in order to reduce our foreign currency exchange risk related to our
investment in J-COM, we have entered into forward sale contracts with respect to
Y20,802 million ($199 million at March 31, 2004). In addition to the forward
sale contracts, we have entered into collar agreements with respect to
Y38,785 million ($372 million at March 31, 2004). These collar agreements have a
weighted average remaining term of approximately one year, an average call price
of 104 yen/ U.S. dollar and an average put price of 121 yen/U.S. dollar. During
the three months ended March 31, 2004, we had unrealized losses of $9 million
related to our yen contracts. We continually evaluate our foreign currency
exposure based on current market conditions and the business environment in each
country in which we operate.

From time to time we enter into total return debt swaps in connection with
our purchase of our own or third-party public and private indebtedness. Under
these arrangements, we direct a counterparty to purchase a specified amount of
the underlying debt security for our benefit. We initially post collateral with
the counterparty equal to 10% of the value of the purchased securities. We earn
interest income based upon the face amount and stated interest rate of the
underlying debt securities, and we pay 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%, we are required to post cash collateral for the
decline, and we record 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 March 31, 2004, the aggregate purchase price
of debt securities underlying total return debt swap arrangements was
$337 million ($205 million of which related to our senior notes and debentures).
As of such date, we had posted cash collateral equal to $52 million. In the
event the fair value of the purchased debt securities were to fall to zero, we
would be required to post additional cash collateral of $285 million.

I-44

We periodically assess the effectiveness of our derivative financial
instruments. With regard to interest rate swaps, we monitor 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. We believe 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, we monitor historical market trends relative to values
currently present in the market. We believe 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 our management to
measure the success of its use of derivative instruments and to determine when
to enter into or exit from derivative instruments.

Our derivative instruments are executed with counterparties who are well
known major financial institutions with high credit ratings. While we believe
these derivative instruments effectively manage the risks highlighted above,
they are subject to counterparty credit risk. Counterparty credit risk is the
risk that the counterparty is unable to perform under the terms of the
derivative instrument upon settlement of the derivative instrument. To protect
ourselves against credit risk associated with these counterparties we generally:

- execute our derivative instruments with several different counterparties,
and

- execute 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 our benefit, if
the respective counterparty's credit rating for its senior unsecured debt
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 our risk management
strategy, we actively monitor the creditworthiness of each of these
counterparties. Based on our analysis, we currently consider nonperformance by
any of our 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 March 31, 2004 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 March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, its internal
controls over financial reporting.

I-45

LIBERTY MEDIA CORPORATION

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

EXCITE@HOME. In 2000, certain of UGC's subsidiaries, including UPC, pursued
a transaction with Excite@Home, which if completed, would have merged chello
broadband with Excite@Home's international broadband operations to form a
European Internet business. The transaction was not completed, and discussions
between the parties ended in late 2000. On November 3, 2003, UGC received a
complaint filed on September 26, 2003 by Frank Morrow, on behalf of the General
Unsecured Creditors' Liquidating Trust of At Home in the United States
Bankruptcy Court for the Northern District of California, styled as IN RE AT
HOME CORPORATION, FRANK MORROW V. UNITEDGLOBALCOM, INC. ET AL. (Case
No. 01-32495-TC). In general, the complaint alleges breach of contract and
fiduciary duty by UGC and Old UGC, Inc. (formerly known as UGC Holdings, Inc.,
now a wholly owned subisidiary of UGC). Old UGC has commenced bankruptcy
proceedings, and this action has been stayed by the Bankruptcy Court in the
bankruptcy proceeding. The plaintiff has filed a claim in the bankruptcy
proceedings of approximately $2.2 billion. UGC denies the material allegations
and intends to defend the litigation vigorously.

ITEM 2. CHANGES IN SECURITIES

On March 3, 2004, Liberty issued 105,401,365 shares of Series A common stock
to the estate and family (the "Magness Group") of the late founder of the former
parent of Liberty in exchange for 96,037,690 shares of Series B common stock
owned by the Magness Group. The issuance was made in reliance on the exemption
from registration afforded by Section 3(a)(9) of the Securities Act of 1933, as
amended, which provides an exemption for any security exchanged by an issuer
with existing security holders where no direct or indirect remuneration is paid
for soliciting such exchange.

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

(a) Exhibits

31.1 Rule 13a-14(a)/15d-14(a) Certification.

31.2 Rule 13a-14(a)/15d-14(a) Certification.

31.3 Rule 13a-14(a)/15d-14(a) Certification.

32 Section 1350 Certification

(b) Reports on Form 8-K filed during the quarter ended March 31, 2004:

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

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

II-1

SIGNATURES

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

LIBERTY MEDIA CORPORATION

Date: May 10, 2004 By: /s/ CHARLES Y. TANABE
-----------------------------------------
Charles Y. Tanabe
Senior Vice President and General Counsel

Date: May 10, 2004 By: /s/ DAVID J.A. FLOWERS
-----------------------------------------
David J.A. Flowers
Senior Vice President and Treasurer
(Principal Financial Officer)

Date: May 10, 2004 By: /s/ CHRISTOPHER W. SHEAN
-----------------------------------------
Christopher W. Shean
Senior Vice President and Controller
(Principal Accounting Officer)

II-2

EXHIBIT INDEX

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

31.1 Rule 13a-14(a)/15d-14(a) Certification.

31.2 Rule 13a-14(a)/15d-14(a) Certification.

31.3 Rule 13a-14(a)/15d-14(a) Certification.

32 Section 1350 Certification