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 JUNE 30, 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 July 30, 2004 was:

Series A common stock 2,678,090,793 shares; and
Series B common stock 121,062,825 shares.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

* See note 4.

(continued)

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(UNAUDITED)

* See note 4.

See accompanying notes to condensed consolidated financial statements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

* See note 4.

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)

SIX MONTHS ENDED JUNE 30, 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 note 4.

See accompanying notes to condensed consolidated financial statements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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 the electronic retailing, media, communications and entertainment industries.
In addition, companies in which Liberty owns interests are engaged in, among
other things, (i) interactive commerce via the Internet, television and
telephone, (ii) cable and satellite broadband services, and (iii) telephony and
other technology ventures. Prior to June 7, 2004, Liberty was also engaged in
international programming and broadband distribution of video, voice and data
services. See note 4. Liberty, through its affiliated companies, operates in the
United States, Europe and Asia.

The accompanying interim condensed consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the results
for such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. These condensed
consolidated financial statements should be read in conjunction with (i) the
consolidated financial statements and notes thereto contained in Liberty's
Annual Report on Form 10-K for the year ended December 31, 2003 and
(ii) Liberty's revised consolidated financial statements for the year ended
December 31, 2003 included in its Current Report on Form 8-K filed on July 14,
2004.

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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

had been converted at the beginning of the periods presented. Excluded from
diluted earnings per share for the six months ended June 30, 2004, are
88.4 million potential common shares because their inclusion would be
anti-dilutive.

(3) 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.

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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

occurred if the QVC acquisition had occurred on January 1, 2003 (amounts
in millions, except per share amounts).

Revenue..................................................... $3,116
Loss from continuing operations............................. $ (313)
Net loss.................................................... $ (296)
Loss from continuing operations per common share............ $ (.11)

(4) SPIN OFF OF INTERNATIONAL GROUP

On June 7, 2004 (the "Spin Off Date"), Liberty completed the spin off (the
"Spin Off") of its wholly-owned subsidiary, Liberty Media International, Inc.
("Liberty Media International"), to its shareholders. Substantially all of the
assets and businesses of Liberty Media International were attributed to
Liberty's International Group segment. In connection with the Spin Off, holders
of Liberty common stock on June 1, 2004 (the "Record Date") received 0.05 of a
share of Liberty Media International Series A common stock for each share of
Liberty Series A common stock owned at 5:00 pm New York City time on the Record
Date and 0.05 of a share of Liberty Media International Series B common stock
for each share of Liberty Series B common stock owned at 5:00 pm New York City
time on the Record Date. The Spin Off is intended to qualify as a tax-free spin
off. For accounting purposes, the Spin Off is deemed to have occurred on
June 1, 2004, and no gain or loss was recognized by Liberty in connection with
the Spin Off.

In addition to the assets in Liberty's International Group operating
segment, Liberty also contributed certain monetary assets to Liberty Media
International in connection with the Spin Off. These monetary assets consisted
of $50 million in cash, 5 million American Depository Shares for preferred,
limited voting ordinary shares of The News Corporation Limited ("News Corp.")
and related derivatives, and a 99.9% economic interest in 345,000 shares of
preferred stock of ABC Family Worldwide, Inc.

The condensed consolidated financial statements and accompanying notes of
Liberty have been prepared to reflect Liberty Media International as a
discontinued operation. Accordingly, the assets and liabilities, revenue, costs
and expenses, and cash flows of Liberty Media International have been excluded
from the respective captions in the accompanying condensed consolidated balance
sheets, condensed consolidated statements of operations, condensed consolidated
statements of comprehensive earnings (loss) and condensed consolidated
statements of cash flows and have been reported under the heading of
discontinued operations in such condensed consolidated financial statements.
Summarized combined financial information for Liberty Media International is
provided in the table below. The May 31, 2004 balance sheet information includes
the contribution of the monetary assets described above.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

COMBINED BALANCE SHEETS

COMBINED STATEMENTS OF OPERATIONS

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(1) Liberty Media International's financial position and results of operations
for the five months ended May 31, 2004 include the results of operations of
UnitedGlobalCom, Inc., which was consolidated beginning January 1, 2004.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

Following the Spin Off, Liberty Media International and Liberty operate
independently, and neither has any stock ownership, beneficial or otherwise, in
the other. In connection with the Spin Off, Liberty Media International and
Liberty entered into certain agreements in order to govern certain of the
ongoing relationships between Liberty and Liberty Media International after the
Spin Off and to provide for an orderly transition. These agreements include a
Reorganization Agreement, a Facilities and Services Agreement, a Tax Sharing
Agreement and a Short-Term Credit Facility.

The Reorganization Agreement provides for, among other things, the principal
corporate transactions required to effect the Spin Off and cross indemnities.
Pursuant to the Facilities and Services Agreement, Liberty provides Liberty
Media International with office space and certain general and administrative
services including legal, tax, accounting, treasury, engineering and investor
relations support. Liberty Media International reimburses Liberty for direct,
out-of-pocket expenses incurred by Liberty in providing these services and for
Liberty Media International's allocable portion of facilities costs and costs
associated with any shared services or personnel.

Under the Tax Sharing Agreement, Liberty is generally responsible for U.S.
federal, state, local and foreign income taxes reported on a consolidated,
combined or unitary return that includes Liberty Media International or one of
its subsidiaries, on the one hand, and Liberty or one of its subsidiaries, on
the other hand, subject to certain limited exceptions. Liberty Media
International will be responsible for all other taxes that are attributable to
Liberty Media International or one of its subsidiaries, whether accruing before,
on or after the Spin Off. The Tax Sharing Agreement requires that Liberty Media
International will not take, or fail to take, any action where such action, or
failure to act, would be inconsistent with or prohibit the Spin Off from
qualifying as a tax-free transaction. Moreover, Liberty Media International has
indemnified Liberty for any loss resulting from such action or failure to act,
if such action or failure to act precludes the Spin Off from qualifying as a
tax-free transaction.

Pursuant to the Short-Term Credit Facility, Liberty has agreed to make loans
to Liberty Media International from time to time up to an aggregate principal
amount of $383 million. In addition, certain subsidiaries of Liberty Media
International have notes payable to Liberty in the aggregate amount of
$117 million. Such notes are included in trade and other receivables, net in the
accompanying condensed consolidated balance sheet at June 30, 2004. The loans
and subsidiary notes payable bear interest at 6% per annum, compounded
semi-annually, and are due and payable no later than March 31, 2005.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 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) Certain of Liberty's News Corp. ADSs were contributed to Liberty Media
International in connection with the Spin Off. See note 4.

(2) Includes $694 million and $533 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2004 and December 31, 2003,
respectively.

(3) At June 30, 2004, other available-for-sale debt securities include
$369 million of investments in third-party marketable debt securities held
by Liberty parent and $20 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 $466 million and $405 million at June 30,
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.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

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.

(6) INTANGIBLE ASSETS

GOODWILL

Changes in the carrying amount of goodwill for the six months ended
June 30, 2004 are as follows:

AMORTIZABLE INTANGIBLE ASSETS

Amortization of intangible assets with finite useful lives was $246 million
and $85 million for the six months ended June 30, 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........................................... $240
2005........................................................ $467
2006........................................................ $423
2007........................................................ $389
2008........................................................ $380

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

(7) DERIVATIVE INSTRUMENTS

The Company's derivative instruments are summarized as follows:

Realized and unrealized gains (losses) on financial instruments during the
six months ended June 30, 2004 and 2003 are comprised of the following:

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

(8) LONG-TERM DEBT

Debt is summarized as follows:

SUBSIDIARY DEBT

At June 30, 2004, Starz Encore Group LLC ("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 six months ended June 30,
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.

At June 30, 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 had entered into a
forbearance agreement whereby the banks agreed to forbear from exercising
certain default-related remedies against the subsidiary. The forbearance
agreement expired on June 15, 2004. Liberty and the subsidiary are currently
considering options with respect to the DMX business and related financing
including, but not limited to, a filing for bankruptcy protection and/or a sale
of the assets of the subsidiary. The outstanding balance of the subsidiary's
bank facility was $86 million at June 30, 2004, all of which is included in
current portion of debt.

Also included in subsidiary debt at June 30, 2004, is $97 million of
capitalized satellite 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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

fair value of Liberty's publicly traded debt securities at June 30, 2004 is as
follows (amounts in millions):

Fixed rate senior notes..................................... $3,139
Floating Rate Notes......................................... $2,508
Senior debentures........................................... $1,726
Senior exchangeable debentures, including call option
obligation................................................ $4,216

Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at June 30, 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 June 30, 2004............................. $ 9,449
Add:
Unamortized issue discount on senior notes and
debentures.............................................. 22
Unamortized discount attributable to call option feature
of exchangeable debentures.............................. 2,363
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Face amount at maturity................................. $11,834
=======

(9) STOCKHOLDERS' EQUITY

SHARES RESERVED FOR ISSUANCE

As of June 30, 2004, there were 60.2 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 six months ended June 30, 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 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.

On July 28, 2004, Liberty completed a transaction with Comcast pursuant to
which Liberty redeemed 120.3 million shares of its Series A common stock held by
Comcast in exchange for 100% of the stock of Encore ICCP, Inc., a wholly owned
subsidiary of Liberty. At the time of the exchange, Encore ICCP held Liberty's
10% ownership interest in E! Entertainment Television, Liberty's 100% ownership
interest in International Channel Networks, all of Liberty's rights, benefits
and obligations under a TCI Music contribution agreement, and approximately
$545 million of cash. The transaction also resolved all litigation pending
between Comcast and Liberty regarding the TCI Music contribution agreement,
which Comcast inherited as part of its acquisition of AT&T Broadband in
November of 2002.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

(10) STOCK BASED COMPENSATION

The Company has granted to certain of its employees options, stock
appreciation rights ("SARs") and options with tandem SARs (collectively,
"Awards") to purchase shares of Liberty Series A and Series B common stock. In
connection with the Spin Off and pursuant to the anti-dilution provisions of the
Liberty Media Corporation 2000 Incentive Plan, the Liberty incentive plan
committee determined to make adjustments to outstanding Liberty Awards. As of
the Record Date, each outstanding Award held by (1) employees of Liberty Media
International, (2) employees of Liberty in departments of Liberty that are
expected to provide services to Liberty Media International pursuant to the
Facilities and Services Agreement and (3) directors of Liberty were divided into
(A) an option to purchase shares of Liberty Media International common stock
equal to the number of shares of Liberty Media International common stock that
would have been issued in respect of the Award if such Award had been exercised
in full immediately prior to the Record Date and (B) an Award to purchase shares
of Liberty common stock equal to the same number of shares of Liberty common
stock for which the outstanding Award is exercisable. The aggregate exercise
price of each pre-Spin Off Award was allocated between the new LMC Award and the
Liberty Media International Award. All other Awards were adjusted to increase
the number of shares of Liberty common stock for which the Award was exercisable
and to decrease the exercise price to reflect the distribution of Liberty Media
International common stock in the Spin Off.

Pursuant to the Reorganization Agreement Liberty is responsible for
settlement of all Liberty Awards whether held by Liberty employees or Liberty
Media International employees, and Liberty Media International is responsible
for settlement of all Liberty Media International Awards whether held by Liberty
employees or Liberty Media International employees. Liberty will continue to
record compensation for all Liberty and Liberty Media International Awards held
by Liberty employees. The compensation for Liberty Media International Awards
will be reflected as an adjustment to additional paid-in capital in Liberty's
statement of stockholders' equity.

The Company accounts for compensation expense related to its Awards 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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

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, 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 for exhibition by Starz Encore at June 30, 2004 is
reflected as a liability in the accompanying condensed consolidated balance
sheet. The balance due as of June 30, 2004 is payable as follows: $118 million
in 2004 and $64 million in 2005.

Starz Encore has also contracted to pay fees for the rights to exhibit films
that have been released theatrically, but are not available for exhibition by
Starz Encore until some future date. These amounts have not been accrued at
June 30, 2004. Starz Encore's estimate of amounts payable under these agreements
is as follows: $245 million in 2004; $498 million in 2005; $161 million in 2006;
$113 million in 2007; $108 million in 2008; and $233 million thereafter.

In addition, Starz Encore is also obligated to pay fees for all qualifying
films that are released theatrically in the United States by studios owned by
The Walt Disney Company from 2004 through 2009, all qualifying films that are
released theatrically in the United States by studios owned by Sony Pictures
Entertainment from 2005 through 2010 and all qualifying films released
theatrically in the United States by Revolution Studios through 2006. Films are
generally available to Starz Encore for exhibition 12 months after their
theatrical release. The fees to be paid by Starz Encore are based on the
domestic theatrical exhibition receipts of qualifying films. As these films have
not yet been released in theatres, Starz Encore is unable to estimate the
amounts to be paid under these output agreements. However, such amounts are
expected to be significant.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

In addition to the foregoing contractual film obligations, Sony has the
right to extend its contract for an additional three years. If Sony elects to
extend its contract, Starz Encore would be required to pay Sony a total of
$190 million in four annual installments of $47.5 million. Sony is required to
exercise this option by December 31, 2007. If made, Starz Encore's payments to
Sony would be amortized ratably as programming expense over the term of the
output agreement extension.

GUARANTEES

Liberty guarantees Starz Encore's obligations under certain of its studio
output agreements. At June 30, 2004, Liberty's guarantee for obligations for
films released by such date aggregated $808 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 June 30, 2004, Liberty has guaranteed Y14.4 billion ($134 million) of the
bank debt of Jupiter Telecommunications, Co., Ltd. ("J-COM"), a former 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
($92 million at June 30, 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. Liberty's investment in J-COM was attributed to Liberty
Media International in the Spin Off. In connection with the Spin Off, Liberty
Media International has indemnified Liberty for any amounts Liberty is required
to fund under these arrangements.

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

I-19

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

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
three Groups based upon each businesses' services or products: Interactive
Group, Networks Group and Corporate and Other (which includes our Tech/Ventures
assets). 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 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 six months ended June 30, 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.

I-20

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

- 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.

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.

- 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-21

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

PERFORMANCE MEASURES

I-22

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

BALANCE SHEET INFORMATION

I-23

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2004

(UNAUDITED)

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

I-24

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;

- fluctuations in currency exchange rates and political unrest in
international markets;

- 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

I-25

disseminate any updates or revisions to any forward-looking statement contained
herein, to reflect any change in its expectations with regard thereto, or any
other change in events, conditions or circumstances on which any such statement
is based.

The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read in
conjunction with (i) our accompanying condensed consolidated financial
statements and the notes thereto, (ii) our Annual Report on Form 10-K for the
year ended December 31, 2003 and (iii) our revised consolidated financial
statements for the year ended December 31, 2003 included in our Current Report
on Form 8-K filed on July 14, 2004.

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 our affiliated
companies. A significant 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 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.

On June 7, 2004, we completed the spin off of our wholly-owned subsidiary,
Liberty Media International, Inc., to our shareholders. Substantially all of the
assets and businesses of Liberty Media International were attributed to our
International Group segment. In connection with the Spin Off, holders of our
common stock on June 1, 2004 received 0.05 of a share of Liberty Media
International Series A common stock for each share of Liberty Series A common
stock owned at 5:00 pm New York City time on the Record Date and 0.05 of a share
of Liberty Media International Series B common stock for each share of Liberty
Series B common stock owned at 5:00 pm New York City time on the Record Date.
The Spin Off is intended to qualify as a tax-free spin off. For accounting
purposes, the Spin Off is deemed to have occurred on June 1, 2004, and we
recognized no gain or loss in connection with the Spin Off.

Our condensed consolidated financial statements and accompanying notes have
been prepared to reflect Liberty Media International as a discontinued
operation. Accordingly, the assets and liabilities, revenue, costs and expenses,
and cash flows of Liberty Media International have been excluded from the
respective captions in the accompanying condensed consolidated balance sheets,
condensed consolidated statements of operations, condensed consolidated
statements of comprehensive earnings (loss) and condensed consolidated
statements of cash flows and have been reported under the heading of
discontinued operations in such condensed consolidated financial statements.

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 increasing Internet sales.

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

I-26

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
industries, which could make the negotiation of favorable distribution contracts
more difficult; 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
affiliates is generated by the sale of advertising on their networks. A downturn
in the 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.

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 provide
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-27

CONSOLIDATED OPERATING RESULTS

REVENUE. Our consolidated revenue increased $1,374 million and
$2,689 million for the three and six months ended June 30, 2004, respectively,
as compared to the corresponding prior year periods. These increases are due
primarily to our acquisition of a controlling interest in QVC, which recognized
$1,289 million and $2,572 million of revenue during the three and six months
ended June 30, 2004. In addition, Ascent Media Group's revenue increased
$37 million and $60 million for the three and six months ended June 30, 2004,
respectively. 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 Loss From Continuing Operations Before
Income Taxes and Minority Interests.

Consolidated Operating Cash Flow increased $298 million and $540 million
during the three and six months ended June 30, 2004, respectively, as compared
to the corresponding prior year periods. This is due primarily to our
acquisition of a controlling interest in QVC, which contributed $278 million and
$548 million, respectively, to our consolidated Operating Cash Flow. These
increases

I-28

were partially offset by a 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.

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 (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 $227 million and
$388 million for the three and six months ended June 30, 2004, respectively, as
compared to the corresponding prior year periods. These increases are due
primarily to our consolidation of QVC in 2003 and a decrease in our stock
compensation in 2004.

OTHER INCOME AND EXPENSE

INTEREST EXPENSE. Interest expense was $301 million and $225 million, for
the six months ended June 30, 2004 and 2003, respectively. The increase is due
to interest on the debt we issued to acquire a controlling interest in QVC
($53 million) and an increase in the accretion of our exchangeable debentures
($19 million).

DIVIDEND AND INTEREST INCOME. Dividend and interest income was $73 million
and $78 million for the six months ended June 30, 2004 and 2003, respectively.
Interest and dividend income for the six months ended June 30, 2004 was
comprised of interest income earned on invested cash ($17 million), dividends on
News Corp. American Depository Shares ($19 million), dividends on ABC Family
Worldwide preferred stock ($13 million), and other ($24 million). In connection
with the Spin Off, we contributed our economic interest in the ABC Family
Worldwide preferred stock to Liberty Media International. Accordingly, this will
not be a source of dividend income for us in the future.

I-29

INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD. A summary
of our share of earnings 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 cost basis 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 9.7% for the six months ended
June 30, 2004 and was 32.8% for the six months ended June 30, 2003. Our 2004 tax
benefit includes state and foreign tax expense, which partially offset our
federal tax benefit. 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 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

I-30

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
("QVC-UK"), Germany ("QVC-Germany") and Japan ("QVC-Japan"). QVC-UK broadcasts
live 19 hours a day. In October 2003, QVC-Germany increased its daily broadcast
time from 19 hours to

I-31

24 hours; and in May 2004, QVC-Japan increased its daily broadcast time from
17 hours to 24 hours. 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 and six months ended June 30, 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
and six months ended June 30, 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 and six months ended June 30, 2004 and 2003
includes the following revenue by geographical area:

QVC's consolidated net revenue increased 17.1% and 18.9% during the three
and six months ended June 30, 2004, respectively, as compared to the
corresponding prior year. The three month increase was driven by a 15.5%
increase in the number of units shipped from 27.8 million in 2003 to
32.1 million in 2004. During the six months ended June 30, 2004, the number of
units shipped aggregated 63.3 million, as compared to 54.1 million for the
corresponding prior year period. Average sales per subscriber increased in each
of QVC's markets for both periods. In addition, returns as a percent of gross
product revenue decreased from 18.7% to 17.3% for the three months ended
June 30, 2004 and from 18.7% to 17.9% for the six months ended June 30, 2004.
These increases in net revenue were partially offset by decreases in average
sale price per unit in all markets except QVC-UK due to purchases of lower
priced home items and a shift in product mix to lower priced apparel and

I-32

accessories. Each of QVC's international markets added subscribers in 2004. The
number of homes receiving QVC's services at June 30, 2004 are as follows:

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 carrying QVC's programming service as
well as general economic conditions.

During the three and six months ended June 30, 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 36.7% of net revenue for the three months ended
June 30, 2003 to 37.6% for the three months ended June 30, 2004. For the six
month period, the gross profit percentage increased from 36.7% in 2003 to 37.2%
in 2004. These increases in gross profit percentage are 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. Favorable
warehousing and distribution expenses as a percent of net revenue also
contributed to the increases in gross profit margin.

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 9.6% and 10.7% for the three and six months
ended June 30, 2004, respectively, as compared to the corresponding prior year
periods. These increases are primarily due to the increase in sales volume. As a
percentage of net revenue, operating expenses were 8.8% and 9.4% for the
three months ended June 30, 2004 and 2003, respectively; and 8.9% and 9.5% for
the six months ended June 30, 2004 and 2003, respectively. The more significant
drivers of these decreases were customer service expenses and commissions. 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. As a percent of net revenue,
commissions decreased in 2004, as compared to 2003. The majority of this
decrease is due to a decrease in QVC-UK due to the termination of commissions to
one distributor and an increase in the mix of non-commissionable sales.

QVC's SG&A expenses increased 14.8% and 15.3% for the three and six months
ended June 30, 2004, respectively, as compared to the corresponding prior year
periods. The majority of these increases

I-33

is due to increases in personnel and information technology 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.

QVC's depreciation and amortization expense increased for the three and six
months ended June 30, 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.

Ascent Media's revenue increased $37 million or 30.1% and $60 million or
24.4% during the three and six months ended June 30, 2004, respectively, as
compared to the corresponding prior year periods. The three month increase is
due to acquisitions and new integration projects by Ascent Media's Networks
Group ($18 million and $11 million, respectively), as well as increases in
projects for feature films and episodic television in Ascent Media's Audio Group
($4 million) and UK Creative Services Group ($4 million). The six month increase
in revenue is due primarily to Ascent Media's Networks Group acquisitions
($29 million) and new integration projects ($15 million), as well as increases
for the Audio Group ($10 million) and UK Creative Services Group ($7 million),
as noted above.

Ascent Media's operating expenses increased $23 million or 32.1% and
$39 million or 26.7% during the three and six months ended June 30, 2004,
respectively, as compared to the corresponding prior year periods. 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 SG&A expenses increased $8 million or 26.3% and $14 million
or 23.5% during the three and six months ended June 30, 2004, respectively, as
compared to the corresponding prior year periods. 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.

I-34

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 June 30, 2004 are as follows:

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

I-35

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.

Starz Encore's revenue increased 5.8% and 3.5% for the three and six months
ended June 30, 2004, respectively, as compared to the corresponding prior year
periods. This increase is primarily due to an increase in the average number of
subscription units for Starz Encore's Thematic Multiplex and Encore services.
The Thematic Multiplex service is a group of channels, each of which exhibits
movies based on individual themes. Total average subscription units increased
11.3% in the first half of 2004, as compared to the first half of 2003. In
addition, Starz Encore's period-end subscription units have increased 8.5% since
the end of 2003 primarily due to increases in STARZ! and Thematic Multiplex
subscriptions. Such increases in subscription units are due in part to (i) new
affiliation agreements between Starz Encore and certain multichannel video
program distributors and (ii) participation with distributors in national
marketing campaigns and other marketing strategies. Under these new affiliation
agreements, Starz Encore has obtained benefits such as more favorable packaging
of Starz Encore's services and increased co-operative marketing commitments.
Starz Encore is negotiating with its other multichannel video programming
distributors to obtain similar packaging 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 24.1%, 24.1% and 11.2%, respectively, of Starz
Encore's revenue for the six months ended June 30, 2004.

Starz Encore's period-end subscription units are presented in the table
below.

At June 30, 2004, cable, direct broadcast satellite, and other distribution
represented 65.6%, 33.3% and 1.1%, respectively, of Starz Encore's total
subscription units.

Starz Encore's operating expenses increased from $109 million to
$142 million or 30.3% and from $205 million to $278 million or 35.6% for the
three and six months ended June 30, 2004, respectively, as compared to the
corresponding prior year periods. Such increases are due primarily to increases
in programming costs, which increased from $99 million and $193 million for the
three and six months ended June 30, 2003 to $133 million and $260 million,
respectively, 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 of
$398 million. 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 (i) 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, (ii) higher cost per
title due to new rate cards for movie titles under certain of

I-36

its license agreements that are effective for movies made available to Starz
Encore in 2004 and thereafter and (iii) 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. Accordingly, the
actual amount of cost increases experienced by Starz Encore may differ from the
amounts noted above.

Starz Encore's SG&A expenses increased from $26 million to $34 million or
30.8% and from $51 million to $61 million or 19.6% for the three and six months
ended June 30, 2004, respectively, as compared to the corresponding prior year
periods. Such increases are due primarily to increases in sales and marketing
expenses partially offset by decreases in bad debt expense. Sales and marketing
expenses increased $16 million and $19 million for the three and six months
ended June 30, 2004, respectively, as compared to the corresponding periods in
2003. 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. During the three months ended
June 30, 2004, Starz Encore sold a portion of its pre-petition accounts
receivable from Adelphia Communications to an independent third party. Starz
Encore had previously provided an allowance against the Adelphia accounts
receivable based on Starz Encore's estimate of the amount it would collect. The
proceeds from the sale of the Adelphia accounts receivable exceeded the net
accounts receivable balance by approximately $8 million, resulting in a
corresponding reduction in bad debt expense of $8 million.

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 21.6% for the six months ended
June 30, 2004, as compared to the corresponding period in the prior year. The
revenue increase was driven by a 20.3% increase in net advertising revenue and a
24.1% 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 11.5%. Such increase is due
primarily to a 21.2% increase in programming costs associated with Discovery's
continued investment in newer and more dramatic programming. This increase was
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 23.6% 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 14.7% for the six months ended
June 30, 2004, as compared to the corresponding period in the prior year. The
increase is due to a 17.7% increase in affiliate revenue and a 13.4% increase in
advertising revenue. Advertising revenue increased as a result of an 8.0%
increase in subscribers combined with continued rating's strength. The
subscriber increase also drove the increase in affiliate revenue.

Court TV's operating expenses, which are comprised primarily of programming
costs, increased 9.5%. The increase in programming costs is due to continued
investment in original and alternative programming. Court TV's SG&A expenses
increased 28.8%. This increase is due to increased

I-37

consumer marketing and other promotional efforts 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 33.3% in the first six months of 2003 to
37.3% in the comparable period of 2004, primarily due to the increased marketing
and promotional costs discussed above.

GSN. GSN's revenue increased 16.2% for the six months ended June 30, 2004,
as compared to the corresponding period in the prior year. This increase is due
to a 7.7% increase in advertising revenue and a 22.8% increase in net affiliate
revenue. Affiliate revenue increased due to a 7.9% 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 10.1% but were fairly consistent as a percentage of revenue.
The increase in operating costs is primarily due to continued investments in
programming. GSN's SG&A expenses were comparable to the prior year. As a
percentage of revenue, SG&A expenses decreased from 58.7% in the first
six months of 2003 to 50.9% in 2004. Increased SG&A associated with increased
marketing efforts were offset by reduced bad debt expenses and general corporate
cost savings.

OTHER. Included in the Networks Group other 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 half of 2004 we also received cash
proceeds of $598 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 $938 million and $21 million,
respectively, during the six months ended June 30, 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. During the first half of 2004, we retired $150 million
principal amount of our parent company debt for aggregate cash payments of
$149 million. We have also entered into total return debt swaps with respect to
$403 million of our public debt, which can be settled and the related debt
retired at our option at any

I-38

time. See--"Quantitative and Qualitative Disclosures about Market Risk--" for
further discussion of these arrangements.

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 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 $340 million for capital expenditures in
2004, including $180 million by QVC, which amounts we expect to be funded by the
cash flows of the respective subsidiary.

We expect that our investing and financing activities, including the
aforementioned debt reduction plan, 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,
$388 million in 2007, $161 million in 2008, and $4,693 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 applicable spread, as the case may be. As of
June 30, 2004, such borrowing capacity aggregated approximately $6,325 million.
Such borrowings would reduce the cash proceeds upon settlement noted in the
preceding paragraph.

Based on currently available information, we expect to receive approximately
$140 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 $480 million during the year ended
December 31, 2004, primarily all of which relates to parent company debt.

On July 28, 2004, we completed a transaction with Comcast pursuant to which
we redeemed 120.3 million shares of our Series A common stock held by Comcast in
exchange for 100% of the stock of one of our subsidiaries, Encore ICCP, Inc. At
the time of the exchange, Encore ICCP held our 10% ownership interest in E!
Entertainment Television, our 100% ownership interest in International Channel
Networks, all of our rights, benefits and obligations under a TCI Music
contribution agreement, and approximately $545 million of cash. The transaction
also resolved all litigation pending between Comcast and us regarding the TCI
Music contribution agreement, which Comcast inherited as part of its acquisition
of AT&T Broadband in November of 2002.

Subsequent to our announcement of the foregoing agreement with Comcast,
Standard and Poor's Securities, Inc. affirmed its long-term corporate credit
rating for our senior debt at the lowest level of investment grade, but cut its
rating outlook from stable to negative. Fitch Investors Service, L.P. and
Moody's Investors Service, Inc. each continue to rate 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.

SUBSIDIARIES

At June 30, 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 June 30, 2004, our subsidiary that operates the
DMX Music service was not in compliance with three covenants contained

I-39

in its bank loan agreement. The subsidiary and the participating banks had
entered into a forbearance agreement whereby the banks agreed to forbear from
exercising certain default-related remedies against the subsidiary. The
forbearance agreement expired on June 15, 2004. Liberty and the subsidiary are
currently considering options with respect to the DMX business and related
financing including, but not limited to, a filing for bankruptcy protection
and/or a sale of the assets of the subsidiary. The outstanding balance of the
subsidiary's bank facility was $86 million at June 30, 2004.

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 for exhibition
by Starz Encore at June 30, 2004 is reflected as a liability in the accompanying
condensed consolidated balance sheet. The balance due as of June 30, 2004 is
payable as follows: $118 million in 2004 and $64 million in 2005.

Starz Encore has also contracted to pay fees for the rights to exhibit films
that have been released theatrically, but are not available for exhibition by
Starz Encore until some future date. These amounts have not been accrued at
June 30, 2004. Starz Encore's estimate of amounts payable under these agreements
is as follows: $245 million in 2004; $498 million in 2005; $161 million in 2006;
$113 million in 2007; $108 million in 2008 and $233 million thereafter.

In addition, Starz Encore is also obligated to pay fees for all qualifying
films that are released theatrically in the United States by studios owned by
The Walt Disney Company from 2004 through 2009, all qualifying films that are
released theatrically in the United States by studios owned by Sony Pictures
Entertainment from 2005 through 2010 and all qualifying films released
theatrically in the United States by Revolution Studios through 2006. Films are
generally available to Starz Encore for exhibition 12 months after their
theatrical release. The fees to be paid by Starz Encore are based on the
domestic theatrical exhibition receipts of qualifying films. As these films have
not yet been released in theatres, Starz Encore is unable to estimate the
amounts to be paid under these output agreements. However, such amounts are
expected to be significant.

In addition to the foregoing contractual film obligations, Sony has the
right to extend its contract for an additional three years. If Sony elects to
extend its contract, Starz Encore has agreed to pay Sony a total of
$190 million in four annual installments of $47.5 million. Sony is required to
exercise this option by December 31, 2007. If made, Starz Encore's payments to
Sony would be amortized ratably over the term of the output agreement extension.

I-40

Liberty guarantees Starz Encore's film licensing obligations under certain
of its studio output agreements. At June 30, 2004, Liberty's guarantee for
studio output obligations for films released by such date aggregated
$808 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.

At June 30, 2004, we guaranteed Y14.4 billion ($134 million) of the bank
debt of J-COM, a former 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 ($92 million at June 30, 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. Our investment in J-COM was attributed to Liberty Media
International in the Spin Off. In connection with the Spin Off, Liberty Media
International has indemnified us for any amounts we are required to fund under
these arrangements.

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-41

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 June 30,
2004, the face amount of our fixed rate debt (considering the effects of
interest rate swap agreements) was $8,175 million, which had a weighted average
stated interest rate of 4.66%. Our variable rate debt of $3,659 million had a
weighted average interest rate of 2.70% at June 30, 2004. Had market interest
rates been 100 basis points higher (representing an approximate 37% increase
over our variable rate debt effective cost of borrowing) throughout the
six months ended June 30, 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-42

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 June 30, 2004, the fair value of our available-for-sale securities was
$20,081 million. Had the market price of such securities been 10% lower at
June 30, 2004, the aggregate value of such securities would have been
$2,008 million lower resulting in a reduction to unrealized gains 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.

We are exposed to foreign exchange rate fluctuations related primarily to
the monetary assets and liabilities and the financial results of QVC's and
Ascent Media's foreign subsidiaries. Assets and liabilities of foreign
subsidiaries for which the functional currency is the local currency are
translated into U.S. dollars at period-end exchange rates and the statements of
operations are translated at actual exchange rates when known, or at the average
exchange rate for the period. Exchange rate fluctuations on translating foreign
currency financial statements into U.S. dollars that result in unrealized gains
or losses are referred to as translation adjustments. Cumulative translation
adjustments are recorded in other comprehensive income (loss) as a separate
component of stockholders' equity. Transactions denominated in currencies other
than the functional currency are recorded based on exchange rates at the time
such transactions arise. Subsequent changes in exchange rates result in
transaction gains and losses, which are reflected in income as unrealized (based
on period-end translations) or realized upon settlement of the transactions.
Cash flows from our operations in foreign countries are translated at actual
exchange rates when known, or at the average rate for the period. Accordingly,
we may experience economic loss and a negative impact on earnings and equity
with respect to our holdings solely as a result of foreign currency exchange
rate fluctuations.

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 June 30, 2004, the aggregate purchase price
of debt securities underlying total return debt swap arrangements, all of which
related to our senior notes and debentures, was $401 million. As of such date,
we had posted cash collateral equal to $40 million. In the event the fair value
of the purchased debt securities

I-43

were to fall to zero, we would be required to post additional cash collateral of
$361 million. The posting of such collateral and the related settlement of the
agreements would reduce our outstanding debt by an equal amount.

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 June 30, 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 six months ended June 30, 2004 that has
materially affected, or is reasonably likely to materially affect, its internal
controls over financial reporting.

I-44

LIBERTY MEDIA CORPORATION

PART II--OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES

Effective May 7, 2004, Liberty issued 23,474 shares of its Series A common
stock, valued at $260,350, to former stockholders of Liberty Webhouse, Inc.
("Liberty Webhouse"), as consideration for their 186 shares of preferred stock
of Liberty Webhouse, pursuant to the merger of a wholly-owned subsidiary of
Liberty with and into Liberty Webhouse. The issuance was made in reliance on the
exemption from registration afforded by Regulation D promulgated under
Section 4(2) of the Securities Act of 1933, as amended, which provides an
exemption for issuances not involving a public offering.

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 June 30, 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: August 9, 2004 By: /s/ CHARLES Y. TANABE
-----------------------------------------
Charles Y. Tanabe
Senior Vice President and General Counsel

Date: August 9, 2004 By: /s/ DAVID J.A. FLOWERS
-----------------------------------------
David J.A. Flowers
Senior Vice President and Treasurer
(Principal Financial Officer)

Date: August 9, 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