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

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

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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

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

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

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

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

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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /

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

The number of outstanding shares of Liberty Media Corporation's common stock
as of October 29, 2004 was:

Series A common stock 2,678,539,740 shares; and
Series B common stock 121,062,825 shares.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

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* See note 4.

See accompanying notes to condensed consolidated financial statements.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)

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* 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)

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* 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)
NINE MONTHS ENDED SEPTEMBER 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)

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* 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

SEPTEMBER 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 controlling and
noncontrolling ownership of interests in subsidiaries and other companies, is
primarily engaged in the electronic retailing, media, communications and
entertainment industries in the United States, Europe and Asia. In addition,
companies in which Liberty owns interests are also 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 the June 7, 2004 spin off of Liberty Media
International, Inc., Liberty was also engaged in international programming and
international broadband distribution of video, voice and data services. See
note 4.

The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X as
promulgated by the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results for such periods have been included. 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 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 (i) the estimate of the
fair value of its long-lived assets (including goodwill) and any resulting
impairment charges, (ii) the reserves related to its inventory obsolescence and
accounts receivable collectibility, (iii) the fair value of its derivative
instruments and (iv) its assessment of nontemporary declines in fair value of
its investments to be its most significant estimates.

Liberty holds a 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.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share ("EPS") is computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding for
the period. Diluted EPS presents the dilutive effect on a per share basis of
potential common shares as if they had been converted at the beginning of the
periods presented. The basic EPS calculation is based on 2,824 million and
2,716 million weighted average shares outstanding for the three months ended
September 30, 2004 and 2003, respectively; and 2,906 million and 2,697 million
weighted average shares outstanding for the nine months ended September 30, 2004
and 2003, respectively. The diluted EPS calculation for the three and nine
months ended September 30, 2004 includes 18 million dilutive securities.
However, due to the relative insignificance of these dilutive securities, their
inclusion does not impact the EPS amount as reported in the accompanying
condensed consolidated statement of operations. Excluded from diluted EPS for
the nine months ended September 30, 2004, are 79.8 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.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) ACQUISITION OF CONTROLLING INTEREST IN QVC, INC. ("QVC") (CONTINUED)
The following unaudited pro forma information for Liberty and its
consolidated subsidiaries for the nine months ended September 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 occurred if the QVC acquisition had occurred on January 1, 2003 (amounts in
millions, except per share amounts).

Revenue..................................................... $4,745
Loss from continuing operations............................. $ (213)
Net loss.................................................... $ (187)
Loss from continuing operations per common share............ $ (.06)

(4) SPIN OFF OF LIBERTY MEDIA INTERNATIONAL, INC.

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.
("LMI"), to its shareholders. Substantially all of the assets and businesses of
LMI 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 LMI Series A common stock for each share of
Liberty Series A common stock owned at 5:00 p.m. New York City time on the
Record Date and 0.05 of a share of LMI Series B common stock for each share of
Liberty Series B common stock owned at 5:00 p.m. 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 LMI 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 LMI as a discontinued operation.
Accordingly, the assets and liabilities, revenue, costs and expenses, and cash
flows of LMI have been excluded from the respective captions in the accompanying
condensed consolidated balance sheets, statements of operations, statements of
comprehensive earnings (loss) and 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
LMI 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)

(4) SPIN OFF OF LIBERTY MEDIA INTERNATIONAL, INC. (CONTINUED)
COMBINED BALANCE SHEETS

COMBINED STATEMENTS OF OPERATIONS

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

Following the Spin Off, LMI and Liberty operate independently, and neither
has any stock ownership, beneficial or otherwise, in the other. In connection
with the Spin Off, LMI and Liberty entered into certain agreements in order to
govern certain of the ongoing relationships between Liberty

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4) SPIN OFF OF LIBERTY MEDIA INTERNATIONAL, INC. (CONTINUED)
and LMI 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 LMI with
office space and certain general and administrative services including legal,
tax, accounting, treasury, engineering and investor relations support. LMI
reimburses Liberty for direct, out-of-pocket expenses incurred by Liberty in
providing these services and for LMI'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 LMI 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. LMI will be responsible for all other taxes that are
attributable to LMI or one of its subsidiaries, whether accruing before, on or
after the Spin Off. The Tax Sharing Agreement requires that LMI 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, LMI 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 agreed to make loans to
LMI from time to time up to an aggregate principal amount of $383 million. In
addition, certain subsidiaries of LMI had notes payable to Liberty in the
aggregate amount of $117 million. During the third quarter of 2004, LMI
completed a rights offering, and used a portion of the cash proceeds to repay
all principal and accrued interest due under the notes payable and Short-Term
Credit Facility. Subsequent to this repayment, the Short-Term Credit Facility
was terminated.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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(1) Certain of Liberty's News Corp. ADSs and other AFS debt securities were
contributed to LMI in connection with the Spin Off. See note 4.

(2) Includes $73 million of shares pledged as collateral for share borrowing
arrangements at September 30, 2004.

(3) Includes $686 million and $533 million of shares pledged as collateral for
share borrowing arrangements at September 30, 2004 and December 31, 2003,
respectively.

(4) At September 30, 2004, other available-for-sale debt securities include
$399 million of investments in third-party marketable debt securities held
by Liberty parent. At December 31, 2003, such investments aggregated
$493 million.

Management estimates that the aggregate fair market value of all of its
other cost investments approximated $143 million and $405 million at
September 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)

(5) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
(CONTINUED)
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 nine months ended
September 30, 2004 are as follows:

AMORTIZABLE INTANGIBLE ASSETS

Amortization of intangible assets with finite useful lives was $370 million
and $144 million for the nine months ended September 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........................................... $121
2005........................................................ $471
2006........................................................ $428
2007........................................................ $392
2008........................................................ $382

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) DERIVATIVE INSTRUMENTS

The Company's derivative instruments are summarized as follows:

Realized and unrealized gains (losses) on financial instruments during the
nine months ended September 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)

(8) LONG-TERM DEBT

Debt is summarized as follows:

PARENT COMPANY DEBT

During the nine months ended September 30, 2004, and pursuant to a
previously announced debt reduction plan, Liberty retired $443 million principal
amount of its parent company debt (primarily comprised of its senior notes) for
aggregate cash consideration of $437 million plus accrued interest. In
connection with these debt retirements, Liberty recognized a gain on early
extinguishment of debt of $18 million, which is included in other income in the
accompanying condensed consolidated statement of operations.

SUBSIDIARY DEBT

At September 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% to .375% per annum on the average unborrowed
portion of the total commitment, depending on Starz Encore's debt to cash flow
ratio. Such fees were not significant for the nine months ended September 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 September 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 September 30, 2004, all of which is included in
current portion of debt.

Also included in subsidiary debt at September 30, 2004, is $95 million of
capitalized satellite transponder lease obligations.

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) LONG-TERM DEBT (CONTINUED)
FAIR VALUE OF DEBT

Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to Liberty
for debt of the same remaining maturities. The fair value of Liberty's publicly
traded debt securities at September 30, 2004 is as follows (amounts in
millions):

Fixed rate senior notes..................................... $2,904
Floating Rate Notes......................................... $2,491
Senior debentures........................................... $1,698
Senior exchangeable debentures, including call option
obligation................................................ $4,084

Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at September 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 September 30, 2004........................ $ 9,208
Add:
Unamortized issue discount on senior notes and
debentures.............................................. 22
Unamortized discount attributable to call option feature
of exchangeable debentures.............................. 2,310
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Face amount at maturity................................. $11,540
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(9) STOCKHOLDERS' EQUITY

SHARES RESERVED FOR ISSUANCE

As of September 30, 2004, there were 64.1 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 nine months ended September 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 repurchased 120.3 million shares of its Series A common stock
(valued at $1,017 million) held by Comcast in exchange for 100% of the stock of
Encore ICCP, Inc. ("Encore ICCP"), 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 $547 million in cash. The transaction also
resolved all litigation pending between Comcast and Liberty

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) STOCKHOLDERS' EQUITY (CONTINUED)
regarding the TCI Music contribution agreement, to which Comcast succeeded as
part of its acquisition of AT&T Broadband in November of 2002. In connection
with this transaction, Liberty recognized a pre-tax gain on disposition of
assets of $387 million.

During the third quarter of 2004, Liberty sold put options with respect to
12.0 million shares of its Series A common stock for cash proceeds of
$3 million. All of these put options remained outstanding at September 30, 2004,
had a weighted average put price of approximately $8.78 and had a term of
approximately 30 days. At Liberty's option, the puts can be either physically
settled or cash settled. Liberty accounts for these put options pursuant to
Statement of Financial Accounting Standards No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY."
Accordingly, the put options are recorded at fair value and are included in
derivative instrument liabilities in the accompanying condensed consolidated
balance sheet. Changes in the fair value of the put options are included in
realized and unrealized gains (losses) on financial instruments in the
accompanying condensed consolidated statement of operations.

(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 LMI,
(2) employees of Liberty in departments of Liberty that are expected to provide
services to LMI pursuant to the Facilities and Services Agreement and
(3) directors of Liberty were divided into (A) an option to purchase shares of
LMI common stock equal to 0.05 times the number of LMC Awards held by the option
holder on 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 was exercisable. The aggregate exercise price of each pre-Spin
Off Award was allocated between the new Liberty Award and the LMI 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 dilutive effect of the distribution of LMI 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 LMI
employees, and LMI is responsible for settlement of all LMI Awards whether held
by Liberty employees or LMI employees. Liberty will continue to record
compensation for all Liberty and LMI Awards held by Liberty employees. The
compensation for LMI 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)

(10) STOCK BASED COMPENSATION (CONTINUED)
STOCK-BASED COMPENSATION," ("Statement 123") to its options. Compensation
expense for SARs and options with tandem SARs is the same under APB Opinion
No. 25 and Statement 123. Accordingly, no pro forma adjustment for such Awards
is included in the following table.

(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 ("Programming Fees") for the rights to exhibit certain films
that are released by these producers. The unpaid balance of Programming Fees for
films that were available for exhibition by Starz Encore at September 30, 2004
is reflected as a liability in the accompanying condensed consolidated balance
sheet. The balance due as of September 30, 2004 is payable as follows:
$136 million in 2004, $78 million in 2005 and $11 million in 2006.

Starz Encore has also contracted to pay Programming Fees for films that have
been released theatrically, but are not available for exhibition by Starz Encore
until some future date. These amounts have not been accrued at September 30,
2004. Starz Encore's estimate of amounts payable under these agreements is as
follows: $62 million in 2004; $617 million in 2005; $161 million in 2006;
$120 million in 2007; $108 million in 2008; and $231 million thereafter.

In addition, Starz Encore is also obligated to pay Programming Fees for all
qualifying films that are released theatrically in the United States by studios
owned by The Walt Disney Company ("Disney") through 2009, all qualifying films
that are released theatrically in the United States by studios owned by Sony
Pictures Entertainment ("Sony") 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 10-12 months after
their theatrical release. The Programming 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

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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
amounts to be paid under these output agreements. However, such amounts are
expected to be significant.

In addition to the foregoing contractual film obligations, each of Disney
and 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
extension period. An extension of this agreement would also result in the
payment by Starz Encore of Programming Fees for qualifying films released by
Sony during the extension period. If Disney elects to extend its contract, Starz
Encore is not obligated to pay any amounts in excess of its Programming Fees for
qualifying films released by Disney during the extension period.

GUARANTEES

Liberty guarantees Starz Encore's obligations under certain of its studio
output agreements. At September 30, 2004, Liberty's guarantee for obligations
for films released by such date aggregated $783 million. While the guarantee
amount for films not yet released is not determinable, such amount is expected
to be significant. As noted above, Starz Encore has recognized the liability for
a portion of its obligations under the output agreements. As this represents a
commitment of Starz Encore, a consolidated subsidiary of Liberty, Liberty has
not recorded a separate liability for its guarantee of these obligations.

At September 30, 2004, Liberty has guaranteed Y13.6 billion ($124 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 had agreed to fund up to an additional
Y10 billion ($91 million at September 30, 2004) to J-COM in the event J-COM's
cash flow (as defined in its bank loan agreement) did not meet certain targets.
J-COM believes it has met the required performance criteria, and accordingly
Liberty's commitment should be reduced to zero as of September 30, 2004.
Liberty's investment in J-COM was contributed to LMI in the Spin Off. In
connection with the Spin Off, LMI 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.

I-19

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES

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

LITIGATION

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

(12) OPERATING SEGMENTS

Liberty is a holding company 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, average sales price
per unit, number of units shipped, 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 each
business's 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, litigation settlements 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.

I-20

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) OPERATING SEGMENTS (CONTINUED)
For the nine months ended September 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.

- 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.

- GSN, LLC ("GSN")--50% owned equity method affiliate that operates a basic
cable network dedicated to game-related programming and interactive game
playing.

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)

(12) OPERATING SEGMENTS (CONTINUED)

PERFORMANCE MEASURES

I-22

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) OPERATING SEGMENTS (CONTINUED)

I-23

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) OPERATING SEGMENTS (CONTINUED)
BALANCE SHEET INFORMATION

I-24

LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) OPERATING SEGMENTS (CONTINUED)
The following tables provide a reconciliation of consolidated segment
operating cash flow to earnings (loss) from continuing operations before income
taxes and minority interests:

I-25

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-26

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 controlling and noncontrolling 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 LMI to our shareholders.
Substantially all of the assets and businesses of LMI 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 LMI Series A common
stock for each share of Liberty Series A common stock owned at 5:00 p.m. New
York City time on the Record Date and 0.05 of a share of LMI Series B common
stock for each share of Liberty Series B common stock owned at 5:00 p.m. 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 LMI as a discontinued operation. Accordingly, the
assets and liabilities, revenue, costs and expenses, and cash flows of LMI have
been excluded from the respective captions in the accompanying condensed
consolidated balance sheets, statements of operations, statements of
comprehensive earnings (loss) and 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 IAC/InterActiveCorp, which we account for
as an available-for-sale ("AFS") 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 AFS security. We view the development of digital and interactive services,
our ability to expand these networks and increase international distribution,
and our ability to increase advertising rates relative to broadcast networks and
other cable networks as key opportunities for growth in the coming months and
years. We face several key obstacles in our attempt to meet these goals,
including: continued consolidation in the broadband and satellite distribution
industries, which

I-27

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
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 TruePosition, Inc., as well as
minority stakes in WildBlue Communications, Inc., and IDT Corporation.
TruePosition provides equipment and technology that provide location-based
services to wireless users. WildBlue Communications plans 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 businesses 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-28

CONSOLIDATED OPERATING RESULTS

REVENUE. Our consolidated revenue increased $953 million and
$3,642 million for the three and nine months ended September 30, 2004,
respectively, as compared to the corresponding prior year periods. These
increases are due primarily to our September 2003 acquisition of a controlling
interest in QVC. Our consolidated financial statements include $1,292 million
and $3,864 million of revenue from QVC during the three and nine months ended
September 30, 2004, as compared to $400 million for each of the three and nine
month periods ended September 30, 2003. In addition, Ascent Media Group's
revenue increased $31 million and $91 million for the three and nine months
ended September 30, 2004, respectively, and Starz Encore's revenue increased
$28 million and $44 million during the same periods. 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 each business's 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, litigation
settlements and impairments of long-lived assets that are included in the
measurement of operating income pursuant to generally accepted accounting
principles. Accordingly, Operating Cash Flow should be considered in addition
to, but not as a substitute for, operating income, net income, cash flow
provided by operating activities and other measures of financial performance
prepared in accordance with GAAP. See note 12 to the accompanying condensed
consolidated financial statements for a reconciliation of Operating Cash Flow to
Earnings (Loss) From Continuing Operations Before Income Taxes and Minority
Interests.

I-29

Consolidated Operating Cash Flow increased $181 million and $721 million
during the three and nine months ended September 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 contributed
$271 million and $819 million, respectively, to our consolidated Operating Cash
Flow in 2004, as compared to $85 million for each of the three and nine month
periods ended September 30, 2003. These increases were partially offset by a
decrease in the operating cash flow of our Networks Group, which resulted
primarily from Starz Encore's higher programming costs in 2004.

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.

LITIGATION SETTLEMENTS. During the nine months ended September 30, 2004,
TruePosition settled a patent infringement lawsuit that resulted in income of
$42 million.

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 $7 million and
$437 million for the three and nine months ended September 30, 2004,
respectively, as compared to the corresponding prior year periods. These
increases are due primarily to our consolidation of QVC in 2003 and gains from
litigation settlements. These increases were partially offset by Starz Encore's
higher programming costs and an increase in stock compensation.

OTHER INCOME AND EXPENSE

INTEREST EXPENSE. Interest expense was $453 million and $374 million, for
the nine months ended September 30, 2004 and 2003, respectively. The increase is
the net effect of interest on the debt we issued to acquire a controlling
interest in QVC and other 2003 debt issuances ($88 million) and an increase in
the accretion of our exchangeable debentures ($21 million) partially offset by
decreases for 2004 debt repayments ($35 million).

DIVIDEND AND INTEREST INCOME. Dividend and interest income was
$114 million and $127 million for the nine months ended September 30, 2004 and
2003, respectively. Interest and dividend income for the nine months ended
September 30, 2004 was comprised of interest income earned on invested cash
($24 million), dividends on News Corp. American Depository Shares
($38 million), dividends on ABC Family Worldwide preferred stock ($13 million),
dividends on other AFS securities ($22 million), and other ($17 million). In
connection with the Spin Off, we contributed 99.9% of our economic interest in
the ABC Family Worldwide preferred stock to LMI. Accordingly, this will not be a
significant source of dividend income for us in the future.

I-30

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 the asset exchange with Comcast ($387 million) and dispositions of certain
AFS 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, and 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 64.6% for the nine months ended
September 30, 2004 and 20.1% for the nine months ended September 30, 2003. Our
2004 effective tax rate exceeds the U.S. federal income tax rate of 35%
primarily due to state and foreign taxes. The effective tax rate in 2003
differed from the U.S. federal income tax rate primarily due to state and local
tax expense which partially offset our federal tax benefit.

OPERATING RESULTS BY BUSINESS GROUP

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

I-31

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

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

INTERACTIVE GROUP

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

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

I-32

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 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 nine
months ended September 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 nine months ended September 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 nine months ended September 30, 2004 and 2003
includes the following revenue by geographical area:

QVC's consolidated net revenue increased 12.1% and 16.5% during the three
and nine months ended September 30, 2004, respectively, as compared to the
corresponding prior year. The three month increase was driven by a 12.7%
increase in the number of units shipped from 28.4 million in 2003 to
32.0 million in 2004. During the nine months ended September 30, 2004, the
number of units shipped aggregated 95.3 million, as compared to 82.4 million for
the corresponding prior year period. Average

I-33

sales per subscriber increased in each of QVC's markets for both periods.
Returns as a percent of gross product revenue increased from 18.2% to 18.9% for
the three months ended September 30, 2004 and decreased from 18.5% to 18.2% for
the nine months ended September 30, 2004. While the number of units shipped
increased, the average sales price per unit ("ASP") in the U.S. market decreased
due to purchases of lower priced items within the home category and a shift in
product mix to lower priced apparel and accessories. QVC-Germany and QVC-Japan
also experienced a drop in ASP in their respective local currencies. However,
these decreases were more than offset by favorable exchange rate fluctuations
resulting in an increase in U.S. dollar-denominated ASP in both markets. Each of
QVC's markets added subscribers in 2004. The number of homes receiving QVC's
services at September 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 (i) the willingness of
cable and satellite distributors to continue carrying QVC's programming service,
(ii) QVC's ability to maintain favorable channel positioning, which may become
more difficult as distributors convert analog customers to digital and
(iii) general economic conditions.

As noted above, during the three and nine months ended September 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 36.8% of net revenue for the three months ended
September 30, 2003 to 37.0% for the three months ended September 30, 2004. For
the nine month period, the gross profit percentage increased from 36.7% in 2003
to 37.1% 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. Reduced
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 11.3% and 10.9% for the three and nine months
ended September 30, 2004, respectively, as compared to the corresponding prior
year periods. These increases are primarily due to the increase in sales volume.
As

I-34

a percentage of net revenue, operating expenses decreased to 9.1% from 9.2% for
the three months ended September 30, 2004 and 2003, respectively; and decreased
to 9.0% from 9.4% for the nine months ended September 30, 2004 and 2003,
respectively. For the three months ended September 30, 2004, the decrease is
primarily 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. For the
nine months ended September 30, 2004, the decrease is primarily due to decreased
commissions expense as noted above and decreased customer service expenses. As a
percentage of net revenue, order processing and customer service expenses
decreased in each market in 2004. Such decrease is a result of reduced personnel
expense due to increased Internet sales and efficiencies in call handling and
staffing.

QVC's SG&A expenses increased 6.0% and 12.0% for the three and nine months
ended September 30, 2004, respectively, as compared to the corresponding prior
year periods. The majority of these increases is due to increases in personnel,
information technology and insurance costs partially offset by lower transponder
expenses. 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. In
connection with our consolidation of QVC in 2003, transponder leases that
previously had been accounted for as operating leases are now accounted for as
capital leases pursuant to the provisions of EITF Issue No. 01-8. Accordingly,
QVC's transponder expense has decreased while depreciation and interest expense
have increased in 2004.

QVC's depreciation and amortization expense increased for the three and nine
months ended September 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 $31 million or 25.6% and $91 million or
24.8% during the three and nine months ended September 30, 2004, respectively,
as compared to the corresponding prior year periods. The three month increase is
due primarily to acquisitions and new business by Ascent Media's Networks Group
($16 million and $10 million, respectively). The nine month increase in revenue
is due primarily to Ascent Media's Networks Group acquisitions ($44 million) and
other new business ($26 million), as well as increases in projects for feature
films and episodic television in Ascent Media's Audio Group ($11 million) and
UK Creative Services Group ($8 million).

Ascent Media's operating expenses increased $21 million or 28.7% and
$59 million or 27.3% during the three and nine months ended September 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 Networks Group noted
above.

Ascent Media's SG&A expenses increased $6 million or 20.5% and $21 million
or 22.5% during the three and nine months ended September 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

I-35

periods. The changes in operating cash flow and operating loss in 2004 for our
other consolidated subsidiaries are due to improvements in the operating results
of OpenTV.

NETWORKS GROUP

The following table combines information regarding our equity method
affiliates with our consolidated subsidiaries, 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 September 30, 2004 are as follows:

Discovery 50%
Court TV 50%
GSN 50%

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STARZ ENCORE. Starz Encore provides premium programming distributed by
cable operators, direct-to-home ("DTH") 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 12.9% and 6.6% for the three and nine
months ended September 30, 2004, respectively, as compared to the corresponding
prior year periods. These increases are 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 up to 6 channels,
each of which exhibits movies based on an individual theme. Total average
subscription units, which represent the number of Starz Encore services which
are purchased by cable, DTH and other distribution media customers, increased
12.6% during the nine months ended September 30, 2004, as compared to the
corresponding period in 2003. In addition, Starz Encore's period-end
subscription units have increased 16.3 million units or 10.8% since the end of
2003. These 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 certain of its other multichannel video
programming distributors, including Echostar Communications whose affiliation
agreement expires on December 31, 2004, 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. In addition, Starz Encore
has entered into fixed-rate affiliation agreements with certain of its
customers. Pursuant to these agreements, the customers pay a fixed rate
regardless of the number of subscribers. The fixed rate is increased annually or
semi-annually as the case may be, and the agreements expire in 2006. As such,
the percentage increase in average subscriptions exceeds the percentage increase
in revenue. Comcast, DirecTV, Echostar Communications and Time Warner Inc.
generated 23.9%, 23.7%, 11.3% and 10.0%, respectively, of Starz Encore's revenue
for the nine months ended September 30, 2004.

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

At September 30, 2004, cable, DTH satellite, and other distribution media
represented 66.5%, 32.3% and 1.2%, respectively, of Starz Encore's total
subscription units.

Starz Encore's operating expenses increased from $110 million to
$150 million or 36.4% and from $315 million to $429 million or 36.2% for the
three and nine months ended September 30, 2004, respectively, as compared to the
corresponding prior year periods. Such increases are due primarily to increases
in programming costs, which increased from $100 million and $294 million for the
three and nine months ended September 30, 2003 to $140 million and
$400 million, respectively, in 2004. Such

I-37

increases are due to (i) increases in the box office performance of movie titles
that became available to Starz Encore in 2004, (ii) higher cost per title due to
new rate cards for movie titles under certain of its license agreements that
were effective for movies made available to Starz Encore in 2004 and
(iii) amortization of deposits previously made under the output agreements. 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 expects its full year 2004 programming costs to be
approximately $560 to $570 million, as compared to $398 million in 2003; and it
expects that its programming costs in 2005 will exceed the 2004 costs by
approximately $125 million to $150 million due to the factors described above.
Assuming a similar quantity of movie titles is available to Starz Encore in 2006
and the box office performance of such titles is consistent with the performance
in 2005, Starz Encore expects that the increase in its 2006 programming expense
will be significantly less than the increases from 2003 to 2004 and from 2004 to
2005. 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 currently does not expect to generate
increases in revenue or reductions in other costs to fully offset the
programming increases. Accordingly, the increased programming costs are expected
to result in a reduction to Starz Encore's operating income in 2005.

Starz Encore's SG&A expenses decreased from $35 million to $32 million
or 8.6% and increased from $87 million to $93 million or 6.9% for the three and
nine months ended September 30, 2004, respectively, as compared to the
corresponding prior year periods. The three month decrease is due primarily to a
one-time payroll tax expense in 2003 and a decrease in bad debt expense
partially offset by an increase in sales and marketing expenses. The nine month
increase is due primarily to increases in sales and marketing expenses partially
offset by decreases in bad debt and payroll tax expense. As noted above, Starz
Encore has entered into new affiliation agreements with certain multichannel
television distributors, which, in some cases, has resulted in new packaging of
Starz Encore's services and increased co-operative marketing commitments. As a
result, sales and marketing expenses increased $3 million and $22 million for
the three and nine months ended September 30, 2004, respectively, as compared to
the corresponding periods in 2003. During the nine months ended September 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 estimated 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 20.2% for the nine months ended
September 30, 2004, as compared to the corresponding period in the prior year.
The revenue increase was driven by a 15.2% increase in net advertising revenue
and a 26.6% increase in net affiliate revenue. The increase in advertising
revenue is primarily due to worldwide increases in audience delivery resulting
from continued growth in distribution and in ratings at most networks. Affiliate
revenue increased due to subscriber growth combined with subscribers moving from
free preview status to paying subscribers at the developing domestic networks.
Exchange rate fluctuations at the international networks also contributed to the
increase in revenue.

I-38

Discovery's operating expense increased 11.3% for the nine months ended
September 30, 2004, as compared to the corresponding period in the prior year.
Such increase is due to a 19.1% increase in programming costs associated with
Discovery's continued investment in original programming. This increase was
offset by reduced operating costs at the consumer products division associated
with the closure of unprofitable stores and cost saving initiatives within the
international ventures division. Discovery's SG&A expenses increased 15.3% for
the nine months ended September 30, 2004, as compared to the corresponding
period in the prior year due to increased marketing initiatives at the domestic
networks combined with exchange rate fluctuations at the international networks.

COURT TV. Court TV's revenue increased 16.1% for the nine months ended
September 30, 2004, as compared to the corresponding period in the prior year.
The increase is due to a 19.5% increase in affiliate revenue and a 14.6%
increase in advertising revenue. Advertising revenue increased as a result of
a 7.5% 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 13.0% for the nine months ended September 30, 2004, as compared
to the corresponding period in the prior year. The increase in programming costs
is due to continued investment in original and alternative programming. Court
TV's SG&A expenses increased 23.6% for the nine months ended September 30, 2004,
as compared to the corresponding period in the prior year. This increase is due
to increased investments in consumer marketing and other promotional efforts as
well as increased overhead resulting from the growth of the business. As a
percentage of revenue, SG&A expenses increased from 34.7% in the first nine
months of 2003 to 36.9% in the comparable period of 2004, primarily due to the
increased marketing and promotional costs discussed above.

GSN. GSN's revenue increased 20.4% for the nine months ended September 30,
2004, as compared to the corresponding period in the prior year. This increase
is due to a 13.8% increase in advertising revenue and a 28.6% increase in net
affiliate revenue. Affiliate revenue increased due to 8.2% 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 the
subscriber growth combined with a small increase in advertising rates.

GSN's operating expenses, which are comprised primarily of programming
costs, increased 25.3% for the nine months ended September 30, 2004, as compared
to the corresponding period in the prior year but were fairly consistent as a
percentage of revenue. The increase in operating costs is primarily due to
continued investments in programming as GSN rebrands its business. GSN's SG&A
expenses were comparable to the prior year. As a percentage of revenue, SG&A
expenses decreased from 57.6% in the first nine months of 2003 to 49.5% in 2004.
SG&A increases 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

I-39

commitments. With the 2003 repayment of the bank debt of our wholly-owned
subsidiaries and our September 2003 acquisition of the controlling interest in
QVC, the cash generated by the operating activities of our privately-owned
subsidiaries has become 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 nine months ended September 30, 2004, we also received
cash proceeds of $662 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 $931 million and $22 million,
respectively, during the nine months ended September 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 2004 through the date of this filing, we have
retired $637 million principal amount of our parent company debt for aggregate
cash payments of $632 million plus accrued interest. We have also entered into
total return debt swaps with respect to $343 million of our public debt, which
can be settled and the related debt retired at our option at any time.
See--"Quantitative and Qualitative Disclosures about Market Risk--" for further
discussion of these arrangements.

Another use of cash in 2004 related to the July 28, 2004 completion of a
transaction with Comcast pursuant to which we repurchased 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
$547 million in cash. The transaction also resolved all litigation pending
between Comcast and us regarding the TCI Music contribution agreement, to which
Comcast succeeded as part of its acquisition of AT&T Broadband in November of
2002.

Our liquidity needs for the remainder of 2004 include approximately
$300 million to settle our total return debt swaps 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. In addition, during the third quarter of 2004, we sold put options
with respect to 12.0 million shares of our Series A common stock for cash
proceeds of $3 million. All of these put options remained outstanding at
September 30, 2004, had a weighted average put price of approximately $8.78 and
had a term of approximately 30 days. When these put options expire, we can, at
our option, physically settle them, cash settle them or roll them into new put
options.

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
approximately $111 million in the fourth quarter of 2004, $1,014 million in
2005, $397 million in 2006, $387 million in 2007, $101 million in 2008, and
$4,504 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
September 30, 2004, such borrowing capacity aggregated

I-40

approximately $6,002 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
$165 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 $490 million during the year ended
December 31, 2004, primarily all of which relates to parent company debt.

Subsequent to our announcement of the aforementioned July 2004 transaction
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. On September 10,
2004, Moody's Investors Service, Inc. also cut its rating outlook from stable to
negative. Fitch Investors Service, L.P. continues 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 September 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 September 30, 2004, our
subsidiary that operates the DMX Music service was not in compliance with three
covenants contained in its bank loan agreement. The subsidiary and the
participating banks 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 September 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 for
Programming Fees for films that were available for exhibition by

I-41

Starz Encore at September 30, 2004 is reflected as a liability in the
accompanying condensed consolidated balance sheet. The balance due as of
September 30, 2004 is payable as follows: $136 million in 2004, $78 million in
2005 and $11 million in 2006.

Starz Encore has also contracted to pay Programming Fees for films that have
been released theatrically, but are not available for exhibition by Starz Encore
until some future date. These amounts have not been accrued at September 30,
2004. Starz Encore's estimate of amounts payable under these agreements is as
follows: $62 million in 2004; $617 million in 2005; $161 million in 2006;
$120 million in 2007; $108 million in 2008 and $231 million thereafter.

In addition, Starz Encore is also obligated to pay Programming Fees for all
qualifying films that are released theatrically in the United States by studios
owned by The Walt Disney Company 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 10-12 months after their
theatrical release. The Programming 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, each of Disney
and 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 extension period. An extension of
this agreement would also result in the payment by Starz Encore of Programming
Fees for qualifying films released by Sony during the extension period. If
Disney elects to extend its contract, Starz Encore is not obligated to pay any
amounts in excess of its Programming Fees for qualifying films released by
Disney during the extension period.

Liberty guarantees Starz Encore's film licensing obligations under certain
of its studio output agreements. At September 30, 2004, Liberty's guarantee for
studio output obligations for films released by such date aggregated
$783 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.

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 September 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 $291 million. As of such
date, we had posted cash collateral equal to $29 million. In the event the fair
value of the purchased debt securities were to fall to zero, we would be
required to post additional cash collateral of $262 million. The posting of such
collateral and the related settlement of the agreements would reduce our
outstanding debt by an equal amount.

I-42

At September 30, 2004, we guaranteed Y13.6 billion ($124 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 had agreed to
fund up to Y10 billion ($91 million at September 30, 2004) to J-COM in the event
J-COM's cash flow (as defined in its bank loan agreement) did not meet certain
targets. J-COM believes it has met the required performance criteria, and
accordingly our commitment should be reduced to zero as of September 30, 2004.
Our investment in J-COM was contributed to LMI in the Spin Off. In connection
with the Spin Off, LMI 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, 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.

I-43

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
September 30, 2004, the face amount of our fixed rate debt (considering the
effects of interest rate swap agreements) was $8,104 million, which had a
weighted average stated interest rate of 4.7%. Our variable rate debt of
$3,436 million had a weighted average interest rate of 3.1% at September 30,
2004. Had market interest rates been 100 basis points higher (representing an
approximate 32% increase over our variable rate debt effective cost of
borrowing) throughout the nine months ended September 30, 2004, we would have
recognized approximately $27 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.

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

I-44

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 September 30, 2004, the fair value of our available-for-sale securities
was $18,400 million. Had the market price of such securities been 10% lower at
September 30, 2004, the aggregate value of such securities would have been
$1,840 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.

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

I-45

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

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to assess as of
the end of each fiscal year the effectiveness of our internal control over
financial reporting, and our independent auditors must attest to such
assessment. We must comply with these requirements for the first time in
connection with the preparation of our financial statements for the year ending
December 31, 2004. We are engaged in a comprehensive effort to comply with
Section 404. Although, we currently believe that our documentation and testing
procedures will be completed in a timely manner, and that we will be able to
provide an acceptable attestation report regarding the effectiveness of our
internal control over financial reporting, we cannot provide you assurance that
such results will be achieved. If we are unable to complete the required
procedures within the time specified by Section 404, we may be unable to file
our Annual Report on Form 10-K by the required deadline. In addition, if upon
implementation, our internal control over financial reporting is deemed to not
be effective, investor confidence and share value may be negatively affected.

I-46

LIBERTY MEDIA CORPORATION

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

KLESCH & COMPANY LIMITED V. LIBERTY MEDIA CORPORATION, JOHN C. MALONE AND
ROBERT R. BENNETT. On September 4, 2001, we entered into agreements with
Deutsche Telekom AG pursuant to which we would purchase its entire interest in
six of nine regional cable television companies in Germany. In February 2002, we
failed to receive regulatory approval for our proposed acquisition. On July 27,
2001, Klesch & Company Limited initiated a lawsuit against us, our chairman,
John C. Malone, and our chief executive officer, Robert R. Bennett, in the
United States District Court for the District of Colorado alleging, among other
things, breach of fiduciary duty, fraud and breach of contract in connection
with actions alleged to have been taken by us with respect to what then was a
proposed transaction with Deutsche Telekom. Klesch sought damages in an
unspecified amount in that action, which was the subject of a jury trial that
began on August 30, 2004. On September 28, 2004, the jury returned a verdict in
our favor on all the legal claims asserted by the plaintiff. The jury also
rejected the plaintiff's claims that Messrs. Malone and Bennett had committed
fraud in their dealings with the plaintiff. A final judgment in the case will be
entered after the court has ruled on various equitable claims asserted by the
parties. Those claims include claims for recovery by the plaintiff based on
unjust enrichment and promissory estoppel theories. We believe all the
plaintiff's equitable claims to be without merit, but there is no assurance that
the court will agree with our position. We do not know whether the plaintiff
will appeal the judgment, assuming it is entered in our favor.

LIBERTY DIGITAL, INC. V. AT&T BROADBAND, LLC AND COMCAST CORPORATION. In
November 1997, our subsidiary, Liberty Digital, Inc. (then known as TCI
Music, Inc.), entered into an amended and restated contribution agreement with
AT&T Broadband (then known as Tele-Communications, Inc.). That agreement, which
was effective as of July 11, 1997, provides for the making of monthly payments
by AT&T Broadband over a 20-year term, at the annual rate of $18 million,
adjusted for increases in the consumer price index.

AT&T Broadband made all the monthly payments required under the amended and
restated contribution agreement until its combination with Comcast Corporation
in November 2002, when it ceased to make any of the required payments. On
January 8, 2003, Liberty Digital filed a lawsuit against AT&T Broadband and
Comcast Corporation in district court in Arapahoe County, Colorado, seeking,
among other things, damages for breach of contract, intentional interference
with contractual relations and a declaratory judgment to the effect that the
amended and restated contribution agreement is valid and binding.

The action against AT&T Broadband and Comcast Corporation was resolved in
July 2004 in connection with a transaction in which we redeemed 120.3 million
shares of our Series A common stock from Comcast in exchange for consideration
that included, among other things, our rights under the amended and restated
contribution agreement. See note 9 to the accompanying condensed consolidated
financial statements.

DR. LEO KIRCH, INDIVIDUALLY AND AS ASSIGNEE, KGL POOL GMBH, AND
INTERNATIONAL TELEVISION TRADING CORP. V. LIBERTY MEDIA CORPORATION, JOHN
MALONE, DEUTSCHE BANK, AG, AND DR. ROLF-ERNST BREUER. Dr. Kirch is the primary
owner of KirchGroup, a German cable television and media conglomerate. In 2001
and 2002, a series of transactions led to the collapse of KirchGroup's control
of much of the German cable market. On September 4, 2001, we entered into
agreements with Deutsche Telekom AG pursuant to which we would purchase its
entire interest in six of nine regional cable television companies in Germany.
In February 2002, we failed to receive regulatory approval for our proposed
acquisition and the transactions with Deutsche Telekom were never consummated.
On January 14, 2004, Dr. Kirch, KGL Pool GBH, and International Television
Trading Corp. added our company, and

II-1

our chairman, John C. Malone, to a lawsuit they had initiated against Deutsche
Bank and Dr. Breuer on February 3, 2003. In that lawsuit, the plaintiffs' claims
against us included, among other things, interference with contract and
interference with prospective economic advantage arising from an alleged
conspiracy among our company, Dr. Malone, Deutsche Bank and Dr. Breuer pursuant
to which we allegedly were involved in effecting the transactions that led to
the collapse of the KirchGroup's control of the German cable market in an effort
to facilitate our agreements with Deutsche Telekom. Dr. Kirch, KGL Pool and
International Television sought damages in an unspecified amount. We and
Dr. Malone filed a motion to dismiss the lawsuit for failure to state a claim
upon which relief can be granted. That motion, as well as the other defendants'
motion to dismiss on the same grounds, was granted by the court on
September 24, 2004. The plaintifs have appealed the court's dismissal of the
case. We continue to believe that their claims are without merit, and we intend
to contest their appeal vigorously.

LIBERTY MEDIA CORPORATION V. NATIONAL BROADCASTING COMPANY. In 1988,
Tele-Communications, Inc. (TCI) and its subsidiaries entered into a series of
related agreements with National Broadcasting Company (NBC) regarding the
Consumer News and Business Channel (CNBC), a programming service created and
produced by NBC. Pursuant to the agreements, Satellite Services, Inc., a
wholly-owned subsidiary of TCI, agreed to provide distribution of the CNBC
service over cable systems controlled by TCI. In a separate agreement, NBC
agreed to make quarterly payments to TCI equal to 6% of CNBC's annual gross
revenues that exceed $80 million. NBC's payment obligations are conditioned on,
among other things, carriage of the CNBC service by qualifying cable systems
serving a minimum number of subscribers.

TCI assigned to us its rights to receive payments from NBC in 1995. In 1999,
TCI merged with AT&T Corp. and we became a wholly-owned subsidiary of AT&T
Broadband LLC, the successor to TCI. In 2001, we were split off by AT&T, taking
with us the right to receive payments from NBC based on CNBC's gross revenues.
TCI's distribution obligations remained with AT&T Broadband until
November 2002, when AT&T Broadband combined with Comcast Corporation.

On February 14, 2003, NBC informed us that it would begin to reduce its
quarterly payments with respect to the CNBC service. NBC alleged that Comcast
Corporation had unlawfully repudiated the distribution agreement it had
inherited from AT&T Broadband, and that this repudiation entitled NBC to reduce
its payments to us. We are not aware of any legal action that NBC has taken to
remedy Comcast Corporation's alleged repudiation of the distribution agreement.

On February 10, 2004, we filed a complaint in the Delaware Superior Court
against NBC to enforce our contractual rights. On August 2, 2004, we entered
into an agreement with NBC providing for the settlement of that action. Under
that agreement, we received $13 million in full payment of our claim for the
period between January 1, 2001 and March 31, 2004. We also agreed to various
amendments to the fee agreement on which our claim was based. Those amendments
included a reduction of $500,000 in the amount of each quarterly payment
otherwise payable to us and the elimination of NBC's right to reduce its
payments under the fee agreement based on Comcast's failure to pay amounts owed
to NBC with respect to Comcast's carriage of CNBC.

II-2

ITEM 2. CHANGES IN SECURITIES

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(1) On July 28, 2004, Liberty completed a transaction with Comcast pursuant to
which Liberty repurchased 120,333,323 shares of its Series A common stock
held by Comcast in exchange for 100% of the stock of Encore ICCP, Inc.
("Encore ICCP"), 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 $547 million of
cash. The transaction also resolved all litigation pending between Comcast
and Liberty regarding the TCI Music contribution agreement, to which Comcast
succeeded as part of its acquisition of AT&T Broadband in November of 2002.

ITEM 6. EXHIBITS

(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.

II-3

SIGNATURES

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

LIBERTY MEDIA CORPORATION

Date: November 9, 2004 By: /s/ CHARLES Y. TANABE
------------------------------------------------
Charles Y. Tanabe
SENIOR VICE PRESIDENT AND GENERAL COUNSEL

Date: November 9, 2004 By: /s/ DAVID J.A. FLOWERS
------------------------------------------------
David J.A. Flowers
SENIOR VICE PRESIDENT AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)

Date: November 9, 2004 By: /s/ CHRISTOPHER W. SHEAN
------------------------------------------------
Christopher W. Shean
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)

II-4

EXHIBIT INDEX

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

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